Expanding OFAC Sanctions on Russia: Increased Risks for Foreign Financial Institutions
- Arne Mielken
- Jan 8, 2024
- 4 min read
By adopting EO 14114, the Biden Administration has raised Russia-related sanctions and scrutiny standards, exposing foreign financial institutions to secondary sanctions risks for supporting certain Russia-related transactions, even unknowingly.
Economic sanctions, export curbs, and regulatory measures against Russia are expanded. The EO widens the import ban on Russian seafood and paves the framework for similar restrictions on other import-controlled items.
President Biden said in a Presidential Document that Russia is exploiting its military-industrial foundation to damage US national security. He has banned foreign financial organisations from working on large military-industrial projects in Russia. Foreign financial institutions are penalised for taking deposits, lending money, buying or selling foreign currency, stocks, futures, or options, or helping buyers and sellers. Finally, he prohibits contributions or gifts of money, goods, or services to, from, or for the benefit of anybody whose property and interests in property are banned under paragraph (b)(ii).
Executive Orders 14024 and 14068 were revised. Section 7 states that anyone whose property or rights are blocked by the order need not be notified. Sections 1 and 2 explain how to import Russian items into the US. This covers Russian-dug, pulled, produced, or manufactured products. Sections 3 and 4 explain which commodities are prohibited and how they relate to post-order imports. Section 5 authorises the Treasury, Commerce, and Homeland Security Secretaries to employ IEEPA's President powers. Section 4 states that the order does not restrict executive departments or agencies and is carried out according to the law and available money.
New OFAC Regulations add typical financial institution-focused secondary penalties to Russia restrictions issued during the Ukraine crisis. These restrictions raise the sanctions risk for international financial institutions doing business in Russia. New laws aim to isolate Russia's military-industrial base, limiting its ability to buy war material. Banks trading lawfully in Russia must follow stricter and more forward-thinking diligence processes. Critical Items are included in the revised Determination, although they do not required to be U.S.-made or have a U.S. nexus.
Foreign Financial Institutions (FFIs) dealing with Russia must take extra precautions. The modified 14024 secondary sanctions rules may restrict US correspondent or payable-through accounts or prevent their creation. All institutional property and interests must be blocked and disclosed to OFAC for companies under complete blocking sanctions. U.S. banks must shut correspondent or payable-through accounts within 10 days after penalties. The new GL 84 authorises limited trades temporarily.
Russia-produced or harvested salmon, cod, pollock, and crab are now banned from import by the US Environmental Protection Agency (OFA). The restrictions also explain Russian-origin gold imports. This new secondary sanctions framework may establish an extraterritorial U.S. export control regime, compelling financial institutions to review their risk appetite and procedures for trade financing and Russia involvement. The Critical Items list is not related to U.S. export control categories, generating ambiguity and necessitating more complex regulations.
Overcompliance with sanctions—foreign businesses collecting deposits, providing loans, buying or selling foreign currency, securities, futures, or options, or soliciting buyers and sellers—may raise risks and costs for banks.
On December 22, 2023, OFAC issued a compliance advisory advising institutions to review their customer base, communicate compliance expectations, send questionnaires, mitigate risks, obtain attestations, incorporate Russia's military-industrial base into sanctions risk assessments, implement enhanced trade finance controls, and use open-source information to inform due diligence. The Compliance Advisory recommends training staff on sanctions risks and red flags, escalating risks quickly, communicating with correspondent banks on due diligence expectations, and incorporating FinCEN and OFAC alerts into anti-money laundering controls.
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