Key Takeaways:
- Throughout October and November 2024, OFAC and the State Department together have designated around 500 individuals and entities.
- Gazprombank Joint Stock Company, Russia's largest bank that had not already been sanctioned, was included in this set of OFAC designations.
- OFAC has also released an alert concerning the Russian financial messaging system, and how those who become members of this system could be sanctioned.
- In addition, OFAC published Sanctions Guidance for the Maritime Shipping Industry, which provides scenarios-based guidance directed at both public and private maritime industry stakeholders.
The Department of the Treasury's Office of Foreign Assets Control ("OFAC") was active in October and November 2024. After issuing an Updated Price Cap Coalition Advisory for the Maritime Oil Industry and Related Sectors on October 21, 2024, which was covered in a previous alert, OFAC sanctioned 275 individuals and entities for supporting Russia's military industrial base or engaging in "sprawling evasion networks," on October 30, 2024 ("October 2024 Designations"). OFAC simultaneously released two general licenses. The U.S. State Department, in coordination with OFAC, also imposed sanctions on more than 120 individuals and companies on October 30, 2024.
The next day, on October 31, 2024, OFAC released Sanctions Guidance for the Maritime Shipping Industry ("Sanctions Guidance"). On November 13, 2024, OFAC released updated FAQs as well as two new FAQs, regarding compliance for the insurance industry, which complements the Sanctions Guidance. Most recently, on November 21, 2024, OFAC announced over 100 new designations targeting Russia's financial sector ("November 2024 Designations"), along with four new general licenses, three amended FAQs, two new FAQs, and a Russia-related alert entitled, "Sanctions Risk for Foreign Financial Institutions that Join Russian Financial Messaging System, System for Transfer of Financial Messages" ("Alert"). OFAC's Sanctions Guidance and Alert, as well as its recently announced designations, general licenses, and FAQs are outlined below.
OFAC's October 2024 Designations and Related General Licenses
The hundreds of additions to the Specially Designated Nationals and Blocked Persons ("SDN") List, on October 30, 2024, comprise two groups. First, individuals and entities involved in Russia-sanctions evasion networks covering 17 jurisdictions, including China, India, Switzerland, Thailand, and Turkey. This group includes two Swiss attorneys and a Thai entity, all of whom were sanctioned pursuant to Executive Order ("E.O.") 14024 for assisting Russian clients, including sanctioned individuals, with corporate formation and trust-related services. Second, various individuals and entities helping Russia sustain its war efforts against Ukraine.
The same day as these designations, OFAC issued two general licenses: General License ("GL") No. 110 and GL No. 111. GL No. 110 allows U.S. persons to wind down specified transactions involving the following seven entities designated by OFAC on October 30, 2024, along with any entity in which one or more of the seven persons listed below owns, directly or indirectly, a 50 percent or greater interest:
1. XH Smart Tech China Co Ltd
2. Lokesh Machines Limited
3. Galaxy Bearings Ltd
4. Orbit Fintrade LLP
5. Wuhan Huazhong Numerical Control Co Ltd
6. Beijing Dynamic Power Co Limited
7. Sharpline Automation Private Limited
GL No. 111 permits U.S. persons to engage, through 12:01 a.m. EST on December 14, 2024, in specified transactions "ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity" ("Covered Debt or Equity") to a non-U.S. person issued or guaranteed by the five entities listed below, along with any entity in which one or more of the five persons listed below owns, directly or indirectly, a 50 percent or greater interest:
1. XH Smart Tech China Co Ltd;
2. Lokesh Machines Limited;
3. Galaxy Bearings Ltd;
4. Beijing Dynamic Power Co Limited;
5. Wuhan Huazhong Numerical Control Co Ltd
GL No. 111 further allows all transactions that are ordinarily incident and necessary to "facilitating, clearing, and settling trades" of Covered Debt or Equity that were placed prior to 4:00 p.m. EDT, October 30, 2024, through 12:01 a.m. EST on December 14, 2024. Finally, GL No. 111 authorizes certain transactions that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. EDT on October 30, 2024, that involve one of the five entities listed above and that are linked to Covered Debt or Equity.
