The US Treasury plans to take enforcement action against those companies and institutions that fail to comply with the multiple sanctions it has issued against Russia
A senior US Treasury Department official told an anti-money laundering (AML) conference in New York recently that the Treasury is studying whether AML obligations should be imposed on to investment advisors, in part due to the risk of Russian elites using certain advisors to hide assets.
Enforcement “is one of the tools we use to promote compliance, and this is particularly important in the context of our Russia sanctions program,” explained US Treasury Under-Secretary for Terrorism & Financial Intelligence Brian E. Nelson during an AML event on sponsored by the Securities Industry & Financial Markets Association. The association is a trade group representing securities firms, banks, and asset management companies.
“We will take enforcement actions against institutions or individuals that evade, avoid, cause a violation of, or conspire or attempt to violate [Office of Foreign Assets Control] OFAC regulations,” Nelson said, adding that Treasury “encourages anyone who may have violated OFAC regulations to voluntarily disclose the apparent violation to OFAC.
“Voluntary self-disclosure is considered a mitigating factor by OFAC in enforcement actions, and under OFAC’s Enforcement Guidelines it will reduce the base amount of any proposed civil penalty.”
Sanctions focused on revenue for ‘Putin’s war machine’
Nelson outlined some of the key sanctions issued to date, including those targeting Russia’s financial sector “and the key sources of revenue that sustain Putin’s war machine.
“We’ve sanctioned Russia’s largest financial institutions and restricted dealings with banks representing approximately 80% of the Russian banking sector,” he said, noting that Treasury has “immobilized” assets of the Central Bank of Russia and prohibited Russia from making debt payments using funds within the United States. “We’ve also imposed new sovereign debt prohibitions, restrictions related to new debt and equity of major Russian state-owned enterprises and large privately-owned financial institutions, and full blocking sanctions on two Russian state investment funds.”
Many Russian oligarchs and elites “are attempting to evade sanctions, and we are working tirelessly to prevent sanctions evaders from exploiting financial loopholes to hide and move their wealth,” Nelson observed. “We will go after their assets wherever they are.
“We will not stand by if others assist in sanctions evasion schemes. Individuals or entities that do so will expose themselves to sanctions and, as appropriate, civil or criminal enforcement.”
Role of the compliance community
The use of broad sanctions against Russia was “made possible in large part by the collaboration we have with the compliance community,” Nelson said. “We understand some of our recent actions in Russia and elsewhere have been novel and technically complex. We also understand this has generated numerous demands on the compliance community over the last few months.”
Treasury has issued “extensive guidance” to ensure the private sector “has as much clarity as possible about OFAC’s sanctions,” Nelson said. “To help industry understand its obligations, OFAC has issued 90 new and 76 amended frequently asked questions since February, published a fact sheet explaining authorizations related to humanitarian, medical, and [non-governmental organization] NGO transactions, and processed hundreds of requests for licenses and interpretive guidance.
“We have carefully crafted wind-down provisions and general licenses to allow for an orderly exit from affected markets and to ensure the continued flow of transactions critical to the global economy, including in energy and agriculture.”
Potential AML rule for investment advisors
Nelson also addressed the money laundering risk posed by investment advisors that may necessitate Treasury’s issuance of an anti-money laundering rule for advisors. He noted that in 2015, Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a proposed rule for investment advisers, but never finalized it.
Nelson explained that certain aspects of the investment advisor industry are segmented, “which can limit transparency. For example, a broker-dealer executing a trade at the direction of an adviser may not know the identity of the adviser’s client.
“The same is true for a prime broker that holds assets in custody on behalf of a hedge fund,” he added. “The prime broker may hold the assets and execute trades on the fund’s behalf, but the broker lacks clarity about the ultimate investors in the hedge fund.”
Treasury is working with law enforcement, the Securities and Exchange Commission, and the Financial Industry Regulatory Authority “to further understand their view of the risk landscape” as well as involving industry “to understand your assessment of the vulnerabilities and risks,” Nelson said, adding that Treasury is “thinking through ways to gather information that will enhance our visibility into this sector, including regarding how Russian elites, proxies, and oligarchs may use hedge funds, private equity firms, and investment advisers to hide their assets.
“This information-gathering effort will help us understand whether a rulemaking is necessary and, if so, how to design it to ensure that it is appropriately tailored.”
