Originally Published: February 25, 2022 – Updated: May 16, 2022
U.S. economic sanctions against Russian interests continue to build in response to the developing situation between the Russian Federation and Ukraine.
Donetsk and Luhansk Regions
On Monday, February 21, 2022, President Biden issued Executive Order No. 14065 (E.O. 14065), “Blocking Property of Certain Persons and Prohibiting Certain Transactions With Respect to Continued Russian Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine.” E.O. 14065 builds upon the sanctions President Biden authorized against Russia under E.O. 14024, “Blocking Property With Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation,” which he issued on April 25, 2021.
Among other restrictions, E.O. 14065 bars U.S. persons from importing any goods, services or technology from, or exporting them to, the two breakaway regions of Ukraine: the Donetsk People’s Republic and the Luhansk People’s Republic (the “Covered Regions”). E.O. 14065 also blocks the property and interests of persons operating in the Covered Regions, and of those persons (including officers and directors) leading business entities operating there. These restrictions in effect mirror the existing set of sectoral sanctions put in place in 2014, prohibiting U.S. persons from doing business in the former Crimea region of Ukraine, and therefore should be familiar to compliance professionals in modifying their screening protocols.
To ease the discontinuation of business that U.S. persons may have in the Covered Regions, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued General License No. 17 authorizing U.S. persons to wind down existing transactions and business relationships there by March 23, 2022. Other general licenses authorize continued limited transactions with the Covered Regions, including the exportation of certain agricultural commodities, medicines and medical devices, among other goods, personal remittances, telecommunications and mail, certain services and software incident to Internet-based communications, and the transactions of specific international organizations and nongovernmental organizations.
Designation of Financial Institutions
U.S. restrictions on Russia’s ability to raise funds tightened following President Biden’s public announcement on Tuesday, February 22, 2022, with the sanctioning of two of Russia’s largest banks, Vnesheconombank (VEB) and Promsvyazbank (PSB), along with 42 of their subsidiaries. The designation of VEB and PSB as Specially Designated Nationals (SDNs) under E.O. 14024 effectively cuts them off from the U.S. financial system and freezes (blocks) their assets within U.S. jurisdiction. No U.S. person can, therefore, transact business with these designated institutions, and with respect to any pending business with VEB—which services Russia’s sovereign debt—U.S. persons must wind down transactions by March 24, 2022.
On February 24, 2022, President Biden announced another wave of U.S. economic sanctions against Russian financial institutions. In this round, four more Russian banks were added to the SDN list, including VTB Bank, which is one of the largest financial institutions in Russia holding more than $250 billion in assets. As with VEB and PSB, VTB’s assets within U.S. jurisdiction are blocked, and U.S. persons are prohibited from doing business with VTB except as permitted by OFAC license. Other Russian banks added to the SDN list as of February 24th include Bank Otkritie, Sovcombank, Novikombank, and many of their subsidiaries. Per General License 11, OFAC authorized U.S. persons until March 26, 2022 to wind down transactions with VTB, Bank Otkritie, Sovcombank, and their subsidiaries. U.S. persons are also authorized to reject, as opposed to block, unauthorized transactions with these entities until March 26, 2022, under General License 12.
The list of fully-blocked Russian banks grew on April 6, 2022, with the significant designations of Sberbank, Russia’s largest state-owned bank, and Alfa-Bank, Russia’s largest private bank, in addition to a large number of their subsidiaries, for their importance to the Russian economy. As with the aforementioned financial institutions, U.S. persons are now prohibited from doing business with these banks, except as permitted by OFAC license.
On May 8, 2022, the Treasury Department added Joint Stock Company Moscow Industrial Bank (MIB) along with ten of its subsidiaries to the SDN list. According to the Treasury press release, MIB provides a wide range of commercial banking services and has taken on certain business on behalf of PSB since that bank’s designation on February 22, 2022.
One such license is General License No. 22, which permits a wind-down period for U.S. persons having business with Sberbank until April 13, 2022. Similarly, General License No. 23 permits U.S. persons to wind down transactions involving Alfa-Bank until May 6, 2022.
Designation of Individuals
In addition to the designations of Russia’s largest financial institutions, the Biden administration added several Russian officials and their immediate relatives to the SDN list pursuant to E.O. 14024. The administration alleges that these individuals have close ties to Russian President Vladimir Putin and participate in what the Administration claims is government corruption.
As the Ukrainian situation continued to deepen in late February, more Russian officials and their family members were added to the SDN list. In fact, on Friday, February 25, 2022, the Treasury Department added Russian President Vladimir Putin and Russia’s Foreign Minister, Sergey Lavrov, among other Russian government security officials, to the SDN list, blocking their property and prohibiting their ability to personally transact business in the U.S. financial system.
