U.S. Authorizes Sanctions on Foreign Financial Institutions That Support Russia’s Military-Industrial Base and Expands Scope of Russian Import Ban

President Biden issued an executive order on December 22, 2023 targeting evasion of U.S. sanctions on Russia. Executive Order 14,114:

• Authorizes sanctions on foreign financial institutions (“FFIs”) determined to have knowingly or unknowingly supported Russia’s military-industrial base.
• Expands prohibitions on importing Russian-origin salmon, cod, pollock and crab.

The expansion of authority to sanction FFIs builds on recent designations of numerous entities and individuals found to be evading U.S. sanctions on Russia. It also follows recent guidance for financial institutions to remain vigilant against potential Russian export control evasion issued by the Department of Commerce’s Bureau of Industry and Security and the Treasury Department’s Financial Crimes Enforcement Network. The new executive order is intended to force FFIs to forgo business related to Russia’s military-industrial base to avoid the risk of being targeted by U.S. sanctions.

FFIs should assess and mitigate risks that include reviewing customers’ activities and implementing best practices recommended by the U.S. government.

New Secondary Sanctions Authority

According to Secretary of the Treasury Janet Yellen, the new secondary sanctions are aimed at ensuring that FFIs “are not witting or unwitting facilitators of circumvention and evasion” related to sanctions on “Russia’s war machine.”

The new executive order amends Executive Order 14,024, authorizing the Secretary of the Treasury, in consultation with interagency partners, to penalize FFIs determined to have engaged in sanctionable conduct with:

• Blocking sanctions (i.e., imposing a freeze on all of their assets in the United States or in the possession or control of a U.S. person, and adding the FFI to the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) Specially Designated Nationals and Blocked Persons List), or
• Sanctions that prohibit opening or impose strict conditions on maintaining correspondent accounts or payable-through accounts for the FFI in the United States.

Sanctionable conduct includes:

• Conducting or facilitating any significant transaction or transactions for or on behalf of any person designated for sanctions by OFAC for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian economy, or other sectors that may be determined by the United States to support Russia’s military-industrial base (the “Specified Sectors”), and
• Conducting or facilitating any significant transaction or transactions or providing any service involving Russia’s military-industrial base, including directly or indirectly, supplying items determined by the United States to be critical to Russia’s war effort, regardless of whether parties to the transaction have been designated for sanctions or whether the items are subject to the U.S. Export Administration Regulations.
  
  
  • A new determination identifies items critical to Russia’s war effort as including certain machine tools, manufacturing equipment, manufacturing materials for semiconductors and related electronics, electronic test equipment, advanced optical systems and navigation instruments (“Critical Items”).

The first type of sanctionable conduct is similar to activity covered by other U.S. sanctions targeting FFIs that engage in significant transactions for or on behalf of certain sanctioned persons. The second type is more expansive, targeting FFIs that conduct or facilitate transactions or provide any services that involve Russia’s military-industrial base but do not necessarily involve a designated person. Notably, in a departure from other secondary sanctions authorities, the new executive order authorizes the imposition of sanctions regardless of whether an FFI knowingly engaged in sanctionable conduct.

OFAC issued Frequently Asked Questions to provide guidance on the new executive order. FAQ 1151 defines “Russia’s military-industrial base” to include the Specified Sectors, as well as individuals and entities that support the supply of Critical Items to Russia. It also describes factors OFAC will consider when determining whether a transaction or transactions is “significant.” These factors are similar to those used in other secondary sanctions. They include:

• The size, number, and frequency of the transaction(s).
• The nature of the transaction(s).
• The level of awareness of management and whether the transactions are part of a pattern.
• The connection between the transaction(s) and people who are targeted for sanctions under a previous executive order (14,024) or otherwise operate in Russia’s military-industrial base.
• Involvement of deceptive practices.
• Impact of the transaction(s) on U.S. national security objectives.

OFAC also clarified that FFIs engaging in non-U.S. dollar transactions can be the target of the new sanctions.

OFAC’s new General License 84 authorizes U.S. financial institutions to close correspondent accounts or payable-through accounts that it maintains within 10 days of the FFI becoming the target of a prohibition to open or maintain such accounts. The license does not authorize any wind-down or other transactions involving FFIs that become subject to full blocking sanctions.

OFAC Advisory for FFIs

OFAC issued an advisory to FFIs outlining its expectations for identifying and mitigating sanctions risks under the new executive order. The advisory provides examples of activity that could qualify as a significant transaction and expose FFIs to sanctions risks. The examples include maintaining accounts, transferring funds or providing other financial services to persons that have been designated for sanctions by OFAC for operating in the Specified Sectors, or to persons inside or outside Russia that support Russia’s military-industrial base, including those that have not been designated but operate in the Specified Sectors. Sanctionable activity may also include facilitating the sale, supply, or transfer, directly or indirectly, to Russia of Critical Items and helping persons evade U.S. sanctions on Russia’s military-industrial base.

In addition to maintaining a risk-based sanctions compliance program and conducting baseline customer due diligence, OFAC recommends that FFIs implement enhanced risk-based controls commensurate with their risk and exposure to Russia’s military-industrial base.

Expansion of Import Ban on Certain Russian-Origin Items

The new executive order also amends Executive Order 14,068. That amendment and a new OFAC determination prohibits the import of Russian-origin salmon, cod, pollock and crab produced wholly or in part in Russia or harvested in Russian waters or by Russia-flagged vessels even if incorporated or substantially transformed into another product outside of Russia. OFAC indicated that it intends to issue a determination related to the importation of certain Russian diamonds processed in third countries.

The amended executive order also authorizes the Secretary of the Treasury to prohibit the import of any products the Secretary of the Treasury determines, in consultation with other agencies, that are mined, extracted, produced or manufactured wholly or in part in Russia, or harvested in Russian waters or by Russia-flagged vessels, regardless of whether they are incorporated or substantially transformed into another product outside of Russia.

Finally, Executive Order 14,068, as amended, authorizes the Secretary of the Treasury to prohibit the import of any products included in existing import prohibitions (fish, seafood and preparations thereof; alcoholic beverages, non-industrial diamonds and gold) or the new prohibition described above, that transited through or were exported from or by Russia, and any products that contain any of the prohibited products.

What FFIs Should Consider Doing

These new measures intensify the U.S. government’s efforts to prevent sanctions evasion and to pressure Russia into ending the war in Ukraine.

FFIs should examine their risks under the new executive order and implement the best practices included in OFAC’s advisory, particularly if the FFI is in a country to which Russia has shifted trade or financial flows as a result of previous U.S. sanctions. That’s especially true given the strict liability standard and potential severe consequences of becoming subject to asset blocking or correspondent or payable through account sanctions.

FFIs should scrutinize their customers’ activities and exports that could relate to Russia’s military-industrial base. Companies also should determine whether those activities involve Critical Items and take steps to address any risks they identify. 

To date, only one FFI is included on OFAC’s list of FFIs subject to correspondent account or payable through account sanctions pursuant to other secondary sanctions regimes that impose sanctions for knowingly engaging in sanctionable conduct. However, FFIs should not be complacent under the new executive order based on the U.S. government’s limited designations under prior authorities. They should consider the strict liability standard applicable to the new secondary sanctions, as well as recent statements from U.S. officials. 

“We expect financial institutions will undertake every effort to ensure that they are not witting or unwitting facilitators of circumvention and evasion,” Secretary Yellen said. “And we will not hesitate to use the new tools provided by this authority to take decisive, and surgical, action against financial institutions that facilitate the supply of Russia’s war machine.”