Worldwide: Biden Administration Threatens Foreign Financial Institutions With Secondary Sanctions For Involvement In Certain Transactions Related To Russia; Expands Ban On Import Of Certain Russian Goods

Key Takeaways:

• On December 22, 2023, President Biden issued a new Executive Order affecting foreign financial institutions and those importing certain goods into the U.S.
• In addition, OFAC provided related new and revised FAQs, as well as a compliance advisory, meant to help foreign financial institutions navigate some of the new sanctions.
• OFAC complemented this new executive order by banning the import of certain seafood sourced from Russia, as well as specific products used to support Russia's war efforts.

On December 22, 2023, President Biden issued a new executive order ("E.O."), E.O. 14114, "Taking Additional Steps With Respect to the Russian Federation's Harmful Activities" ("New E.O."). The New E.O., among other things, authorizes the Department of the Treasury's Office of Foreign Assets Control ("OFAC") to impose sanctions on foreign financial institutions supporting Russia's war effort by, directly or indirectly, engaging in specified transactions, and implements a ban on imports of Russian origin of seafood, alcoholic beverages, and diamonds into the U.S. On the same day, OFAC announced two related determinations: The Determination Pursuant to Section 11(a)(ii) of E.O. 14024, as amended by the New E.O. ("14024 Determination"), which prohibits foreign financial institutions from transacting in certain items; and a Determination Pursuant to Section 1(a)(i)(B) of E.O. 14068, as amended by the New E.O. ("14068 Determination") (collectively, the "Determinations"), prohibiting the import of salmon, cod, pollock, and crab sourced from Russia. Finally, OFAC also issued three related General Licenses— General License ("GL") 83, GL 84, and GL 85—and published additional Russian sanctions-related guidance in the form of 12 new FAQs and amendments to previous FAQs, as well as a Compliance Advisory directed at foreign financial institutions that provides additional guidance on the amendments to E.O. 14024.

New E.O. Exposes Foreign Financial Institutions to U.S. Sanctions for Supporting Certain Russian Industries and Authorizes Import Ban on Russian Seafood, Alcoholic Beverages, and Diamonds

According to the Biden administration, the New E.O is a response to Russia's "continued use of its military-industrial base to aid its effort to undermine security in countries and regions important to U.S. national security." The New E.O. amends E.O. 14024 and E.O. 14068.

The amendments to E.O. 14024 are directed at foreign financial institutions and mark the first time that the U.S. has targeted foreign persons with the express threat of secondary sanctions in connection with Russia-related sanctions.

The New E.O. adds a section to E.O. 14024 providing that a foreign financial institution may be sanctioned if it has either:

When foreign financial institutions meet these criteria, the following U.S. sanctions may be imposed upon them:

The amendment to E.O. 14024 also explicitly prohibits donations of food, clothing, medicine, and other items specified in 50 U.S.C. 1702(b)(2), by any person, "to . . . or for the benefit of any person whose property and interests in property are blocked pursuant to the" Blocking Provision ("Blocked Person"). Notably, this restriction on donations applies to both "any contribution or provision of funds, goods, or services by, to, or for" a Blocked Person and the receipt of such services, goods, or funds from a Blocked Person. This means Blocked Persons are prohibited from both making and receiving these donations.

"Foreign financial institution" is broadly defined as "any foreign entity that is engaged in the business of accepting deposits; making, granting, transferring, holding, or brokering loans or credits; purchasing or selling foreign exchange, securities, futures or options; or procuring purchasers and sellers thereof, as principal or agent."

Examples of a "foreign financial institution" consist of banks; entities operating credit card systems; insurance and trust companies; securities brokers and dealers; investment companies; employee benefit plans; and dealers in precious metals, stones, or jewels (and holding companies, affiliates, or subsidiaries of same). However, international financial institutions identified in 22 U.S.C. 262r(c)(2) (e.g., International Monetary Fund and European Bank for Reconstruction and Development) and other similar institutions OFAC has identified (or may identify) are not included.

In addition, the New E.O. makes clear that, "for these measures to be effective in addressing the national emergency declared in this order," the U.S. government does not need to give prior notice of a listing or determination made pursuant to the New E.O.

