Citadele Bank

On the effect of sanctions on Citadele Bank’s services related to Russia

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The financial sanctions imposed by the European Union and the U.S. against Russia are very significant and, depending on the developments in Ukraine, will become even more far reaching, potentially directly affecting several sectors and industries. These sanctions unavoidably impact many companies in the Baltics with business partners in Russia and also Belarus. These partnerships are often made significantly more difficult or impossible.

AS “Citadele banka” has a zero-tolerance rule against sanction breaches and attempts to circumvent sanctions. In its provision of financial services, AS “Citadele banka” complies in full with international, national, and the USA’s Office of Foreign Assets Control (OFAC) sanctions in accordance with the procedures set out in normative acts. The bank complies with the USA’s OFAC sanctions in all currencies.

Therefore, we urge our customers with business interests in Russia to follow the latest news on applicable sanctions and comply with these sanctions fully. Please be aware that the bank has the right to cease its partnership with customers to whom sanctions apply, or if there is reasonable doubt that they are breaching or circumventing sanctions. Please also see the bank’s Sanctions FAQ for more information.

Bearing in mind that adherence to sanctions and potential breaches are binding for both banks and business owners, Citadele has prepared guidelines for business owners who are willing to continue working with partners in Russia. We will help with navigating the changing sanctions and avoiding a breach, which could result in annulled transactions, frozen assets or even criminal liability.

This article is regularly updated for the latest information.

LATEST SANCTIONS ON RUSSIA. The following sanctions on Russia have recently been enacted and are complied with by the bank.

New EU sanctions:
On February 23rd, 2022, the European Union adopted sanctions against more than 350 persons, including 27 high-profile individuals and entities who have played a role in undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. These include decision-makers such as members of the government who were involved in the illegal decisions; banks and business persons/oligarchs supporting Russian operations in the Donetsk and Luhansk territories financially or materially. In addition, there is now an import ban on goods from the non-government controlled areas of the Donetsk and Luhansk Oblast, restrictions on trade and investments related to certain economic sectors, a prohibition to supply tourism services, and an export ban for certain goods and technologies. Read more on the EU website.

New US OFAC sanctions:
On February 22nd, 2022, U.S. OFAC designated two financial institutions that are crucial to financing the Russian defence industry (State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB)), as well as 42 of their subsidiaries, several individuals and 5 vessels (ships). All transactions related to these entities are now prohibited. Also, OFAC extended existing sovereign debt prohibitions to cover participation in the secondary market for bonds issued after March 1, 2022, by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation. Read more on OFAC website.

Effect of the new sanctions on the bank’s services

If your business operations are linked with Russia, Belarus or any other country under sanctions, the Bank may ask you to submit additional information on specific payments or your operations as a whole. The Bank may contact you to ask for information on your business partners in Russia and Belarus, their owners and beneficial owners, as well as the goods you produce and services you provide, and the final recipient of these goods.

Payments linked to Russia and Belarus are scrutinised and are subject to more thorough checks. Therefore, please enter as much information as possible for these payments, adding specific products and services and final recipients, rather than just, for example, an invoice number. This helps us process your payments faster.

Please be advised that for all payments to bank accounts in Russia and Ukraine, it is now a requirement to indicate the full physical street address of your counterparty (the payee). Payments without the indicated address shall not be processed.

We recognise that working with Russia and also Belarus is currently complicated, as both customers and financial institutions must ensure that sanctions are not being breached, and that parties are adhering to the Criminal Law. However, we are certain that, by working together and adhering to legislative requirements, we can find effective solutions to reduce risks and for successful business operations.

If you are investing in the financial markets, the Bank urges you to be mindful of the portfolio risk in Russia-related financial instruments which are susceptible to sanctions risks, especially in the event of actions from international authorities, exchanges and institutions. 

If you have any questions, please contact Citadele Bank or your manager directly, and we will be happy to give you a consultation. 

As the situation develops, the bank may take additional actions to ensure effective application of sanctions. 

