Beginning February 21, the U.S. Department of the Treasury’s Office of Foreign Assets Control has issued significant sanctions in response to the Russian Federation’s military invasion of Ukraine and its recognition of Ukraine’s separatist regions.

Since Buckley’s last update on February 25, there have been a number of developments in the sanctions against Russia, which include:

Additionally, since our last update, numerous agencies have taken measures to emphasize the importance of compliance with Russia sanctions:

  • The U.S. Department of Justice announced the formation of Operation KleptoCapture, a task force dedicated to enforcing U.S. sanctions on Russia, by identifying and prosecuting persons who support the Russian regime through sanctions evasion or corruption
  • The Financial Crimes Enforcement Network, which administers U.S. anti-money laundering laws, warned all financial institutions to be vigilant against efforts to evade U.S. sanctions on Russia, with particular emphasis on the obligations of cryptocurrency exchanges and administrators to identify and report these efforts
  • The New York Department of Financial Services issued guidance alerting regulated institutions to increased cybersecurity threats and increased risks that sanctioned entities may use virtual currency to evade sanctions

These recent measures, as well as previous sanctions imposed in response to Russia’s invasion of Ukraine, are discussed in more detail below. The breadth of the sanctions and speed at which they were imposed, combined with the efforts of DOJ, FinCEN, and NYDFS to raise awareness about their importance, suggest that compliance with the Russia sanctions, including detecting and reporting efforts to evade sanctions, is viewed by the U.S. and New York governments as critical. U.S. persons may wish to redirect compliance resources accordingly. Additionally, unlike the rollout of past sanctions programs, it may not be safe to expect that OFAC and other authorities will afford U.S. persons any significant amount of time to come into compliance.

As widely reported, the U.S. sanctions are being issued in close coordination with EU and UK authorities, and institutions with cross-border business will need to take the U.S., UK, and EU measures into account when conducting Russia-related business. Notably, the EU will exclude seven Russian banks from SWIFT beginning on March 12, although this group does not include Sberbank and Gazprombank, the main channels for payments for Russian oil and gas. For detailed coverage of UK and EU sanctions developments, please see updates from David Savage, Head of Financial Crime at Stewarts Law.

I. OFAC sanctions on Russia

Ban on Russian energy imports and investment

On March 8, President Biden issued an executive order that prohibits the importation into the U.S. of the following products of Russian origin: crude oil; petroleum fuels, oils and other petroleum distillates; liquified natural gas; coal; and coal products. The executive order also prohibits any new investment in the energy sector of the Russian Federation by a U.S. person. Finally, it prohibits U.S. persons from approving, financing, or facilitating any of the above transactions by a foreign person, if the transaction would be prohibited if conducted in the U.S. or by a U.S. person. In conjunction with the executive order, OFAC issued General License No. 16 permitting transactions through April 22 that are ordinarily incident to the importation of the above-listed products and that occur pursuant to written agreements entered into prior to March 8.

Asset blocking sanctions on Vladimir Putin, VTB, Nord Stream 2 and many others

OFAC has recently imposed property-blocking sanctions on significant Russian banks, state-owned and private enterprises and Russian elites. Banks include Russia’s largest bank, Sberbank, and VTB Bank, Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, Promsvyazbank Public Joint Stock Company, Bank Otrie, Sovcom OJSC and Novikom Bank, along with over 90 of these banks’ subsidiaries. OFAC also imposed blocking sanctions on Nord Stream 2 AG, the company behind the $11.3 billion pipeline project that was intended to carry gas from Russia to Germany, Russian president Vladimir Putin, Sergei Lavrov, and multiple Kremlin-connected individuals. For additional OFAC designations, see here and here. OFAC issued multiple general licenses that enable limited activities related to the wind down of business with some of the targeted entities, including Nord Stream 2 AG, as well as transactions “related to energy” with certain of the targeted entities. All entities owned 50 percent or more, directly or indirectly, by any of the blocked entities or their listed subsidiaries are also subject to blocking sanctions, even if not identified as blocked by OFAC.

Embargoes on the Donetsk People’s Republic and Luhansk People’s Republic regions

On February 21, President Biden issued Executive Order 14065 barring most dealings subject to U.S. jurisdiction that involve the so-called Donetsk People’s Republic or Luhansk People’s Republic regions of Ukraine (together, the Covered Regions). The prohibitions include:

  • New investments in the Covered Regions, or any other regions of Ukraine determined by the secretary of the Treasury, in consultation with the secretary of State
  • The importation into the U.S. of any goods services or technology from the Covered Regions
  • The exportation from the U.S. or by a U.S. person of any goods, services or technology to the Covered Regions
  • Facilitation of any of the above by U.S. person

The executive order also authorized the secretary of the Treasury to impose property blocking sanctions on persons determined to operate in the Covered Regions after February 21.

