The problem of wealth managers’ Russian clients

The global wealth management industry finds itself at the center of arguments over the breadth and depth of seizures of Russian cash and assets, and the limits to such action.

It has now been more than three weeks since the Russian invasion of Ukraine began. Sanctions and other restrictions cut Russia off from the outside financial world. JP Morgan and Goldman Sachs end their activities in the country. Others may follow. Private client advisors and wealth managers with Russian or Russian-related clients have uncomfortable decisions to make.

Now is the time for the wealth industry to show real leadership in addressing these issues.

A reminder of what has happened so far: in the case of the UK, the country froze the assets of designated individuals, including Vladimir Putin and Foreign Minister Sergei Lavrov. Hundreds of oligarchs and other individuals known to be associated or have links with the Russian regime are on the net; prohibitions on making funds or other economic resources available to these designated persons, directly or indirectly, have also been imposed. To give a stark example, the UK took over Roman Abramovich’s Chelsea football club, throwing one of Europe’s top teams into chaos.

In Switzerland, to the astonishment of some in the supposedly neutral country, Bern froze the accounts of designated individuals and pledged to approve European Union sanctions against Russia. In the US, EU and Canada, governments have imposed bans and bank freezes. Russia is outside the SWIFT banking system. The ruble tumbled, the dollar gained and the euro weakened, raising questions about broader market dislocations. Wealth managers’ asset allocation decisions will need to be reviewed. Major banks like UBS, Credit Suisse, Deutsche Bank, BNP Paribas and UniCredit detailed their exposures.

Inevitably, however, banks, law firms, accountants, multi-family offices and trust companies may feel they have no choice but to eject customers if there is has the slightest hint of connection to Putin’s regime, even though some people are not on any official list. This seems like the prudent way to go. Sanctions may not target all those who fall under the rubric of “politically exposed persons”. Wealth managers may conclude that even if a PEP with a Russian connection has not been sanctioned, they should leave.

Decisions like these remind us how world-class monitoring and integration of Know Your Customer is now a non-negotiable process that companies need to master. Businesses should consider a complete refresh of their customer lists and KYC processes.

Economic and military wars intersect, and policymakers will argue that while depriving some people of financial services may catch undeserving ones as a kind of “collateral damage”, in too many cases those sanctioned mined billions of dollars. of the former Soviet Union rather than being true creators of new value.

It is infuriating to see how the financial and business worlds of the Western world have made a rich living from this narrow cohort of the Russian population without any shame. The red carpet has been thrown out with excitement, so watching companies rush to divest from all things Russian leaves a sour taste.

Yet sometimes it takes events as horrific as those in Ukraine to wake people up, including wealth managers.

The pendulum now swings violently the other way. There is bound to be a sort of “grey area” where Russian-born people living abroad, like now legal citizens of the countries they inhabit, could be suspected or even denied access to certain services. This raises several questions.

The author of this article has spoken to advisers and people in London and Geneva, for example, about the potential for serious injustices and mistakes being made. There are unpleasant emotions. Tory MP Roger Gale reportedly said every Russian citizen living in the UK should be deported and ‘sent home’ – an approach that appears to take a cavalier approach, if those citizens have a UK passport. What happens, for example, to a Russian who has spent his entire adult life in the UK? (The author of this article knows several of these people personally.)

What we don’t want to see are people with a Russian surname or birthplace, but unconnected to Putin’s regime, being ostracized. In today’s naturally difficult environment, it is important that due process remains firm. Too often, companies take the knee-jerk approach of excluding people from services and worrying about the details later.

It is therefore essential that wealth managers and other players in the space explain as fully as possible their decisions to let certain clients go. It’s not enough to exclude customers and hope it falls under the media radar. Solid explanations of why action is being taken are needed. Inevitably, businesses will be asked why they booked certain customers in the first place, and such questions could get nasty, but businesses have to deal with them.

The morality that wealth managers deal with can be murky for all sorts of reasons. Consider this: soaring commodity prices, such as oil, mean that people in the Middle East and other areas where political governance may be questionable will make a lot more money, and many of them are already clients of private banks and others in the sector. Unfortunately, the geopolitical crises of our time risk adding to the immense wealth of populations in jurisdictions not always known for their respect for freedom and individual rights.

Dolores W. Simon