Tuesday, May 17, 2022

Warren, Porter seek answers about corporate business dealings in secondary markets to avoid sanctions

By Colleen M. Svelnis, J.D.

Senator Elizabeth Warren (D-Mass), a member of the Senate Banking, Housing, and Urban Affairs Committee, and Rep. Katie Porter (D-Calif) have sent letters to the CEOs of Goldman Sachs and JPMorgan Chase, seeking information on how the banks may be profiting off of Russia’s invasion of Ukraine. According to the lawmakers, the volume of Russian corporate-debt trades is at two-year high, despite historic U.S. sanctions against Russia.

The letter cautions that large financial institutions may be cashing in on Russia’s war in Ukraine, with the volume of Russian corporate debt trades reaching a two-year high in March 2022. The letter requests answers from the banks about the scope of their trades in Russian debt since the invasion of Ukraine and the clients that they are helping profit from the invasion. The members of Congress called out the banks for exploiting sanctions loopholes that allow them to continue to profit from business dealings with Russian debt in the secondary markets. Despite the sanctions that the United States imposed on the Russian economy and Russian elites, the legislators write that several large financial institutions have maneuvered to exploit loopholes that allow them to continue to trade in Russian sovereign debt in secondary markets.

Warren and Porter warn that major financial institutions are “getting in on the action of the flailing Russian economy,” trading “dirt-cheap Russian government or corporate bonds along with credit-default swaps, […] insurance on the potential default of a borrowers.” And they accuse JP Morgan and Goldman Sachs of engaging in the sales and trades of Russian debt on the secondary market. The letter cites recent reports indicates Goldman Sachs is buying up Russian debt securities at low prices and reselling these to American hedge funds, providing cover for other financial institutions seeking to profit from war. Additionally, the letter states that JP Morgan has similarly taken advantage of the war in Ukraine by brokering deals for private Russian corporations with ties to the Russian government.

Warren and Porter state that the international community has “stepped up efforts to wage a ‘maximum pressure’ campaign on Putin’s regime to end its aggression in Ukraine, freezing Russian foreign exchange reserves and limiting imports of Russian oil.” These measures have succeeded in squeezing Russia’s economy and its access to funds. However, despite these measures, the volume of Russian corporate-debt trades is at a two-year high, doubling the average daily value of trades from the same time frame in 2020.

The maneuvering highlighted in the letter is legal under the sanctions put forward by the U.S. Treasury because trading in the secondary markets is not prohibited so long as counterparties to the transactions are not sanctioned entities, and so long as the Russian sovereign debt being traded was issued prior to March 1, 2022. However, Warren and Porter cautioned that it may “undermine the work of the U.S. Treasury and the international community.”

The letters seek the following information by May 24, 2022:
  1. What kinds of trades and investments in Russian debt has Goldman Sachs and JP Morgan facilitated since the start of the Russian invasion of Ukraine on February 24, 2022?
  2. Please list the total value of these trades, broken down by type of trade.
  3. What is the total value of Goldman Sachs and JP Morgan’s profits for all trades in Russian debt since February 24, 2022?
  4. Please list all clients involved in trades of Russian government and corporate debt since February 24, 2022, including the data and type of trade, the amount of the trade, and the client’s profit from the trade.
  5. Has Goldman Sachs and JP Morgan recommended or advised clients that they could maintain their anonymity in these trades, or have they facilitated efforts to do so?
  6. How does Goldman Sachs and JP Morgan ensure that its trades and its clients trades involving Russian debt are compliant with the U.S. sanctions regime?
  7. Are you reporting the identity of any of your clients that are involved in trades of Russian debt to OFAC or other regulators?