Because this approach has similarities to the 2014 sanctions that targeted the Crimea region of Ukraine, banks and other institutions may wish to consult OFAC’s 2014 Crimea Sanctions Advisory, which sets out OFAC’s expectations for ensuring that transaction monitoring systems include appropriate search terms corresponding to major geographic locations in the Crimea region, when implementing compliance controls intended to interdict transactions involving the Covered Regions.

Sanctions imposed under Executive Order 14024

The Biden administration has utilized previously available authorities to target Russia’s financial sector. Executive Order 14024 of April 15, 2021 had previously authorized sanctions to be imposed on persons operating in any sector of the Russian economy as determined by the Department of the Treasury, in consultation with the Department of State. On February 22, the Department of the Treasury determined that the financial services sector of the Russian economy falls within the scope of Executive Order 14024, which in turn enables the imposition of sanctions on any person determined to operate in Russia’s financial services sector. OFAC has utilized this authority to issue four directives imposing a number of restrictions on dealings with Russia’s financial services sector.

Sovereign debt restrictions

On February 22, OFAC imposed new restrictions on dealings in Russian debt. In April 2021, OFAC issued Directive 1 Under Executive Order 14024, which prohibited U.S. financial institutions from participating in the primary market for bonds issued after June 14, 2021 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation; and from lending ruble or non-ruble denominated funds to those same institutions. Under revised Directive 1A, U.S. financial institutions will also be prohibited from conducting secondary market dealings in bond instruments issued by the same institutions on or after March 1, 2022.

Correspondent account and payable through account sanctions on Sberbank

On February 24, OFAC issued Directive 2 Under Executive Order 14024, targeting Russia’s largest bank, Sberbank. The directive prohibits U.S. financial institutions from processing transactions for Sberbank or its subsidiaries, and from the opening or maintaining a correspondent or payable-through account for or on behalf of Sberbank or its subsidiaries. Executive Order 14024, in conjunction with the Directive 2, authorizes OFAC to designate additional foreign financial institutions as subject to the transaction- and account-related prohibitions of Directive 2. The prohibitions applicable to Sberbank take effect on March 26, 2022.

Debt and equity restrictions on Russian enterprises

Also on February 24, OFAC issued Directive 3 Under Executive Order 14024, which prohibits U.S. persons from engaging in all transactions in, provision of financing for, and other dealings in new debt of greater than 14 days maturity and new equity issued by 13 Russian state-owned enterprises and entities, as well as their subsidiaries, on or after March 26, 2022. The entities include Sberbank, AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot, and Russian Railways. OFAC may determine that additional entities are subject to Directive 3.

Prohibiting transactions involving the Central Bank, the National Wealth Fund, and the Ministry of Finance, of the Russian Federation

On February 28, OFAC issued Directive 4 under Executive Order 14024, which prohibits “any transaction” involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, “including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities.” This effectively freezes the foreign reserves of these entities in the U.S.

Entities subject to Directives 1A, 3 and 4 can be found in OFAC’s Non-SDN Menu-Based Sanctions List. Entities subject to Directive 2 can be found in OFAC’s Correspondent Account and Payable-Through Account Sanctions (CAPTA) List.

Exception for transactions related to energy

Also, on February 28, OFAC issued Russia-related General License No. 8A to authorize energy-related transactions with certain entities that would otherwise be prohibited by Executive Order 14024 or the directives issued thereunder. The license authorizes, through June 24, 2022, “transactions related to energy” involving (1) State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank; (2) Public Joint Stock Company Bank Financial Corporation Otkritie; (3) Sovcombank Open Joint Stock Company; (4) Public Joint Stock Company Sberbank of Russia; (5) VTB Bank Public Joint Stock Company; (6) any entity in which one or more of the above persons own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest; or (7) the Central Bank of the Russian Federation. The term “related to energy” means the extraction, production, refinement, liquefaction, gasification, regasification, conversion, enrichment, fabrication, transport, or purchase of petroleum, including crude oil, lease condensates, unfinished oils, natural gas liquids, petroleum products, natural gas, or other products capable of producing energy, such as coal, wood, or agricultural products used to manufacture biofuels, or uranium in any form, as well as the development, production, generation, transmission, or exchange of power, through any means, including nuclear, thermal, and renewable energy sources.

