Financial Institutions Under the Spotlight in Expanded U.S. Russia Sanctions

On December 22, 2023, President Biden issued Executive Order (“E.O.”) 14114, Taking Additional Steps with Respect to the Russian Federation’s Harmful Activities¹, which expands the Russian Harmful Foreign Activities Sanctions program by authorizing sanctions, often referred to as secondary sanctions, on foreign (i.e., non-U.S.) financial institutions (“FFIs”), such as non-U.S. banks and insurance companies, among others, that are determined to have engaged in transactions or provided services that support or involve Russia’s military-industrial base. 

The additional sanctions authority granted to the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), through E.O. 14114’s amendment of E.O. 14024,² is a significant expansion of the United States’ Russia-related sanctions programs that puts a spotlight on FFIs that have dealings with Russian entities, or non-Russian entities that do business with Russia, regardless of whether those entities are designated targets of sanctions. 

The amendment of E.O. 14024 expands the United States’ prior targeting, since the enactment of the Ukraine Freedom Support Act of 2014, of FFIs engaged in certain Russia-related defense and energy transactions and significant financial transactions on behalf of Russian Specially Designated Nationals (“SDNs”),³ and has parallels with the targeting of FFIs under the United States’ Hong Kong and Iran-related sanctions.⁴

Background

E.O. 14024 was issued on April 15, 2021. It authorizes the Secretary of the Treasury to sanction any person in the technology or defense and related materiel sectors of the Russian economy (and other sectors determined by the Secretary of the Treasury), as well as any person engaged in certain harmful activities “for or on behalf of, or for the benefit of, directly or indirectly, the Government of the Russian Federation.” E.O. 14024 also authorizes sanctions on any person who is determined “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” those harmful activities, or persons sanctioned under E.O. 14024. E.O. 14024 has been a key source of authority for U.S. sanctions against Russia since the escalation of the Ukraine conflict in February 2022. 

E.O. 14114 targets Russia’s “continued use of its military-industrial base” and “reliance on the international financial system” to evade sanctions and acquire “dual-use and other critical items from third countries.” Among other things, E.O. 14114 adds a new section to E.O. 14024, expressly targeting FFIs that conduct or facilitate significant transactions for or on behalf of SDNs already designated under E.O. 14024 for operating or having operated in specified sectors, or FFIs that conduct or facilitate significant transactions or provide services involving Russia’s military-industrial base. 

What is an FFI? 

E.O. 14114 includes a typical definition of “foreign financial institution”, which is “any foreign entity that is engaged in the business of accepting deposits; making, granting, transferring, holding, or brokering loans or credits; purchasing or selling foreign exchange, securities, futures or options; or procuring purchasers and sellers thereof, as principal or agent. . . includ[ing] depository institutions; banks; savings banks; money services businesses; operators of credit card systems; trust companies; insurance companies; securities brokers and dealers; futures and options brokers and dealers; forward contract and foreign exchange merchants; securities and commodities exchanges; clearing corporations; investment companies; employee benefit plans; dealers in precious metals, stones, or jewels; and holding companies, affiliates, or subsidiaries of any of the foregoing.”⁵

The broad definition of FFI thus captures more than just traditional banks and insurance companies, and includes, among many others, precious metals, stones, or jewels dealers as well as employee benefit plans. 

The term does not include the International Monetary Fund, International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, International Development Association, International Finance Corporation, Multilateral Investment Guarantee Agency, African Development Bank, African Development Fund, Asian Development Bank, Inter-American Development Bank, Bank for Economic Cooperation and Development in the Middle East and North Africa, Inter-American Investment Corporation, International Fund for Agricultural Development, or North American Development Bank, “or any other international financial institution so notified by” OFAC.⁶

What transactions are targeted? 