Keep up with developments

Some of the sanctions — such as targeted sanctions — are aimed at named individuals or legal entities, while so-called sectoral sanctions are aimed at specific sectors of the economy, such as categories of goods and services. Businesses must adhere to these sanctions in full and ensure that partner companies or their board members or beneficial owners are not named on the sanctions lists.

People sometimes ask why the bank has cancelled a transaction if the business partner is not on the sanctions list. EU sanctions are applied according to a chain principle, meaning that, even if a business partner is not directly on the list of sanctioned organisations, they may be a sanctioned entity’s parent company, or a sanctioned person may be a highly-ranking member of staff or on the company’s management board. Namely, sanctions also apply if the sanctioned person directly or indirectly controls or owns your business partner.

The official lists of sanctions are available here and here.

Know your customer

To avoid breaching sanctions, it is vitally important to know your customer. This means that you must do research on your business partner’s owners, board members, true beneficiaries and representatives. Firstly, this will help you work preventatively and ensure that the business in question is not a direct or indirect subject of the sanctions.

You should be aware of the main customers and partners of your business partner, especially if this partner is located in a country at higher risk of sanctions. For example, if you choose to use the services of a Russia-based intermediary, their website may list as one of its main partners a company that is on the sanctions list. These situations must be evaluated as risks, as the partners of the subjects of current sanctions are evaluated first when reviewing subjects for future sanctions. Furthermore, by supporting the partners of those subject to sanctions, you are indirectly supporting those on the sanctions list. It is therefore important to research as long of a delivery chain as possible to avoid cancelled transactions or frozen assets.

Consider your exit strategy

The world of sanctions is constantly changing, and they can be impacted by both EU and U.S. decision-making. This means that even if your partner or sector is not currently on the sanctions list, there is no guarantee that it will remain so tomorrow due to political decisions. Therefore, when signing an agreement or any contracts with organisations from sanctioned countries, it is important to consider disclaimers allowing you to unilaterally cancel the agreement in the case of direct or indirect applicability of sanctions on the counterparty.

Be open and transparent

Adherence to sanctions is binding for both banks and businesses, and responsibility for breaching sanctions applies to both banks and businesses. Therefore, there will be situations when banks will preventatively try to reduce risks, and will contact a business for more information before processing a transaction. Questions are usually about the nature of the business, delivery channels, business partners and the source of products and services used in manufacture.

Experience shows that partnerships with Russia as well as Belarus have certain red flags. One of these is chains of intermediaries which use front companies to hide the involvement of sanctioned persons in transactions to avoid sanctions. It is therefore crucial to give information on your business partners and planned deliveries. You may also have to issue clarifications if regular payments to accounts in third countries are made. Partnering with businesses belonging to the Russian or Belarussian government always comes with risks that a government representative will be included in the list of sanctions. 

To ensure that payments can be processed faster, always include complete and transparent information in the payment details. For example, instead of writing “Invoice No. 1234,” write “Invoice No. 1234 for the purchase of petroleum from [partner].” It would be good practice to acquire information on your partners before beginning a transaction so that, if necessary, you can answer the bank’s questions, which will make the fast processing of payments much easier. 

Hire a sanctions coordinator/officer 

If your business is substantially linked with Russia or Belarus, for example, you have a long-term partnership with partners from this country, or your company has a large emphasis on goods or services from Russia or Belarus, you should consider bolstering your ranks with a sanctions officer or an employee who is a sanctions specialist and can navigate the changing environment. This doesn’t necessarily mean that you would have to hire a full-time external specialist; you could use someone who has been working at the company for a while and who is knowledgeable in the company’s operations and economic activity in Russia or Belarus. 

By educating and training this person, your company will not only be able to better manage sanctions risks and navigate the changing world of today, but you will also send a powerful signal to banks who want to work long-term while respecting regulations set out in sanctions and law. If you have a long-term plan of developing your business through Russia or Belarus, delegating one person for monitoring updates and communicating constructively with the bank is an important prerequisite for developing a successful economic partnership through our neighbouring country in today’s geopolitical environment.