United States: New Executive Order Authorizes The Imposition Of Secondary Sanctions On Foreign Financial Institutions Facilitating Russia's Military-Industrial Base And Expands Import Prohibitions On Certain Russian-Origin Products

Key Points

• On December 22, 2023, President Biden issued E.O. 14114 "Taking Additional Steps With Respect to the Russian Federation's Harmful Activities."
• Specifically, E.O. 14114, which amends E.O. 14024 and E.O. 14068, both:

(i) Provides OFAC with the authority to impose certain secondary sanctions on FFIs determined, knowingly or unknowingly, to have engaged in any significant transaction for or on behalf of certain entities designated under E.O. 14024, or to have engaged in any significant transaction or provided any service involving the broadly-defined Russian military-industrial base.

(ii) Expands upon and clarifies the ban on the importation and entry into the United States of Russia-origin fish and seafood, alcoholic beverages, non-industrial diamonds, and gold to include certain products imported from third countries.

• Additionally, on December 22, 2023, OFAC issued a Compliance Advisory, "Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia's Military-Industrial Base," which provides practical guidance for FFIs on how to identify sanctions risks and implement corresponding controls, as well as several FAQs with additional guidance on E.O. 14114.
• With the issuance of E.O. 14114 and the related U.S. regulatory agency guidance highlighted in this alert, the U.S. government is putting FFIs on notice that it expects heightened customer due diligence when engaging in transactions or other activities with a nexus to Russia. FFIs can now become subject to U.S. sanctions themselves for engaging in certain conduct, regardless of whether such FFIs had knowledge that such conduct was prohibited.

New Secondary Sanctions Now Applicable to Foreign Financial Institutions

Section 1 of Executive Order (E.O.) 14114 amends E.O. 14024 by adding a new Section 11(a), which now provides the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) with the authority to impose secondary sanctions on foreign financial institutions (FFIs) determined to have:

(i) Conducted or facilitated any significant transaction or transactions for or on behalf of any person designated pursuant to Section 1(a)(i) of E.O. 14024 for operating or having operated in the technology, defense and related materiel, construction, aerospace or manufacturing sectors of the Russian economy, or other such sectors as may be determined to support Russia's military-industrial base by the Secretary of the Treasury, in consultation with the Secretary of State.

(ii) Conducted or facilitated any significant transaction or transactions, or provided any service, involving Russia's military-industrial base, including the sale, supply, or transfer, directly or indirectly, to the Russian Federation of any item or class of items as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce.

These items or classes of items, referred to as "critical items," are identified in the Annex to an OFAC determination, also issued on December 22, 2023. OFAC refers to this determination as the "Russia Critical Items Determination," and provides a non-exhaustive list of certain items that are within the scope of the Section 11(a)(ii) secondary sanctions authority, including certain 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 and navigation instruments.

OFAC Frequently Asked Question (FAQ) 1151 defines certain terms used in Section 11(a) as follows:

• "Foreign Financial Institution" is defined in subsection 11(f) of E.O. 14024 and the definition is similar to the definition as used in other OFAC sanctions programs, but for purposes of E.O. 14114 also includes operators of credit card systems and insurance companies.
• "Russia's military-industrial base" includes the technology, defense and related material, construction, aerospace, and manufacturing sectors of the Russian Federation economy (and other sectors as may later be determined pursuant to E.O. 14024) and may include individuals and entities that "support the sale, supply, or transfer of critical items identified in determinations pursuant to subsection 11(a)(ii) of E.O. 14024." See Determination of December 22, 2023 here.
• "Significant transaction or transactions" is broadly defined similarly to other OFAC sanctions programs, noting that OFAC may consider the totality of facts and circumstances, including some or all of certain enumerated factors, when determining whether a transaction or transactions are "significant."

New Section 11(b) of E.O. 14024 provides the types of sanctions that can be imposed on FFIs under Section 11(a), including: (i) prohibiting the opening of, or prohibiting or imposing strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States for such FFIs (i.e., CAPTA sanctions); or (ii) blocking sanctions against such FFIs (i.e., designation as a Specially Designated National (SDN)).

OFAC issued General License (GL) 84 authorizing certain wind-down transactions during the 10-day period after the effective date of the imposition of CAPTA sanctions against a FFI, but has not issued any general license that would authorize wind-down transactions involving a FFI that becomes subject to full blocking sanctions.

