My microscopic part in the war against Russia
Mechanics of Economic Sanctions
Follow Me on Twitter @trader_dads
An interesting thing happened on Feb 24th 2022. In an amazing coincidence, COVID-19 stopped being a problem on the same day the Russian Army invaded Ukraine.
In response to the invasion, the US Govt announced a flurry of sanctions against Russia, Russian businesses and the Russian elites. Shortly after, my day to day tasks at work increased 10-fold to make sure the private sector implemented, obeyed and executed the sanctions handed down.
I learned some interesting things about how economic warfare works in the 21st century and how the sausage is really made when Good Morning America or Today Show leads off with headlines like “US announces more sanctions against Russia”.
So Let’s break some of this process down…..
^^^^^^^^^That’s probably the weakest gag in the article (I hope) ^^^^^^^^^^^
What are sanctions?
For our purposes, the things I’ve been interacting with when we say Sanctions are Economic Sanctions More specifically, we mean financial transaction sanctions. A financial transaction sanction is a new rule issued by a government organization listing a Person, Place, Organization, Location or Type of financial transaction that will now have a restriction on it by order of that government regulating body .
Most often a financial transaction sanctions outright bans the transfer of money from a U.S. based financial institution to the sanctioned destination party. Receiving money to an account can also be restricted. This is what we actually mean when someone finds out their “accounts are frozen” . Some examples below of a financial transaction sanction:
Any bank or money transfer service cannot send/receive money to any bank account with these people listed as owner (Specially Designated Nationals list)
Any bank or money transfer service cannot send/receive money to this list of bank accounts
Any bank or money transfer service cannot send/receive money involving any of these companies.
Let’s forget the inevitable cat and mouse game which these things drift towards and focus on their stated objectives.
Objective of Sanctions
The objectives of economic sanctions can lean in different directions depending on the underlying strategy behind them. In the case of the US response to the Russian invasion, the objective appears to be Two-fold
— To hurt the Russian Oligarchs
The basic idea here is to gum up the business dealings of Putin, his inner circle and other power brokers of Russia. The oligarchs get irritated, inconvenienced and tired of the hassle then pressure Putin to leave Ukraine so the sanctions are lifted. This is why you see the gossipy articles about Russian oligarchs’ yachts seized because they could not make the payments on time or pay the staff.
This would be the equivalent of Russia telling Russian banks not to send/receive money for the Elon Musks of the United States to hurt their projects and operations.
— To make functioning in a globalized world extremely difficult for Russia
Russia cannot pay for things it needs because no bank will accept their payments. Russia cannot receive money for things it sold because banks will not deliver the money. (there are a few notable exceptions carved out in these rules presently…..I see you other there EU.)
Where does the sanction order originate ?
This is the best governmental view of economic sanction development I have found. Their flowchart below lays out the upstream steps quite well before the directive is announced and the private sector financial service providers who actually manage the mechanics and implementation of their decrees can start.
After the US Govt’s Executive Order trickles down, it’s up to the private sector to make it happen in cost -effective and Real Time ways.
To be honest, I think many people in the OFAC offices, DOJ and State Dept. think this is what happens next to get their orders implemented.
Guess which one I am ?
(Un?)Fortunately, the mechanics are a little less fiery Hell scape and more Office Space IT guy. So here it is…..
Private Sector Mechanics To Deploy Sanctions
Alright, so the Biden administration publishes new sanctions via Executive Order
The data and data warehousing solutions company LexusNexus offers a service to constantly grab raw information from the OFAC dept., format the information into their standardized format and make the information available for sale to banks and other financial service providers. (They perform the ETL in other words)
Every LexusNexus client host their own nterprise tool named Fircosoft for teams to review and manage the transactions.
LexusNexus delivers the formatted file (a proprietary file format) to the client via an SFTP connection installed between LexusNexus and the clients.
The Fircosoft Brochure ETL and Scan Process
Banks and financial service firms use Fircosoft to review and manage the data as well as scan their financial transactions efficiently and in large volume for any data points that matches the data watch list LexusNexus provided.
Techie Jargon Alert
A series of application servers will be running Java processes to pop the FIX message (or SWIFT or other type) off an MQ queue that previously received the message from an upstream payment team at the bank.
Another Java process digests the message tags and “scans” or searches tag values against the local watchlist database previously updated by the SFTP delivery mentioned above.
A match (I.E. a bank transaction contains restricted data ) will go to a table for quarantine and further review by staff. No match and the financial transactions are free to go “out the door” to it’s destination.
For a major retail bank like Citi or Wells Fargo. This amounts to millions of transactions per day which requires scanning before “going out the door”. Failure to scan a transaction, or worse— deliver money to a restricted recipient— can result in fines, audits and interest charges on the bank.
SWIFT transaction, ACH transaction, FedWire transactions, CHIPS transaction are all included in this never ending stream of payments. To make the matter more dynamic, a client of LexusNexus will receive a new formatted file 2x per day or more depending on the importance and number of changes made to the population of sanctions. Keep in mind, this list can be 10,000+ lines long and must be inserted to the watchlist ASAP.
So that’s the process in a nutshell. Systems toil away checking and rechecking financial transactions to keep money out of the hands of enemies, terrorists or political opponents.
P. S.
Worth noting that Crypto is currently not in scope for these type of transactions. This is a whole other debate right now regarding circumventing sanctions. Ironically, eventually, the underlying blockchain technology will actually remove the need for all these data reconciliations and vendor services because the sanction could be written right into the blockchain smart contract/rules. I don’t see that happening for at least 10 years however due to the massive industry shift and system changes required.
