InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Special Alert: Russian invasion of Ukraine triggers significant sanctions (updated)
Over past few days, and following weeks of clear signals that sanctions would be imposed in response to military activity, the Biden administration issued significant new sanctions in response to the Russian Federation’s military invasion of Ukraine and its recognition of Ukraine’s separatist regions. The recent measures:
- Freeze the U.S. assets of numerous Russian banks and their subsidiaries, including Russia’s second largest bank, VTB, the company behind the Nord Stream 2 pipeline and multiple Kremlin-connected individuals
- Cut off Sberbank, Russia’s largest bank, from the U.S. financial system by prohibiting transactions involving Sberbank and imposing correspondent account-related prohibitions
- Prohibit transactions in new debt and equity of 13 large Russian enterprises
- Target secondary market dealings in Russian government debt
- Impose a near complete prohibition on dealings with the separatist regions of Ukraine
Special Alert: Russian invasion of Ukraine triggers significant sanctions
On February 21 and 22, following weeks of clear signals that sanctions would be imposed in response to military activity, the Biden administration issued significant new sanctions in response to the Russian Federation’s recognition of separatist regions of Ukraine and incursions of Russian troops. The new measures impose property-blocking sanctions on two state-owned banks (including their subsidiaries), target secondary market dealings in Russian debt, and impose a near complete prohibition on dealings with the separatist regions of Ukraine. Additionally, the Department of the Treasury took steps that enable it to impose sanctions on any person determined to be operating in Russia’s financial services sector. This appears to be an initial phase of sanctions activity and should military activity continue or escalate, it is likely that sanctions would similarly increase in stringency.
The evolving nature of the U.S. sanctions response is evidenced by a recent announcement that the Biden administration will soon impose sanctions targeting Nord Stream 2 AG, the company behind the $11.3 billion pipeline project that was intended to carry gas from Russia to Germany. Buckley will continue to monitor the situation and provide updates.
OFAC sanctions Russians engaged in Ukrainian destabilization activities
On January 20, the U.S. Treasury Department’s Office of Foreign Assets Control announced sanctions pursuant to Executive Order 14024 against four individuals engaged in Russian government-directed influence activities to destabilize Ukraine. OFAC stated that it will continue to take actions, including in partnership with the Ukrainian government, “to undercut Russia’s destabilization efforts.” The designations are the latest actions to target purveyors of Russian disinformation, including similar designations made last April (covered by InfoBytes here). As a result of the sanctions, all property and interests in property of the sanctioned individuals subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” OFAC noted that its regulations generally prohibit U.S. persons from participating in transactions with the designated persons, which include “the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person, or the receipt of any contribution or provision of funds, goods or services from any such person.”
OFAC sanctions North Koreans
On January 12, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13382 against five Democratic People’s Republic of Korea (DPRK) individuals based in Russia and China that OFAC designated as “responsible for procuring goods for the DPRK’s weapons of mass destruction (WMD) and ballistic missile-related programs.” According to OFAC, these sanctions are part of the U.S.’s ongoing efforts to counter the DPRK’s “continued use of overseas representatives to illegally procure goods for weapons.” As a result of the sanctions, all property and interests in property of the sanctioned individuals subject to U.S. jurisdiction are blocked and must be reported to OFAC. OFAC noted that its regulations generally prohibit U.S. persons from participating in transactions with the designated person, including transactions transiting the U.S. OFAC’s announcement further warned that any foreign financial institution that knowingly facilitates significant transactions or provides significant financial services for any of the designated individuals may be subject to U.S. correspondent account or payable-through account sanctions.