The New E.O. also amends E.O. 14068 to (inter alia) prohibit the importation into the U.S. of the following products originating in Russia (the "Item Import Ban"):

The New E.O. also allows for the expansion of the import ban to other categories of seafood (including fish) and diamonds, as determined by the Secretary of the Treasury, in conjunction with the relevant authorities, "that were mined, extracted, produced, or manufactured wholly or in part in the Russian Federation, or harvested in waters under the jurisdiction of the Russian Federation or by Russia-flagged vessels" (the "Category-Based Import Ban").

"Diamond" means any diamonds classified as such in subheadings 7102.10, 7102.31, and 7102.39 of the U.S. Harmonized Tariff Schedule (or other subheadings specified in determinations made pursuant to the New E.O.).

Importantly, imports of the above-referenced products are prohibited even if such products have been made part of, or were "substantially transformed" into, other products outside of Russia. Products subject to these new import regulations may also be prohibited from importation if they were otherwise "transited through or were exported from or by" Russia.

OFAC Determinations Prohibit Importation of Key Russian Products

In connection with the New E.O., OFAC issued the following Determinations, along with technical, non-substantive changes to the existing determination banning the importation of gold from Russia.

OFAC's 14024 Determination provides that the Class of Items Ban applies to certain products (detailed further therein):

• Machine tools and manufacturing equipment
• Manufacturing materials for semiconductors and related electronics
• Electronic test equipment
• Propellants, chemical precursors for propellants, and explosives
• Lubricants and lubricant additives
• Bearings
• Advanced optical systems
• Navigation instruments

Meanwhile, OFAC's 14068 Determination—by applying the Category-Based Import Ban that is discussed above—prohibits the importation into the U.S. of the following items "produced wholly or in part in" Russia "or harvested in waters under the jurisdiction of" Russia or by Russian vessels, regardless of "whether such fish, seafood, and preparations thereof have been incorporated or substantially transformed into another product outside of" Russia ("Seafood Ban"):

• Salmon
• Cod
• Pollock
• Crab

OFAC GLs Authorize Specified Limited Transactions

OFAC issued three GLs related to the New E.O. and the Determinations summarized above. First, GL 83 provides that all transactions prohibited by the 14068 Determination "that are ordinarily incident and necessary to the importation into the U.S. of seafood derivative products, pursuant to" contracts "entered into prior to December 22, 2023 are authorized" until February 21, 2024 at 12:01 AM (EST).

Second, GL 84 provides that U.S. financial institutions will have a 10-day period, upon a specific foreign financial institution being made subject to the U.S. Bank Account Prohibition, to engage in certain transactions for purposes of closing the foreign financial institution's account or transferring remaining funds to a foreign financial institution located outside of the U.S.

Finally, although unrelated to the New E.O., GL 85 authorizes certain dealings "incident and necessary to the wind down of any transaction involving Expobank Joint Stock Company" ("Expobank") until March 21, 2024 at 12:01 AM (EST). OFAC added Expobank to its Specially Designated National and Blocked Persons ("SDN") List on December 12, 2023.

OFAC FAQs & Compliance Advisory

To assist with complying with the New E.O. and Determinations, OFAC issued 12 new Russia-related OFAC FAQs (1146-1157), three revised FAQs, and a Compliance Advisory, "Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia's Military-Industrial Base."

The FAQs (both new and amended) provide further guidance regarding the Determinations, GLs, and OFAC's interpretation of the New E.O., including the various important bans. A summary of the key points from each new FAQ follows:

