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NYDFS will take expedited measures to enforce Russian sanctions
On March 2, New York Governor Kathy Hochul announced that NYDFS will increase its sanctions enforcement actions against Russia, including taking measures to expedite the procurement of blockchain analytics tools to detect exposure among regulated licensed virtual currency businesses to Russian individuals, banks, and other entities sanctioned by the Biden administration. “Accelerating the procurement process is a critical step to strengthen the Department's ability to enforce anti-money laundering and Bank Secrecy Act laws in this immediate crisis and beyond,” the announcement stated, explaining that “[l]everaging purpose-built technologies and service providers for virtual currency protects the financial system from illicit activity including money laundering, terrorist financing and ransomware activity.” NYDFS Superintendent Adrienne A. Harris added that monitoring transactions and exposure in real-time is imperative for preventing actors from attempting to evade sanctions through the transmission of virtual currency. The announcement follows NYDFS guidance on cybersecurity and virtual currency issued last week, which raised the specter of elevated cyber risk due to ongoing cyberattacks against Ukraine that could spill over to other networks, as well as potential direct attacks against U.S. critical infrastructure. (Covered by a Buckley Special Alert.) Governor Hochul also issued an Executive Order at the end of February, which directed all New York State agencies and authorities to review and divest public funds from Russia.
OFAC, DOJ measures aim for stronger compliance with Russian sanctions
On March 2, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and the DOJ announced new measures to strengthen compliance with Russia-related sanctions in response to the situation in Ukraine. OFAC observed that in the past few days, Russia has taken measures “to use exporters to act as their agents and help them raise resources to prop up their currency and fund their priorities.” In response, OFAC reiterated that such actions taken on behalf of Russia’s Central Bank are prohibited. Newly issued and updated frequently asked questions address enhanced sanctions compliance measures and further explain recent sanctions, including prohibitions imposed pursuant to Directive 4 under Executive Order (E.O.) 14024, “Prohibitions Related to Transactions Involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation.” (Covered by InfoBytes here.) Additionally, the updated FAQs clarify, among other things, that energy payments can and should continue. As explained in OFAC’s announcement, General License (GL) 8A permits “U-turn transactions” so that energy payments may be processed through non-sanctioned, third-country financial institutions to allow the continuation of transactions that support the flow of energy to the market. OFAC also issued new FAQs and general licenses (see GLs 9A, 10A, 13, and 14) related to E.O. 14065, “Blocking Property of Certain Persons and Prohibiting Certain Transactions With Respect to Continued Russian Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine” to further clarify the stipulated prohibitions.
The same day, the DOJ launched Task Force KleptoCapture, “an interagency law enforcement task force dedicated to enforcing the sweeping sanctions, export restrictions, and economic countermeasures that the United States has imposed, along with allies and partners,” in order to “isolate Russia from global markets.” “The Justice Department will use all of its authorities to seize the assets of individuals and entities who violate these sanctions,” Attorney General Merrick B. Garland stated. The Task Force will be staffed with DOJ prosecutors, agents, analysts, and professional staff with expertise in sanctions and export control enforcement, anticorruption, asset forfeiture, anti-money laundering, tax enforcement, national security investigations, and foreign evidence collection. According to the announcement, the Task Force will use data analytics, cryptocurrency tracing, foreign intelligence sources, and information from financial regulators and private sector partners to investigate and prosecute violations of new and future sanctions (both those related to the Ukraine invasion as well as those imposed for prior instances of Russian aggression and corruption), and “combat[] unlawful efforts to undermine restrictions taken against Russian financial institutions,” including prosecuting persons who attempt to evade know-your-customer and anti-money laundering measures. The Task Force will also target efforts to use cryptocurrency to launder foreign corruption proceeds and sanctions evasion and “us[e] civil and criminal asset forfeiture authorities to seize assets belonging to sanctioned individuals or assets identified as the proceeds of unlawful conduct.”
OFAC targets Russian wealth, imposes sanctions on Putin and Lavrov
During February and March, as conflict continued to escalate in Ukraine, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) imposed significant new sanctions, including most recently designations targeting numerous Russian elites and their family members for continuing to provide direct and indirect support to the Russian government through their business empires, wealth, and other resources. (See also General License 15.) The sanctions also targeted six of the individuals companies, one of Russia’s largest privately-owned aircraft, and one of the world’s largest superyachts. The actions were taken in close coordination with the EU, UK, Canada, Japan, the ROK, and Australia as part of a “transatlantic effort to further deny Russian elites the benefits of their kleptocracy” and to ensure the effective implementation of recently announced financial sanctions. An additional 26 Russia- and Ukraine-based individuals and seven Russian entities connected with the Russian government’s efforts to promulgate disinformation and influence perceptions were also sanctioned by OFAC, while the Department of State imposed substantial costs on 22 Russian defense-related firms. OFAC also released three new Russian harmful foreign activities sanctions FAQs.
