First of all, let us point out that for Swiss banks, implementing this arsenal of measures was always going to be a highly complex operation.
Entire nations sanctioned
Although the banking industry has applied general and sector-specific sanctions for many years, the raft of measures adopted since 24 February is particularly complicated to implement. It is also unusual in that the sanctions concern what is a growth market for a number of banks, bringing their efforts to develop client bases in that market to a sudden halt.
The type of sanctions introduced and the scope of the people and entities targeted go well beyond measures previously taken against specific countries. In the case of Russia and Belarus, whole nations are being targeted, not just specific commercial activities, entities or individuals as in the past.
This broader scope means that banks have to take into account a multitude of scenarios: Russians in Russia, Russians domiciled or resident abroad (in Switzerland, Europe or elsewhere), dual nationals, people with links to Russian entities, companies and structures owned partly or wholly by Russians, different types of investments and financial instruments and so forth.
As well as this new configuration, there is the complexity arising from the large number of sanctions programmes introduced. Let us take the example of a Swiss banking group with several entities outside of Switzerland. They must apply multiple sets of sanctions: those adopted by Switzerland and those adopted by other jurisdictions in which the group operates.
The complexity arises from the fact that some of these jurisdictions may not have adopted sanctions against Russia or Belarus, and of those that have, their rules are not always similar to the Swiss regime.
Another issue that must be addressed relates to the US regime adopted by OFAC (Office of Foreign Assets Control), which is unique because of its extraterritorial scope. It applies to all transactions denominated in US dollars and all transactions with US indicia, regardless of the location of the client or beneficiary.
Finally, correspondent and custodian banks with which Swiss institutions work outside of Switzerland are themselves subject to a variety of regulatory regimes, including sanctions programmes, with which they too must comply. Because of the consolidated supervision principle, a banking group is required to ensure that the rules that apply to its parent company in Switzerland are complied with by all of the group’s entities based outside of Switzerland, even if they are more stringent than local ones. This requires careful efforts to raise awareness within those entities, and among clients served by a single group in multiple jurisdictions.
Given this, for a Swiss bank to be able to act in accordance with the sanctions regime against Russia and Belarus, it is required to comply strictly with measures adopted by Switzerland’s Federal Council and meet the prudential requirements of the State Secretariat for Economic Affairs (SECO) and financial market regulator FINMA, but also take into account the operational policies of third-party institutions. Finally, banks have had to inform the authorities regularly about how their exposure to the relevant clients has changed over time.
Accordingly, compliance departments, which are on the front line in dealing with these issues, have had to rise to the challenge. This has involved bolstering their skills and capabilities, while also providing day-to-day support to various business lines – particularly the Front Office, Support, Trading and Credit – in order to address numerous specific cases.
Operations and IT teams have also been heavily affected by the complexity of the programmes to be implemented, for example in terms of processing authorised transactions and transfers and managing securities and the associated income.
One valuable lesson arising from the experience is that Swiss banks have had the wisdom to combine their strengths proactively, rather than try to tackle the difficulties in isolation. Through their discussions, they have together been able to “operationalise” the rules adopted by the authorities, with the aim of developing a single, conservative set of guidelines for the industry.
One priority in these efforts was to protect the reputation of the Swiss finance industry and take steps to avoid the risk of sanctions being applied inadequately. Professional associations such as the Swiss Bankers Association, meanwhile, have played a particularly important role in interpreting the rules.
However, banks still have work to do given that there is no visibility as to the outcome of the conflict or the future development of the sanctions, which are changing constantly from week to week. The fact remains that the energy expended by Swiss banks on these matters, initially a crisis management response, is now an integral part of their day-to-day activities.