Latest EO 'Raises the Bar' for Russia Sanctions Compliance, Law Firms Say

A new U.S. executive order significantly raises Russia-related compliance risks for foreign banks that may have thought they weren’t subject to U.S. sanctions authorities, law firms said this month. The order also could lead to new risks for U.S. businesses, the firms said, which may need to conduct more due diligence on any foreign financial institutions with ties to their supply chains.

The order, issued Dec. 22, gives the U.S. broader authority to sanction financial institutions involved in shipping goods to Russia, including certain “critical items” included on a new Treasury Department list (see 2312220023). The Biden administration hasn’t yet announced any designations under the order, but that “likely will change,” Vedder Price said, especially ahead of the second anniversary of Russia's invasion of Ukraine next month.

Morrison Foerster also said it’s expecting to see “continued targeting of third-country actors” over the next year, including foreign banks that may be subjected to secondary sanctions under the new authority. Banks should “ensure they have sufficient controls and mitigation measures in place to guard against these risks,” the firm said.

Although the order targets foreign financial institutions (FFIs), Vedder Price stressed that it also increases risks for U.S. businesses. American companies and banks should be screening any foreign banks they do business with to find out the “extent to which” those banks are involved in any Russia-related transactions. The firm advised U.S. entities to “avoid transactions with FFIs that could become sanctioned.”

But determining which foreign banks could be targeted under the new order may prove challenging. Wilkie Farr said the U.S. could impose secondary sanctions on foreign financial institutions “without respect to whether” that institution has “knowledge” that a transaction with Russia involves one of the critical items on Treasury’s list.

“This marks a significant change from other secondary sanctions authorizations, which require that FFIs ‘knowingly’ engage in activities that could result in sanctions or other restrictions,” the firm said. “The risk of imposition of these restrictive measures raises the bar for FFIs connected to the U.S. financial system to ensure that they conduct substantial due diligence on transactions that may have a Russian nexus.”

Morrison Foerster also called the restrictions a “significant expansion” of the Office of Foreign Assets Control’s authority. It said the U.S. can impose blocking or correspondent account sanctions on any foreign bank providing certain services involving Russia even if no sanctioned party is involved. The firm said this new authority could cause global financial institutions to “reexamine their overall exposure to Russia, given the new threat of secondary sanctions.”

That may force foreign banks to review their customers and identify any that could “create exposure based on association” with Russia’s military or with items listed by Treasury, Sheppard Mullin said, which include semiconductor manufacturing equipment, ball bearings, navigation instruments and more. The firm advised banks to follow up with any of those customers to “either ensure customer accounts are not facilitating the sanctioned activity or restricting high-exposure accounts and customers.”

Banks should also take compliance steps before bringing on a new customer, Dechert said, including by doing “enhanced diligence on the nature of the transactions they are facilitating” to make sure they don’t involve any critical items on Treasury’s list or “otherwise support Russia’s military-industrial complex.” They should also “carefully” monitor any updates from OFAC that incorporate more Russian sectors or other items Russia is looking to import for its military, Wilkie Farr said.

“These new measures are a shot across the bow to any FFIs that may have thought they were outside the scope of U.S. sanctions on Russia,” the firm said.