US Sanctions on Russia Expand to Target Foreign Financial Institutions Providing Services to Sanctioned Persons and Sectors

What Happened: 

On December 22, 2023, President Biden issued Executive Order (EO) 14114  that expands the authority of the US Department of Treasury Office of Foreign Assets Control (OFAC) to sanction foreign financial institutions that provide services to certain persons and sectors subject to US sanctions on Russia, deemed by OFAC to support Russia’s military-industrial base (the FFI EO). Simultaneous with President Biden’s issuance of the FFI EO, OFAC published a Compliance Advisory (FFI Advisory) for foreign financial institutions regarding steps that foreign financial institutions can take to mitigate sanctions exposure.

The Bottom Line:

US sanctions on Russia have now expanded to target financial institutions outside of the United States that provide financial services to certain individuals and sectors subject to US sanctions on Russia. OFAC has signaled that foreign financial institutions should carefully consider the compliance guidance provided in OFAC’s FFI Advisory and take steps to identify and minimize exposure to Russia’s military-industrial base, including to develop an appropriate sanctions compliance program.

The Full Story:

The FFI EO

On December 22, 2023, President Biden issued the FFI EO to amend EO 14024 and EO 14068. According to a Press Release issued by US Secretary of the Treasury, Janet Yellen, the FFI EO is meant to further target Russian sanctions evasion and solidify the US commitment to its G7 allies by making clear to foreign financial institutions that facilitating significant transactions relating to Russia’s military-industrial base may expose them to US sanctions. In a Press Briefing, the White House described the FFI EO as providing OFAC with a tool, for the first time, to use secondary sanctions against financial institutions outside of the United States that are still providing financial services to Russia’s war-time economy (activity that has been prohibited for US persons under EO 14024 since April 2021).

For the purposes of the FFI EO, a “foreign financial institution” is quite broadly defined as any foreign entity that is engaged in the business of accepting deposits; making, granting, transferring, holding, or brokering loans or credits; purchasing or selling foreign exchange, securities, futures or options; or procuring purchasers and sellers thereof, as principal or agent. This includes depository institutions; banks; savings banks; money services businesses; operators of credit card systems; trust companies; insurance companies; securities brokers and dealers; futures and options brokers and dealers; forward contract and foreign exchange merchants; securities and commodities exchanges; clearing corporations; investment companies; employee benefit plans; dealers in precious metals, stones, or jewels; and holding companies, affiliates, or subsidiaries of any of the foregoing.

The FFI EO amendment to EO 14024 authorizes the imposition of sanctions on foreign financial institutions that are either (1) facilitating significant transactions on behalf of persons designated for operating in certain key sectors of the Russian economy that support the country’s military-industrial base (i.e., persons subject to sanctions under EO 14024); or (2) facilitating significant transactions or providing services involving Russia’s military-industrial base, including those relating to specific manufacturing inputs and technological materials that Russia is seeking to obtain from foreign sources (i.e., “specified items”). Simultaneous with President Biden’s issuance of the FFI EO, OFAC issued a determination listing the prohibited specified items under amended EO 14024, which includes certain types of machine tools, manufacturing equipment, materials related to semiconductors, electronic test equipment, propellants and chemical precursors for propellants, machine lubricants, bearings, advanced optical systems and navigation instruments.

OFAC’s general licenses under EO 14024 remain in place. These licenses authorize certain transactions that would otherwise be prohibited related to the production, manufacturing, sale, transport, or provision of agricultural commodities, agricultural equipment, medicine, medical devices, replacement parts and components for medical devices, or software updates for medical devices. OFAC has also clarified that foreign financial institutions would not face sanctions risks for supporting these transactions.

The secondary sanctions imposed by OFAC under EO 14024, as amended by the FFI EO, may either (i) prohibit the foreign financial institution from the opening of, or prohibit or impose strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States (i.e., non-SDN sanctions); or (ii) impose full blocking sanctions (i.e., SDN sanctions) on the foreign financial institution.

The FFI EO amendment to EO 14068 also authorizes OFAC to prohibit the importation of products that have been processed or substantially transformed in third countries. The FFI EO amends EO 14068 to authorize OFAC to implement the expanded import prohibitions by issuing determinations outlining the prohibit products. Simultaneous with President Biden’s issuance of the FFI EO, OFAC issued a determination prohibiting the import of Russian seafood products and amended an existing determination prohibiting the import of gold.

The FFI Advisory

Simultaneous with President Biden’s issuance of the FFI EO, OFAC published the FFI Advisory, which provides foreign financial institutions with guidance on the sanctions risks of providing financial services to individuals and entities in Russia as well as steps that foreign financial institutions can take to mitigate sanctions exposure.

