On December 22, 2023, the Biden Administration issued a new Executive Order (“EO”) “Taking Additional Steps with Respect to the Russian Federation’s Harmful Activities” (the “December 22 EO”) amending EO 14024 of April 15, 2021 (“Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation”) and EO 14068 of March 11, 2022 (“Prohibiting Certain Imports, Exports, and New Investment With Respect to Continued Russian Federation Aggression”). According to a statement from the US Secretary of the Treasury, Janet Yellen, this December 22 EO further targets Russia’s evasion of US sanctions and export controls and, in particular, is intended to deter foreign financial institutions from facilitating significant transactions relating to Russia’s military-industrial base. Notably, Secretary Yellen’s statement includes the following warning to foreign financial institutions “[w]e 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.” This echoes recent initiatives by the Departments of Commerce and the Treasury’s Financial Crimes Enforcement Network to enhance enforcement efforts by increasing expectations of financial institutions as key gatekeepers for detecting sanctions evasion efforts through their sophisticated compliance programs (see our recent blog here).
On the same day, the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”) issued two new Determinations and an amended Determination under EO 14024 and 14068, three general licenses (“GLs”), twelve new and three amended Frequently Asked Questions (“FAQs”), and an explanatory Sanctions Advisory for Foreign Financial Institutions in connection with the December 22 EO. The OFAC press release about the December 22 EO and the relevant OFAC actions can be found here. These measures were issued in coordination with G7 allies. The measures are effective immediately. Key takeaways from these actions are summarized below.
New Authority to Impose Sanctions on Foreign Financial Institutions Facilitating Russian Targeted Sectors or Supply of Certain Items to Russia
The December 22 EO amends EO 14024 by adding a new section 11 that authorizes OFAC to impose sanctions on foreign financial institutions (“FFIs”) for: (1) conducting or facilitating significant transactions on behalf of persons designated for operating or having operated in the following key sectors of the Russian economy that support the country’s military-industrial base: the technology, defense and related materiel, construction, aerospace, manufacturing sectors, or additional sectors as may be determined by Treasury to be part of the military-industrial base (the “Targeted Sectors ”); or (2) conducting or facilitating significant transactions or providing services involving Russia’s military-industrial base, including the sale, supply, or transfer, directly or indirectly, to Russia of items identified by the Treasury (see below referenced Determination).
The sanctions that may be imposed on FFIs found to engage in these activities include prohibitions or restrictions on having correspondent or payable-through accounts (“CAPTA”) in the United States or designation to the List of Specially Designated Nationals and Blocked Persons (“SDN List”) (i.e., full blocking sanctions.) As of the date of this blog, no such sanctions have yet been imposed.
On the same day and pursuant to the newly added section 11 of EO 14024, OFAC issued a separate Russia Critical Items Determination identifying the items that support Russia’s military-industrial base and thus may trigger the sanctions on FFIs. This Determination identified 29 items in the following eight categories: (1) certain machine tools and manufacturing equipment; (2) certain manufacturing materials for semiconductors and related electronics; (3) certain electronic test equipment; (4) certain propellants, chemical precursors for propellants and explosives; (5) certain lubricants and lubricant additives; (6) certain bearings; (7) certain advanced optical systems; and (8) certain navigation instruments. FFIs are expected to use this list of items to mitigate their sanctions risks.
OFAC also issued FAQs 1148 through 1153 in relation to the FFI sanctions. Notably,
- FAQ 1148 identifies FFI activities that may trigger the sanctions, including maintaining accounts, transferring funds, or providing other financial services to persons that operate in the Targeted Sectors, and facilitating the sale, supply, or transfer to Russia of items identified in the Russia Critical Items Determination.
- FAQ 1149 indicates that US financial institutions must close any CAPTAs maintained for FFIs prohibited from having a CAPTA under the December 22 EO. As discussed below, the Russia-related GL 84 authorizes the closures of such accounts within 10 days of the imposition of sanctions.
- FAQ 1151 clarifies the definition of the following terms: “Foreign Financial Institution,” “Russia’s military-industrial base” and “significant transaction or transactions”. Notably, “Russia’s military-industrial base” includes not only the Targeted Sectors but also individuals and entities that support the sale, supply, or transfer of items identified in the Russia Critical Items Determination.
- FAQ 1152 clarifies that FFIs that engage in transactions even in non-USD currencies may still be sanctioned under the newly added section 11 of EO 14024.
- FAQ 1153 directs FFIs to use information on the websites of OFAC and the Department of State, the Federal Register Notices, and the press releases of OFAC and State to identify those SDNs designated as operating in the Targeted Sectors of the Russian economy that support Russia’s military-industrial base. OFAC also intends to update the SDN List to add additional information to reflect the sector in which an SDN was designated for operating.
