Harmful Western bank policies hit miltech startups

BLUF: Regulatory policy of Western banks prohibit transfers related to weaponry and semi-military goods and services, even when national interests lie in funding and growing the industry. In other news: Keen Venture Partners allocates €125 million to finance European defense startups this year, including in Ukraine. Also: a workshop among drone/EW makers in Lviv to find ways to replace Chinese components.

THE BIG STORY: Western banks barely working with defense startups

U.S.-based startup Omira Systems, which develops EW systems based on AI, recently sought to receive an investment transfer. To their surprise, the U.S. branch of Wise Bank declined the transaction and blocked the company account. 

This was an immediate five-alarm fire. It meant that its whole account – and all transfers – were on hold. The problem was that the investment apparently went against the bank’s Acceptable Use Policy, which doesn't support transfers related to weaponry, military and semi-military goods and services.

Troubles with the bank mean that, if Omira were a bigger company with more employees, the blocked account would have been a disaster. They might not have been able to pay salaries at the end of the month, said Jack Aureliano De Santis, CEO of Omira Systems.

He also added that the investor wrote in the payment description that the investment was related to defense. To resolve the issue and avoid big problems, the startup had to find another bank that works with military startups in just a few days.

De Santis’ problem highlights the incongruence between national interests and banking policy. Many of these banks come from countries that have been allied with Ukraine, and are seeking to support and learn from Ukrainian defense tech innovation. Despite this, some banks view working with Ukrainian defense companies as either unethical, unprofitable or otherwise unacceptable. 

“You need to find a bank that doesn’t think that defense is just for ‘killing babies’ or doesn’t follow ESG [Environment, Social, and Governance] rules, which prohibit defense or dual use,” said De Santis. “And it’s extremely hard. Especially the ESG part that prohibits banks from offering services to anything defense-related.”

Wise Bank told Counteroffensive.Pro that their policy prohibits transfers related to weaponry and military-related goods and services. In case of blocked accounts Wise also gives time to customers to transfer funds from a blocked account.

While they couldn’t talk about any specific case, a Wise spokesperson said, a separate team from a bank will look again into the De Santis’ case to provide him with a final decision.

Ukrainian encrypted communications company HIMERA also had problems with account registration.

"Most banks… we talked to refused to work with us. These included Wise, Revolut, Paysera, and others. Because of this, the first investments took a couple of weeks longer to come in," said Misha Rudominski, co-founder of HIMERA.

To resolve the problem with registration, a startup had to find a bank that works with defense or dual-use goods. Silicon Valley Bank was the way out for Omira Systems. In HIMERA’s case, they have not mentioned the name of the bank, but have solved their banking problem.

The culmination of startups’ blocked accounts occurred in the summer of 2024. In July, American bank Mercury (which is popular among startups) unexpectedly stopped working with startups from Ukraine, Russia, Belarus, and 34 other countries.

Mercury's decision also hit Ukrainian miltech.

"This was a significant problem for us. We had to quickly find another bank, go through compliance, and reconfigure processes for the new bank. Some transactions were suspended for a couple of weeks. And the entire process of transitioning to another bank took a month," said Andrii Taganskyi, COO at Odd Systems, a Ukrainian startup that produces FPV drones and optics.

Accounts of Ukrainian users and from several other countries were only one percent of all deposits of the bank’s customers. But their servicing amounts to 50 percent of all efforts and risks, explained Immad Akhund, CEO of the bank Mercury. These operations were unprofitable for Mercury, he said. 

So for startups, there are only two options – change the bank or hide connections with defense. 

EU is taking steps to allow financing for defense

The European Investment Bank (EIB), a large creditor owned by the EU government, also has restrictions on financing defense or military projects. In March 2024, the EU executive urged it to lift restrictions, but to no avail. 

Theoretically, this institution can provide loans for goods like UAV and transport infrastructure, which can be used for military and civil purposes. However, the EU Treaty on European Union (TEU), which forms the basis of EU laws, has a section –  Article 41(2) – that stops the EU from funding operations with military or defense implications. 

However, in November 2024 the EU approved funding for five cross-border projects for the first time, to support defense procurement of €300 million through the European Defence Industry Reinforcement. 

One of the reasons for funding that project was the Russia-Ukraine war, which emphasized the need for critical defense products among EU members.

