How Compliance is Structured at Movchan’s Group

Vyacheslav Dvornikov

Jan 14, 2025

Like all licensed financial companies, Movchan’s Group is obliged to conduct a full compliance check of clients. This protects both us and, more importantly, our other clients from the risk of suffering from repressive actions by regulators or law enforcement agencies. Together with the head of the compliance department of Movchan's Group, Zhadra Abdullina, we explain in more detail how compliance is organized in our company and with the independent administrator, why it is important, and how Western financial institutions currently treat Russian-speaking clients.

How is compliance organized in Movchan’s Group?

The formal task of compliance checks for clients and counterparties, which today’s legislation requires from all participants in business relationships (especially those with special licenses and whose activities are regulated), is considered to be the identification (and in this case, refusal to cooperate) of a fake client identity, a ban on the client from performing the requested actions, or (and) the criminal origin of their funds. However, the legislative reality is such that the risks are not only of a “mistake” (i.e., “missing” criminal money, for example, or a client under sanctions), but even insufficiently thorough study of the client in most countries of the world are extremely high: the regulator can revoke the license, fine, and responsible employees may find themselves under investigation. Therefore, in practice, compliance departments, in most organizations independent of other services and making the final decision on interaction with the client, require irrefutable evidence of the absence of problems and without this do not allow the client for service. That is, the “burden of proof” falls on the client and, of course, the business managers who would like to work with them.

We, like all licensed financial companies, are obliged to conduct a full compliance check of clients, including anti-money laundering measures (AML, Anti-Money Laundering), in accordance with the requirements of regulators. We carry out this check in two jurisdictions — in the Cayman Islands and Kazakhstan, where our management companies are registered and have all the necessary permits and licenses.

We are skeptical about the often formal and illogical requirements for checks that most compliance departments of large financial structures present. But this does not mean that we do not see great importance in our checks. First of all, they allow us to ensure that funds are invested in our funds and products by persons not associated with offenses and that their capital was earned legally. This protects both us and, more importantly, our other clients from the risk of suffering from repressive actions by regulators or law enforcement agencies. It is no secret that if law enforcement suspects the presence of criminal money in a particular system, they can easily stop its activities by freezing the accounts and assets of all investors. The investigation can then take years.

At the first stage of the compliance check, we request a number of documents, including a passport, to ensure that the investor is a real person. We also check their residential address, sources of funds, and employment information, including data from the resume. This is necessary to understand how the investor's capital was formed and to find out if they had connections with government structures or political organizations. Such a connection in itself does not pose a problem but requires more thorough future verification — in the world now, the attitude towards politically exposed persons (PEP) is extremely cautious.

The situation is always considered in a complex. If it is a state-owned company, we look at what position the investor worked in, whether they were on the board of directors, worked under an employment contract, or had a share in the company. We also analyze what this company was engaged in.

Next, we thoroughly check all the provided documents. For this, we have our own tools, and we also refer to open sources of information. We ensure that the client is not a PEP, does not appear on sanctions lists, and does not have a dubious past. Special attention is paid to checking the source of funds. For example, if a client receives income in the form of dividends from a company, we make sure that this company has the financial ability to pay them and that it is not fictitious. We check everything, down to each transaction, bank statement, to understand how the money moved.

This is how compliance works at the level of the management company. However, at the product level, there is another stage of verification conducted by an independent provider. In the case of a fund, this role is performed by the administrator, whose employees may repeat the same actions as we do. They make the final decision on admitting the investor. If it is about managing funds in separate accounts implemented through Interactive Brokers, then a similar check is conducted by the broker itself.

On average, compliance takes three weeks from the moment the client fully provides the document package.

Why is it important for the company to conduct comprehensive compliance?

From a compliance perspective, three types of risks can be identified. The first is regulatory risks. They are associated with the possibility that the regulator will impose fines on the company or apply other sanctions, up to revoking the license if the company does not comply with the requirements of the legislation of the country where the management company is registered.

For us, as a company, the consequences may not be limited to license revocation. For example, if the regulator revokes the license, investors who have entrusted their honestly earned money for management may sue the management company, demanding compensation for damages caused by the temporary freezing of their funds.

And of course, reputational risks cannot be forgotten. If an undesirable person is among the investors, it can seriously undermine trust in the company and damage its reputation both among clients and partners. For example, banks may stop working with such a company.

There are many examples of problems associated with “improper” (in quotes, because in these cases it is not about proven violations in court, but about the opinion of inspectors sent by the regulator). In 2018–2019, the activities of the British broker “Dolfin” were stopped. The FCA (The Financial Conduct Authority) considered that the broker did not properly check a number of its Chinese clients and allowed them to violate investment conditions to obtain golden visas. Thousands of the broker's clients waited for their assets to be unfrozen for two years — many (those who had open temporary positions and could not close them) lost substantial money. In 2022, Danske Bank was required to pay more than $2 billion in a money laundering case in the bank's Estonian branch. From 2007 to 2015, about 200 billion euros of dubious transactions related to clients from Russia and other CIS countries passed through the bank. The group investigating these cases stated that the branch did not properly implement systems to detect suspicious operations, which made it possible to use the bank for money laundering. Among other things, Danske Bank suffered colossal damage to its reputation, leading to a loss of trust from clients and investors.