OFAC issued a GL 84 authorizing US financial institutions to engage in certain wind-down activities involving sanctioned FFIs. With respect to FFIs that are prohibited from maintaining a CAPTA, GL 84 authorizes US financial institutions that maintain the prohibited CAPTAs to (1) process or allow the FFI to execute transactions through the prohibited CAPTA for the purpose of closing the account and (2) transfer remaining funds in the FFI’s prohibited CAPTA to the FFI’s other accounts outside of the United States and close the prohibited CAPTA. This authorization is valid for 10 days from the day the CAPTA sanction is imposed. GL 84 does not authorize transactions otherwise prohibited by the Russian Harmful Foreign Activities Sanctions Regulations (“RuHSR”), including dealings with SDNs designated pursuant to the RuHSR.
Furthermore, OFAC issued a Sanctions Advisory to provide guidance to FFIs on how to identify and mitigate sanctions risks. Notably, the Advisory sets forth (1) examples of activities that could expose FFIs to sanctions risks under the amendments to EO 14024, (2) examples of risk-mitigating measures that FFIs may implement in addition to the baseline customer due diligence procedures and other anti-money laundering controls, and (3) best practices for building a risk-based sanctions compliance program. In this Advisory, OFAC also encourages FFIs to review previous guidance issued by OFAC and other agencies (e.g., the Bureau of Industry and Security within the Commerce Department) in their efforts to combat Russia-related evasion risks.
Expansion of the Import Ban on Certain Russian Products
EO 14068 already imposes a ban on imports into the United States of (A) Russian-origin fish, seafood, and preparations thereof; alcoholic beverages; non-industrial diamonds; and other Russian-origin products as may be determined by Treasury, including since June 2022 Russian-origin gold. The December 22 EO amended EO 14068 by expanding this import prohibition to cover also imports into the United States, including into free trade zones of products processed in a third country, specifically (B) categories of the following products as determined by Treasury that were mined, extracted, produced, or manufactured wholly or in part in Russia, or harvested in Russian waters or by Russia vessels, even if such products have been incorporated or substantially transformed into other products outside of Russia: fish, seafood, and preparations thereof; diamonds; and any other such products as may be determined by Treasury; (C) products determined by the Treasury to contain any of the products in the above categories (A) – (B); and (D) products in the above categories (A) – (C) determined by Treasury to have transited through or been exported from or by Russia.
With respect to the product group (B) above, OFAC issued a separate Seafood Determination identifying salmon, cod, pollock, and crab as subject to the expanded import ban. In parallel, OFAC issued GL 83 authorizing transactions prohibited by the Seafood Determination that are ordinarily incident and necessary to the importation into the United States of seafood derivative products through 12:01 a.m. EST on February 21, 2024, provided the transaction is conducted pursuant to written agreements concluded before December 22, 2023.
To enforce the expanded import ban, the December 22 EO requires the Secretary of Homeland Security to prescribe rules and regulations to collect documents and information necessary to enforce the import prohibitions.
OFAC issued new FAQs 1154 through 1157 regarding the expanded import ban. Notably,
- FAQ 1154 indicates that OFAC intends to issue a Determination related to the importation of certain Russian diamonds processed in third countries and associated guidance in the near term.
- FAQ 1156 clarifies that the expanded import ban does not prohibit US persons from engaging in transactions to sell or re-direct to other buyers or countries shipments outside the United States that were previously destined for the United States.
- FAQ 1157 states that OFAC intends to define “salmon”, “cod”, “pollock”, and “crab” as identified in the Seafood Determination by referencing the Harmonized Tariff Schedule of the United States (HTSUS) subheadings for these products.
Expobank Wind-Down General License
On the same day but unrelated to the December 22 EO, OFAC issued GL 85 authorizing certain wind-down activities involving Expobank Joint Stock Company (“Expobank”) that was designated to the SDN List on December 12, 2023 pursuant to EO 14024. Specifically, GL 85 authorizes (1) transactions prohibited by EO 14024 that are ordinarily incident and necessary to the wind-down of transactions involving Expobank or its majority-owned subsidiaries through 12:01 am ET March 21, 2024, provided that payments to a blocked person are made into a blocked account in accordance with the RuHSR; and (2) transactions prohibited by EO 14024 that are ordinarily incident and necessary to (i) the closing of a non-SDN’s account at Expobank or its majority-owned subsidiaries and (ii) the unblocking and lump sum transfer of remaining assets in a non-SDN’s account at Expobank or its majority-owned subsidiaries to the non-SDN’s other account at a non-SDN financial institution through 12:01 am ET March 21, 2024. This may be helpful to companies trying to extricate their funds stuck in accounts at Expobank after its recent SDN designation.
