How to conduct KYC on Russian Counterparties ?
Doing business with Russian entities in non-sanctioned sectors of the economy requires some specific attention points regarding client due diligence (the risk exposure assessment process of clients to money laundering and terrorist financing).
Russia complies with their national AML/CTF laws and implements the assessments out of supranational reports. The Russian law and its accompanying acts are similar to what the 4th European AML Directive (EU 2015/849) prescribes.
Moreover, through the membership in the FATF, the Eurasian Group and the Council of Europe Committee of Experts on the evaluation of AML measures and the Financing of Terrorism, Russia indicates the common goal to combat AML and financing of terrorism. Recently, on 13 November 2017, the adoption of the beneficial owners disclosing procedure had been published.
A clear understanding of some basic principles will allow you to strengthen your processes. In Russia there are three main types of companies:
The General Participant’s Meeting (General assembly) is the highest governing body of an LLC, and almost all matters fall within its exclusive competence. Even if the LLC participants choose to create a board of directors, the General Participants Meeting has the power to limit the delegation of several matters to the board and as stipulated in the charter. The possibility exists to create a “supervisory board” and a “board of Directors”. This means that the identification of both governing bodies might be necessary over Client Due Diligence (besides the 25% UBO legal rule).
The joint stock company can be on the one hand an Open Joint Stock Company (OJS), or OAO in Russian, where shares may be publicly traded without the permission of other shareholders. An OAO can distribute its shares to an unlimited number of shareholders and sell them without limitations. On the other hand, we have a Closed Joint Stock Company (CJS), or ZAO in Russian, whose shares are distributed among a limited number of shareholders (maximum 50).
The JSC “organisation charter” must satisfy a number of requirements. In addition to the name and business address, the charter must specify whether the JSC is public or non-public and specify other provisions required by law. Both public and non-public JSCs must maintain a shareholder register in which the holdings of the shareholders are listed. A “licensed registrar" must perform this function. For KYC purposes, one can ask a declaration made by the licensed registrar. Eventually, it is possible to have two layers of governing bodies: a “supervisory board” and a “board of Directors”. A best practice is to have a copy of the charter in the KYC archive.
As in other countries, some of the above-mentioned companies might be “partially” state-owned corporations. In some cases, the JSC can be completely or partially owned by the federal government. In this case, politically exposed persons (PEPs) will probably be present in the Governing bodies and an Enhanced due diligence process will be applicable. The state will be one of the shareholders (both possible for OJS or CJS).
One partner can buy or sign contracts. So, what are the proxies for the company? The interaction between the Supervisory Board (Board of Directors) and the (Operational) Executive Board can be different from one company to another. If the counterparty is a Russian entity – we would advise to ask for a “translated copy” of the charter and/or a declaration of the General Manager/COO or CFO.
How to establish a company in Russia?
Establishing a company in Russia will start similarly to a company settlement in Belgium with the signing of a charter. In this charter, most of the basic principles on how the company will be organised will be written down. A copy of this document will allow an in-depth analysis of the corporate structure.Partially state-owned companies have no different legal setup. The state will be one of the (primary) shareholders at that moment. There are some specific state companies, but for the operation of governmental or municipal assets, the Russian state will use the so-called unitary state enterprises. The Russian Post is an excellent example of a unitary state enterprise.
What are Russian Customer Due Diligence requirements?
Under the new 4th AML Directive, the CEO and CFO are required to be identified (part of the executive board). The supervisory board will need to be identified as well (if they own (in)directly more that 25% of the shares).
Nevertheless, we have to keep in mind that based on Transparency International’s corruption index, Belgium is ranked 15 out of 176 countries and that Russia is positioned 131. (See Transparency Index). The burden of regulatory compliance is getting stronger in an interconnected environment. Getting a view on the different aspects can be a benefit to the understanding of your professional relationships.
By performing a gap analysis we can map the drivers to ensure your compliance with the latest requirements of the fourth directive. Develop training plans, communication strategies and awareness campaigns in line with the designed framework and regulatory requirements.
Our compliance services and solutions include:
- Customer acceptance policy and the related AML Matrix Risk Score system meeting regulatory requirements
- Corporate Governance
- Ultimate Beneficial Owner (UBO) and Political Exposed Person (PEP) identification procedures
- Monitoring transaction detection scenarios
- Entreprise Wide Risk Assessment
- Compliance framework and Regulatory Watch solution
- Screening tools adapted to your business model
- Formations & Trainings on AML and financial crimes topics
- Participants filtering with international sanctions lists and embargoes
- Review of the KYC register
- And many other topics
ComplianceFinancial firmsKYCAMLRisk Based ApproachRussiaFinancial InstitutionsFinancial operationsEurope
