Listen to this post

In a bold move to tighten its sanctions enforcement, the EU rolled out Directive 2024/1226, establishing minimum rules for defining criminal offenses and penalties related to the violation of EU sanctions. Effective May 19, the Directive mandates Member States to incorporate its provisions into their national legislation within 12 months.

Continue Reading Walking the Tightrope: EU’s Sanctions Enforcement Directive Puts Violators on Notice
Listen to this post

Effective April 24, the statute of limitations (“SoL”) under the International Emergency Economic Powers Act (“IEEPA”) and the Trading with the Enemy Act (“TWEA”) has been extended from five to ten years. It would have been easy to miss this change, buried within a supplemental emergency appropriation bill (H.R. 815) signed into law by President Biden on April 24, 2024, but its impacts will be profound for entities facing internal or government investigations for sanctions violations.

Continue Reading Say SoL Long to Short Limits: Doubling Down on the Sanctions Statute of Limitations
Listen to this post

Author and futurist Peter Zeihan recently asserted that President Joe Biden has presided over “the most protectionist administration the United States has had in at least a century.” And Donald Trump reportedly plans to double down on protectionism if elected in November 2024. By the way, Zeihan is also the guy who predicts that The End of the World is Just the Beginning. His theory is that the global economic and political order the United States built and maintained since WWII is collapsing.

Continue Reading The End of the World Order and the Rise of Trade Regulation
Listen to this post

On February 29, 2024, the Biden administration issued a statement addressing the national security risks to the U.S. auto industry directing the Department of Commerce to conduct an investigation into Chinese made “connected vehicles” (CVs).

Continue Reading Department of Commerce Initiates Investigation into Chinese-Made “Connected Vehicles”: Potential Prohibitions on Certain Information and Communications Technology and Services
Listen to this post

On Wednesday, March 6, 2024, the Department of Commerce, Department of the Treasury and Department of Justice issued another Tri-seal Compliance Note, focusing this time on the obligations of foreign based persons complying with U.S. sanctions and export control laws as well as recent enforcement actions. This may signal more scrutiny on the compliance of foreign companies which we have discussed here.

Continue Reading Guidance to Foreign Companies on Export Controls and Sanctions: Departments of Commerce, Treasury, and Justice Issue Tri-Seal Compliance Note on Foreign Based Persons’ Obligations to Comply with U.S. Sanctions and Export Control Laws
Listen to this post

On December 22, 2023, President Biden signed a new Executive Order (E.O. 14114) containing the latest round of sanctions against the Russian Federation. Shortly thereafter, Treasury Secretary Janet Yellen stated that the Office of Foreign Assets Control (OFAC) will take “decisive” and “surgical” action when enforcing sanctions against financial institutions involved in transactions that support Russia’s military-industrial base. Under the new sanctions, non-U.S. financial institutions may be denied access to U.S. correspondent accounts or payable-through accounts, effectively denying access to the U.S. financial system. OFAC may also block an offending institution’s property in the United States. The sanctions build on the Russian Harmful Foreign Activities Sanctions promulgated in 2021 and 2022 (E.O.s 14024 and 14066).

Focus on Foreign Financial Institutions

Readers of this blog will know that, in response to Russia’s invasion of Ukraine, the United States imposed several rounds of direct sanctions designed to hamstring Russian military procurement by targeting Russian entities and Russian financial institutions. Russia has increasingly used third countries to evade these sanctions and continues to procure military equipment.

The new Executive Order intensifies the focus on “foreign financial institutions”[1] that conduct or facilitate transactions on behalf of the Russian military-industrial base. In so doing, the new action expands the reach of so-called “secondary sanctions” against parties that do business with Russia.

Compliance Takeaway

Non-U.S. financial institutions should immediately take steps to mitigate their sanctions risk by screening their transactions and customers, and halting transactions that may support the Russian military-industrial base.

Under the new rule, OFAC may sanction any foreign financial institution involved in “significant transactions” in specific industry sectors[2] or involving specific items[3] that support the Russian military. The specific sector and item lists are designed to assist foreign financial institutions in identifying transactions that will subject them to sanctions, and thus help them mitigate their sanctions risk.

The term “significant transactions” is defined to include even a single transaction, depending on the circumstances. OFAC may consider the totality of the facts and circumstances when determining whether a transaction is (or multiple transactions are) “significant.” Relevant factors include size, number, and frequency of the transactions; the nature of the transactions; management’s level of awareness; and any other factors that OFAC deems relevant.

Foreign financial institutions may wish to review their customer base and identify customers that could create exposure based on association with one of the specified industry sectors or transactions that may involve the specified items. Based on the risk assessment, the institution should follow up with these identified customers and transactions to either ensure customer accounts are not facilitating the sanctioned activity or restricting high-exposure accounts and customers. As explained in OFAC’s Compliance Advisory, these steps should supplement, not replace, an institution’s baseline customer due diligence and anti-money laundering controls.

OFAC has issued two General Licenses to support financial institution compliance with these new sanctions. General License No. 84 permits U.S. financial institutions to process transactions through the end of 2023 to close correspondent accounts or payable-through accounts that are prohibited by the new E.O.

General License No. 85 permits transactions through March 21, 2024, in order to wind down business with Expobank Joint Stock Company or any entity in which Expobank has a majority interest.

Conclusion

The new Executive Order is another step in the global effort to target Russia’s evasion of sanctions and export restrictions to support its military-industrial base. Rather than target the bad actors themselves, this set of sanctions places the burden on foreign third parties to identify and stop transactions that may support what Secretary Yellen calls Russia’s “war machine.” While U.S. banking institutions are intimately familiar with sanctions and export compliance, the new Executive Order follows the extraterritorial model for sanctions and export controls that we’ve seen more and more of recently. Keep an eye on this space as we continue to track these developments.

FOOTNOTES

[1] Section 11(f) of the amended E.O. 14024 defines “foreign financial institution” 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.” This covers many types of entities such as “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.”

[2] The covered sectors can include any industry sector that is determined to support Russia’s military-industrial base, and includes “technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy.” Section 11(a) of the amended E.O. 14024.

[3] Specific item categories listed in the EO include certain semiconductor manufacturing tools, machine tools, test equipment, lubricants, bearings, optical systems, and navigational instruments. Other items restricted for trade includes the Common High Priority Item List.

Listen to this post
  • Semiconductors are the only commodity that are as ubiquitous and as heavily regulated.
  • Semiconductors are unique: nothing so common is as tightly controlled, and nothing so tightly controlled is as common.
  • But this puts the industry in an extremely complex position.
  • Other industries may ask . . . are we next?
Continue Reading The Semiconductor Moment
Listen to this post

On November 21, 2023, the U.S. Office of Foreign Assets Control (OFAC) announced its largest settlement in history with the virtual currency exchange Binance. This almost-billion dollar settlement is a part of a larger comprehensive settlement with the Department of Justice, FinCEN, and the CFTC, totaling over $4 billion. OFAC found that Binance had allowed 1.6 million transactions in violation of multiple sanctions regimes while Binance’s C-Suite was complicit. Binance’s blunders that led to this enforcement action highlight the importance of management commitment to compliance programs.[1]

Continue Reading Binance’s Paper Compliance Program Crumples Under OFAC Scrutiny in Largest OFAC Settlement in History