Banks seek clarity to avoid ‘over-compliance’ with EU sanctions on Russia

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European banks are stepping up their complaints to Brussels about a lack of clarity on how to implement EU sanctions on Russia and a “misalignment” with equivalent measures imposed by the US and UK.

Representatives of the region’s biggest banks, including the European Banking Federation, are due to discuss their concerns with European Commission officials in a video conference on Thursday, while the umbrella organisation plans to set out its questions in a letter to Brussels.

The issues include whether to handle the proceeds of investment sales for Russian clients, how to judge if a company is controlled by sanctioned individuals and managing existing agreements with Moscow’s central bank.

The confusion among banks over EU measures against Moscow in response to its invasion of Ukraine could intensify as Brussels is this week discussing a fifth round of restrictions to target Russian coal imports and widen restrictions on its banking sector.

The commission published a Q&A addressing some of the initial questions raised by the banks in an earlier letter the sector sent to Brussels. EU officials are keen to provide more detailed guidance to the lenders while also addressing the risk of “over-compliance”, in which lenders take an overzealous approach to sanctions.

One worry is that banks could refuse to hold deposits for Russian residents of the EU, when current sanctions only prevent the bloc’s banks from accepting new deposits of more than €100,000 from Russians who do not also have an EU passport. “You tend to err on the side of prudence,” said a senior European banker.

Two types of “over-compliance” are raising concerns, said a commission official: “One is excessive compliance by member states, who might be excessively cautious and address issues that may not be entirely covered by sanctions.

“Then there can be over-compliance by banks, for example discontinuing deposits by Russian customers even if they are resident here and not captured by the sanctions. Firms might take decisions to preserve their reputation or limit risks more broadly; this is not only about sanctions,” the official added.

Valdis Dombrovskis, the commission’s executive vice-president, told the Financial Times: “Clearly we understand there needs to be some guidance to banks and institutions that are applying sanctions and we are looking at this.”

One of the main worries of the bigger European banks with operations across the globe is that they are being pulled in different directions because of a lack of harmony between EU, US and UK sanctions on Russia.

While western countries have attempted to co-ordinate their measures, the banks say there are important differences. For instance, the key question of whether an entity is controlled by people or companies on the sanction list is defined by the US as whether they own 50 per cent or more, but the EU defines it as more than 50 per cent.

If two sanctioned people or entities together own more than half of a company, the EU and US consider that to count as control, but the UK does not.

Furthermore, the UK does not consider secondary trades in shares of a sanctioned company as breaching sanctions, but the US does and the EU does in some cases.

Some banks are also unsure what they should do with repurchase agreements where the counterparty is the Russian central bank, which is now subject to sanctions. Repurchase agreements are a way for banks to raise money or to provide financing by securing a loan against an asset.

Banks are seeking guidance on whether they should try to unwind repurchase agreements with the central bank by returning funding or liquidating assets. If such unwinding transactions were considered to be in breach of sanctions, those agreements would be effectively frozen.

There is also concern among lenders about trading and investment accounts they hold on behalf of Russians. The banks want clarity on whether the Russian client selling investments worth more than €100,000 would breach sanctions.

The EBF declined to comment on the issues.

“Given the scale of sanctions, demands for clarification were important and the risk of varying interpretations significant,” said the commission official. “This is why we put out FAQs. This is also why we are reaching out with business associations and stakeholders.”

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