In traditional European banks (like Crédit Agricole, Barclays, BNP Paribas) cooperation with defense companies is regulated by international conventions. See, for example, Barclays’ Statement on the Defense Sector: 

“We recognise that various types of defence equipment are considered necessary for achieving internationally accepted goals, such as legitimate national defence… At the same time, we also recognise that the [sector] involves equipment and activities that have the potential to lead to significant impacts on individuals, communities and the broader geopolitical landscape.”

Each government also has its own national laws regulating the banking sphere.

One of the solutions for Ukraine to find investments and bypass European regulations on defense financing became the ‘Danish model,’ where Denmark directly financed weapons production in Ukraine. 

Other countries are now following the same scenario, including Iceland, Canada, Sweden, and others. In 2024, €538 million was invested in Ukrainian defense through this method. The funds went to the production of deep-strike kamikaze drones, Bohdana self-propelled artillery units, and missiles.

BUSINESS LUNCH TOPICS: What our reporting shows!

1. Exclusive: Top Dem on Senate defense appropriations to press Pentagon on learning lessons from Ukraine miltech innovation

Sen. Chris Coons, incoming ranking Democrat on the U.S. Senate appropriations subcommittee, said he has been “pushing and pushing and pushing” the Pentagon and fellow appropriators to pay closer attention to technical and tactical lessons learned on the Ukrainian battlefield. 

"The Ukrainians have survived in no small part because of their incredible ingenuity... they're MacGyvering their way through this conflict with incredible persistence and creativity — from the cyber realm, to how they're delivering 3D printed drones... we have to learn the lessons of this,” he told Counteroffensive.Pro. 

The lack of American preparedness for this style of conflict — and the processes necessary for success — has caused some alarm for Coons.

“Our defense procurement system is bureaucratic, slow-moving, sclerotic, [and] largely captured by a few major contractors,” he said. “We are not fit for purpose [in] a digital age where, as we're seeing in Ukraine, drones are the most important piece of conflict in this century. So I intend to really push this relentlessly.”

2. Keen Venture Partners investing €125 million euros in defense startups

The Amsterdam-based VC is planning to invest in 20-25 startups across Europe, including in Ukraine. The new fund will focus on drone and radar technology in European NATO member countries.

Ukrainian teams can apply too, because registration of IP abroad is possible. In particular, Keen Venture Partners is looking for Ukrainian startups that have already established production and are interested in working with foreign markets, said Ties Klinkhamer, defense analyst at Keen Venture Partners.

Klinkhamer said they are interested in 18 specific areas within defense tech, and they will help startups reach out to ministries of defense in Europe to speed up the procurement cycle. For example, in the Netherlands, the procurement process can take up to one year. 

3. Ukrainian miltech brainstorming on how to replace Chinese components 

This month Lviv hosted a closed presentation of component manufacturers organized by the IRON Lviv Tech Cluster, which unites 65 defense and robotics startups. 

The event was attended by 11 companies specializing in the manufacture of components for drones, electronic warfare and others. Among them were Abacus-Tech (EW manufacturer), Sine Engineering (developer of swarming drone technology), Kray (developer of equipment for drones). 

Companies discussed how to localize production and presented their navigation modules, frames for drones, batteries, FPV systems, and ammunition activators.

“The dependence on Chinese components [in] the defense industry carries security and economic risks, so it is important to develop local production in Ukraine,” the organizers told Counteroffensive.Pro.

4. Verkhovna Rada passes draft law which will re-impose penalties for suppliers who violate deadlines for the state

The adoption of draft law № 12245 was a requirement of the International Monetary Fund with a deadline of the end of January. It introduces a number of changes to the Budget Code of Ukraine, including:

• a fine of 20 percent for violation of terms regarding the quality (completeness) of goods, 

• a penalty of 0.1 percent of the cost for each day of delay for violation of the terms of fulfillment of the obligation,

• an additional fine of 7 percent of the cost for a delay of more than 30 days.

5. Danish delegations visited Kyiv to explore new weaponry

From January 13-18, two delegations of Danish representatives were in Ukraine’s capital to learn about the latest military developments on the battlefield. During the visit, the delegation held meetings with Ukrainian defense companies and clusters like Brave1.

