Thursday, March 30 2023 10:52
Emmanuil Mkrtchyan

Separating apples from oranges: The essence of compliance

Separating apples from oranges: The essence of compliance

ArmInfo. Russian resettlers, whose number in Armenia, according to various sources, is estimated from 80 to 100 thousand people, not only contributed to high "statistical" economic growth and low "estimated" inflation in the country, but also made it possible to significantly strengthen the resources of the Armenian banking system.  However, Armenia, having benefited from both people and capital, has appeared under the powerful sanctions lens of the Western countries, which is seriously concerned about the possibility of circumvention of anti-Russian sanctions by countries friendly or neutral to Russia. Armenian banks were immediately warned that they must strictly follow the international regulations against the legalization of proceeds from crime (money laundering) and put up serious barriers to clients' attempts to circumvent anti-Russian sanctions in the course of trading activities.  By and large, by March last year, Armenian banks were not ready for such a turn, and therefore they began to actively implement the so-called compliance control and its tough “barrier” tools.

ArmInfo correspondent asked Sergey Hovhannisyan, Head of Compliance Division of Ardshinbank, the largest bank in Armenia, to clarify on the details of this work.

 

- It's no secret that recently it has become more difficult for even an ordinary citizen of Armenia to open a bank account, not to mention depositing thousands of dollars or euros into this account. Instead of "Thank you", the bank requires a pile of certificates, mainly about income. A real ‘’shock’’ therapy! As a result, dissatisfaction is growing...

 

- Yes, you are right, we are being more and more harshly criticized by our customers. Tightening compliance control suggests not only verifying the legality of source of income, but also requires disclosing the content of trade and other contracts so that the bank can safely conduct a transaction. Even purchase of real estate with cash has become problematic as these are large sums and they need to be verified. You know, a lot has changed and, as if all at once. Yes, until 2022 we had a different financial life, a different savings structure, etc., but now everything is stricter and tougher. Otherwise, any of the Armenian banks runs the risk of falling under secondary sanctions and ... well, you know, what happens in such cases. Both the bank and its customers will suffer.

On the other hand, our clients should understand and accept new circumstances and, accordingly, change their financial behavior, try not to participate in suspicious transactions that are not adequate to their usual background.

It is important to keep in mind that there are extremely important aspects associated with the arrival of a large number of immigrants in Armenia. This is a real problem for the country's financial market, a problem between Armenia and many European countries that insist on our strict adherence to the sanctions regime.

 

-In this case, it is not clear enough why these compliance requirements extend to, ordinary residents, if I may say so, the citizens of Armenia, your clients, whose credit and other financial history the bank knows very well?

 

-It’s a delicate matter, as they say. First, compliance control should apply to all clients, all transactions. We do not consider our clients to be “innocent victims”, but we cannot close our eyes to the possibility that some of them may be involved in high-yield but suspicious trade deals or money laundering. This possibility is "reduced" by the fact that, according to our analytical calculations, more than 90% of the funds transferred from Russia to Armenia today are not the money of Russian, Ukrainian, Belarusian resettlers, but of representatives of our Diaspora, most of whom have Armenian passports and registration. Of course, it is very good that this money will now be circulated in homeland, creating additional value, but they should not be uncontrolled. This is exactly the function of compliance: separating apples from oranges.

 

- It is known that compliance control is considered as a doing business in accordance with applicable laws, rules, codes and standards. Could you tell me more about that ?

 

- Each bank develops its own measures in connection with the increased risks associated with money laundering. The greater the volume of transactions, by the way today they have increased significantly, the greater the risks. After 2022, the banking system of Armenia has faced a new situation, which has had a significant impact on combating money laundering. There are new challenges, new risks. Our bank initially took steps, including technical and professional ones, in order to adequately counter these challenges. For example, if at the end of 2021 the bank’s team working in the field of preventing money laundering attempts consisted of 4 employees, now our department has 13 employees, and their number will continue to grow.

 

 - Could you specify please, what type of compliance control you mean, regulatory one, that is, the one that meets the requirements of the Central Bank, or corporate one, that is, corresponding to your internal processes and procedures? They somewhat differ as it is one thing to follow the instructions from above, and another to form your own corporate procedural culture.

 

- In fact, the Central Bank of Armenia, as a regulator, sets requirements for banks based on the law on combating the financing of terrorism and money laundering. This law, in turn, is based on FATF standards, an interstate organization that develops world standards in the field of combating money laundering and terrorist financing and is based on the best world practices. From this point of view, what the Central Bank requires and what the banks do, are completely compatible, and banks are trying to apply all this in their daily work. This work is regulated by internal legal acts. 

