December US sanctions: focus on restrictions on foreign financial institutions working with Russian companies

6 February 2024
Law Messenger
In January and February 2024, the number of references to new cases of restrictions on Russian persons' settlements with foreign banks and related problems increased in the media. One of the reasons for these restrictions was the December sanctions imposed by the United States. On 22 December 2023, the President of the United States signed Executive Order 14114[1], which, among other items, expands the criteria for applying restrictive measures under the sanctions regime imposed on Russia by Executive Order 14024 of 2021.

Additional restrictions in new section 11 of Executive Order 14024, as amended by Executive Order 14114, relate to foreign financial institutions that risk having secondary sanctions imposed on them when conducting or facilitating significant transactions

  • with sanctioned persons or on behalf of any person operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy (the list of such sectors may be expanded) (sec. 11 (a) (i)); or
  • with persons involved in the provision of service, supply, or transfer, directly or indirectly, of a certain item or class of items[2] to persons related to Russia’s military-industrial base (sec. 11 (a) (ii)).
The term “foreign financial institution” (FFI) means 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. Thus, foreign financial organizations may include not only credit institutions directly, but also operators of credit card systems, trust companies, brokers, exchanges and other organizations providing financial services.

As restrictive measures, the Secretary of the Treasury, in consultation with the Secretary of State and in some cases with the Secretary of Commerce, may prohibit such an FFI from opening and maintaining correspondent and payable-through accounts or impose blocking sanctions on such an FFI, including blocking all property and interests in property that are in the United States.

Although foreign banks already bore the risks of secondary sanctions under CAATSA[3], the restrictions under Executive Order 14114 primarily increase risks for banks and other FFIs of "friendly" countries. This is because the new restrictions establish the possibility of applying restrictive measures even in situations where the relevant transactions are made in any currency, and not only in U.S. dollars[4].

Please note that the conditions for imposing secondary sanctions on FFIs under the new provisions on transactions involving specified items (sec. 11(a) (ii)) do not require sanctioned status from the FFI party under such a transaction. Therefore, changes to the list of specified items should be monitored.

OFAC's clarifications[5] to the Executive Order provide a sample list of criteria for determining the significance of a transaction, which include, among other items, the frequency of transactions, the nature of the transactions, and the level of awareness of management of the nature of the transactions. This allows a broad qualification of specific transactions and their significance for the purpose of imposing sanctions.

Based on OFAC's recommendations[6], in order to reduce the risk of being sanctioned, FFIs will be required to apply enhanced customer due diligence procedures: reviewing the institution’s customer base to determine exposure to involvement in the specified sectors of the Russian economy, informing clients that they may not use their accounts to do business with designated persons operating in the specified sectors or conducting any activity involving Russia’s military-industrial base, and implementing enhanced trade finance controls related to the specified items.

Authors:
  • Natalia Aristova
    Partner
    B1 Legal
  • Anzhelika Burdeinaia
    Senior Manager
    B1 Legal
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