" class="no-js "lang="en-US"> EXCLUSIVE: “Payments, The Path to Peace?” – in ‘The Paytech Magazine’ - Fintech Finance
Thursday, March 28, 2024

EXCLUSIVE: “Payments, The Path to Peace?” – in ‘The Paytech Magazine’

Payments have been on the front line like never before. But could the West’s response to war in Ukraine strengthen its arsenal in repelling a wider assault on the integrity of the financial system? Geraint Evans, Trulioo | Fintech Finance

When the ‘European Wall’ between Russia and Ukraine was violently breached in early 2022, a shocked West groped for a non-armed response forceful enough to bring Moscow to its knees: finance became that counter-weapon.

Governments took aim at Russia’s politically exposed super-rich with sanctions on a scale never before seen. Its central bank reserves, stashed abroad, were frozen. Ordinary people mobilised anonymous donations of cryptocurrency to support the Ukrainian resistance. But the financial warhead that could undoubtedly cause a broadside was one that disabled the cross-border payments system on which the country’s banks relied.

In March, the independent SWIFT payments messaging service, which facilitates the majority of transactions settled between the world’s banks, dealt what was, at that point, the biggest blow to the Kremlin. Initially, seven major Russian banks were shut out of the flow of international, multi-currency transactions or had their access to the SWIFT network severely limited after a tense debate between European states, mindful of the damage such a move inflicted on their own financial systems. As the shelling intensified, Russia’s ally Belarus saw its banks coming under the same heat.

The consequences of the financial tourniquet applied to Russia were rapid and severe: 30 per cent wiped off the ruble’s value, to which the Central Bank responded by hiking interest rates to 20 per cent, making life for ordinary Russian citizens even more challenging. Given all transactions for major network cards (VISA, Mastercard and Amex included) operate through SWIFT, many point-of-sale and e-commerce payments were crippled. PayPal, too, turned off the tap. It was perhaps appropriate that SWIFT’s communication superhighway, which has done so much to introduce transparency and trust into the payments process, should emerge as the secret weapon against a regime that appears to rely on false ‘truths’ and opacity.

Payments, and how they are handled, in 2022, reflect many of the values now at stake: a democratised financial service characterised by openness, fairness and freedom of movement – the very antithesis of tyranny. In fact, freedom of communication, more broadly, made President Vladimir Putin’s well-practised flow of disinformation hard to sustain. It’s trickier to maintain an iron curtain of propaganda in a Gen Z world of Facebook (Meta), Twitter, WhatsApp, YouTube and Tik Tok.

On the other hand, modern payment systems’ very interconnected-ness and enhanced speed make it hard to stop a flight of cash from any one country, or take action against it without sustaining self-inflected wounds.

Such blanket sanctions are always morally problematic, too, and how effective they will be in ending the conflict is, as yet, unproven. Russia launched its own rival to SWIFT – the System for Transfer of Financial Messages (SPFS) – after similar threats of suspension following the annexation of Crimea, and it will likely seek to use it to transact international payments, given time. And the alternative finance that has flowed into Russia to help the war effort is almost certainly also flowing the other way; an avenue for individuals and businesses to launder Kremlin-linked cash through unregulated vehicles such as non-fungible tokens (NFTs).

One of the inevitable but still painful consequences, too, of freezing out Russia – not to mention the privations it’s likely to visit on blameless men and women in the street – is the threat of swingeing fines on any financial institution in the West that falls foul of rapidly changing sanctions lists.

They are faced with continuously having to update screening procedures and monitor compliance programmes to keep pace with the latest politically exposed person or business whose beneficial owner is on some state’s list. A small price, you might say, compared to Ukraine’s sacrifice and the gravity of the threat, but sanctions will only be effective if those actioning them can get through the layers of ‘Russian dolls’ that oligarchs and others typically hide their assets inside. Offshore bank accounts, spurious holding companies and shady corporate structures designed to hide the sources of, particularly property-related, asset holdings in metropolitan centres like London, are commonplace.

And What Professor Louise Shelley, director of the Terrorism, Transnational Crime and Corruption Center at George Mason University in the US, described in one interview as the ‘desperate movement of all kinds of commodities and resources through investment vehicles’, is hard to follow in a panic.

“Our technology can only be as good as the regulations and it is currently legal to set up corporate structures and trusts that obfuscate who actually owns certain assets,” points out Garient Evans, SVP of identity solutions at global identity verification provider, Trulioo, which has already done much to tighten the noose around spurious entities.

“We saw it with the Panama Papers, we saw it with the Pandora papers,“ he says. “They shone a light on these structures that allow people to park their assets and avoid sanctions. Now, here we are again, with everybody really understanding the criticality of preventing activity by individuals where we don’t know who owns assets in on- and offshore trusts.”

Trulioo’s data analytics technology is actively playing a part in efforts to pin such activities to sanctioned individuals.

“The moment a government puts an individual on a sanctions list, our data is updated in real time, so that our systems can help identify that match,” says Evans. But lawmakers are still failing, he adds. “One area where governments are going to have to have some willpower, is real estate. A good example of that is, in the United States, in 2020, we updated our anti-money laundering laws, to make them

stronger. One gaping hole is real estate, where there’s no obligation to post suspicious activity reports on transactions.

“So, somebody shows up and buys a castle, all in cash, and there’s no obligation to report that. And, if it’s bought through these blind trusts, nobody knows who the ultimate beneficial owner is. So, even though the US had an opportunity to pass legislation on where money laundering is happening, it still has not had the willpower. And it’s not just about Russian oligarchs, but also drug traffickers and other criminals who are doing the same.”

In the UK, the Economic Crime Bill has been fast-tracked so that British authorities can ‘pursue Putin’s allies in the UK with the full backing of the law, beyond doubt or legal challenge’. The bill, which was due to be passed in March, would set up a public register of beneficial owners of non-UK entities that own or buy land there, giving authorities clearer sight when imposing sanctions and financial institutions a reliable data source to inform screening.

Evans is hopeful that this time things will be different.

“What I expect to happen now is regulators and legislators put in long-term legislation that targets executives. In the past, sometimes banks just saw dealing with money laundering as the potential cost of doing business, to some extent. However, lack of tolerance and legislation will prevent this situation continuing the way it has done for the past 20 or 30 years.”

So, is this a wake-up call in a way that the Pandora papers were not?

“I’m naturally optimistic,” says Evans, “and when I read about the implications of these sanctions, I take an optimistic perspective that it was a massive miscalculation on the part of Putin to go into Ukraine and do what he’s done, because he didn’t believe the rest of the world would be so unified in its outreach and action. And there is now the willpower to take on what was previously taboo – to take on the dirty money, these trusts and the lack of clarity around who owns such assets. I think that’s possible in a new way that was not imaginable before. It just requires that willpower.

“I think this is a time where people stop thinking we just have to live with the likes of Putin and dirty money, that’s the way life is. This situation has given us a chance to say ‘no’. Our governments can rally, they can be intolerant, and they can increase the righteousness of our money flows. We can do something about this. This is an opportunity for a reset.”


 

This article was published in The Paytech Magazine #11, Page 21-22

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