So, although compliance checks can be lengthy, burdensome, and cause irritation, we do not advise seeking institutions where checks are “easier” — there your risk of suffering from such “ease” is much higher.

How has compliance work changed after February 24, 2022?

In the last two years, checks of investors for being on sanctions lists have significantly tightened. An important part has become checking close relatives of potential investors, as there is a risk of capital withdrawal through them.

Even more attention has been paid to checking the source of funds for investors of Russian origin. Now it is required not just to confirm the fact of the origin of funds by providing a tax declaration or real estate sale agreement, but also to document the full movement of these funds up to the account from which the transfer of funds is planned. In general, investors now have to provide significantly more documents.

On the other hand, over the past two years, we have greatly automated compliance procedures. We have connected tools that allow us to spend less human resources and time on verification, which remains at the same high level. We also, as much as possible, simplified the processes for the clients themselves: the maximum part of the documents is provided in electronic form, certifications are done in the most efficient way, etc.

How does compliance work differ in companies with Russian-speaking clients from those focused on Western clients?

In the field of AML (anti-money laundering), there is a risk assessment system that determines the depth of compliance checks. There are various levels of checks, such as enhanced due diligence and simplified due diligence. This assessment depends on a number of factors, such as the investor's country of origin, the source of funds for investment, the type of product they are investing in, and others.

When it comes to Russian citizens, even if they have long lived in an EU country, they are automatically recognized as high-risk clients — only because of their passport or even country of birth. We always conduct enhanced checks on such clients — not because we consider them “worse” than others, but because these are the requirements of regulators, and our compliance with these requirements serves as a guarantee of safety and comfort for all our investors.

It should be noted that the classification of clients from the CIS into the high-risk group existed long before February 2022. The same applies, for example, to Kazakhstan.

Any European bank usually conducts simplified due diligence if the client is a resident of a European country and has a clear income, for example, in the form of a salary from a European company. In this case, the maximum requirement is to provide a copy of the passport and tax declaration, as the legislation allows such an approach for low-risk clients.

It should be noted that within compliance procedures, there are many “liberties” and “self-activities” that compliance officers of various organizations allow themselves. They often require documents and evidence not specified in the legislation and clearly excessive in terms of ensuring AML requirements. Several banks known to us request a letter from a tax lawyer from investors confirming that the client has paid all due taxes. Some require notarization of bank statements, even if they are obtained through an online system. Many organizations need two or more confirmations of the residential address. In our activities, we try not to cross the line of necessity.

How are the relationships of our compliance department with external providers — the administrator (in the case of funds) and Interactive Brokers (in the case of separate accounts) built? Can we influence their decisions?

This is one of the most complex topics in compliance because the administrator is a huge global organization. Its employees are forced to work with clients from all over the world and of all types, and therefore, as a rule, poorly understand the specifics. Sometimes this misunderstanding becomes the cause of excessive bureaucracy, attempts to play it safe, applying to an investor from one country the logic and rules that work in another country. We regularly receive requests from the administrator for new investors and can only assess how justified they are and whether they comply with legal requirements. If the request seems logical, we explain to the client the need to provide additional documents. If the request seems excessive, we can try to challenge it and often do. However, the final word always remains with the administrator. We have no way to influence their decisions or, for example, ask to expedite the verification of one client compared to another.

However, Interactive Brokers, in principle, does not correspond with management companies that have the right to manage individual client accounts on the Interactive Brokers platform. It independently checks all documents through its platform and may not even communicate with the client before denying them.

We can explain a lot to our administrator since we are in direct contact. Many times we have had to reassure colleagues, showing that, for example, the investor is a namesake of a person who is on the sanctions list, not a sanctioned person; that a particular bank from which the transfer is made is not under sanctions, although located in Russia; that not all companies with the word “oil” in their name are “Rosneft,” and so on. The broker, however, can automatically deny the client in such a case, and this, as they say, “cannot be appealed.”

Do MG clients have problems with withdrawing money from a compliance perspective?

In fact, a client withdrawing money from our product has already passed our compliance at some point and then held money in a reputable structure (fund, bank, broker, administrator) and can easily present all supporting documents. We, in fact, provide them all to them. Although each financial institution where the client plans to withdraw money has its own compliance standards, in our practice, our clients have not encountered problems with withdrawing funds. When withdrawing money, the client provides the financial institution with certain documents, including those collected as part of compliance at the stage of opening an account in Movchan’s Group. This allows the bank to ensure that the client initially invested absolutely clean money and is now simply returning it. The transparency of our funds, as well as the reliability of the administrator and other providers, gives confidence that there will be no problems when withdrawing funds.