The FFI Advisory provides the following examples of activities that could expose foreign financial institutions to sanctions risk under EO 14024, as amended by the FFI EO:

• Maintaining accounts, transferring funds, or providing other financial services (i.e., payment processing, trade finance, insurance) for any persons designated for operating in the specified sectors under EO 14024. To date, OFAC has issued determinations specifying Russia’s aerospace, electronics, marine, financial services, metals, mining, quantum computing, accounting, trust and corporate formation services, management consulting, architecture, engineering, construction, manufacturing, and transportation sectors as specified sectors under EO 14024.
• Maintaining accounts, transferring funds, or providing other financial services (i.e., payment processing, trade finance, insurance) for any persons, either inside or outside Russia, that support Russia’s military-industrial base, including those that operate in the specified sectors under EO 14024, regardless of whether such person has been designed for operating in such sectors.
• Facilitating the sale, supply, or transfer, directly or indirectly, of the specified items (described above) to Russian importers or companies shipping the items to Russia.
• Helping companies or individuals evade US sanctions on Russia’s military-industrial base, including:
  • offering to set up alternative or non-transparent payment mechanisms;
  • changing or removing customer names or other relevant information from payment fields;
  • obfuscating the true purpose of or parties involved in payments; or
  • otherwise taking steps to hide the ultimate purpose of transactions to evade sanctions.

The FFI Advisory recommends that foreign financial institutions take steps to identify and minimize their exposure to activity involving Russia’s military-industrial base and those that support it in addition to existing baseline customer due diligence procedures and other anti-money laundering controls. OFAC provides the following examples of controls that an institution may implement, to the extent commensurate with its risk and current exposure to Russia’s military-industrial base and its supporters:

• Reviewing an institution’s customer base to determine exposure to the following:
  • Any customers involved in the specified sectors of the Russian economy or who conduct business with designated persons in the specified sectors.
  • Any customers that may be involved in the sale, supply, or transfer of the specified items to Russia or to jurisdictions previously identified as posing a high risk of Russian sanctions evasion.
• Communicating compliance expectations to customers, including informing them that they may not use their accounts to do business with designated persons operating in the specified sectors or conduct any activity involving Russia’s military-industrial base. This may also include sharing the list of the specified items with customers, especially customers engaged in import-export activity, manufacturing, or any other relevant business lines.
• Sending questionnaires to customers known to deal in or export specified items to better understand their counterparties.
• Taking appropriate mitigation measures for any customers or counterparties engaged in high-risk activity or who fail to respond to requests for information regarding activity of concern. These measures include restricting accounts, limiting the type of permissible activity, exiting relationships, and placing customers or counterparties on internal “do not onboard” or “do not process” watchlists.
• On a risk-basis, obtaining attestations from customers that they do not operate in the specified sectors, engage in any sales or transfers of the specified items to Russia, or otherwise conduct any transactions involving Russia’s military-industrial base.
• Incorporating risks related to Russia’s military-industrial base into sanctions risk assessments and customer risk rating criteria. This includes updating jurisdictional risk assessments as appropriate.
• Implementing enhanced trade finance controls related to the specified items, including monitoring information collected as part of documentary trade.
• Using public information and past transactional activity to inform due diligence and to conduct proactive investigations into possible sanctions and export control evasion.

OFAC recommends that foreign financial institutions review OFAC’s previously issued guidance for US financial institutions and work to implement a sanctions compliance program consistent with OFAC’s guidance, including:

• Training staff on sanctions risks and common red flags. This includes not only compliance personnel but also front-line staff, senior management, and business lines (e.g., underwriters, relationship managers). It is especially important to train staff that while it is appropriate for customers to ask for guidance on how to comply with bank policies and sanctions, any request for assistance in evading sanctions should be treated as a serious red flag and result in appropriate mitigation measures.
• Ensuring any identified risks or issues are escalated quickly to the proper level (e.g., senior risk committee) and promoting a “culture of compliance.”
• Communicating clearly and frequently with US and other correspondent banks on their due diligence expectations and requests for information.
• Incorporating information and typologies from relevant US Financial Crimes Enforcement Network (FinCEN) and OFAC alerts and advisories into automated and manual anti-money laundering controls. Of particular concern for Russian sanction evasion are:
  • Customers conducting business with newly formed Russian companies or newly formed companies in third-party countries known to be potential transshipment points for exports to Russia.
  • Companies or counterparties supposedly involved in production or import-export of sophisticated items with no business history or little-to-no web presence.
  • Customers or counterparties using unusual or atypical payment terms and methods, such as large cash payments, frequent or last-minute changes to end-users or payees, or routing payments through third countries not otherwise involved in the transaction.

Foreign financial institutions should note that the FFI Advisory provides the foregoing compliance efforts as sanctions risk mitigation only. Although the foregoing sanctions compliance efforts are considered favorably by OFAC under its current framework for assessing sanctions violation penalties on US persons, it is not yet clear whether OFAC will consider such compliance efforts when assessing secondary sanctions on foreign financial institutions.

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Hunton Andrews Kurth LLP will continue to monitor the development of this, and other US sanctions matters. Further, Hunton Andrews Kurth has experience developing and administering sanctions compliance programs as described above. Please contact us if you have any questions or would like further information regarding these new developments or other questions related to US sanctions programs or effective sanctions compliance and risk mitigation measures.