State Department's October 2024 Designations
The State Department targeted sanctions evasion by designating producers, exporters, and importers of items essential to Russia's war efforts including aerospace components, microelectronics, and computer numerical control items on the Common High Priority List in several countries, including China, India, Kazakhstan, the Kyrgyz Republic, Malaysia, Singapore, Thailand, Turkey, and the United Arab Emirates. The State Department also designated several senior Russian Ministry of Defense officials who were appointed earlier in 2024. Other designations targeted Russia's defense industry, including military repair facilities, producers of advanced technologies, and persons supporting the Belarus-Russia alliance. Additional subsidiaries of State Atomic Energy Corporation Rosatom were also sanctioned. All these designations were made pursuant to E.O. 14024.
OFAC's Sanctions Guidance for Maritime Industry Participants
The Sanctions Guidance supplements OFAC's prior guidance related to the maritime industry, including the May 2020 Sanctions Advisory for the Maritime Industry, Energy and Metal Sectors, and Related Communities. OFAC issued the Sanctions Guidance to provide "scenario-based guidance" that helps maritime industry stakeholders (1) identify novel or common fact patterns that could indicate sanctions evasion; (2) address common issues involving counterparty due diligence; and (3) implement sanctions compliance best practices.
In the Sanctions Guidance, OFAC describes five different scenarios summarized as follows:
1. Deceptive shipping practices to conceal sanctions nexus
The first scenario describes situations where buyers, sellers, and ship charterers may be engaging in deceptive practices to hide sanctions violations. One case study describes a U.S. protection and indemnity ("P&I") club that, in addressing a vessel owner's damages claim, uncovers inconsistencies in the details provided by the owner. It also finds reports showing lengthy time periods during which the ship failed to transmit automatic identification system ("AIS") data. In this case study, OFAC underscores the importance of ship operators, port agents, and P&I clubs' roles when it comes to investigating and uncovering this kind of suspicious behavior by requesting the necessary documentation from their respective counterparts. OFAC makes clear that insurers that provide coverage for shipments based on a falsified certificate of origin may be subjected to sanctions.
To avoid these consequences, OFAC suggests that P&I clubs and maritime industry stakeholders perform thorough due diligence on each transaction to confirm the shipping documentation received provides accurate information about the origin and destination of the cargo. This is particularly true where the transactions involve jurisdictions known for sanctions evasion such as those "known by industry to be commonly listed on falsified documentation or certain waters known for frequent [ship-to-ship] operations of sanctioned oil." Unfortunately, OFAC does not provide a list of such jurisdictions. OFAC also explains that AIS manipulation has been used to conceal the origin of certain oil shipments.
It goes on to recommend, in scenarios with AIS abnormalities, that insurers be on the lookout for other indications that data was manipulated or concealed, such as (i) a possible misclassification of the ship and type of trade; (ii) extended periods with no AIS transmission; (iii) irregular voyage or traffic patterns; and (iv) other types of data concealment or manipulation, like using Maritime Mobile Service Identity manipulation to hide a ship's name or location.
2. Identification of SDNs on Trade Documentation
The second scenario addresses situations where U.S. maritime industry stakeholders commit sanctions violations by mistakenly transacting with an SDN. It discusses a circumstance involving a U.S. entity that may have unintentionally violated U.S. sanctions because of a counterparty's deceptive practices when transacting with the U.S. entity's affiliate.
Specifically, OFAC describes how the affiliate and a bank both rejected the counterparty's attempts to proceed with the transaction because they identified that an SDN was involved. Afterwards, the counterparty sought to swap the SDN with a newly formed entity as a proxy. OFAC explains these kinds of violations can be avoided by investigating red flags, such as revisions to original transaction documentation used to conceal evidence of connections to sanctioned jurisdictions or refusals to share additional information when responding to standard industry requests.
OFAC makes clear that "[n]on-U.S. persons could also be subject to OFAC enforcement, including secondary sanctions, for causing U.S. persons to violate U.S. sanctions, evading, or conspiring to violate U.S. sanctions." OFAC encourages maritime industry stakeholders to adopt "robust internal sanctions compliance controls" to maintain compliance with U.S. sanctions.
3. Policy or registration renewals for vessels with obscured or complex ownership structures
The third scenario relates to circumstances involving U.S. insurance or reinsurance brokers that violate sanctions laws by providing insurance coverage to sanctioned persons. This often involves a sanctioned entity that uses a complex ownership structure to conceal its ultimate beneficial ownership. OFAC recommends that insurers (and reinsurers) insert sufficient exclusion clauses in their policies, permitting easy termination of such agreements in the event an insurer discovers it is providing coverage to a sanctioned entity.
