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Agencies flag intermediaries in evading Russia-related sanctions
On March 2, the DOJ, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), and the Department of Commerce’s Bureau of Industry and Security (BIS) issued a joint compliance note on the use of third-party intermediaries or transshipment points to evade Russian- and Belarussian-related sanctions and export controls. This is the first collective effort taken by the three agencies to inform the international community, the private sector, and the public about efforts taken by malign actors to evade sanctions and export controls in order to provide support for Russia’s war against Ukraine. The compliance note outlines enforcement trends and details attempts made by Russia “to circumvent restrictions, disguise the involvement of Specially Designated Nationals and Blocked Persons [] or parties on the Entity List in transactions, and obscure the true identities of Russian end users.” The compliance note also provides common red flags indicating whether a third-party intermediary may be engaged in efforts to evade sanctions or export controls, and outlines guidance for companies on maintaining effective, risk-based sanctions and export compliance programs. The agencies highlight other measures taken to constrain Russia, including stringent export controls imposed by BIS to restrict Russia’s access to technologies and other items, sanctions and civil money penalties issued against U.S. persons who violate OFAC sanctions and non-U.S. persons who cause U.S. persons to violate Russian sanctions programs, and the DOJ’s interagency law enforcement task force, Task Force KleptoCapture, which enforces sanctions, export controls, and economic countermeasures imposed by the U.S. and foreign allies and partners.
OFAC issues more Russian sanctions and metals and mining determination
On February 24, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced significant measures targeting the metals and mining sector of the Russian Federation economy under Executive Order 14024. OFAC also imposed sanctions on 22 individuals and 83 entities to further isolate Russia from the international economy and hinder the country’s access to capital, materials, technology, and military support sustaining its war against Ukraine. (See also OFAC’s fact sheet on sanctions measures taken during the past year.) According to OFAC, the designations target “over 30 third-country individuals and companies connected to Russia’s sanctions evasion efforts, including those related to arms trafficking and illicit finance.” The agency added that “[w]hile Russian banks representing over 80 percent of total Russian banking sector assets are already subject to U.S and international sanctions,” it is now “designating over a dozen financial institutions in Russia, including one of the top-ten largest banks by asset value.” OFAC explained that sanctioned actors are known to turn to smaller banks and wealth-management firms to evade sanctions and access the international financial system. As a result, several wealth management-related entities and associated individuals playing key roles in Russia’s financial services sector have been sanctioned. OFAC also issued a determination (effective February 24), in consultation with the Department of State, allowing for sanctions to be imposed on any individual or entity determined to operate or have operated in the metals and mining sector of the Russian Federation economy.
As a result of the sanctions, all property and interests in property belonging to the sanctioned persons that are in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. Further, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons unless authorized by an OFAC-issued general or specific license, or exempt.
The announcement further noted that additional measures have been taken by the Departments of State and Commerce, as well as the Office of the U.S. Trade Representative, in coordination with allies and G7 partners.
In conjunction with the sanctions, OFAC issued several Russia-related general licenses (see GLs 8F, 13D, 60, and 61), as well as five associated frequently asked questions.
FATF suspends Russia’s task force membership
On February 24, the Financial Action Task Force (FATF), the international standard-setting body on illicit finance, suspended the Russian Federation’s membership, saying the country’s “actions unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system.” This marks the first time the FATF has ever suspended a country from its membership. Despite the suspension, the FATF emphasized that Russia “remains accountable for its obligation to implement the FATF Standards” and “must continue to meet its financial obligations.” According to the statement, the FATF will continue to monitor the situation and will consider whether to lift or modify these restrictions during each of its plenary meetings.
Treasury Secretary Janet Yellen issued a statement following the suspension. Explaining that “FATF members lead the global effort on combatting money laundering and the financing of terrorism and proliferation and members are expected to uphold and promote core principles that safeguard the global financial system,” Yellen stressed that “Russia’s ongoing war undermines the principles of international cooperation and mutual respect that underpin the mandate of the FATF.” She further commented that the “United States commends the FATF’s historic decision to suspend Russia’s membership in the body,” and added that “Russia’s disregard for the sovereignty and territorial integrity of Ukraine is at odds with the FATF’s foundational values of international cooperation and the rule of law. Further, Russia’s dealings with suppliers of last resort such as Iran and North Korea, its government-driven efforts to evade international sanctions and export controls, and other activities … make it a haven for illicit finance—the very thing the FATF works to combat.”