• FAQ 1146: describes the purpose of the New E.O. as addressing Russia's war efforts.
• FAQ 1147: specifies how the New E.O. amends E.O. 14024 (as outlined above).
• FAQ 1148: identifies the kinds of transactions that could expose a foreign financial institution to sanctions under E.O. 14024 (as amended) including:
  • "[P]rocessing any significant transaction(s) for persons that have been designated for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors, or additional sectors as may be determined to be part of the military-industrial base (the specified sectors)."
  • "[M]aintaining accounts, transferring funds, or providing other financial services to persons, either inside or outside Russia, that operate in the specified sectors."
  • "[F]acilitating the sale, supply, or transfer, directly or indirectly, to the Russia . . . of certain items critical to Russia's war effort identified in the" 14024 Determination.
• FAQ 1149: outlines the sanctions that OFAC may impose on foreign financial institutions, per the New E.O., including the U.S. Bank Account Prohibition and the blocking of property (and interests in same) pursuant to the Blocking Provision.
• FAQ 1150: describes the purpose of the 14024 Determination, including an instruction that foreign financial institutions should use the list of items provided in the 14024 Determination "for the purpose of mitigating sanctions risk".
• FAQ 1151: addresses how OFAC plans to interpret the following terms (under the New E.O.):
  • "[F]oreign financial institution" - see discussion above.
  • "Russia's military-industrial base" - includes the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian Federation economy. In addition, "Russia's military-industrial base may also include individuals and entities that support the sale, supply, or transfer of critical items identified in" the 14024 Determination.
  • "[S]ignificant transaction or transactions" - OFAC may consider the totality of the circumstances and facts in determining whether a transaction is "significant" including:
    • 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 E.O. 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 U.S. national security objectives; and
    • such other factors that OFAC deems relevant.
• FAQ 1152: clarifies that "foreign financial institutions . . . that engage in transactions in non-USD currencies [may] be sanctioned under" E.O. 14024, as amended by the New E.O.
• FAQ 1153: covers how to determine which SDNs on OFAC's SDN List operate in the specified sectors. The FAQ suggests referring to OFAC and the U.S. Department of State's respective websites and press releases, as well as the Federal Register Notices. OFAC plans to revise its SDN List to include "the sector in which an SDN was designated for operating."
• FAQ 1154: details how the New E.O. amends E.O. 14068. The FAQ makes clear that OFAC may prohibit the importation, into the U.S., of additional products under the Category-Based Import Ban or the Item Import Ban. Accordingly, "OFAC intends to issue a determination related to the importation of certain Russian diamonds processed in third countries . . . in the near term."
• FAQ 1155: explains the Seafood Ban.
• FAQ 1156: addresses GL 83 and notes U.S. persons are allowed to participate in transactions involving selling or re-directing shipments outside the U.S. of items previously destined for the U.S., notwithstanding the Seafood Ban.
• FAQ 1157: defines "salmon," "cod," "pollock," and "crab," for purposes of the Seafood Ban.

OFAC's Compliance Advisory—which complements the FAQs but strictly relates to OFAC's implementation of sanctions under E.O. 14024 (as amended by the New E.O.)—states outright that "[f]oreign financial institutions that conduct or facilitate significant transactions or provide any service involving Russia's military-industrial base run the risk of being sanctioned by OFAC."

In addition to describing some of the new sanctions authorities and referencing additional helpful guidance previously provided by OFAC, the Compliance Advisory provides examples of activities that may create sanctions risk for foreign financial institutions, under E.O. 14024 (as amended). These activities include, but are not limited to, "[m]aintaining 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" or "[f]acilitating the sale, supply, or transfer, directly or indirectly, of the specified items to Russian importers or companies shipping the items to Russia."

Recommendations for Foreign Financial Institutions

The Compliance Advisory also explains how foreign financial institutions can reduce their U.S. sanctions risk. For instance, OFAC advises they send "questionnaires to customers known to deal in or export specified items to better understand their counterparties" and incorporate "risks related to Russia's military-industrial base into sanctions risk assessments and customer risk rating criteria."

In addition, the last two sections of the Compliance Advisory, respectively, identify best practices for foreign financial institutions to follow when attempting to comply with E.O. 14024 (as amended) and specify certain permissible transactions under GL 6C (e.g., those involving food and medical care). Best practices include, for example, making sure employees are trained on sanctions risks and common red flags.

To ensure they are ready for these new regulations, foreign financial institutions should, in accordance with OFAC's Compliance Advisory, strive to promote and maintain a "culture of compliance" by, for example, "[e]nsuring any identified risks or issues are escalated quickly to the proper level (e.g., senior risk committee)." Likewise, foreign financial institutions are instructed to clearly communicate with U.S. correspondent banks (as well as those in other jurisdictions) so all parties are aligned on due diligence expectations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.