The United States and its partner nations have established an extensive framework of export controls and sanctions. The goal of this policy is to significantly limit Russia's capacity to import goods that directly aid in its conflict with Ukraine. Despite these steps, Russia has been using third nations more frequently to get around sanctions, allowing it to keep acquiring vital supplies for its military-industrial complex. In an effort to combat individuals who continue Russia's war against Ukraine, The Office of Foreign Assets Control (OFAC) has expanded its targeting authority to handle this evasion.
A significant Executive Order (E.O.) revising E.O. 14024 has been issued by the President in reaction to the Russian Federation's continued aggression against Ukraine. OFAC has been given more authority by this amendment to target foreign financial institutions involved in particular transactions related to Russia's military-industrial base. The goal is to stop providing financial support for Russia's aggression and to make individuals who assist in these transactions accountable.
Key Highlights
OFAC's advisory, named “Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base” provides essential guidance to foreign financial institutions on the amendments to E.O. 14024, offering practical insights into identifying sanctions risks and implementing corresponding controls. The advisory outlines new sanctions authorities, allowing OFAC to target foreign financial institutions involved in either:
- Conducting or facilitating significant transactions for persons designated in specific sectors of the Russian Federation's economy, such as technology, defense, construction, aerospace, or manufacturing.
- Engaging in significant transactions or providing services related to Russia's military-industrial base, including the sale, supply, or transfer of specified items. The determination of these items is made by the Secretary of the Treasury in consultation with the Secretaries of State and Commerce.
Sanctions Measures
If foreign financial institutions are found to have violated the modified E.O. 14024, OFAC has the authority to apply severe penalties such as complete blocking sanctions or limitations on operating correspondent accounts in the US. The suggestion stresses that to comprehend potential punishments and their ramifications fully; one must refer to the entire set of criteria specified in the modified E.O.
Foreign financial institutions face sanctions risk under the amended E.O. 14024 if engaged in the following activities:
Maintaining accounts, transferring funds, or providing financial services:
- For individuals designated for operating in specified sectors.
- For persons supporting Russia's military-industrial base, including those operating in specified sectors of the Russian Federation's economy.
Facilitating the sale, supply, or transfer of specified items:
- Directly or indirectly to Russian importers or companies shipping these items to Russia.
Assisting in evading U.S. sanctions on Russia’s military-industrial base, including:
- Offering to establish alternative or non-transparent payment mechanisms.
- Altering or removing customer names or relevant information from payment fields.
- Obfuscating the true purpose or parties involved in payments.
- Taking steps to conceal the ultimate purpose of transactions to evade sanctions.
Sanctions Risk Management
According to the Sanction Advisory Report of OFAC, foreign financial institutions should have a diversified approach that goes beyond standard customer due diligence (CDD) and anti-money laundering processes in order to manage sanctions risk successfully. This all-encompassing plan, which was designed to mitigate their risk of exposure to Russia's military-industrial complex and its allies, consists of:
- Reviewing Customer Base: Examine the institution's customers in order to provide a comprehensive evaluation of exposure to Russian industries.
- Communicating Compliance Expectations: Customers should be made fully aware that their accounts are not to be used to transact with specific individuals or activities associated with Russia's military-industrial base. Distribute the list of specified items to relevant clients, particularly those involved in import-export or production.
- Customer Questionnaires: For deeper knowledge, send targeted questionnaires to clients who deal with particular topics.
- Mitigation Measures for High-Risk Activity: Implement appropriate measures for high-risk customers, such as restricting accounts or placing them on internal watchlists.
- Incorporating Risks into Assessments: Update jurisdictional risk assessments on a regular basis and include risks into evaluations of sanctions risk.
- Utilizing Open-Source Information: Use open-source data and previous transactions to inform due diligence and proactive investigations.
- Specific Attention to High-Risk Customers: Customers operating in specific Russian sectors or interacting with authorized people should be given extra attention. Pay close attention to those who may be engaged in selling, supplying, or transferring listed items to Russia or high-risk areas prone to sanctions evasion.
Permissible Transactions
OFAC maintains a comprehensive permission order defined by General License (GL) 6C, permitting transactions that would otherwise be banned under Executive Order (E.O.) 14024. This includes agricultural commodities, agricultural equipment, medicine, medical devices, replacement parts and components for medical devices, and software updates for medical devices.
It is critical to emphasize that the changes made in E.O. 14024 have no effect on the current authorizations in GL 6C. Foreign financial institutions can actively participate in or facilitate transactions covered by GL 6C, copying the permissions afforded to US individuals. This gives clarity and reassurance, ensuring that permissible transactions critical to sectors such as agriculture and healthcare are not impacted by recent regulatory changes.