OFAC published FAQs on Belarus, Ukraine-/Russia-related, and Venezuela-related sanctions programs
On January 7, the U.S. Treasury Department’s Office of Foreign Assets Control published a new FAQ 956 regarding Belarus, Ukraine-/Russia-related, and Venezuela-related sanctions programs, which prohibit U.S. persons from dealing in certain new debts (such as bonds, loans, drafts, loan guarantees, or letters of credit) of certain identified persons in these countries. The FAQ provides additional guidance on how OFAC views modifications to pre-existing loans, contracts, or other agreements to replace LIBOR as the reference rate. According to the FAQ, “[l]oans, contracts, or other agreements that use LIBOR as a reference rate that are modified to replace such benchmark reference rate will not be treated as new debt for OFAC sanctions purposes, so long as no other material terms of the loan, contract, or agreement are modified.”
OFAC reaches multiple settlements with companies that exported goods to Russia and Sudan
On September 27, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a roughly $1.4 million settlement with a Texas-based supplier of goods and services for the oil and gas industries (a subsidiary of a Netherlands corporation) for allegedly approving contracts that allowed a foreign subsidiary to supply goods to a Russian energy firm blocked under Directive 4 of Executive Order (E.O.) 13662, “Blocking Property of Additional Persons Contributing to the Situation in Ukraine,” as implemented by the Ukraine-Related Sanctions Regulations. According to OFAC’s web notice, between July 2015 and November 2016, U.S.-senior managers at the company approved five contracts for its foreign subsidiary to supply oil and exploration goods to the blocked energy firm, thus constituting a “prohibited provision of services involving a person determined to be subject to Directive 4 ([the blocked energy firm]), its property, or its interests in property.”
In arriving at the settlement amount, OFAC considered various aggravating factors, including, among other things, that (i) U.S. senior managers knew that their approvals were for contracts to supply goods to a blocked entity; (ii) the company “acted directly contrary to U.S. foreign policy objectives by approving the sale of oil production or exploration equipment to an entity subject to the restrictions of Directive 4”; and (iii) the company should have recognized the risk involved when the contracts were approved.
OFAC also considered various mitigating factors, including, among other things, that the company took meaningful corrective actions upon discovering the alleged violations to ensure sanctions compliance, and cooperated with OFAC’s investigation and entered into tolling agreements.
OFAC separately reached a $160,000 settlement with a subsidiary of a subsidiary of the same Netherlands corporation for its apparent violation of OFAC’s now-repealed Sudanese Sanctions Regulations. According to OFAC’s web notice, three of the subsidiary’s U.S. employees allegedly facilitated the sale and shipment of oilfield equipment intended for delivery to Sudan, which was, at the time of the transaction, an apparent violation.
President Biden issues executive order blocking certain Russian pipelines
On August 20, President Biden signed Executive Order (E.O.) Blocking Property with Respect to Certain Russian Energy Expert Pipelines to take additional steps with respect to the national emergency declared in E.O. 14024 (covered by InfoBytes here) related to specific harmful foreign activities by the Russian government. The new E.O. prohibits, among other things, (i) “the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to this order”; and (ii) “the receipt of any contribution or provision of funds, goods, or services from any such person.” Concurrently, OFAC issued Russia-related General License (GL) 1A, as well as several new and updated FAQs related to the updated designations (see FAQs 894, 919, 920, and 921). Specifically, GL 1A authorizes certain activities involving the Federal State Budgetary Institution Marine Rescue Service (MRS) (“or any entity in which MRS owns, directly or indirectly, a 50 percent or greater interest”) that are not related to the construction of specified pipeline projects. Several individuals and entities have also been added to OFAC’s Specially Designated Nationals List.
OFAC sanctions Russian officials
On August 20, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and the Department of State joined the United Kingdom in announcing sanctions pursuant to Executive Order 13382 against nine Russian individuals and two Russian entities in connection with poisoning or Russia’s chemical weapons program under a Russian opposition leader. According to OFAC, this is the third time Treasury has used discretionary authority to respond to Russia’s use of a chemical agent against its own citizens (covered by InfoBytes here). The Department of State also designated several entities and persons pursuant to E.O. 13382 for “having engaged, or attempted to engage, in activities or transactions that have materially contributed to, or pose a risk of materially contributing to, the proliferation of weapons of mass destruction or their means of delivery” by Russia. As a result of the sanctions, all of the property and interests in property of the designated persons that are in the U.S. or in the possession or control of U.S. persons, as well as any entities that are owned 50 percent or more by the designated persons, are blocked and must be reported to OFAC. Additionally, OFAC regulations generally prohibit U.S. persons from participating in transactions with the designated persons unless exempt or otherwise authorized by an OFAC general or specific license. OFAC further warned that “any foreign person who knowingly facilitates a significant transaction or transactions for or on behalf of one of these persons risks being sanctioned.”
