US Issues Russia Sanctions EO, Due Diligence Expectations for Financial Institutions

An executive order signed by President Joe Biden last week gives the U.S. broader authority to sanction financial institutions involved in shipments to Russia, marking a “significant step forward” in holding those foreign banks accountable for helping Moscow buy a range of critical items for its military, senior administration officials said.

The order, signed Dec. 22, gives the U.S. a new tool to target financial institutions that have “failed to make the choice” to either withdraw from Russia’s economy after its invasion of Ukraine or to stop allowing their companies to ship U.S. goods to Russia's military, an official said during a Dec. 21 call with reporters. The order marks the “first time that we’re introducing a tool that allows us to use secondary sanctions to go after financial institutions during this conflict,” the official said.

Under the new authority, the U.S. will be able to sanction banks providing any service or facilitating sales to Russia -- including those conducted in currencies other than the U.S. dollar -- that involve certain “critical items," the White House said in a fact sheet. A new determination published by the Office of Foreign Assets Control outlines a list of those items, including certain machine tools, materials used to make semiconductors, chemical precursors, industrial bearings and navigation instruments.

The order also authorizes the U.S. to sanction banks facilitating “significant transactions” for or on behalf of people or entities the U.S. already has designated for operating in Russian industries that support its military industrial base, the White House said. When determining whether transactions are “significant,” the administration will consider the size, number and frequency of the transactions, the “level of awareness of management,” whether the transaction is part of a “pattern of conduct,” whether it involves “deceptive practices” and other factors, OFAC said in new guidance.

Financial institutions sanctioned under this authority will face full blocking sanctions or will either lose or face “strict conditions” on their U.S. correspondent bank accounts, the White House said. The order also authorizes the U.S. to place new import restrictions on certain products mined, harvested or produced in Russia, such as diamonds and seafood, even if those products are then substantially transformed in a third country, and therefore do not have Russia as the country of origin.

A senior administration official said the new authority is the culmination of two years of speaking to both U.S. and foreign banks about making sure the transactions they approve don’t aid Russia’s military. “With the president's signing of the executive order,” the person said, “we have a tool that allows us to hold them accountable.”

Officials added they don’t believe any American or European financial firms are currently in violation of the new authority because most don’t do business with Russia, but they may be affected if they act as correspondent banks for banks that are in violation (see 2312210085). The administration plans to speak with banks in the coming weeks to “inform” them about the order, an official said, but the U.S. hopes those firms stop allowing transactions involving Russia’s military “well before we have to use this tool.”

The order gives banks “a very stark choice,” the official said, “If you are continuing to ship these types of goods into Russia, you need to be in a position to make sure that those goods are not going to Russia's military industrial complex, or you’ve got to stop.”

OFAC issued two new general licenses to authorize certain transactions that may be blocked or restricted under the order. General License 84 authorizes certain transactions involving banks that will be subject to a new penalty introduced by the order that will restrict their access or ban their access to their U.S. correspondent bank accounts. The license authorizes certain transactions involving the closure of those correspondent or payable-through accounts “during the 10-day period beginning on the effective date of the imposition of the prohibition.”

General License 85 authorizes certain wind-down transactions, along with transactions involving the closing of accounts, with Russia-based Expobank Joint Stock Company and any entity it majority owns. Those transactions are authorized through 12:01 a.m EDT March 21. OFAC sanctioned Expobank earlier in December as part of a new wave of new designations against Russia-related procurement networks (see 2312120037).

A new compliance advisory issued by OFAC includes examples of activities that could expose foreign banks to sanctions under the order, such as maintaining accounts, transferring funds, or providing other financial services to any party sanctioned for operating in certain Russian industries, as well anyone inside or outside Russia who supports Russia’s military-industrial base. Banks could also be targeted if they help companies evade Russia-related sanctions, including if they:

• offer to set up alternative or nontransparent payment mechanisms
• offer to change or remove customer names or other relevant information from payment fields
• obfuscate the true purpose of or parties involved in payments
• otherwise take steps to hide the ultimate purpose of transactions to evade sanctions.

The guidance also outlines several due diligence steps banks should take to comply with the new restrictions, including:

• communicating “compliance expectations” to customers, including sharing with them OFAC’s new list of critical items
• sending questionnaires to customers known to trade in those items, so banks can “better understand their counterparties”
• taking “appropriate mitigation measures” for certain high-risk customers, such as restricting accounts, exiting relationships and placing customers on “do not onboard” or “do not process” watch lists
• obtaining attestations from customers that they don’t operate in certain Russian sectors
• introducing “enhanced” trade finance controls for certain items
• using open-source information and past transactions to inform due diligence and to conduct proactive investigations.

OFAC also said banks should be regularly training employees beyond the compliance staff, including “front-line” officials, senior management, underwriters and relationship managers. They should also make sure any business risks are “escalated quickly to the proper level,” communicate “clearly and frequently” with U.S. and other correspondent banks on their due diligence expectations and incorporating information and “typologies” from recent sanctions advisories (see 2210060043, 2207130014) and 2212160027) into “automated and manual anti-money laundering controls.”

A range of new and revised frequently asked questions provides guidance on the scope of the executive order and how OFAC will define certain terms, such as “foreign financial institution” and “Russia’s military-industrial base.” The FAQs also address how banks can determine whether a customer operates in a sanctioned Russian sector, and stress that banks can be sanctioned even if their transactions are in non-dollar currencies, and more.