Treasury roundtable examines effectiveness of Russian sanctions and export controls
On February 10, Deputy Secretary of the Treasury Wally Adeyemo convened a roundtable to hear from sanctions and U.S. foreign policy experts on the effectiveness of the unprecedented sanctions and export controls imposed on Russia by a coalition of more than 30 countries. Over the past year, the countries have imposed economic restrictions on Russia with the intention of disrupting Russia’s military supply chains and denying the Russian government funding for its war against Ukraine. Adeyemo discussed progress made on these fronts, and said the strain on Russia’s military can be seen through the government’s attempts to backfill equipment and supplies through third parties in permissive jurisdictions or sanctioned countries. Adeyemo said that in the upcoming weeks and months, Treasury intends to increase “its focus on countering sanctions evasion, including by targeting facilitators and third-country providers that may wittingly or unwittingly help Russia replenish the supplies and material it desperately needs to support its military.”
U.S.-EU release statement on Joint Financial Regulatory Forum
On February 7-8, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S.-EU Joint Financial Regulatory Forum to continue their ongoing financial regulatory dialogue. According to a joint statement issued by the participants, the matters discussed focused on six themes: “(1) market developments and financial stability risks; (2) sustainable finance and climate-related financial risks; (3) regulatory developments in banking and insurance; (4) operational resilience and digital finance; (5) regulatory and supervisory cooperation in capital markets; and (6) anti-money laundering and countering the financing of terrorism (AML/CFT).”
The joint statement acknowledged that the Russia/Ukraine conflict, coupled with global economic uncertainty and inflationary pressures, have exposed “the financial system to downside risk both in the EU and in the U.S,” with participants stressing the importance of international coordination in monitoring vulnerabilities and building resilience against stability risks. During the forum, participants discussed recent developments related to sustainability-related financial disclosures, climate-related financial risks, cross-border bank resolution coordination, the transition away from LIBOR, digital finance operational resilience, and progress made in strengthening their respective AML/CFT frameworks.
Treasury official warns Turkish companies on engaging with Russian entities
On February 3, Under Secretary of the Treasury for Terrorism and Financial Intelligence, Brian E. Nelson, met with the Banks Association of Turkey to discuss international sanctions actions against Russia for its war against Ukraine. Nelson highlighted global illicit finance challenges and stressed the importance of addressing weaknesses within the financial system “to root out financial crime, shine light on the financial shadows that illicit actors exploit, and work toward a more equitable and inclusive global economy.” Nelson commented on potential areas for cooperation between Turkish banks and the broader international finance community, pointing to opportunities for the U.S. and Turkey to work together to mitigate anti-money laundering vulnerabilities in the real estate sector. He also focused on Russia’s “abuse of the global financial system to fund” its war in Ukraine as a main factor in international cooperation for preventing Russia from circumventing sanctions and financial controls “in dozens of countries, including [Turkey].” While Nelson recognized Turkey’s reliance on Russian energy and agriculture, he said that “the marked rise over the past year in non-essential Turkish exports or re-exports to Russia makes the Turkish private sector particularly vulnerable to reputational and sanctions risks.” Engaging with sanctioned Russian entities puts Turkish banks and businesses “at risk of sanctions and a potential loss of access to G7 markets and correspondent relationships,” Nelson stressed, calling upon Turkish financial institutions to conduct “enhanced due diligence” in all transactions with Russian entities and individuals—especially within vulnerable sectors.
OFAC offers more guidance on price caps for Russian petroleum
On February 3, the U.S. Treasury Department’s Office of Foreign Assets Control published additional guidance on the implementation of the price cap policy for crude oil and petroleum products of Russian Federation origin. As previously covered by InfoBytes, last November, OFAC published a Determination Pursuant to Executive Order (E.O.) 14071 stating that the prohibitions of E.O. 14071 apply to U.S. persons providing covered services (including (i) trading/commodities brokering; (ii) financing; (iii) shipping; (iv) insurance, including reinsurance and protection and indemnity; (v) flagging; and (vi) customs brokering) as they relate to the maritime transport of Russian Federation crude oil, provided, however, that such covered services are authorized if the Russian oil is purchased at or below the price cap.