Biden order authorizes sanctions authority covering Russian activities
On April 15, the Biden administration announced several actions intended to block property with respect to specified harmful foreign activities by the Russian government, including the issuance of Executive Order (E.O.) Blocking Property With Respect To Specified Harmful Foreign Activities Of The Government Of The Russian Federation. Specifically Directive 1 to the E.O. provides that, at the determination of the acting director of the Office of Foreign Assets Control (OFAC) and in consultation with the State Department, U.S. financial institutions are prohibited from:
- Participating “in the primary market for ruble or non-ruble denominated 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
- “Lending ruble or non-ruble denominated funds to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.”
These actions are prohibited as of June 14, 2021, “except to the extent provided by law or unless licensed or otherwise authorized by [OFAC].” For purposes of the Directive, a “U.S. financial institution” is defined as “any U.S. entity (including its foreign branches) that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or other extensions of credit, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent.” This term also includes branches, offices, and agencies of foreign financial institutions located in the U.S., but does not include such institutions’ foreign branches, offices, or agencies.
In conjunction with the issuance of the new E.O., OFAC also published several new and updated FAQs and added several individuals and entities to OFAC’s list of Specially Designated Nationals. The new additions include sanctions taken against (i) several Russian technology companies that support the Russian Intelligence Services, which OFAC stated are responsible for having “executed some of the most dangerous and disruptive cyber attacks in recent history”; (ii) five individuals and three entities related to Russia’s occupation of the Crimea region of Ukraine pursuant to E.O.s 13660 and 13685; and (iii) 16 entities and 16 individuals that attempted to influence the 2020 U.S. presidential election at the direction of Russian government leadership.
As a result of the sanctions, all of the property and interests in property of the designated persons that are in the United States or in the possession or control of U.S. persons, as well as any entities that are owned 50 percent or more by the designated persons, are blocked and must be reported to OFAC. Additionally, OFAC regulations generally prohibit U.S. persons from participating in transactions with the designated persons unless exempt or otherwise authorized by an OFAC general or specific license. In its announcement, OFAC further warned that “foreign persons that knowingly engage in a significant transaction or transactions with the persons designated today may themselves face the risk of designation,” and emphasized that “financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to secondary sanctions or be subject to an enforcement action.”
OFAC sanctions Russian officials
On March 2, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order (E.O.) 13661 against seven Russian government officials in connection with the “poisoning and subsequent imprisonment of [a] Russian opposition figure.” One of the designated individuals is also being sanctioned pursuant to E.O. 13382 “for acting or purporting to act for or on behalf of, directly or indirectly, the Federal Security Service.” In conjunction with OFAC’s sanctions, the Department of State also designated several entities and persons pursuant to E.O. 13882 for “having engaged, or attempted to engage, in activities or transactions that have materially contributed to, or pose a risk of materially contributing to, the proliferation of weapons of mass destruction or their means of delivery” by Russia. As a result of the sanctions, all of the property and interests in property of the designated persons that are in the United States or in the possession or control of U.S. persons, as well as any entities that are owned 50 percent or more by the designated persons, are blocked and must be reported to OFAC. Additionally, OFAC regulations generally prohibit U.S. persons from participating in transactions with the designated persons unless exempt or otherwise authorized by an OFAC general or specific license. OFAC further warned that “any foreign person who knowingly facilitates a significant transaction or transactions for or on behalf of one of these persons risks being sanctioned.”