Among them were Jeffrey Saunders, CTO and Strategic Advisor at the Danish National Defence Technology Centre, Ole Kværnø, director of the National Centre for Defence, Robotics and Autonomy, and Nicholas Hawtin, program manager at the Technical University of Denmark (DTU) Science Park.

In Collaboration with CENTRE UA – Ukrainian orders/legislation we’re tracking:

Accounting Chamber Reform (Draft Law №10044-d by 16.09.2024)

Stage: signed by President Zelenskyy.

The reform envisions significant changes in the organization and functioning of the Accounting Chamber, which controls the receipt of funds to Ukraine’s State Budget and their use (including defense industry). Its activities must be closer to the standards of the International Organization of Supreme Audit Institutions (INTOSAI).

The law aims to increase transparency, efficiency, and independence of financial control in Ukraine's public sector. Key innovations include:

• Transformation of the membership formation system. Instead of the current 13 members, it's proposed to reduce their number to 11, while introducing competitive selection with priority given to international experts' opinions during the transition period.

• Expansion of the body's control powers. The Accounting Chamber will now have the right to audit:

  • Local budgets.

  • Municipal enterprises.

  • Extra-budgetary funds.

  • Funds received from international partners.

• Implementation of a mechanism for reviewing consolidated financial reporting in the public sector (governmental and local institutions, state companies and their budgets).

• Mandatory external evaluation of the institution's activities every five years.

• Establishment of clear parliamentary procedures for reviewing Accounting Chamber reports.

Particularly important is ensuring the body's political and financial independence, as well as strengthening control by relevant Verkhovna Rada committees over the implementation of Accounting Chamber recommendations.

ON THE MOVE: Professional movement, promotions and industry news.

Know someone in the defense tech space who has made a professional move? Drop us a line at [email protected]! 

• Tommi Malinen, an experienced manager in defense, will join Summa Defence Ltd. as Chief Sales Officer in February 2025. This is a Finland-based company specializing in dual-use technologies for civilian and defense sectors. 

• Kateryna Bumaha was promoted to General Counsel at HIMERA, a manufacturer of encrypted communication systems. Previously, she worked at Ukraine’s MoD as a legal expert in digitalization.

• Odd Systems, a Ukrainian drone and optics producer, is hiring a CEO for its Manufacturing Business, a Head of Project Office, and people in the Sales, Marketing, and Administrative division.

30 SECOND ELEVATOR PITCH:

Ptashka Drones specializes in developing net launchers to counter Russian Mavic-type drones. They developed a system that allows enemy drones to be captured with special net sets. That development works on FPV, Mavic, or Autel drones. Currently, they are working on launching fiber optic production and are seeking investments for it.

“To implement our idea, we seek an investment of $300,000. We are in the process of developing a ground station, and we are [developing] new technologies. We already have ready-made solutions, but we want to improve and scale up in the direction of fiber,” said Yevhen Sukhinin, CEO of Ptashka Drones.

MUST READS:

• President Volodymyr Zelenskyy and Prime Minister of the UK Keir Starmer signed an agreement on defense cooperation. It includes developing long-range systems and investments in Ukrainian defense production (like drones and artillery). The main focus is on the development of maritime security and cyber defense.

• U.S. reveals secret support for Ukraine’s drone industry, reports The New York Times. Last September, the U.S. sent $1.5 billion to boost production of drones. U.S. intelligence officials helped to build this program.

• Ukraine plans to integrate Ukrainian elements of air defense into the NASAMS anti-aircraft system, said Rustem Umerov, minister of defense. This has to increase the effectiveness of the system.

• Shield AI, the U.S.-based drone maker, established its office in Kyiv. They already started training Ukraine’s Unmanned Systems Forces on operations with the V-BAT drone, which was tested in the electronic warfare environment.

• Ukraine produced 30,000 drone bombardiers for units of the Ukrainian army, said Herman Smetanin, minister of Strategic Industries. These drones which Russians call ‘Baba Yaga’ not only destroy enemy equipment and personnel but are also effectively used to deliver ammunition, food, or medicine to hard-to-reach areas and remote mining.

• Russians started to use cheap Molniya and Privet-82 kamikaze drones with TM-62 land mines.

• Great Britain will send 15 air-defense systems, Gravehawk, specifically designed for Ukraine, with modernized air-to-air missiles to Ukraine. Delivery will be during this year.Share the newsletter

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