President Biden issued EO 14114 on December 22, 2023 authorizing sanctions against FFIs that support Russia’s military industrial complex. This action exposes FFIs to so-called “secondary” sanctions, up to and including asset-blocking sanctions, even when their activities do not involve any U.S. nexus. Under EO 14114, FFIs could be sanctioned for conducting or facilitating (including by processing payments for) significant transactions relating to certain designated sectors of the Russian economy, or for conducting or facilitating the export of certain items that are viewed as supporting the Russian military industrial-base, even if the items are not subject to U.S. export control laws. FFIs are broadly defined to include not only depository institutions but also insurance companies, investment companies, securities brokers/dealers among others. Effectively, as a way of trying to stop the sale of certain items to Russia by actors that were not dissuaded from such behaviour by sanctions imposed to date, this new authority allows OFAC to go after banks and insurers who facilitate such sales.

OFAC has also issued a series of Frequently Asked Questions (“FAQs”) relating to the new EO and an Advisory to Foreign Banks on Russia Sanctions Risks (the “Advisory”).

New secondary sanctions authorization

Sanctionable activities

EO 14114 first amends EO 14024 by adding a new section 11 that provides authority to the Secretary of Treasury, in consultation with the Secretary of State and the Secretary of Commerce, to impose secondary sanctions on FFIs that are determined to have:

• conducted or facilitated any significant transaction or transactions for or on behalf of any person designated for operating or having operated in certain Russian Federation military-industrial sectors; or

• 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.

OFAC issued a determination on December 22, 2023 pursuant to the amendment of EO 14024 (“Russia Critical Items Determination”) specifying the items or classes of items (“Russia Critical Items”) for which transactions would be sanctionable under Section 11(a)(ii) of the amended EO 14024. The specific items are listed in the Annex to the Russia Critical Items Determination and include the following categories:

• certain machine tools and manufacturing equipment;

• certain manufacturing materials for semiconductors and related electronics;

• certain electronic test equipment;

• certain propellants, chemical precursors for propellants and explosives;

• certain lubricants and lubricant additives;

• certain bearings;

• certain advanced optical systems; and

• certain navigation instruments.

Russia Critical Items are not limited to items subject to U.S. law, meaning that FFIs can be sanctioned for engaging in activities involving items that are not generally subject to U.S. export control laws, including the Export Administration Regulations.

The Advisory provides examples of activities that could expose FFI to secondary sanctions, including:

• Maintaining 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

  • any persons, either inside or outside Russia, that support Russia’s military-industrial base, including those that operate in the specified sectors of the Russian Federation economy.

• Facilitating the sale, supply, or transfer, directly or indirectly, of Russia Critical Items to Russian importers or companies shipping the items to Russia.

• Helping companies or individuals evade U.S. sanctions on Russia’s military-industrial base (including by offering to set up alternative/non-transparent payment mechanisms; changing/removing customer names/other relevant information from payment fields; obfuscating the true purpose of parties involved in payments; or otherwise taking steps to hide the ultimate purpose of transactions to evade sanctions).

Definitions

OFAC issued FAQ 1151 defining “foreign financial institutions” for purposes of EO 14114 to mean “any foreign entity that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, futures or options, or procuring purchasers and sellers thereof, as principal or agent. It includes depository institutions, banks, savings banks, money services businesses, operators of credit card systems, trust companies, insurance companies, securities brokers and dealers, futures and options brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, clearing corporations, investment companies, employee benefit plans, dealers in precious metals, stones, or jewels, and holding companies, affiliates, or subsidiaries of any of the foregoing.” The term does not include international institutions identified in 22 U.S.C. 262r(c)(2), the International Fund for Agricultural Development, the North American Development Bank, or any other international financial institution specifically notified by OFAC.

FAQ 1151 also defines “Russia’s military-industrial base” to include the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian Federation economy, and other sectors that may be designated by OFAC in future. Russia’s military-industrial base may also include individuals and entities that support the sale, supply, or transfer of certain critical items that are determined to support Russia’s military-industrial base. FFIs can identify persons designated on the Specially Designated Nationals (“SDN”) List for operating in sectors supporting Russia’s military-industrial base by reviewing OFAC and the State Department’s websites and the relevant Federal Register notices for each SDN designation as outlined in FAQ 1153. For example, parties designated pursuant to EO 14024 are tagged with [RUSSIA-EO14024] on the SDN List.

Finally, FAQ 1151 OFAC may consider the “totality of the facts and circumstances” when determining whether a transaction or transactions are “significant.” OFAC may consider the following factors: (a) the size, number, and frequency of the transaction(s); (b) the nature of the transaction(s); (c) the level of awareness of management and whether the transactions are part of a pattern of conduct; (d) the nexus of the transaction(s) to persons sanctioned pursuant to EO 14024, or to persons operating in Russia’s military-industrial base; whether the transaction(s) involve deceptive practices; (f) the impact of the transaction(s) on U.S. national security objectives; and (g) such other relevant factors that OFAC deems relevant.