OFAC also imposed significant sanctions against the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, as well as three entities that manage one of Russia’s key sovereign wealth funds: the Russian Direct Investment Fund, its management company, and one of the managing company’s subsidiaries. Sanctions were also imposed against Russian President Vladimir Putin and Minister of Foreign Affairs Sergei Lavrov, along with directors of the Foreign Intelligence Service, the Federal Security Service and the Federal Service of National Guard Troops, the interior minister, and other top government officials (see announcements here and here). As a result of the sanctions, all property and interests in property belonging to the sanctioned individuals and entities, and “any entities that are owned, directly or indirectly, 50 percent or more” by the blocked persons that are subject to U.S. jurisdiction are blocked and must be reported to OFAC. 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. The Financial Industry Regulatory Authority also sent a regulatory notice alerting members of recent sanctions-related developments and advising members to continue to monitor OFAC’s website for relevant information.
OFAC also issued Directive 4 under Executive Order (E.O.) 14024, which prohibits related transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, unless otherwise authorized by OFAC. Entities subject to Directive 4 can be found in OFAC’s updated list of Specially Designated Nationals or on OFAC's Non-SDN Menu-Based Sanctions List. Additionally, OFAC issued Russia-related General License 8A to authorize certain energy transactions with specified entities through 12:01 a.m. eastern daylight time, June 24, 2022.
OFAC further announced that it is adding regulations to implement E.O. 14024 related to specified harmful foreign activities of the Russian government (covered by InfoBytes here). OFAC stated it plans to supplement these regulations with a more comprehensive set of regulations that may include additional interpretive guidance and definitions, general licenses, and other regulatory provisions.
Additionally, President Biden, along with leaders of the European Commission, France, Germany, Italy, the UK, and Canada, issued a joint statement imposing further restrictive economic measures to further isolate Russia from the international financial system. The leaders agreed to block certain Russian banks from accessing the SWIFT global messaging system in order to harm the banks’ ability to operate globally and announced their commitment to “restrictive measures” against the Russian Central Bank to prevent the deployment of its international reserves in a manner that undermines the impact of these sanctions. The announcement further noted that the leaders plan to launch a transatlantic task force to ensure financial sanctions are effectively implemented through the identification and freezing of assets belonging to sanctioned individuals and companies that exist within their countries’ jurisdictions. Actions will include “employing sanctions and other financial and enforcement measures on additional Russian officials and elites close to the Russian government, as well as their families, and their enablers.”
Find continuing InfoBytes coverage on the U.S. sanctions response to Russia’s invasion of Ukraine here.
OFAC sanctions Belarusians for supporting Russian invasion of Ukraine
On February 24, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against 24 Belarusian individuals and entities due to Belarus’s support for, and facilitation of, Russia’s invasion of Ukraine. The sanctions focus on Belarus’s defense sector and financial institutions, which have close ties to Russia. OFAC stressed that the “Belarusian economy is highly dependent on key Russian financial institutions and their subsidiaries” and that restrictions imposed against the Public Joint Stock Company Sberbank of Russia, VTB Bank Public Joint Stock Company, and State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank, combined with the new measures taken against Belarusian banks “target nearly one-fifth of the country’s entire financial sector.” Specifically, OFAC designated two significant state-owned banks that directly or indirectly finance or conduct activity on behalf of the Government of Belarus (GoB). “Sanctioning these two GoB-owned banks, in addition to Russia-related restrictions imposed on three other systemically important Belarusian financial institutions, means that a significant portion of the Belarusian financial sector is now subject to U.S. sanctions,” OFAC stated. As a result of the sanctions, all property and interests in property belonging to the sanctioned individuals and entities that are in the U.S. or in the possession or control of U.S. persons, and “any entities that are owned, directly or indirectly, 50 percent or more” by the blocked persons are blocked and must be reported to OFAC. 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.
In conjunction with the sanctions, OFAC issued numerous related directives and general licenses that provide for multiple exceptions, along with several new and updated frequently asked questions. A Buckley Special Alert provides additional details related to the evolving nature of the U.S. sanctions response to Russia’s invasion of Ukraine.
