The world's wealth management industry finds itself in the centre of arguments about how far and deep should seizures of Russian money and assets go, and what the limits on such action should be.
It is now more than three weeks into the Russian invasion of Ukraine. Sanctions and other restrictions are cutting Russia off from the outside financial world. JP Morgan and Goldman Sachs are winding down operations in the country. More may follow. Private client advisors and wealth managers with Russian or Russia-linked 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 has frozen assets on designated persons, including Vladimir Putin and Foreign Minister Sergei Lavrov. Hundreds of oligarchs and other individuals known to be associated with or to have links to the Russian regime are in the net; bans on making funds or other economic resources available to those designated persons, either directly or indirectly, have also been imposed. To give one prominent example, the UK has seized control of Roman Abramovich’s Chelsea Football Club, throwing one of the top European teams into chaos.
In Switzerland, to the astonishment of some in that famously neutral country, Berne has frozen accounts of designated individuals and vowed to endorse European Union sanctions against Russia. In the US, the EU and Canada, governments have imposed bans and bank freezes. Russia is out of the SWIFT banking system. The rouble has collapsed, the dollar has gained and the euro has weakened, raising questions about wider market dislocations. Wealth managers' asset allocation decisions will need to be reviewed. Major banks such as UBS, Credit Suisse, Deutsche Bank, BNP Paribas and UniCredit have detailed their exposures.
Inevitably, however, banks, law firms, accountants, multi-family offices and fiduciary services firms may think they have no alternative but to eject clients if there is the slightest suspicion of connection to the Putin regime, even if certain persons aren’t on any official list. That appears the prudent course to take. Sanctions may not capture all who fall under the rubric of “politically exposed persons.” Wealth managers may conclude that even if a PEP with a Russia connection hasn’t been sanctioned, they must go.
Such decisions remind us of how world-class know-your-client monitoring and onboarding are now non-negotiable processes that firms must get right. Firms should consider a wholesale refresh of their client lists and KYC processes.
Economic and military warfare intersect, and policymakers will argue that while cutting some people loose from financial services can catch some who don’t deserve it as a sort of “collateral damage,” in all too many cases those being sanctioned have extracted billions of dollars from the former Soviet Union rather than been genuine creators of new value.
It is galling how the Western world’s financial and business worlds have earned a rich living from this narrow cohort of the Russian population with nary a flicker of shame. The red carpet was thrown down with gusto, so to watch firms now rush to disassociate themselves from anything Russian leaves a sour taste.
Even so, it sometimes takes events as horrible as those in Ukraine to make people, including wealth managers, wake up.
The pendulum is now swinging violently the other way. There is bound to be a sort of “grey area” where Russian-born people living abroad, such as those now legal citizens of the countries they inhabit, could come in for suspicion or even be denied access to certain services. That raises several questions.
The author of this article has spoken to advisors and people in London and Geneva, for example, about the potential for serious injustices and mistakes being made. There are ugly emotions out there. The Conservative MP Roger Gale has reportedly said that every Russian citizen living in the UK should be expelled and "sent home" – an approach that seems to take a cavalier approach, if such citizens have UK passports. What, for example, happens to a Russian who has spent his or her entire adult life in the UK? (The author of this article knows several such people personally.)
What we don’t want to see is people with a Russian surname, or place of birth but no connection to the Putin regime, being ostracised. In the current understandably fraught environment, it is important for due process of law to hold firm. All too often firms can take the knee-jerk approach of cutting people from services and worrying about the details later.
It is therefore essential that wealth managers and others in the space explain as fully as possible their decisions to let certain clients go. It is not enough to cast clients out and hope this falls under the media radar. Strong explanations of why actions are taken are necessary. Inevitably, firms will be asked why they booked certain clients in the first place, and such questioning could get unpleasant, but firms have to deal with it.
The morality of whom wealth managers deal with can be murky for all kinds of reasons. Consider this: The surging price of commodities, such as oil, means that people from the Middle East and other regions where political governance can be questionable will make a great deal more money, and many of them are already clients of private banks and the rest of the sector. Alas, the geopolitical crises of our time are likely to add to the vast wealth of people in jurisdictions not always known for their respect for liberty and individual rights.