New EO Could Lead to Secondary Sanctions on Banks Facilitating Shipments to Russia

A new executive order scheduled to be signed by President Joe Biden Dec. 22 will give the U.S. new authority to sanction financial institutions that facilitate transactions for companies sending controlled goods to Russia.

The EO will mark the “first time” the U.S. is “introducing a tool that allows us to use secondary sanctions” to target banks indirectly aiding Russia's military, a senior administration official said during a Dec. 21 call with reporters that was held on the condition it remain confidential until Dec 22. “It gives us a surgical tool that allows us to go after the financial institutions that are doing transactions that are furthering Russia's military industrial complex,” the official said.

The U.S. will use the authority mostly to target financial institutions that either haven’t yet stopped doing business in Russia or that haven’t stopped approving payments for shipments of U.S. goods to Russia’s military, the official said. The U.S. is specifically looking to stop shipments of semiconductors, but also machine tools, chemical precursors, ball bearings, optical systems and other goods, parts and technology that can be used by Russia's military.

The official said they don’t believe any American or European financial firms will be in violation of the new authority, partly because most of those banks no longer do business with Russia. But the official stressed that U.S. or EU financial institutions may be impacted if they act as correspondent banks for banks “that are currently doing this type of business in third countries.”

The administration plans to speak with those U.S. and European banks over the coming weeks about the importance of telling foreign banks that they work with "that they need to take steps to prevent themselves from being subjected to this executive order,” the official said, “or they may have to cut off” those relationships.

The Biden administration is hoping the new authority acts as a deterrent, the official added, saying many of the foreign banks that could be targeted under the EO will value their connection to the U.S. financial system over revenue they earn from helping send goods to Russia. “Fundamentally, people are not going to want to take that risk,” the official said. “The message we're going to send clearly to people is that you either do the due diligence that you need to, or you put at risk the ability to have access to our [financial] system.”

Although the authority is a “very powerful tool,” the official said “our hope, frankly, is that jurisdictions and financial institutions will take actions to stop the behavior well before we have to use this.”