Compliance with the restrictions imposed under Executive Order 14024 could be complicated. The sanctions prohibit only particular types of transactions with the targeted entities. Thus, in addition to identifying the target’s involvement in any particular transaction, the particular facts and circumstances of the transaction may need to be closely evaluated to determine whether a transaction is permissible. Finally, OFAC issued a host of general licenses that provide for multiple exceptions, which further complicates the analysis.

II. Initiatives by DOJ, FinCEN, and NYDFS

Additional U.S. and state government authorities have also taken action, which highlights the importance of complying with U.S. sanctions on Russia.

Operation KleptoCapture

As noted above, on March 2, 2022, the DOJ announced the formation of an interagency task force, called Task Force KleptoCapture, to enforce recent U.S. sanctions on Russia. The task force will focus on:

  • Investigating and prosecuting violations and evasion of U.S. sanctions on Russia, including the evasion of anti-money laundering and know-your-customer requirements
  • Targeting efforts to use crypto currency to evade sanctions or transact in proceeds of foreign corruption
  • Seizing assets belonging to sanctioned individuals or assets identified as the proceeds of criminal activity

In announcing the formation of the task force, Attorney General Garland stated that the “Justice Department will use all of its authorities to seize the assets of individuals and entities who violate [Russia] sanctions,” and that DOJ, “will leave no stone unturned in our efforts to investigate, arrest, and prosecute those whose criminal acts enable the Russian government to continue this unjust war.”

The task force will include lawyers from DOJ’s National Security, Criminal, Tax, and Civil divisions, and various U.S. Attorneys’ Offices across the country. The task force will also include agents and analysts from numerous law enforcement agencies, including the FBI; U.S. Marshals Service; U.S. Secret Service; Department of Homeland Security–Homeland Security Investigations; IRS–Criminal Investigation; and the U.S. Postal Inspection Service.

FinCEN alert on sanctions evasion

On March 7, FinCEN issued a warning to all financial institutions subject to anti-money- laundering program requirements under the Bank Secrecy Act, instructing them to be vigilant against efforts to evade U.S. sanctions on Russia. The alert reminds financial institutions of their obligation to report potential sanctions evasion, with particular emphasis on the obligations of those acting in the crypto currency space, noting that “it is critical that all financial institutions, including those with visibility into [crypto currency flows]…identify and quickly report suspicious activity associated with potential sanctions evasion, and conduct appropriate risk-based customer due diligence or, where required, enhanced due diligence.” The alert contained a list of 10 “red flags” or potential indicators, of sanctions evasion, three of which are specific to sanctions evasion using crypto currency. Given the emphasis on crypto currency, it would be reasonable for exchangers and administrators who are regulated under the BSA to ensure that strong sanctions compliance programs are implemented as a matter of priority.

FinCEN also “strongly” encouraged financial institutions to make full use of their ability to share information under Section 314(b) of the USA PATRIOT Act to prevent, identify, and report potential sanctions evasion, to make use of innovative techniques to identify hidden Russian and Belorussian assets, and to perform appropriate due diligence, particularly regarding Russian politically exposed persons.

NYDFS guidance

On February 25, the New York State Department of Financial Services issued guidance highlighting increased risk in the areas of cybersecurity and virtual currency in response to the Russian military actions in Ukraine, and reminded regulated entities that they must “fully comply” with U.S. sanctions on Russia and related NYDFS regulations, as covered in this Buckley Special Alert.

The guidance highlighted that all regulated firms should “immediately”:

  • Monitor all government communications on a real-time basis to remain abreast of sanctions developments
  • Ensure that their systems, programs, and processes remain in compliance with all the requirements and restrictions as they are imposed, including reviewing and modifying their transaction monitoring and filtering programs required under Part 504 of the Superintendent’s Regulations
  • Monitor all transactions, particularly trade finance transactions and funds transfers, to identify and block funds as required by OFAC
  • Ensure that their OFAC compliance policies and procedures are being updated on a continuous basis

Given the rapid evolution of the situation in Ukraine, the involvement of multiple government agencies in fortifying the U.S. financial system against sanctions evasion, and the coordinated global response, it would be reasonable to expect rapid change in U.S. sanctions targeting Russia. It would also be reasonable to expect that compliance with the Russia sanctions is a top priority for the Biden administration and to devote resources and expertise accordingly.