Biden Signs Executive Order Targeting Foreign Banks Supporting Russia

US President Joe Biden on December 22, 2023, signed an executive order (EO) amending EO 14024—Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation—to authorize the US Treasury Department’s Office of Foreign Assets Control (OFAC) to designate foreign financial institutions that help Russia’s defense industry, as Moscow’s war against Ukraine approaches its two-year anniversary. The President signed the new EO several days after the EU adopted its 12^th package of sanctions against Russia, which included a ban on Russian diamonds and designated additional Russian individuals and entities, freezing their assets and imposing travel bans.

As Russia works to rebuild its military after nearly two years of fighting, the Biden administration will likely utilize the new authority to designate or threaten to designate, foreign financial institutions in countries such as China, Türkiye, and the UAE that help Russia evade sanctions and enhance its military capabilities.

According to the White House Fact Sheet, the EO amends EO 14024 to expand US authorities to sanction:

• Financial institutions determined to have conducted or facilitated any significant transaction for or on behalf of individuals or entities sanctioned by the United States for operating in sectors of the Russian economy that support its military-industrial base.
• Financial institutions determined to have conducted or facilitated any significant transaction, or provided any service, involving Russia’s military-industrial base, including the sale, supply, or transfer to Russia of certain critical items.

Foreign financial institutions that are designated by OFAC for engaging in these activities will either face full blocking sanctions or significant limits on their US correspondent accounts.

OFAC, in coordination with the release of the new EO, has issued guidance advising foreign financial institutions on strategies to mitigate their risk of being sanctioned by the United States and listing activities that could expose them to sanctions risk, such as:

• 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 US sanctions on Russia’s military-industrial base, including:
  • Offering to set up alternative or non-transparent payment mechanisms.
  • Changing or removing customer names or other relevant information from payment fields.
  • Obfuscating the true purpose of or parties involved in payments.
  • Taking steps to hide the ultimate purpose of transactions to evade sanctions.

By listing activities that could expose foreign financial institutions to US sanctions, OFAC is targeting many sanctions evasion methodologies that Russia uses to gain access to restricted goods and technologies, as well as the global financial system.

OFAC’s guidance highlights the convergence between sanctions evasion and money laundering and advises that financial institutions should conduct baseline customer due diligence (CDD) and use other anti-money laundering controls commensurate with its current exposure to Russia’s military-industrial sector and its supporters to ensure they are not violating US sanctions.

• Financial institutions should review their customer base to determine their exposure to any customers involved in the specified sectors of the Russian economy or who conduct business with designated persons in the specified sectors, as well as those who may be involved in the sale, supply, or transfer of specific items to Russia or to jurisdictions considered high-risk for helping Russia evade sanctions.
• OFAC also advises that financial institutions should communicate compliance expectations to their customers, stressing that they may not use their accounts to do business with designated persons operating in sectors that could involve Russia’s military-industrial base.
• Risk assessments also need to be updated to incorporate risks related to Russia’s military-industrial base into customer risk rating criteria, including updating jurisdictional risk assessments as appropriate.
• OFAC also recommends implementing enhanced trade finance controls related to specified critical items, including monitoring information collected as part of documentary trade.

US regulators are more thoroughly enforcing trade controls meant to limit Russia’s access to critical weapons and technologies. The United States is working with foreign allies and taking a whole-of-government approach to hold those who evade sanctions and trade controls accountable for violations, working to ensure that US-origin military equipment and technologies do not fall into Russia’s hands.

• The Commerce Department’s Bureau of Industry and Security (BIS) on December 6, 2023, added 42 entities to the Entity List for contributing to Russia’s military and defense industrial base. Several of the entities are directly linked to the joint Iranian-Russian efforts to develop and construct an unmanned aerial system (UAS) facility in the “Alabuga Special Economic zone” to produce Shahed-136 drones for use in Russia’s war in Ukraine. The entities were added for engaging in illicit efforts to acquire and divert the highest priority US-origin electronic components with military applications to Russia, engaging with Russian military end-users or sanctioned parties, and diverting US-origin electronic and avionic components on behalf of parties in Russia.
• The Justice Department on December 6, 2023, in coordination with BIS, which included Hans Maria De Geetere and his companies on the Entity List, charged the Belgian national with engaging in a yearslong scheme to unlawfully export sensitive, military-grade technology from the United States to China and Russia. OFAC the day before included De Geetere and companies linked to him on the SDN list.
• The BIS on November 6, 2023, issued temporary denial orders (TDOs) against seven persons and three companies for illegally exporting electronics with military applications to Russia. TDOs are protective administrative measures issued by BIS that cut off not only the right to export items subject to the Export Administration Regulations (EAR) from the United States but also bar the ability to receive or participate in exports from the United States or reexports of items
  subject to the EAR.

The Treasury Department, in concert with the new EO, also issued a list of critical items, advising foreign financial institutions to avoid facilitating the sale or transfer of these articles to Russia to reduce sanctions risk under the new authorities. The list includes 29 items including certain machine tools and manufacturing equipment, manufacturing materials for semiconductors and related electronics, electronic test equipment, certain propellants, chemical precursors for propellants and explosives, certain lubricants and additives, certain ball and roller bearings, certain advanced optical systems, and certain navigation instruments.