With the introduction of this new authority, we note a few critical points for industry stakeholders. First, unlike many secondary sanctions targeting authorities, this authority does not require that FFIs "knowingly" engaged in the prohibited conduct. This imposes potential secondary sanctions liability on FFIs under a standard of strict liability, regardless of a given FFI's level of knowledge, which may have the practical effect of deterring FFIs from engaging in any transactions with a Russia nexus.

Second, with respect to Section 11(a)(i), the authority to impose secondary sanctions on FFIs determined to have conducted or facilitated any significant transaction or transactions for or on behalf of any person designated pursuant to Section 1(a)(i) of E.O. 14024 for operating in certain sectors of the Russian economy does not apply to transactions involving persons designated in all sanctioned sectors of the Russian economy. Notably, Section 11(a)(i) does not provide authority to designate FFIs that engage in transactions involving an E.O. 14024-designated person that was designated for operating in the financial services, accounting, trust and corporate formation services, management consulting, electronics, marine, quantum computing, metals and mining, architecture, engineering, and transportation sectors of the Russian economy.

However, we note that the Section 11(a)(ii) authority to impose sanctions on FFIs determined to have conducted or facilitated any "significant transaction" or "provided any service" which involves "Russia's military-industrial base" does not require that counterparties to a transaction involving "Russia's military-industrial base" must first be designated as SDNs.

OFAC Compliance Advisory for Foreign Financial Institutions

Given the impact of the new secondary sanctions authority of E.O. 14114, OFAC issued a Compliance Advisory to provide guidance to foreign financial institutions on mitigating these risks under E.O. 14114, including practical guidance on how to identify sanctions risks and implement corresponding controls. OFAC's Compliance Advisory and the related OFAC FAQs (particularly OFAC FAQ 1148) highlight examples of sanctionable services involving "Russia's military-industrial base," including (but not limited to):

• "Maintaining accounts, transferring funds, or providing other financial services (i.e., payment processing, trade finance, insurance)" for persons who have been designated as SDNs in a sector of "Russia's military-industrial base," or who are not SDNs but otherwise operate in those sectors.
• Facilitating the direct or indirect sale, supply, or transfer to Russia of specific "critical items" designated by the U.S. Secretaries of Treasury, State and Commerce.

OFAC also notes that helping companies or individuals evade U.S. sanctions on Russia's military-industrial base is activity that could, on its own, expose a FFI to secondary sanctions risk under E.O. 14114. According to the Compliance Advisory, such activities include:

• "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; or
• otherwise taking steps to hide the ultimate purpose of transactions to evade sanctions."

Building upon OFAC's "Framework for OFAC Compliance Commitments," as well as previous agency alerts focused on Russia sanctions and export control evasion risks, OFAC's Compliance Advisory re-emphasizes customer due diligence and anti-money laundering controls, but also recommends that FFIs take additional steps to identify their exposure to activity involving Russia's military-industrial base, and take certain risk mitigation steps, such as obtaining attestations from certain customers and updating customer risk rating criteria. Additional best practices highlighted in the Compliance Advisory include training staff (not only compliance personnel but also front-line staff, senior management, and business teams) on sanctions risks and common red flags, ensuring issues are escalated quickly using proper reporting functions, and communicating frequently with U.S. and other correspondent banks on their due diligence expectations and requests for information.

This most recent Compliance Advisory follows a series of advisories issued by U.S. regulators addressing Russia-connected sanctions and export controls evasion risks, including the three joint notices―on June 28, 2022, on May 19, 2023, and on November 6, 2023—issued by OFAC, the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) and the Commerce Department's Bureau of Industry and Security (BIS), that urge financial institutions to employ risk-based controls to detect criminal activity and/or attempts to evade U.S. sanctions and export controls.

Expansion of Ban on Importation of Certain Russian-Origin Products

E.O. 14114 also amends E.O. 14068, the authority under which OFAC prohibits the importation into the United States of certain Russian-origin products, including fish, seafood, and preparations thereof, alcoholic beverages, non-industrial diamonds and additional products of Russian origin as might be determined by the U.S. Secretary of the Treasury, in consultation with the U.S. Secretary of State and U.S. Secretary of Commerce.