 

- In other words, do banks develop their own procedures? For example, the questionnaire that is quite notorious among immigrants. It seemed to me that it was drawn up at the Central Bank, but then I found out that each bank made its own - some are stricter, some are less strict...

 

- The questionnaire you are talking about is just the tip of the iceberg. Compliance is a rather powerful control system, which cannot be dealt without automation. For example, even before 2022, Ardshinbank already had its own automated compliance control system and gradually improved it. But after the February developments associated with the outbreak of war in Ukraine, the bank accelerated this process. For example, at the beginning of the year, even before the start of the Russian-Ukrainian confrontation, we acquired the database of the LexisNexis company, which works in the field of creating and providing access to multi-industry databases. We have acquired a database of persons with significant political exposure. This enables the bank to effectively recognize politically exposed persons among its clients. This, by the way, is also required by the FATF and the Central Bank of Armenia.

An agreement has been signed and another tool is in the process of being implemented, which will allow the bank to identify suspicious transactions and customers in a fully automated mode. So, for example, if client X participates in certain transactions with high frequency, then the “red light” lights up. And our team starts the verification process.

Today we are acquiring automated systems that meet the best international standards. Yes, as I said, we also have our own ones, but we and our foreign counterparties, partners should be sure that the bank is working with standardized tools. And as a result, we refused, as they say, to reinvent the wheel.

In our work, we also use an important tool of the SWIFT system - an international interbank system for transmitting information and making payments, the so-called "sanction screening". This system allows all outgoing and incoming payments, regardless of their scale, to be checked against all sanctions lists and databases. By the way, our intrabank operating program also has anti-sanction components that are updated periodically.

I would like to note that for the third year we have been ordering an audit of our compliance function from the Big4 audit company to be sure that we are doing everything right and on time.

 

- And how do you solve the problem of personnel? After all, this is a responsible and difficult job. If you approach it carelessly, you can lose the entire customer base.

 

- That's right, special competencies and skills are needed here. The vast majority of our employees have international qualifications obtained from international institutions in this field. The Bank undertakes to finance the process of studying and passing exams to obtain a certificate of a specialist abroad. This is a mandatory requirement, otherwise the specialist may not have career growth, or even a job.

 

- And yet, I think that the readers will be interested to know what are the minimum requirements that the bank demands today from non-citizens of Armenia who want to become bank clients?

 

 - As we have already said, each bank sets its own "passing" criteria, but in general, they are almost identical: client must have business interests in Armenia, equity participation in a company or the status of an individual entrepreneur. Otherwise, it is necessary to have an employment contract with an Armenian company and, of course, to have registration.

In other words, these preconditions are necessary for the bank to be sure that the interests of a non-resident, one way or another, are connected with Armenia, that heshe permanently lives here and organizes either hisher own business or is an employee. Thus, heshe is in fact a resident of the country. But the presence of these preconditions does not mean that a bank account will be opened automatically for a client, no, additional research is being carried out. The same applies to the accounts of non-resident legal entities, resident legal entities with non-resident partners or shareholders, accounts are opened only after careful examination by our department. It must be understood that even though the company is Armenian, it is important to know who its ultimate beneficiary is. If heshe is a non-resident, then the automated system finds an “anomaly” and refuses to open an account. Then the experts will deal with it.

 

- And how many refusals were there to open accounts or to conduct transactions with Ardshinbank over the past year?

 

- I can't give absolute numbers, but in percentage terms they have grown significantly. Thus, the number of refusals to open accounts in our bank in 2022 is 60 times higher than in 2021. The main reason is the sanctions risks or the so-called “non-compliance risks”. Not all individuals wishing to open accounts met our criteria or preconditions, and not all legal entities conducting transactions, after their in-depth study, continued to inspire confidence. There were cases of refusal due to the presence of trade activities for parallel imports of sanctioned goods. Refusals on such and similar transactions increased 10 times over the year.

 

- Is there a difference between the FATF criteria and the requirements associated with the sanctions regime? After all, they are on completely different planes.

 

- We have zero tolerance for all of them. The schemes are, of course, very different. Laundering schemes are very vague, you have to be a great professional to get on the trail. And the sanctions schemes are clearer, not so intricate. They mainly refer to import-export. There may be cases with price agreements regarding luxury goods, when an expensive item under a contract is sold much cheaper and thus, as it were, does not fall under sanctions. All of this needs to be figured out. 

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