Reported by Jordan Mallory & J. Scott Maberry

On December 22, 2023, President Biden signed a new Executive Order (E.O. 14114) containing the latest round of sanctions against the Russian Federation. Shortly thereafter, Treasury Secretary Janet Yellen stated that the Office of Foreign Assets Control (OFAC) will take “decisive” and “surgical” action when enforcing sanctions against financial institutions involved in transactions that support Russia’s military-industrial base. Under the new sanctions, non-U.S. financial institutions may be denied access to U.S. correspondent accounts or payable-through accounts, effectively denying access to the U.S. financial system. OFAC may also block an offending institution’s property in the United States. The sanctions build on the Russian Harmful Foreign Activities Sanctions promulgated in 2021 and 2022 (E.O.s 14024 and 14066).

Focus on Foreign Financial Institutions

Readers of this blog will know that, in response to Russia’s invasion of Ukraine, the United States imposed several rounds of direct sanctions designed to hamstring Russian military procurement by targeting Russian entities and Russian financial institutions. Russia has increasingly used third countries to evade these sanctions and continues to procure military equipment.

The new Executive Order intensifies the focus on “foreign financial institutions”[1] that conduct or facilitate transactions on behalf of the Russian military-industrial base. In so doing, the new action expands the reach of so-called “secondary sanctions” against parties that do business with Russia.

Compliance Takeaway

Non-U.S. financial institutions should immediately take steps to mitigate their sanctions risk by screening their transactions and customers, and halting transactions that may support the Russian military-industrial base.

Under the new rule, OFAC may sanction any foreign financial institution involved in “significant transactions” in specific industry sectors[2] or involving specific items[3] that support the Russian military. The specific sector and item lists are designed to assist foreign financial institutions in identifying transactions that will subject them to sanctions, and thus help them mitigate their sanctions risk.

The term “significant transactions” is definedto include even a single transaction, depending on the circumstances. OFAC may consider the totality of the facts and circumstances when determining whether a transaction is (or multiple transactions are) “significant.” Relevant factors include size, number, and frequency of the transactions; the nature of the transactions; management’s level of awareness; and any other factors that OFAC deems relevant.

Foreign financial institutions may wish to review their customer base and identify customers that could create exposure based on association with one of the specified industry sectors or transactions that may involve the specified items. Based on the risk assessment, the institution should follow up with these identified customers and transactions to either ensure customer accounts are not facilitating the sanctioned activity or restricting high-exposure accounts and customers. As explained in OFAC’s Compliance Advisory, these steps should supplement, not replace, an institution’s baseline customer due diligence and anti-money laundering controls.

OFAC has issued two General Licenses to support financial institution compliance with these new sanctions. General License No. 84 permits U.S. financial institutions to process transactions through the end of 2023 to close correspondent accounts or payable-through accounts that are prohibited by the new E.O.

General License No. 85 permits transactions through March 21, 2024, in order to wind down business with Expobank Joint Stock Company or any entity in which Expobank has a majority interest.

Read full report: https://www.globaltradelawblog.com/2023/12/29/new-russia-sanctions-intensify-pressure-on-banks-worldwide/