A brokerage for wealthy Russians that accounted for more than two-thirds of all the trading through the tiny island of Guernsey was shut down by regulators concerned about its links to a sanctioned bank.
(Bloomberg) — A brokerage for wealthy Russians that accounted for more than two-thirds of all the trading through the tiny island of Guernsey was shut down by regulators concerned about its links to a sanctioned bank.
ITI Trade Ltd. offered a gateway to trading on the Moscow stock exchange and booked annual volumes of around £53 billion ($63.7 billion) in the year ending March 2022. In the first quarter it traded £13.3 billion just as the Russian invasion of Ukraine began, and was then placed into administration management by the Guernsey watchdog. The brokerage’s London unit is facing separate regulatory scrutiny.
Courts around Europe have begun to scrutinize financial firms that offered access to Russian markets for international investors, with regulators and administrators left grappling with the fallout from tit-for-tat sanctions between Russia and major western powers.
Guernsey’s Financial Services Commission forced ITI to close after a series of failings in its monitoring of financial crime risks. The company took too long to warn it that the sanctioned Sovcombank PJSC was a minority shareholder, according to a series of court filings from the Channel Island off the coast of France. The watchdog didn’t go as far as accusing ITI of any criminality.
Court filings obtained by Bloomberg from Guernsey reveal an uneasy and sometimes testy relationship between the regulator and the firm, ending in the company being effectively forced to close by the regulator.
In Guernsey, the commission said the firm risked breaching international sanctions and it needed to act “to protect the reputation of the” island as a financial center.
By the time it came to court in July last year, ITI didn’t contest the administration management order but lawyers for the controlling shareholder Da Vinci Private Equity Fund said in a statement that it didn’t agree with some of the evidence presented to the court.
Run by a former Renaissance Capital trader, Da Vinci said its lawyers had been actively working with regulators to address their concerns. “The changes in the geopolitical climate led to issues with their independent service providers being unwilling or unable to continue to support ITI Trade’s licensed activities.”
ITI had said in May that all its customers were rated as a “high risk” from financial crime. ITI managed due diligence in accordance with Guernsey’s rules, Da Vinci said.
“The joint administration managers are currently considering the options for the business, the steps required for the return of client assets and client monies, and the settlement of open transactions,” Matthew Wright, at the administrator manager Leonard Curtis, said.
ITI was prevented from taking on new business twice before by the commission. “This is very rare,” Andrew Snell, deputy director of the Guernsey Financial Services Commission, said in documents submitted to the court last year.
The Guernsey commission specifically focused on ITI’s ongoing operations as the firm pleaded with the regulator to allow extra time to close open trades.
“The firm is exposed to heightened risk posed by geopolitical landscape following Russia’s invasion of Ukraine and the increased international sanctions in response,” Snell wrote.
ITI didn’t alert the commission that Sovcombank — sanctioned in February very shortly after Russia invaded — was an 8.75% shareholder for over two months. Its lawyers wrote to say that it had only come to their attention at the end of April and insisted that the bank was just a financial investor and its presence was no breach of the sanctions, the court filings show.
Da Vinci is now the 100% shareholder of ITI Trade, the company’s lawyers said and the firm now has no sanctioned shareholders.
The firm offered “direct market access” to the Moscow exchange to a number of customers including algorithmic traders until international access was restricted in February. Some 95% of ITI’s trading volumes were generated from the Moscow link.
Despite accounting for more than two-thirds of all stockbroking revenue on the island, the company had only a very small physical presence. Alex Phil, the sole Guernsey-based executive director of ITI Trade, did “not appear to fully understand the firm’s business,” according to Snell.
Meanwhile in London, ITI Capital was separately ordered by the Financial Conduct Authority to stop taking on any new financial clients without approval.
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