January 4, 2024
On December 22, 2023, President Biden issued Executive Order (EO) 14114 that expands the authority of the US Department of Treasury Office of Foreign Assets Control (OFAC) to sanction foreign financial institutions that provide services to certain persons and sectors subject to US sanctions on Russia, deemed by OFAC to support Russia’s military-industrial base (the FFI EO). Simultaneous with President Biden’s issuance of the FFI EO, OFAC published a Compliance Advisory (FFI Advisory) for foreign financial institutions regarding steps that foreign financial institutions can take to mitigate sanctions exposure.
The Bottom Line:
US sanctions on Russia have now expanded to target financial institutions outside of the United States that provide financial services to certain individuals and sectors subject to US sanctions on Russia. OFAC has signaled that foreign financial institutions should carefully consider the compliance guidance provided in OFAC’s FFI Advisory and take steps to identify and minimize exposure to Russia’s military-industrial base, including to develop an appropriate sanctions compliance program.
The Full Story:
The FFI EO
On December 22, 2023, President Biden issued the FFI EO to amend EO 14024 and EO 14068. According to a Press Release issued by US Secretary of the Treasury, Janet Yellen, the FFI EO is meant to further target Russian sanctions evasion and solidify the US commitment to its G7 allies by making clear to foreign financial institutions that facilitating significant transactions relating to Russia’s military-industrial base may expose them to US sanctions. In a Press Briefing, the White House described the FFI EO as providing OFAC with a tool, for the first time, to use secondary sanctions against financial institutions outside of the United States that are still providing financial services to Russia’s war-time economy (activity that has been prohibited for US persons under EO 14024 since April 2021).
For the purposes of the FFI EO, a “foreign financial institution” is quite broadly defined as 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. This includes 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.
The FFI EO amendment to EO 14024 authorizes the imposition of sanctions on foreign financial institutions that are either (1) facilitating significant transactions on behalf of persons designated for operating in certain key sectors of the Russian economy that support the country’s military-industrial base (i.e., persons subject to sanctions under EO 14024); or (2) facilitating significant transactions or providing services involving Russia’s military-industrial base, including those relating to specific manufacturing inputs and technological materials that Russia is seeking to obtain from foreign sources (i.e., “specified items”). Simultaneous with President Biden’s issuance of the FFI EO, OFAC issued a determination listing the prohibited specified items under amended EO 14024, which includes certain types of machine tools, manufacturing equipment, materials related to semiconductors, electronic test equipment, propellants and chemical precursors for propellants, machine lubricants, bearings, advanced optical systems and navigation instruments.
OFAC’s general licenses under EO 14024 remain in place. These licenses authorize certain transactions that would otherwise be prohibited related to the production, manufacturing, sale, transport, or provision of agricultural commodities, agricultural equipment, medicine, medical devices, replacement parts and components for medical devices, or software updates for medical devices. OFAC has also clarified that foreign financial institutions would not face sanctions risks for supporting these transactions.
The secondary sanctions imposed by OFAC under EO 14024, as amended by the FFI EO, may either (i) prohibit the foreign financial institution from the opening of, or prohibit or impose strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States (i.e., non-SDN sanctions); or (ii) impose full blocking sanctions (i.e., SDN sanctions) on the foreign financial institution.
The FFI EO amendment to EO 14068 also authorizes OFAC to prohibit the importation of products that have been processed or substantially transformed in third countries. The FFI EO amends EO 14068 to authorize OFAC to implement the expanded import prohibitions by issuing determinations outlining the prohibit products. Simultaneous with President Biden’s issuance of the FFI EO, OFAC issued a determination prohibiting the import of Russian seafood products and amended an existing determination prohibiting the import of gold.
The FFI Advisory
Simultaneous with President Biden’s issuance of the FFI EO, OFAC published the FFI Advisory, which provides foreign financial institutions with guidance on the sanctions risks of providing financial services to individuals and entities in Russia as well as steps that foreign financial institutions can take to mitigate sanctions exposure.
The FFI Advisory provides the following examples of activities that could expose foreign financial institutions to sanctions risk under EO 14024, as amended by the FFI EO:
The FFI Advisory recommends that foreign financial institutions take steps to identify and minimize their exposure to activity involving Russia’s military-industrial base and those that support it in addition to existing baseline customer due diligence procedures and other anti-money laundering controls. OFAC provides the following examples of controls that an institution may implement, to the extent commensurate with its risk and current exposure to Russia’s military-industrial base and its supporters:
OFAC recommends that foreign financial institutions review OFAC’s previously issued guidance for US financial institutions and work to implement a sanctions compliance program consistent with OFAC’s guidance, including:
Foreign financial institutions should note that the FFI Advisory provides the foregoing compliance efforts as sanctions risk mitigation only. Although the foregoing sanctions compliance efforts are considered favorably by OFAC under its current framework for assessing sanctions violation penalties on US persons, it is not yet clear whether OFAC will consider such compliance efforts when assessing secondary sanctions on foreign financial institutions.
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Hunton Andrews Kurth LLP will continue to monitor the development of this, and other US sanctions matters. Further, Hunton Andrews Kurth has experience developing and administering sanctions compliance programs as described above. Please contact us if you have any questions or would like further information regarding these new developments or other questions related to US sanctions programs or effective sanctions compliance and risk mitigation measures.