Echoes of the Kremlin’s latest hard-line policies on terrorism have spread to the financial sector, prompting key financial regulators to announce drastic measures to control and strictly monitor free capital movement within and outside the country.

The Central Bank (CB) spelled out a set of new and tougher regulations in September on the type of information commercial banks will soon have to demand from clients before handling their financial transactions and other banking operations, while Russia’s top anti-money laundering official has called for the creation of a new financial agency that will fight against bankrolling terrorism with finances of questionable origins in the Euro-Asia Group (EAG), which include the CIS and China.

These moves stemmed from a strong belief among Russian officials that part of the unregulated cash flow in the country’s buoyant economy and other financial assets of questionable origins are being used to fund the rising wave of terrorist acts in the country, and particularly for fueling the ongoing insurgence in Chechnya, the war-torn republic which is being held hostage by an unusual mix of political terrorists and religious fanatics demanding independence from Russia.

Announcing the Russian initiatives in September, Viktor Zubkov, director of the Federal Financial Monitoring Service, the government agency which keeps tabs on financial flows in and outside the country, said the EAG will help coordinate anti-terrorism efforts by disseminating information and other intelligence data on suspicious financial transfers, help with personnel training of anti-money-laundering experts and map out other stringent measures aimed at thwarting funding terrorism in member countries. Backing up the call with a pledge of $1 million, Finance Minister Alexei Kudrin noted that the sum could be doubled if circumstances demanded it. The fund will go into training financial monitoring experts and enacting anti-terrorism legislation in member countries.

In a related move, the new CB’s directive coded No. 262-P, effective from September, is another attempt in the Russian authorities’ broader programs aimed at stemming this free flow of questionable money in and out of the country. According to CB’s new directive, banks are now required to request full information not only from clients who open accounts with them, but also on other parties who might have access to the accounts — so-called beneficiaries of financial transactions conducted on the basis of agency agreements, contract instructions, commissions and trust management arrangements for the purpose of carrying out bank operations and other financial transactions.

In compliance with the new CB requirements, commercial banks are obliged to draft programs that will enable them to gather the necessary amount of information for identifying clients and their operations’ beneficiaries. Such information for an individual client is expected to include his and his operation’s beneficiaries’ full names, passport numbers, and citizenships, while a legal entity is expected to provide its corporate registration number, location, address, and telephone number to banks.

The novelty in this new directive for individual clients is that they will now be required to provide information on beneficiaries to their transactions, while legal entities will be obliged to disclose the composition of their management structures and chartered capitals — details that were not requested in the past, when information was collected only from clients that had business with banks. In a situation when a bank cannot gather these data on its own, either due to client refusal to provide the information, or due to other technicalities, the bank is required to refer the case to the appropriate government agencies or notify the CB to take action. Only federal and regional governments and their agencies are exempted from the new requirements.

"The latest cases of terrorism in the country have prompted our political authorities to review the current measures regarding the movement of money around and out of the country, with the goal of setting huge barriers on questionable financial assets and combating measures of financing terrorism in Russia," according to a CB representative, who refused to be identified. This directive logically flows from common sense. Most of the cash flow, including huge money transfers, is done through banks, he noted. And, if most of these operations are made more transparent by ordering banks to identify and collect vital statistics not only on clients who are directly involved in such transactions, but also on those that are remotely connected, then it will be much easier to trace the real end receivers of such transfers and, therefore, monitor the purpose for which the money has been sent. The aim of these measures is to fight money laundering which takes place to finance terrorism."

Most bank executives contacted for opinions would not comment, while those that commented, requested for anonymity. However, the general opinion in the off-record commentaries was that such measures could impact negatively on the local banking systems as clients will stay from the sector altogether, except in urgent and unavoidable circumstances when whey cannot do without banks.

Besides, according to local reports on the issue, some bankers are of the opinion that the CB’s new measures will not achieve the set goal — of tracking cash flow — and are, therefore, skeptical about the whole issue. "Who will openly agree that he is funding terrorism or laundering money?" Yulia Matevosova, investments manager at Vneshtorgbank was quoted by Gazeta as saying. "If someone executes a banking operation based on a contract, the terms of the contract are used for processing the financial operation through the bank. In other cases, bankers simply have to take their clients’ words at face value.".