On December 22, 2023, President Joseph Biden issued Executive Order 14114 (EO) amending EO 14024 by authorizing the imposition of U.S. sanctions on foreign financial institutions that are either facilitating significant transactions on behalf of persons designated for operating in certain key sectors of the Russian economy, or facilitating significant transactions or providing services involving Russia’s military-industrial base. According to Secretary of the Treasury, Janet Yellen, Russia “has increasingly shifted certain trade and financial flows through third countries to evade sanctions and continue its procurement of critical items for their wartime production.” With these latest prohibitions, she indicated that the United States expects that financial institutions “undertake every effort to ensure that they are not witting or unwitting facilitators of circumvention and evasion. And we will not hesitate to use the new tools provided by this authority to take decisive, and surgical, action against financial institutions that facilitate the supply of Russia’s war machine.”
More specifically, EO 14114 allows Treasury’s Office of Foreign Assets Control (OFAC) to sanction foreign financial institutions that have (i) conducted or facilitated a significant transaction or transactions for any persons designated pursuant to EO 14024 for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian economy; or (ii) conducted or facilitated any significant transaction or transactions, or provided any service, involving Russia’s military-industrial base, including the sale, supply, or transfer, directly or indirectly, to Russia, of any item or class of items as may be determined by the Secretary of the Treasury. For additional details on such items, see Determination Pursuant to Section 11(a)(ii) of EO 14024, dated December 22, 2023, that includes certain machine tools and manufacturing equipment, materials for semiconductors and certain electronics.
OFAC has issued a Guidance for Foreign Financial Institutions in which it provides examples of activities that could expose such entities to sanctions risks. The following are examples:
- Maintaining accounts, transferring funds, or providing other financial services (i.e., payment processing, trade finance, insurance) for any persons designated for operating in the specified sectors.
- Maintaining accounts, transferring funds, or providing other financial services (i.e., payment processing, trade finance, insurance) for any persons, either inside or outside Russia, that support Russia’s military-industrial base, including those that operate in the specified sectors of the Russian Federation economy.
- Facilitating the sale, supply, or transfer, directly or indirectly, of the specified items to Russian importers or companies shipping the items to Russia.
- Helping companies or individuals evade U.S. sanctions on Russia’s military-industrial base. This includes: (i) offering to set up alternative or non-transparent payment mechanisms, (ii) changing or removing customer names or other relevant information from payment fields, (iii) obfuscating the true purpose of or parties involved in payments, or (iv) otherwise taking steps to hide the ultimate purpose of transactions to evade sanctions.
The sanctions that may be imposed under EO 14114 include designation by OFAC on the Specially Designated Nationals (SDN) List and prohibitions or restrictions on foreign financial institutions having correspondent or payable-through accounts (“CAPTA”) in the United States. OFAC also issued Russia-related General License (GL) 84 that authorizes U.S. financial institutions that maintain correspondent accounts or payable-through accounts for any foreign financial institution to engage in certain wind-down activities involving any sanctioned foreign financial institution. To date, no sanctions have been imposed on any foreign financial institutions based on the scope of EO 14114 that amended EO 14024. However, if imposed, under GL 84, U.S. financial institutions will have only a 10-day period to wind-down activities with a sanctioned foreign financial institution.
The above referenced guidelines also provide helpful steps – in addition to undertaking typical customer due diligence – to assist foreign financial institutions in identifying and minimizing exposure. In addition, OFAC has issued FAQS 1148 – 1153 to provide further clarification on the scope these potential sanctions on foreign financial institutions. Importantly FAQ 1151 sets forth OFAC interpretation of the terms “foreign financial institution,” “Russia’s military-industrial base”, and a “significant transaction(s).”