How financial institutions can understand and operate within sanctions

By Timur Turlov, CEO of Freedom Holding Corp.
Photo by Valery Ayapov

Freedom Holding Corp. (FRHC) is one of the biggest investment companies in Eastern Europe, Russia and Central Asia. However, as a U.S. person, the company is obliged to obey a wide range of sanctions regimes imposed on specific countries. In light of the consequences of the rising geopolitical tensions, this issue becomes more important.

How sanctions work

Over the past decade, IT compliance in the financial industry has become more important and even more demanding. Compliance encompasses specific areas like anti-money laundering (AML) and counter-terrorism financing as well as general regulatory compliance. Each regulation requires companies to fulfill specific obligations under the license it holds at all times.

Different sanctions regimes have existed for centuries. Regulated financial companies are mostly subject to economic sanctions according to the nature of their products and services. In 2022, sanctions compliance is quite complicated due to the overlap of different sanctions regimes.

For example, sanctions regimes are often supplemented by secondary sanctions. Usually, they are aimed at preventing third-party companies from being used as a tool to evade international sanctions by individuals and entities from those countries under sanctions.

In order to prevent evasion by entities under sanctions, the U.S. government puts them on special lists. This is either the sectoral sanctions identifications list, the specially designated nationals (SDN) or blocked persons list.

Moreover, when there is any U.S. involvement or connection—including (without limitation) any transaction denominated in USD—to a payment through the U.S. financial system, institution or U.S. person, it constitutes a so-called U.S. nexus.

The company where I serve as chairman, FRHC, as a U.S. entity falls under the definition of a U.S. persona and must comply with the U.S. sanctions regime, controlled by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC). The company’s foreign subsidiaries must comply with the Group Sanctions Compliance Policy, which is addressed to cover obligations under the U.S. sanctions. At the same time, all FRHC foreign subsidiaries are subject to their local sanctions regimes, and in the event that transaction characteristics trigger other nexuses, then other sanctions regimes must apply as well.

For example, an EU broker providing services in the EU member states (EU MSs), on EU stock markets, in instruments denominated in EU MSs currencies, is also subject to EU sanctions regulation. Provision of services on the London Stock Exchange (LSE), for instruments denominated in GBP and processing transactions in GBP as currency, triggers a U.K. nexus. In this case, an EU broker must follow both EU and U.K. sanctions regimes, in addition to the U.S. one. In case there are any local restrictions imposed by the country a client is a resident of, an EU broker must consider them as well.

When the provision of services involves the participation of service providers from other countries like Switzerland, Canada, Australia, etc., with transactions in the local currency and/or with instruments denominated in the local currency, it triggers conditions where the sanctions regime of the respective country or countries must also apply.

What complicates even more sanction compliance is the due diligence on the parties involved in the transaction in terms of sanctions, such as processing (sending/receiving/correspondent) banks and processing brokers/clearing houses/depositories. Those involved parties may also have their own risk appetite and internal policies and procedures, which must be taken into consideration.

How financial companies can follow the rules

FRHC strives to comply with numerous comprehensive, overlapping and selective sanctions programs applicable to the company and its subsidiaries. The approach that my team and I take can help other financial companies in their compliance. One place to start is to establish a designated sanction compliance policy integration with the monitoring tools that are connected to a database where clients are screened against applicable sanctions upon onboarding and then on a daily basis as part of the ongoing monitoring program.

You can also consider hiring a sanctions compliance officer who supervises the implementation of the group sanction policy in all the subsidiaries via a compliance monitoring program and local sanction compliance officers. This mechanism can be an effective tool to make sure that group policy and all applicable sanctions programs are properly followed.

FRHC invested a substantial amount of money to make onboarding and ongoing reviews of clients more efficient. We have integrated our trading platform with a cloud-based solution that performs real-time database screening during client onboarding. The system helps guarantee that FRHC subsidiaries are aware of a potential or existing client found on any sanction list.

In addition, FRHC subsidiaries in Kazakhstan heavily rely on online government databases during the processing of information about a client. That would be impossible without the high level of trust the Kazakhstani government has toward local businesses. As a result, there are loads of developed fintech and govtech projects in the country.

Additional measures like real-time database screening and biometric verification can also help your company to avoid potential fraudulent activities. Internal analysis at FRHC shows these new tools have a positive impact on the online client onboarding process, speeding it up and making it smoother.

For example, the digital approach to lending has been successfully implemented in Freedom Finance Credit, a microcredit organization. This sophisticated loan application processing system allows us to make a decision in four seconds, based on close integration with extensive databases. Also, we always can explain why we reject loan applications; in this case, we offer alternative solutions. We are the first financial institution that has started to do so in Kazakhstan.

Access to government databases can allow financial companies to digitalize the entire process of loan issuing. Also, it can increase the speed of service execution and help to avoid the human factor. This may result in lower average costs for loans.

These actions and suggestions have all been undertaken by FRHC. They are simply examples for other financial companies, but their implementation with FRHC shows that even amid rising geopolitical risks, large companies can operate efficiently when invested in effective compliance control.


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