As with most Executive Orders that authorize the blocking of persons, E.O. 14024 already authorized the Secretary of the Treasury to block persons who provide assistance to SDNs designated under E.O. 14024.⁷ In part, however, the additional sanctions authority added by E.O. 14114 targets not only dealings with certain SDNs, but also involving Russia’s military-industrial base. An FFI will be targeted if it is determined to have: 

(i) conducted or facilitated any significant transaction or transactions for or on behalf of any person designated pursuant to section 1(a)(i) of this order for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy, or other such sectors as may be determined to support Russia’s military-industrial base by the Secretary of the Treasury, in consultation with the Secretary of State [“specified sectors”];⁸ or 

(ii) conducted or facilitated any significant transaction or transactions, or provided any service, involving Russia’s military-industrial base, including the sale, supply, or transfer, directly or indirectly, to the Russian Federation of any item or class of items as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce [“specified items”].⁹

FFIs should therefore watch out for transactions involving items linked to Russia’s military-industrial base. According to the Russia Critical Items Determination¹⁰ issued by OFAC on December 22, 2023 following consultation with the Departments of State and Commerce, FFIs face sanctions risk for conducting or facilitating significant transactions, or providing services, involving “the sale, supply, or transfer, directly or indirectly, to the Russian Federation” of specified items, including certain types of machine tools and semiconductor manufacturing equipment, manufacturing materials for semiconductors and related electronics, electronic test equipment, propellants and chemical precursors for propellants and explosives, lubricants and lubricant additives, bearings, advanced optical systems, and navigation instruments. 

FFIs also face sanctions risk for assisting with the evasion of U.S. sanctions through “non-transparent payment mechanisms” or other means of concealing customer information and the purpose of transactions with Russia’s military-industrial base.¹¹

Are routine financial services targeted?

Yes. In addition to processing significant transactions, routine customer services, including “maintaining accounts, transferring funds, or providing other financial services to persons, either inside or outside Russia, that operate in the specified sectors of the Russian Federation economy”, can expose FFIs to sanctions under subsection 11(a)(ii) of E.O. 14024, as amended by E.O. 14114.¹²

Are non-U.S.-dollar transactions targeted?

Yes. Secondary sanctions of the type authorized by section 11 of E.O. 14024, as amended by E.O. 14114, target transactions and activities regardless of whether a U.S. person (e.g., a U.S. person financial institution providing correspondent banking services) is involved. OFAC makes clear in its guidance¹³ that FFIs will face sanctions risks for processing significant transactions in any currency, directly or indirectly, with SDNs in the specified sectors, or for conducting or facilitating significant transactions, or providing services, involving Russia’s military-industrial base or the specified items. 

What constitutes a “significant transaction”?

To determine whether one or more transactions are “significant”, “OFAC may consider the totality of the facts and circumstances,” including the following, non-exclusive factors: 

(a) the size, number, and frequency of the transaction(s);

(b) the nature of the transaction(s);

(c) the level of awareness of management and whether the transactions are part of a pattern of conduct;

(d) the nexus of the transaction(s) to persons sanctioned pursuant to E.O. 14024, or to persons operating in Russia’s military-industrial base;

(e) whether the transaction(s) involve deceptive practices;

(f) the impact of the transaction(s) on U.S. national security objectives; and

(g) such other relevant factors that OFAC deems relevant.¹⁴

What sanctions measures can be imposed on FFIs?

If an FFI is sanctioned pursuant to section 11 of E.O. 14024, as amended by E.O. 14114, the Secretary of the Treasury may:

(i) prohibit the opening of, or prohibit or impose strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States; or 

(ii) block all property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of such foreign financial institution, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in.¹⁵

Property blocking under subsection 11(b)(ii) of E.O. 14024, as amended by E.O. 14114, would mean the FFI is added to the SDN List.

What steps can FFIs take to mitigate relevant risks? 