In addition to amending EO 14024 to target foreign financial institutions that help Russia’s war in Ukraine, the new EO also amends EO 14068 to make importing specific Russian goods to the United States, such as diamonds and seafood, more difficult. Certain products mined, extracted, produced, or manufactured wholly or in part in Russia are banned, even if these products are then transformed or processed in a third country, as is the importation of certain products harvested in Russian waters or by Russia-flagged vessels.

• Salmon, cod, pollock, and crab that were produced wholly or in part in Russia are prohibited, even if the fish was processed outside the Russian Federation, in countries such as China. According to media reports, the United States in 2022 imported more than $300 million worth of salmon and pollock from China, with the majority of the processed seafood likely coming from Russia, which has been evading the ban on seafood imposed after Moscow’s invasion of Ukraine by diverting fish to other countries for processing.
• The importation into the United States of Russian-origin gold is also prohibited, except to the extent provided by law, or unless licensed or otherwise authorized by OFAC. This determination excludes gold of Russian Federation origin that was located outside of the Russian Federation prior to June 28, 2022.

The United States and its partners in the coming months also intend to introduce import restrictions on diamonds mined, processed, or produced in Russia, building on an existing US ban on the importation of Russian-origin diamonds, according to the White House Fact Sheet issued along with the new EO. India processes most rough diamonds, and Russia is the biggest rough diamond producer in the world. The Group of Seven (G7) nations and the EU said they would ban non-industrial diamonds from Russia starting in January 2024, followed by a block in March on Russian-origin diamonds processed in third countries. A traceability mechanism is expected to be implemented in September, which will help identify rough diamonds of Russian origin. More than 90 percent of Russia’s diamonds come from US-designated, state-owned mining enterprise, Alrosa, according to OFAC.

Key Takeaways

The latest Executive Order signals an increased enforcement stance on the part of US regulators. Senior US officials recently traveled to Turkey and the UAE to express their concerns about financial institutions that transact with entities subject to US sanctions.

Russia’s intelligence services use both witting and unwitting financial intermediaries to facilitate sanctions evasion and access restricted materials. Front companies and networks in third countries also facilitate Russia’s access to restricted materials. Therefore, financial institutions must exercise extra caution when transacting with entities in high-risk jurisdictions—especially countries known as offshore secrecy havens, “neutral” jurisdictions that have not imposed sanctions on Russia, or countries known for free-trade zones—or in sectors vulnerable to exploitation by Russian actors, such as technology, defense, and aviation. Simple list screening will be insufficient to prevent sanctions evasion, and financial institutions will probably engage in increased de-risking to avoid becoming vulnerable to secondary sanctions and being cut off from the US financial system.

The DOLFIN platform lists evasion tactics, such as obfuscation of addresses and use of anonymous legal entities, as well as techniques involving senior government officials, such as the use of subsidiaries of state-owned banks.

DOLFIN also describes strategies and techniques to identify and mitigate sanctions risks, highlighting the challenges of detecting Russian sanctions evasion because of Russia’s interconnectedness with the global financial system and the sophistication of Russian actors when concealing beneficial ownership information and source of funds through front and shell companies.

DOLFIN’s resources on export controls can help financial institutions implement standards associated with the risks of financial crimes associated with trade. Coupled with OFAC’s latest recommendations, the resources listed on the DOLFIN platform can help mitigate the risk of sanctions and other penalties, as regulators continue to crack down on violators.

Significant transactions. OFAC may consider the totality of the facts and circumstances when determining whether transactions are “significant.” These factors can include:

• The size, number, and frequency of the transaction(s).
• The nature of the transaction(s).
• The level of awareness of management and whether the transactions are part of a pattern of conduct.
• The nexus of the transaction(s) to persons sanctioned pursuant to EO 14024, or to persons operating in Russia’s military-industrial base.
• Whether the transaction(s) involve deceptive practices.
• The impact of the transaction(s) on US national security objectives.
• Other factors that OFAC may deem relevant.

OFAC almost certainly will not impose secondary sanctions on financial institutions that unwittingly engage in a limited number of transactions. However, knowingly and intentionally helping sanctioned individuals and entities evade restrictions by facilitating illegal transactions or creating payment mechanisms to help sanctioned entities obscure the end-users or true purpose of transactions can result in full blocking sanctions or restrictions on their US correspondent accounts.

The new EO is a warning not just to foreign financial institutions that they will be subject to secondary sanctions if they are found to be facilitating Russia’s access to restricted goods and technologies or helping the Russian military’s aggression in Ukraine. Manufacturers and exporters should also be cautious when dealing in products that bear a high risk of evasion or diversion and should enhance their due diligence processes. Vulnerable sectors such as aviation, energy, defense, and technology should warrant closer examination.

The new EO indicates the Biden Administration’s increased determination to prevent Russia from accessing critical equipment and technologies that will enable Moscow to continue its war in Ukraine. OFAC is probably under pressure to designate in the near term one or more foreign financial institutions involved in facilitating Russian sanctions evasion to demonstrate its resolve to disrupt Russia’s military aggression. Treasury Secretary Janet Yellen after the release of the new EO stated that Treasury expects financial institutions to undertake every effort to ensure that they are not witting or unwitting facilitators of circumvention and evasion.