The new determination—published pursuant to section 1(a)(ii), 1(b), and 5 of E.O. 14071—establishes that, effective February 5, the price cap on discount to crude petroleum products of Russian Federation origin will be $45 per barrel, and the price cap on premium to crude petroleum products of Russian Federation origin will be $ 100 per barrel. OFAC also published another determination, which outlines prohibitions on certain categories of services as they relate to the maritime transportation of petroleum products of Russian Federation origin, including trading/commodities brokering, financing, shipping, insurance, flagging, and customs brokering. Specifically, unless authorized by law or licensed or otherwise authorized by OFAC, “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any of the Covered Services to any person located in the Russian Federation” are prohibited. These determinations do not authorize transactions otherwise prohibited by the Russian Harmful Foreign Activities Sanctions Regulations.
In conjunction with these determinations, OFAC also published additional guidance, as well as Russia-related General Licenses 56A and 57A.
Secretary of the Treasury Janet Yellen applauded the G7’s price cap announcement, stating that the agreement helps limit Russia’s key revenue generator for funding its war against Ukraine, while promoting stable global energy markets.
OFAC sanctions senior executives of Iranian UAV manufacturer
On February 3, the U.S. Treasury Department’s Office of Foreign Assets Control announced sanctions pursuant to Executive Order 13382 against eight senior executives of an Iran-based firm that was previously sanctioned by the U.S. and EU for manufacturing unmanned aerial vehicles (UAVs) for Iran’s Islamic Revolutionary Guard Corps (IRGC) Aerospace Force. OFAC also designated two Islamic Republic of Iran Navy vessels as property in which the Government of Iran has an interest. “Iranian entities continue to produce UAVs for Iran’s IRGC and military. More broadly, Iran is supplying UAVs for Russia’s combat operations to target critical infrastructure in Ukraine,” Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said in the announcement. “The United States will continue to aggressively target all elements of Iran’s UAV program.”
As a result of the sanctions, all property and interests in property belonging to the sanctioned persons that are in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. Further, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. Persons that engage in certain transactions with the designated individuals or entities may themselves be exposed to sanctions, and “any foreign financial institution that knowingly facilitates a significant transaction or provides significant financial services for any of the individuals or entities designated today pursuant to E.O. 13382 could be subject to U.S. sanctions.”
OFAC sanctions evasion network supporting Russia’s military-industrial complex
On February 1, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced it is imposing “full blocking sanctions against 22 individuals and entities across multiple countries related to a sanctions evasion network supporting Russia’s military-industrial complex.” The sanctions, taken pursuant to Executive Order 14024, are part of the United States’ strategy to target sanctions evasion efforts around the globe, shut down key backfilling channels, expose facilitators and enablers, and limit Russia’s access to revenue to fund its war against Ukraine. “Targeting proxies is one of many steps that Treasury and our coalition of partners have taken, and continue to take, to tighten sanctions enforcement against Russia’s defense sector, its benefactors, and its supporters,” Deputy Secretary of the Treasury Wally Adeyemo said. The sanctions are part of Treasury’s ongoing commitment to the Russian Elites, Proxies, and Oligarchs Task Force, which identifies, freezes, and seizes assets of sanctioned Russians around the world, and leverages information sharing between international partners as well as key data from the Financial Crimes Enforcement Network.
As a result of the sanctions, all property and interests in property belonging to the sanctioned persons that are in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. Further, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons, unless exempt or authorized by a general or specific OFAC license. Prohibitions “include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person.”
FinCEN alert covers potential CRE investments by sanctioned Russians
On January 25, the Financial Crimes Enforcement Network (FinCEN) issued an alert to financial institutions on potential investments in the U.S. commercial real estate sector by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act. The alert provides a list of possible red flags and typologies regarding attempted sanctions evasion in the commercial real estate sector and emphasizes financial institutions’ Bank Secrecy Act reporting obligations. The alert noted that banks frequently work with market participants who seek financing for commercial real estate projects, and that banks have customer due diligence obligations to verify the beneficial owners of legal entity customers. Specifically, the alert noted that “banks therefore may be in a position to identify and report suspicious activities associated with sanctioned Russian elites and their proxies including [politically exposed persons], among banks’ [commercial real estate]-related customers.” According to FinCEN, the recent alert builds on FinCEN’s March 2022 alert identifying real estate, luxury goods, and other high value assets involving sanctioned Russian and elites, and is the fourth alert issued by FinCEN on potential Russian illicit financial activity since Russia’s invasion of Ukraine in February 2022 (covered by InfoBytes here).