E.O. 14114 amends Section 1(a)(i)(B) of E.O. 14068 to authorize a prohibition on the import of the above listed products, as well as additional categories of products as may be determined by the U.S. Secretary of the Treasury, in consultation with the U.S. Secretary of State and U.S. Secretary of Commerce, into the United States (including a foreign trade zone located in the United States) from third countries. Pursuant to this authority, OFAC issued a Seafood Determination identifying salmon, cod, pollock and crab as subject to this import prohibition. (See FAQs 1154 and 1155, and FAQ 1157 for the list of covered HTSUS subheadings).

E.O. 14114 clarifies that such prohibitions apply when the products that are imported from a third country are "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, notwithstanding whether such products have been incorporated or substantially transformed into other products outside of the Russian Federation."

In connection with the expansion of the existing import restrictions on Russian-origin seafood, OFAC issued GL 83, which authorizes all transactions ordinarily incident and necessary to the importation into the United States of salmon, cod, pollock and crab subject to the Seafood Determination, pursuant to written contracts or agreements entered into prior to December 22, 2023, through 12:01 A.M. EST, February 21, 2024. See FAQ 1156.

These actions set the stage for similar expanded restrictions on other import-controlled goods, such as diamonds. OFAC states in OFAC FAQ 1154 that it intends to issue a determination related to the importation of certain Russian diamonds processed in third countries pursuant to E.O. 14068 in the near term.

We also note that previously, on June 28, 2022, OFAC issued a Determination adding Russian-origin gold to the list of products subject to the E.O. 14068 import ban. OFAC's revised OFAC FAQ 1070 clarifies that this prohibition does not extend to Russian-origin gold located outside Russia prior to June 28, 2022.

Key Takeaways

The issuance of E.O. 14114 and the related OFAC guidance indicates that the U.S. government has heightened expectations for financial institutions, and it is not afraid to target foreign financial institutions for supporting Russia's military-industrial base.

In a statement made by U.S. Secretary of the Treasury Janet Yellin following the issuance of E.O. 14114, Secretary Yellin noted that U.S. government officials "expect financial institutions will undertake every effort to ensure that they are not witting or unwitting facilitators of circumvention and evasion. And we will not hesitate to use the new tools provided by this authority to take decisive, and surgical, action against financial institutions that facilitate the supply of Russia's war machine." In a background press call, a senior Biden administration official noted that this authority "will be the first time that we're introducing a tool that allows us to use secondary sanctions to go after financial institutions during this conflict," and that "ultimately, for almost any bank in the world, given the choice between continuing to sell a modest amount of goods to Russia's military industrialized complex or being connected to the U.S. financial system, they're going to choose being connected to the U.S. financial system."

While the authority to designate non-U.S. persons for "material support" for sanctioned persons existed prior to the issuance of E.O. 14114, this new authority represents the first secondary sanctions authority issued under the Russian Harmful Foreign Activities Sanctions.

Given that FFIs specifically could be exposed to secondary sanctions liability for engaging in certain transactions, regardless of whether their level of knowledge, FFIs will face significant compliance challenges when continuing to engage in transactions, or when facilitating transactions or other activities, with a nexus to Russia. The U.S. government is sending a clear message that they expect FFIs to do the due diligence that is required, or risk secondary sanctions exposure. While there have not been any designations of FFIs under these new authorities to date, we expect to see designations soon in the future, as the issuance of E.O. 14114 and the related OFAC guidance has put such actors "on notice." FFIs should closely monitor transactional partners and take additional risk mitigation steps as outlined in OFAC's Compliance Advisory and in previous U.S. regulators' advisories.

With respect to the importation ban, industry stakeholders should closely monitor for any changes to the list of products subject to import restrictions, and adhere to guidance issued not only by OFAC, but also U.S. Customs and Border Protection (CBP) requirements. Indeed, in connection with the issuance of E.O. 14114 amending E.O. 14068, CBP issued additional guidance, stating that it will now require importers of covered products, regardless of origin, to provide self-certification that do not contain any inputs originating from the Russian Federation. This includes any seafood products or components from the Russian Federation that are incorporated or substantially transformed in a third country, before they are imported into the United States. Any false statements could lead to significant monetary penalties, forfeitures, and even criminal prosecution. Importers of covered products will therefore need to conduct extensive due diligence and supply chain mapping in order to comply with the certification requirement.

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