OFAC refers maritime industry stakeholders to FAQ 102 for additional guidance with respect to these kinds of clauses.
4. Mid-voyage Sanctions Risks
The fourth scenario consists of situations where stakeholders learn about potentially sanctionable conduct while a vessel is on route with the shipment or after it arrives. This case study deals with a tanker vessel that, two months after leaving port and days before docking at its destination, was the subject of news reports for tampering with its location data to conceal a ship-to-ship ("STS") transfer during which it received crude oil of Iranian origin. The vessel's U.S.-based hull and machinery, and cargo insurers confirm the media report through their due diligence efforts and revoke their respective policies; the port authority requests the relevant documentation, performs additional due diligence, and does not allow the vessel to unload the cargo because it cannot verify its origin; and the flag state authorities complete further due diligence, confirm the veracity of the news reports, and de-flag the vessel after attempting to contact it to no avail.
OFAC explains that in the event a sanctions issue arises while the ship is on its way to the port (e.g., through an illegal STS transfer), those involved in the transaction should conduct additional due diligence as described in the scenario. Specifically, they should try to determine their sanctions-related risk for continuing to provide services to an SDN. OFAC further suggests that stakeholders in this scenario should consider applying for an OFAC license that permits them to either continue providing services to, or wind down their transaction(s) with, the sanctioned party. OFAC recommends that if a maritime industry stakeholder believes it violated OFAC's sanctions programs, it should file a voluntary self-disclosure.
5. Opaque Ownership Information
The fifth scenario is focused on situations where maritime industry stakeholders attempt to conceal their ultimate beneficial ownership information when selling, or attempting to sell, tankers. The case study discusses a ship broker who is organizing the sale of multiple ageing crude oil tankers. A potential buyer, a recently incorporated vessel management company, offers to buy one of the tankers without an inspection. The broker requests the buyer's company information. After reviewing it, the broker finds the buyer is a special purpose vehicle with no prior involvement in the trade of seaborne oil. Not only does the buyer's website fail to include contact information or general information, but the buyer is reluctant to provide additional details, such as source of funds or its lines of business.
OFAC explains, in this case, there is no immediate sanctions concern. However, "given the totality of factors involved in this sale, and the inability of the broker to receive further information," the broker decides not to broker the deal for this buyer. The broker proceeds to flag this incident in its internal customer tracking database in case the same entity attempts to buy another vessel, either directly or indirectly (as an ultimate beneficial owner).
Based on this scenario, OFAC recommends that those participating in ship sales conduct a risk-based assessment on their counterparties. Likewise, such parties should be wary of complex ownership structures, as well as the use of shell companies or escrow agents, which may indicate a party is attempting to conceal the ultimate beneficial ownership of a vessel.
OFAC's Alert
OFAC released the Alert as a warning to foreign jurisdictions and financial institutions concerning the sanctions risks that come with becoming a part of the Russian financial messaging system ("System for Transfer of Financial Messages" or "SPFS"). In the Alert, OFAC first explains that, after Russia's illegal invasion of Ukraine in 2014, the Central Bank of Russia started the SPFS to evade U.S. sanctions (and those of its allies) or diminish their effect. According to OFAC, Russia continues to promote the SPFS as an alternative to the Society for Worldwide Interbank Financial Telecommunication network and sanctioned Iranian banks have joined the SPFS in furtherance of Russia's sanctions evasion and war efforts.
OFAC confirms that SPFS is considered a part of the financial services sector of Russia's economy. This means any foreign financial institution ("FFI") that becomes a member of the SPFS (or already is) could itself be sanctioned for operating in this sector, based on E.O. 14024. Indeed, OFAC underscores that it "views joining SPFS after publication of this alert as a red flag and is prepared to more aggressively target foreign financial institutions that take such action."
OFAC suggests that FFIs should be careful about being exposed to financial institutions that have joined the SPFS because these banks could be "conduits for Russian sanctions evasion." Likewise, OFAC reminds FFIs that they can be sanctioned if they "conduct or facilitate any significant transaction or transactions or provide any service involving Russia's military-industrial base." It also instructs FFIs to consider that the EU has sanctioned the SPFS (in June 2024).