Potential sanctions authorized

Sanctions that may be imposed pursuant to the new EO include prohibitions or strict conditions on opening correspondent accounts or payable-through accounts in the U.S. (which would result on the FFI being added to OFAC’s CAPTA list), and/or blocking of all property and property interests within the United States or in the possession or control of U.S. Persons by designation to the SDN List, which would in effect prohibit all transactions between a sanctioned FFI and the U.S. economy.

OFAC guidance for risk mitigation

OFAC released the Advisory to provide guidance to FFIs on EO 14114. In addition to providing examples of types of activities that could expose FFIs to secondary sanctions, the Advisory also provides guidance to identify and mitigate sanctions risk. According to the Advisory, in addition to baseline customer due diligence and anti-money laundering controls, FFIs should implement controls based on their risk and current exposure, such as:

• Reviewing their customer base to determine exposure of customers in the specified sectors of the Russian economy or who may be involved in the sale, supply, or transfer of Russia Critical Items (and if the FFI is unsure whether a particular item is subject to the Russia Critical Items Determination or otherwise linked to Russia’s military-industrial base, the FFI should conduct further due diligence on the customer and transaction);

• Communicating compliance expectations to customers (including that they may not use accounts to do business with designated persons operating in specified sectors or conduct any activity involving Russia’s military-industrial base) and obtaining attestations from customers on a risk-basis that the customers do not operate in the specified sectors, engage in any sales or transfers of the Russia Critical Items to Russia, or otherwise conduct any transactions involving Russia’s military-industrial base;

• Taking appropriate mitigation measures for any customers or counterparties engaged in high-risk activity or who fail to respond to requests for information regarding activity of concern (i.e., restricting accounts; limiting the type of permissible activity; exiting relationships; or placing customers/counterparties on internal “do not onboard”/”do not process” watchlists);

• Updating sanctions risk assessment and customer risk rating criteria to incorporate risks related to Russia’s military-industrial base;

• Implementing enhanced trade finance controls related to Russia Critical Items, including monitoring information collected as part of documentary trade;

• Using open-source information and past transactional activity to inform due diligence and conduct proactive investigations into possible sanctions and export control evasion;

• Training FFIs’ staff on sanctions risk and common red flags;

• Promoting a “culture of compliance” in FFIs, including escalating risks or issues to the proper level;

• Incorporating information and typologies from relevant U.S. Government alerts and advisories into automated and manual anti-money laundering controls (including carefully scrutinizing newly formed Russian companies or newly formed companies in third-party countries known to be potential transshipment points for exports to Russia and companies involved in production or import-export of sophisticated items with no business history or web presence). Transshipment points include Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates, and Uzbekistan according to previous U.S. Government guidance. A recent alert related to evasion of U.S. trade controls is detailed in a previous Hogan Lovells’ advisory: U.S. regulators issue joint notice concerning SAR key term and global evasion of trade controls; and

• Reviewing “A Framework for OFAC Compliance Commitments.”

Finally, the Advisory notes that broad authorizations remain for certain activities relating to Russia. In particular, General License (“GL”) 6C continues to authorize activities related to the production, manufacturing, sale, transport, or provision of agricultural commodities or equipment, medicine, and medical devices, and FFIs can continue to engage in or facilitate transactions that would be authorized for U.S. persons under GL 6C without secondary sanctions exposure.

New SDN designations

On December 12, 2023, OFAC added four new financial institutions located in Russia to the SDN list:

• Expobank Joint Stock Company;

• Aktsionernoe Obshchestvo Obedinennaya Investitsionnaya Gruppa;

• Settlement Non Bank Credit Organization Metallurg; and

• Obshchestvo s Ogranichennoi Otvetstvennostyu.

OFAC additionally released, on December 22, 2023, GL 85, authorizing the wind down of transactions and the closure of accounts involving Expobank Joint Stock Company (“Expobank”). All transactions prohibited by EO 14024 that are necessary for the winding down of transactions involving Expobank, or closing accounts held at Expobank, are authorized through 12:01 a.m. eastern daylight time, March 21, 2024. GL 85 does not authorize prohibited transactions under Directive 2 or Directive 4 under EO 14024, or any transactions prohibited by the Russian Harmful Foreign Activities Sanctions, unless separately authorized.

Prohibition on imports of certain seafood products

EO 14114 also amends EO 14068 by authorizing OFAC to prohibit the importation and entry into the U.S. items not subject to current U.S. export controls. These items may include:

• certain fish, seafood, and preparation thereof, diamonds, other products “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;

• products containing such products; and

• prohibited products that transited through or were exported from or by the Russian Federation.

OFAC released a corresponding determination (“the Seafood Determination”). The Seafood Determination “prohibits the importation into the United States of salmon, cod, pollock, or crab of Russian Federation origin, even if incorporated or substantially transformed into another product in a third country” according to FAQ 1156.

Prohibition on imports of gold of Russian Federation origin

On December 22, 2023, OFAC also amended the Gold Determination pursuant to the amendments to EO 14068 described above. The amended Gold Determination does not prohibit new activities and is only amended to reflect “technical, non-substantive changes” due to the amended EO 14068. The Gold Determination prohibits the importation into the United States of Russian Federation origin gold (except for such gold that has been incorporated or substantially transformed into a foreign-made product).