FCC launches inquiry to reduce cyber risks
On February 25, the FCC adopted a Notice of Inquiry proposed by FCC Chairwoman Jessica Rosenworcel that would launch an inquiry into the vulnerabilities of the internet’s global routing system, in response to the increasing risk of cyberattacks stemming from Russia’s invasion of Ukraine. The adopted inquiry solicits public comments on vulnerabilities threatening the security and integrity of the Border Gateway Protocol, which is central to the global routing of internet traffic. The inquiry also intends to evaluate how these security risks could impact the transmission of data through email, e-commerce, and bank transactions to interconnected Voiceover Internet Protocol and 911 calls and how best to address any identified challenges. Comments are due 30 days after publication in the Federal Register, with replies due 30 days later.
Special Alert: NYDFS guidance on cybersecurity and virtual currency responds to events in Ukraine
The New York Department of Financial Services last week issued guidance on its cybersecurity and virtual currency regulations in response to the Russian military actions in Ukraine and recently imposed sanctions. NYDFS specifically raised the specter of elevated cyber risk due to ongoing cyberattacks against Ukraine, which could spill over to other networks, as well as potential direct attacks against U.S. critical infrastructure.
Updated cybersecurity regulation guidance
NYDFS suggested that regulated entities with programs pursuant to its cybersecurity regulation (23 NYCRR 500) have the potential to mitigate increased cyber threats and should take the following steps:
- Review cybersecurity programs for compliance, with particular attention to certain safeguards and core cybersecurity hygiene measures, including access control, vulnerability management, and privileged access review
- Review, update, and test incident-response and business-continuity plans and ensure they address ransomware events
- Review and implement practices pursuant to the June 2021 Ransomware Guidance
- Re-evaluate plans to maintain essential services and protect critical data in the event of an extended outage or service disruption
- Conduct a full test of backup and recovery abilities
- Provide additional cybersecurity awareness training and reminders for all employees
NYDFS also advised that regulated entities should keep track of known threat actors and take extra precautions when doing business in Russia and Ukraine, including segregating Russian and Ukrainian networks. Regulated entities must report cybersecurity events that meet the criteria of 23 NYCRR 500.17(a) as promptly as possible and within 72 hours, and should also report cybersecurity events immediately to law enforcement, including the FBI and the Cybersecurity and Infrastructure Security Agency.
Guidance in response to recent sanctions
In the last week, the Biden administration imposed significant new sanctions targeting Russian assets, the Russian financial market, and Russian business dealings in response to Russia’s invasion of Ukraine. (See InfoBytes coverage here.) NYDFS reiterated that regulated entities should fully comply with U.S. sanctions on Russia, as well as Part 504 of its regulations regarding transaction monitoring and filtering. In order to comply with the new sanctions, NYDFS recommended that regulated entities take the following steps immediately:
- Monitor all communications from NYDFS, the U.S. Department of the Treasury, the Office of Foreign Assets Control (OFAC), and other federal agencies on a real-time basis to keep tabs on the latest developments
- Modify transaction monitoring and filtering programs as necessary to capture new sanctions as they are proposed
- Monitor all transactions, particularly trade finance transactions and funds transfers, and identify and interdict transactions prohibited by U.S. sanctions.
- Update OFAC compliance policies and procedures on a continuous basis to incorporate the recent sanctions and any new sanctions that may be imposed.
Updated virtual currency regulation guidance
NYDFS also cautioned that sanctioned entities may attempt to use virtual currency to evade sanctions. It said regulated entities must ensure they have “tailored policies, procedures, and processes to protect against the unique risks that virtual currency present” and are complying with the relevant state and federal laws, including the OFAC Sanctions Compliance Guidance for the Virtual Currency Industry and New York virtual currency regulation (23 NYCRR 200). Additionally, regulated entities should monitor the effectiveness of virtual currency-specific control measures, including sanctions lists, geographic screening, geolocation tools/IP address identification and blocking capabilities, and transaction monitoring and investigative tools, including blockchain analytics tools.
Buckley will continue to monitor the ongoing situation in Ukraine and provide updates in conjunction with significant developments.
If you have any questions regarding the NYDFS guidance or the recent Ukraine-related sanctions against Russia, please visit our Privacy, Cyber Risk & Data Security or Bank Secrecy Act/Anti-Money Laundering & Sanctions practice pages, or contact a Buckley attorney with whom you have worked in the past.
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.”