OFAC's November 2024 Designations and Associated General Licenses
The November 2024 Designations consist of 16 individuals and around 100 entities, primarily from Russia. However, the most significant designation was of Gazprombank Joint Stock Company ("Gazprombank"), Russia's biggest bank that had not yet been sanctioned and one of the few through which Western companies still operating in Russia could use to continue funding operations. In addition, 50 small and medium-sized Russian banks, over 40 registrars of Russian securities, and 15 Russian finance professionals were sanctioned.
Along with these designations, OFAC released four Russia-related general licenses, summarized as follows:
- GL No. 53A: replaces and supersedes General License No. 53 and permits transactions "incident and necessary to the official business of diplomatic or consular missions of" the Russian government, which are prohibited under E.O. 14024 and involve Gazprombank (or any entity in which Gazprombank owns, directly or indirectly, a 50% or greater interest). Likewise, it authorizes transactions, otherwise prohibited under E.O. 14024 and involving Gazprombank, which are "incident and necessary to the compensation of employees of Russian missions."
- GL No. 55C: replaces and supersedes General License No. 55B and allows two types of transactions through June 28, 2025, at 12:01 AM (EST). First, transactions connected to the seaborne trade of crude oil originating from the Sakhalin-2 project," which are prohibited by the determination based on section 1(a)(ii) of E.O. 14071. Second, all transactions prohibited by E.O. 14024 involving Gazprombank, or any entity in which Gazprombank owns, directly or indirectly, a 50 percent or greater interest, which are connected to the Sakhalin-2 project.
- GL No. 113: permits transactions "incident and necessary to the wind down of transactions involving the" SDNs listed in the annex therein, through December 20, 2024, at 12:01 AM (EST). The SDNs in the annex consist of Gazprombank and numerous small and medium Russian banks and financial services institutions included in the November 2024 Designations. This is a rather short wind down period especially for the many Western companies that have relationships with Gazprombank.
- GL No. 114: authorizes transactions "ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity issued or guaranteed by" Gazprombank or Interstate Bank (or any entity owned, directly or indirectly, individually or in the aggregate, 50 percent or greater by those two banks) ("Relevant Debt or Equity"). Transactions that are otherwise prohibited by E.O. 14024 "that are ordinarily incident and necessary to facilitating, clearing, and settling trades of Covered Debt or Equity that were placed prior to 4:00 p.m. eastern standard time, November 21, 2024 are authorized through 12:01 a.m. eastern standard time, December 20, 2024." Likewise, transactions incident and necessary to the wind down of derivative contracts entered prior to November 21, 2024, at 4 PM (EST), involving these entities or Relevant Debt or Equity, are permitted. These transactions are authorized through December 20, 2024, at 12:01 AM (EST).
OFAC's New and Amended FAQs
OFAC issued two sets of new and modified FAQs, on November 13, 2024, and November 21, 2024, respectively. The earlier set (includes FAQ 1199 and FAQ 1200) contains OFAC's updated guidance with respect to the insurance industry.
The set of FAQs issued on November 21, 2024, comprises three amended FAQs (FAQ 976, FAQ 1096, FAQ 1197), which were updated to account for designations or new general licenses released alongside these FAQs, as well as the following two new FAQs:
- FAQ 1201: addresses which authorizations are available to Russian diplomatic or consular missions operating either inside or outside of Russia, including General License No. 53A. After setting out the authorizations available to these different groups, OFAC explains, generally, "transactions that are 'ordinarily incident and necessary' to the official business of a diplomatic or consular mission, whether third-country or Russian, include standard foreign diplomatic or consular mission operations, including bank transactions related to the operation of those missions, such as salary payments, expense reimbursement for employees, or payments of utilities for diplomatic or consular facilities."
- FAQ 1202: clarifies that OFAC's November 2024 Designations will not "negatively impact the processing of personal, non-commercial remittances, to or from Russia." OFAC confirms its sanctions efforts are not targeting such transactions. It also notes there are multiple Russian banks that are not subject to sanctions that can keep processing such transactions. Therefore, U.S. financial institutions and FFIs are allowed to continue processing transactions that do not include SDN participants (and are not otherwise prohibited by OFAC), including personal, non-commercial, remittances
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