In parallel with the amendment of E.O. 14024 by E.O. 14114, OFAC published the Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base (the “OFAC Advisory to FFIs”).¹⁶ In it, OFAC provides examples of additional risk-based measures (beyond ordinary customer due diligence (CDD) procedures and anti-money laundering (AML) controls) that FFIs can take to mitigate their risks under the expanded sanctions: 

• reviewing existing customers and counterparties to determine exposure to the specified sectors and specified items;
• communicating to customers and counterparties the FFI’s compliance expectations, “including informing them that they may not use their accounts to do business with designated persons operating in the specified sectors or conduct any activity involving Russia’s military-industrial base” and “sharing the list of the specified items;”
• adopting additional KYC questions for customers and counterparties with potentially relevant dealings, including for existing customers and counterparties;
• implementing heightened controls and restrictions on “customers or counterparties engaged in high risk activity or who fail to respond to requests for information regarding activity of concern;”
• obtaining attestations from customers subject to heightened controls that they do not engage in problematic activities;
• updating as appropriate sanctions-related risk assessments and customer risk ratings in light of the expanded sanctions’ focus on Russia’s military-industrial base;
• paying attention to information collected in trade finance documents and implementing enhanced controls, especially with respect to the specified items; and
• monitoring publicly available information and past transactions, and proactively investigating possible evasion of U.S. sanctions or export controls.

In addition, the OFAC Advisory to FFIs summarizes previous guidance relating to best practices concerning risk-based sanctions compliance programs.

OFAC has indicated that it anticipates updating the information included in the SDN List to note “the sector in which an SDN was designated for operating”, to aid FFIs’ compliance efforts.¹⁷ Before such information becomes available, FFIs may refer to publicly available sources, such as OFAC and State Department press releases, Federal Register notices, and website announcements.

Please reach out to your usual Linklaters contacts if you would like to discuss in further detail.

¹ Executive Order 14114 of December 22, 2023, available at https://ofac.treasury.gov/media/932441/download?inline.

² Executive Order 14024 of April 15, 2021, available at https://ofac.treasury.gov/media/57936/download?inline. In addition, E.O. 14114 also amended E.O. 14068 to impose additional restrictions on the import of Russia-origin goods into the United States.

³ See 22 U.S.C. § 8924(a), (b).

⁴ See, e.g., E.O. 13846, secs. 2 & 6.

⁵ E.O. 14024, as amended by E.O. 14114, sec. 11(f). 

⁶ E.O. 14024, as amended by E.O. 14114, sec. 11(f); see also 22 U.S.C. § 262r(c)(2). 

⁷ E.O. 14024, sec. 1(a)(vi)(B).

⁸ E.O. 14024, as amended by E.O. 14114, sec. 11(a)(i). According to OFAC FAQ 1148, “FFIs may be sanctioned for processing any significant transaction(s) for persons that have been designated for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors, or additional sectors as may be determined to be part of the military-industrial base.” See https://ofac.treasury.gov/faqs/1148.

⁹ E.O. 14024, as amended by E.O. 14114, sec. 11(a)(ii). Coordination with the Secretary of State and Secretary of Commerce is common in sanctions executive orders, including, for example, E.O. 14105 of April 15, 2021, Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern, available at https://home.treasury.gov/system/files/206/Executive%20Order%2014105%20August%209%2C%202023.pdf. 

¹⁰ OFAC, Determination Pursuant to Section 11(a)(ii) of Executive Order 14024, available at https://ofac.treasury.gov/media/932446/download?inline.

¹¹ OFAC, Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base, available at https://ofac.treasury.gov/media/932436/download?inline. 

¹² OFAC FAQ 1148, available at https://ofac.treasury.gov/faqs/1148. 

¹³ OFAC FAQ 1152, available at https://ofac.treasury.gov/faqs/1152.   

¹⁴ OFAC FAQ 1151, available at https://ofac.treasury.gov/faqs/1151. 

¹⁵ E.O. 14024, as amended by E.O. 14114, sec. 11(b). 

¹⁶ Available at https://ofac.treasury.gov/media/932436/download?inline.   

¹⁷ OFAC FAQ 1153, available at https://ofac.treasury.gov/faqs/1153.