Economic activity

US banks with big loans on yachts of Russian oligarchs brace for sanctions

  • The United States has said it will seize the yachts, private jets and other assets of Russian oligarchs.
  • Sanctions are a headache for banks with multi-million dollar loans against these luxury toys.
  • Insider spoke with three lawyers about the problems this could create for US banks.

The United States is on a mission to seize the yachts and private jets of Russian oligarchs, President Joe Biden said in his State of the Union address last Tuesday. The next day, the Department of Justice announced that it was launching a KleptoCapture Working Group seize assets and apply other sanctions against the oligarchs.

Russian elites aren’t the only ones who have to worry about sanctions. The world’s wealthy frequently use loans to finance major purchases to avoid parting with other assets. Banks that have an interest in yachts, jets or any other secured assets belonging to a sanctioned person are caught in these regulatory measures.

European banks like Credit Suisse are already scrambling — the Financial Times reported last week that the Swiss bank had asked investors to destroy documents related to the loans of yachts and private jets of its wealthy clients. Credit Suisse declined to comment on Insider. French and Italian authorities have already begun to seize yachts.

American banks

are much less exposed to Russian debt than European banks, but three lawyers told Insider that U.S. banks aren’t necessarily safe. The list of more than 250 sanctioned individuals and entities grows almost daily, and the sweeping sanctions mean banks have few options if a borrower defaults on a loan or the government seizes the asset.

“It’s a huge headache because all of a sudden the assets you have loans against are something you can’t access,” said law firm Stroock partner Tom Firestone, who previously spent 14 years at the Department of Justice. “You want to get your asset, but you have to stay on the right side of the law. It can take a lot of legal analysis, and it’s obviously not quick or cheap.”

Sanctions leave banks with limited options for loans in danger of default

The sanctions prohibit any U.S. person or entity from doing business with a Specially Designated National, or SDN, which can be any person or entity.

While a bank obviously cannot issue a new loan to a sanctioned person, the sanctions also apply to existing loans with customers who are new to the SDN registry.

Antonia Tzinova, a partner at Holland & Knight, said the penalties were very restrictive and it was unclear whether a US bank could even receive payments on an extended loan.

The Justice Department and the Office of Foreign Assets Control did not immediately respond to Insider’s requests for clarification on whether banks could accept loan repayments or how secured assets would be treated.

Most worryingly, banks are reluctant to seize loans, seize collateral and sell it. Yachts are particularly heavy to unload and can take a year to 14 months to sell, JPMorgan’s head of loans previously told Insider. But under the new sanctions, if SDN cannot repay the loan, the bank is prohibited from extending repayment terms or accepting other collateral, be it shares or bonds. works of art. A slide in an investor presentation suggested that previous sanctions led to a third of defaults on Credit Suisse yacht and aircraft loans in 2017 and 2018, the Financial Times reported.

“There is no way banks can restructure the loan against the named person to allow for some sort of resolution,” Tzinova told Insider. “So at that point they need to look to collateral. Whether they can move collateral and own it depends on the specific terms of the existing loan. They may even need to get a license from OFAC in order to move on the collateral.”

OFAC is likely to be overwhelmed with applications for licenses, Tzinova said, adding that it takes at least several months to get one and can take more than a year.

If the bank seizes the collateral, it is generally required to keep it and report it to the US Treasury Department, said Michael Dawson, partner at WilmerHale. The bank would need additional permission from OFAC to sell the asset, and even then it could only collect enough to cover the outstanding principal; the rest would be held in an escrow account and the bank would have to pay interest on it.

US banks aren’t in hot water like their European counterparts – yet

It’s unclear to what extent U.S. banks are exposed to loans secured by durable assets – as opposed to securities – with sanctioned individuals. Data from the Bank for International Settlements reported that in September, US banks had about $14.7 billion in exposure to Russian bank debt, while Italian and French banks had nearly double that.

A senior executive at a major U.S. bank told Insider that while foreign banks with U.S. arms lent to Russians against hard assets such as yachts, U.S. banks generally did not. The banker said that in their company, all potential customers are screened against the sanctions list and that their group’s previous requests to provide loans to Russians, even unsanctioned ones, had been refused due to a lack of assets in the United States.

“It is very difficult for us to lend to non-resident customers if their assets and sources of repayment are not onshore in the United States,” said the executive, who spoke on condition of anonymity in order to Express freely. “It’s not just residency; it’s that their sources of income and their assets are mostly based in the United States, because we’re looking at cash flow to repay that.”

Firestone said he was skeptical that the compliance protocol meant US lenders were shielded from any impact of the sanctions. The SDN list continues to grow to include individuals like family members of oligarchs, and the task force is opening the door to more sanctions, he said.

“There are many other countries that have corrupt regimes whose assets may be located in the United States,” he said, adding that so-called politically exposed persons with loans may be scrutinized, ” because once you get all the architecture and machinery in place, those kind of task forces won’t limit their investigations to just one country.”

Firestone also said Russia is unlikely to agree to the sanctions. The Kremlin has already banned borrowers from repaying foreign bondholders in a currency other than the rouble. It is possible that Russia could retaliate by banning Russians from repaying loans in any form to Western lenders, he added.

Lawyers said the sanctions situation changes from hour to hour. Tzinova, who is from Bulgaria, said it was “difficult to predict how it will turn out”, adding: “What is happening in Europe is inexplicable to me in the 21st century.”