On Dec. 19, 2014, President Obama issued Executive Order 13685, "Blocking Property of Certain Persons and Prohibiting Certain Transactions With Respect to the Crimea Region of Ukraine," to impose sanctions relating to the Russian occupation of the Crimean region of Ukraine (“Crimea”). E.O. 13685 prohibits most direct and indirect transactions (including financial, trade and other commercial transactions) by U.S. persons or within the United States to or from Crimea unless authorized by the U.S. Department of Treasury Office of Foreign Assets Control (OFAC) or exempted by statute. On July 30, 2015, OFAC issued an Advisory, entitled “Obfuscation of Critical Information in Financial and Trade Transactions Involving the Crimea Region of Ukraine,” to call attention to practices that have been used to circumvent or evade the Crimean sanctions. While billed as an “Advisory,” the agency’s release stands as a warning to the financial services and international trade sectors of their obligation to implement adequate controls to guard against such evasive practices and ensure compliance with their obligations under the Crimean sanctions.
OFAC identified evasive practices in two principal sectors – financial services and international trade – consisting of the omission or obfuscation of references to Crimea and locations within Crimea in documentation underlying transactions involving U.S. persons or the United States.
Regarding financial transactions, OFAC stated that certain persons had repeatedly omitted originator or beneficiary address information from SWIFT messages1 involving individuals ordinarily resident in, or entities located in, Crimea. In some cases, SWIFT messages omitted all originator or beneficiary address information, whereas other instances involved payment messages that contained only partial address information for Crimean individuals or entities, e.g., the SWIFT message might include a street address but no reference to a town, city, region or country. OFAC reported that financial institutions discovered the data missing from these SWIFT messages through enhanced due diligence efforts performed on one of the transaction parties after identifying a suspicious Crimea-related pattern or practice.
OFAC commented that “these fact patterns present challenges to intermediary financial institutions' efforts to accurately identify and interdict transactions involving Crimean individuals and entities.” OFAC “urged” U.S. persons and persons conducting business in or through the United States to be cautious when processing payment instructions lacking complete address information when such transactions involve an individual or entity that previously has omitted partial or complete address information of Crimean individuals or entities.
In the international trade context, OFAC stated that references to Crimea have been obscured in trade transactions and associated agreements and documentation. For example, Crimean counter-parties have been listed on financial and trade documents as being located in Russia rather than in Ukraine to facilitate otherwise illegal sales of U.S. goods, directly or through third-party distributors in foreign countries, to Crimean entities or individuals.
OFAC characterized all of these activities as intended to circumvent existing sanctions compliance controls utilized by U.S. persons and persons conducting business in or through the United States (including financial institutions, corporate entities, and individuals). OFAC counseled that the risk of processing transactions in apparent violation of Crimean sanctions can be mitigated by implementing the following types of measures, although it noted that parties should tailor specific compliance measures to their own risk profile:
- Including in transaction monitoring systems (e.g., interdiction filters) an appropriately expansive list of search terms corresponding to major geographic locations in Crimea, and not simply references to "Crimea."
- Requesting additional information from parties (including financial institutions, corporate entities and individuals) that previously have violated or attempted to violate U.S. sanctions on Crimea by, e.g., routing transactions to or through U.S. financial institutions with inaccurate or incomplete address information for Crimean individuals or entities.
- Clearly communicating Crimean sanctions obligations to international partners, and discussing OFAC sanctions compliance expectations with correspondent banking and trade partners.
Persons and entities operating in the financial services and international trade sectors would be well-advised to take note of OFAC’s warnings and suggestions. OFAC previously has imposed significant penalties under other sanctions programs on persons, companies and financial institutions that engaged in or facilitated, either knowingly or through disregard for sanctions compliance obligations, similar obfuscating practices, such as omission or truncation of identifying information from SWIFT messages. Having issued the Advisory, claims of inadvertence or ignorance of the Crimean sanctions requirements will not be well-received by OFAC as mitigating factors in the penalty phase of an enforcement action. Given the potential severity of penalties, companies operating in the financial services and international trade sectors should heed OFAC’s warning.