Ray Cohen

Bridging lenders funding borrowers with Russian links could be 'left holding the baby'

Russia’s invasion of Ukraine has, apart from the terrible humanitarian crisis, ushered in significant changes to the sanctions and UK economic crime legislation, with more to come.

I can’t recall a time when so many updates had been issued by HM Treasury over such a short period; sometimes we see five new notices a day!

With such a fast-moving beast, and the potential for even more amendments, how are firms in the financial services sector coping? Can they do business with anybody who is Russian/Belarusian or has connections there? Is there a danger that finance providers exiting clients or lending to people with links will be left holding the baby?  

As a result of the new sanctions, lenders should be asking themselves the following two key questions: Do I have borrowers who are Russian or have connections with Russia, and do I have any investors/funders with these links? Even if they are not named as ‘sanctioned’, what am I going to do about it? Anyone who has a customer that is now sanctioned will have to liaise with HM Treasury.

For some finance providers, they may not have enough information to actually know who has links and might not be able to easily interrogate their loan books to identify Russian nationals, without going through the file manually.

Technically, there is no reason why you cannot lend to someone who is Russian. For example, a non-sanctioned Russian living here for many years with a permanent right to reside — who has a regular job in the UK on average income and ordinary wealth, without any financial links to Russia — using bridging finance to buy a three-bed semi in a normal chain break, doesn’t pose a significant money laundering (ML) risk. On the other hand, for anyone who has financial links back to Russia, it is likely to be harder to verify whether those ties do or don’t relate back to anyone who is sanctioned, involved in organised crime, a politically-exposed person (PEP), or connected to bribery and corruption. 

Getting the balance right isn’t easy and, in some respects, it’s now simpler to just say, ‘No’. Some firms have clearly started to do this and are looking to exit existing relationships, commencing the merry-go-round.

Firms should consider what to do with existing customers who have links. If they are now no longer sure they have sufficient information, that could be problematic. Calling loans in is one way of shifting them off the books, but it doesn’t necessarily absolve the risk of having allowed themselves to be used to further financial crime in the first place. If they repossess and sell, what risks are involved in handing back the net proceeds?

Taking money from a Russian investor/funder, or continuing to do so, is probably even more problematic if the source of wealth information is not strong enough. Obviously, accepting additional money would be impossible on that basis. Refunding/returning money already held/due may also be an issue if there are doubts about how clean the original money was. Some specialist lawyers and investigative agencies in the anti-money laundering field may find themselves quite busy!

Since this blew up, I have been asked the following questions: What about refinancing with no new money? What about if the solicitors confirm the source of funds are in a UK bank? 

If you are replacing a loan with no new funds, that doesn’t mean there is no ML risk. Assuming they are not sanctioned or a PEP, you will still have to consider how they obtained their original source of wealth and what links they may have. The fact that it’s already in the system isn’t sufficient. Any refinancing could still be considered as layering. 

If an existing lender has called in their loan, it could be because they now have concerns about whether they knew enough about the customer in the first place. 

In the past, many companies only focussed on the source of funds and, in looking at that, simply inspected whether it was in a UK bank or building society account. The number of fines against banks is sufficient in itself to see that you cannot rely on them getting it right — plus, they wouldn’t tell you if they had reported their transactions as suspicious.

Solicitors have also previously played a big part in all of this. In the past, some of the big law firms have been more than happy to take on uber wealthy Russian clients. One wonders how they may have verified that the source of wealth was completely clean, and if any of them now have concerns about this. When you see a case (as I did recently) where a Russian entrepreneur was a billionaire in his 30’s, how many firms have the ability to properly verify that the source of wealth has no adverse links to suspect government connections, bribery and corruption, or organised crime?

Russia was already considered to be high risk before the invasion so, apart from the specific sanctions and some other changes (the foreign entities register and sanctions offences etc), the real impact is probably more about focussing the mind. In that respect, it may not just be about Russian money! 

Similar issues with regard to verifying the original source of wealth can equally apply to other HNW customers from high-risk countries, such as China, Turkey, and other parts of the Middle East.

How comfortable will solicitors be to confirm they have verified the source of funds and wealth for these groups going forward, and how much of an impact will this have on the high-end property market if these investors are effectively blocked out? 

It remains to be seen how this will all play out. Will this be the time when there really is change in the use of the UK property market washing dirty money? Or will the UK government (by means of planned further changes) and firms operating in the sector continue to say one thing but do something else?

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