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. Last Updated: 07/27/2016

U.S. Bank Locks Out Russians

Spurred by a summer banking crisis and a post-Sept. 11 money-laundering clampdown by U.S. regulators, the Union Bank of California has cut its ties with some 450 Russian banks.

Union Bank of California vice president Roman Kortava said it had been forced to make the move because of "the incompetence and biased attitude toward Russian banks of certain American officials and bankers," the business daily Vedomosti reported Friday.

"What we spent the past four years building is being destroyed," it quoted Kortava as saying. "We are once again experiencing a crisis of trust toward Russian banks."

A representative of the bank in Moscow confirmed the report Friday, but would provide no further comment.

Earlier in the summer, the New York division of Dutch ABN Amro quietly closed correspondence accounts with some 100 banks in Russia, Eastern Europe and the Caribbean amid U.S. authorities' investigations of its dealings with foreign financial institutions.

The bank, which is the world's 20th largest with some $600 billion in assets, did not provide details of the regulators' investigation.

Union Bank of California's decision to close correspondence accounts as of Dec. 20 had in part been caused by a badly timed summer banking crisis, which came soon after a decision by management to expand its business in Russia, banking specialists said.

In July fears of a purge by the Central Bank prompted banks to stop lending to one another. The interbank lending market was frozen, and the resulting drop in liquidity triggered a run by depositors, eventually causing the temporary collapse of Guta Bank, a major domestic bank.

"This decision is a combination of [U.S. regulators'] tightening of control of the corporate citizenship of banks and the fact that UBoC's crediting business was undoubtedly hurt by the banking crisis," said Richard Hainsworth, head of bank rating agency Rusrating.

Hainsworth said the higher costs of monitoring the origins of Russian funds, along with the sour experience of the crisis, had left the bank feeling "exposed" in Russia.

With the departure of ABN Amro and UBoC, larger Russian banks will take up the slack and provide foreign settlement arrangements for smaller banks, Hainsworth said. Ironically, this would make the origin of Russian funds even harder for foreign banks to track, he noted.

Correspondence accounts allow money transfers, currency exchange and other operations to take place between two banks, and are possible conduits for laundering illegal funds.

The Bank of New York scandal in 1999, when billions of dollars in suspect funds from Russia were allegedly laundered through the bank, besmirched the reputation of Russia's banking system, and led the Bank of New York to terminate most of its correspondence accounts with Russian banks.

In May, Western banks were driven to review their security records after Riggs Bank, one of the oldest U.S. banks, was fined $25 million in connection with a probe into possible links to terrorism financing. The fine was the largest-ever imposed on a financial institution for such violations.