On June 16, 2015, section 5(b) of the Ukraine Freedom Support Act of 2014 (UFSA) (P.L. No. 113-272), which authorizes the President to impose sanctions on foreign financial institutions (FFIs) that facilitate financial transactions on behalf of Russian persons designated as Specially Designated Nationals (SDNs), became operative. Although the President indicated while signing the UFSA that he did not then intend to impose sanctions under the law, the President reserved the right to do so, and can now impose sanctions on FFIs under the UFSA as he deems appropriate.
The UFSA, which was signed into law on December 18, 2014, was designed in part to persuade non-US persons to forego certain business activities with Russia relating to the Russian defense and energy industries, as well as specified Russian SDNs. Section 5(b) of the statute authorizes (but does not require) the President to prohibit, or otherwise impose strict conditions on, the payable-through or correspondent accounts in the United States of FFIs that knowingly facilitate a “significant” financial transaction on behalf of a Russian person designated as an SDN by the US Treasury Department, Office of Foreign Assets Control (OFAC) pursuant to the UFSA, Executive Orders 13660, 13661, or 13662, or any other executive order addressing the Ukraine crisis. This is similar to the sanctions authorized against FFIs in the Iran secondary sanctions context. It is not clear if the restriction on payable-through and correspondent accounts would apply only to accounts located in the United States, or if they would apply also to accounts opened or maintained by US banks outside the United States.
The President may waive application of such sanctions if the President determines that the waiver is in the national security interest of the United States and reports the reason for such determination to Congress. See our previous advisory on the UFSA for additional details.
The UFSA does not define the term “significant financial transaction,” thereby leaving interpretation of the term to the President’s discretion. The Iranian Financial Sanctions Regulations (IFSR), 31 C.F.R. Part 560, which set out factors to consider in assessing whether a financial transaction is “significant” under a different law, can be instructive. The IFSR provide that “the totality of the facts and circumstances” may be considered in assessing whether a financial transaction is “significant,” including factors such as:
- the size, number, and frequency of transactions
- the nature of the transaction(s)
- the level of awareness of management and whether the transaction(s) are part of a pattern of conduct
- the nexus between the transaction(s) and a blocked person
- the impact of the transaction(s) on statutory objectives
- whether the transaction(s) involve deceptive practices
As discussed above, the President stated at the signing of the UFSA that “[a]t this time, the Administration does not intend to impose sanctions under this law, but the Act gives the Administration additional authorities that could be utilized, if circumstances warranted.” FFIs dealing with Russian SDNs should be on the lookout for a possible change in the Administration’s stated position, especially if the crisis in Ukraine escalates. Currently, there are approximately 50 Russian individuals and 40 Russian entities on the SDN List by way of the specified Executive Orders. Therefore, FFIs should conduct screening of the counter-parties and beneficiaries of transactions to determine if any such individual or entity is involved, and then conduct a risk-based assessment if a positive hit is identified.