On Thursday, March 3, 2022, the Treasury Department announced that it was designating a host of Russian individuals and entities, and blocking their property within U.S. jurisdiction. These persons are alleged to have profited from their association with Russian President Vladimir Putin, or alleged to have engaged in state-sponsored disinformation against Ukraine or election interference against the United States.
The Treasury Department designated more prominent Russian officials, individuals and their property under E.O. 14024 in the following week. On Friday, March 11, 2022, the Treasury Department announced that it was adding to the SDN list the Russian Government’s spokesman and members of his family, a wealthy Russian businessman, his yacht and business aircraft, VTB Bank’s entire management board, and eleven members of the Russian State Duma. These designations were closely followed on Tuesday, March 15, 2022, by the designation of several Russian individuals and entities under the Magnitsky Act of 2012 for human rights violations, and the re-designation of the head of state of Belarus, Alexander Lukashenko, and the addition of his wife to the SDN list.
In a further escalation of U.S. sanctions against Russia, on March 24, 2022, the Treasury Department designated the entire Russian State Duma and 328 of its members (in addition to the 12 members previously designated on March 11) under E.O. 14024 for their voting in support of recognizing the independence of the pro-Russian Donetsk People’s Republic and Luhansk People’s Republic. The Treasury Department’s designation of the State Duma is unprecedented in targeting a country’s entire legislature, the consequences of which remain to be seen. Other sanctions imposed on March 24 include the designation of the CEO of Sberbank for his close ties to President Putin and the designation of 48 companies that are part of Russia’s defense-industrial base and supply chain.
On April 6, 2022, in response to increasing tensions over Ukraine, the Biden Administration announced additional blocking sanctions against members of President Putin’s family, the family of Russia’s Foreign Minister, Sergei Lavrov, and certain members of the Russian Security Council.
On May 8, 2022, the Treasury Department announced the further designations of eight members of Sberbank’s Executive Board and 27 members of Gazprombank’s Board of Directors.
The continued designation of individuals, entities, and their property underscores the importance of screening persons with whom U.S. persons conduct business abroad—especially those who are or may be connected with Russia, Belarus, or Ukraine—as well as any entity 50% or more owned by such individuals or entities.
Further Restrictions on Dealings in Russian Sovereign Debt
On February 22, OFAC also increased existing restrictions on dealings in Russian sovereign debt, further limiting Russia’s ability to raise revenue. Directive 1A under E.O. 14024 extends such prohibitions to cover participation in the secondary market for ruble or non-ruble denominated bonds issued after March 1, 2022, by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
As the conflict in Ukraine continued to escalate in the following days, OFAC took further action on Monday, February 28, 2022, to issue Directive 4 under E.O. 14024, which prohibits U.S. persons from transacting business with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation (collectively, the "Directive 4 entities”), except as permitted by general or specific license. This action effectively immobilizes any assets of the Directive 4 entities held in the United States, although not imposing blocking sanctions on them. Rather than blocking, Directive 4 requires U.S. persons to reject such transactions, unless otherwise authorized or exempted by OFAC.
OFAC also issued a number of general licenses authorizing some limited transactions involving the Directive 4 entities. Among several others, General License 8B authorizes U.S. persons (through non-U.S. financial institution intermediaries) to continue to conduct transactions “related to energy” with the Central Bank of the Russian Federation and certain other Russian banks until June 24, 2022. General License 9C authorizes U.S. persons to receive interest, dividend, or maturity payments in connection with debt or equity of the Directive 4 entities until May 25, 2022.
Restricting U.S. Bank Transactions with Certain Large Financial Institutions and Investments in Certain Major State-Owned Enterprises
On February 24, 2022, OFAC issued two directives pertaining to Russian financial institutions and state-owned enterprises under E.O. 14024. Directive 2 prohibits U.S. financial institutions from opening or maintaining correspondent accounts or payable-through accounts for or on behalf of several Russian financial institutions listed in Annex 1 of the directive, which notably includes Sberbank. U.S. financial institutions must close any correspondent or payable-through accounts with the listed banks by March 26, 2022. For any banks added to this list in the future, U.S. financial institutions will have 30 days after the date of such determination to close their correspondent or payable-through accounts.
Directive 2 also prohibits U.S. financial institutions from processing transactions involving any of the listed Russian financial institutions, unless authorized or exempted by OFAC. Directive 3, in turn, prohibits U.S. persons from investing in new debt or equity in a number of Russian state-owned enterprises including, among others, Sberbank, energy giant Gazprom and telecommunications giant Rostelecom.
An exception to the sweeping prohibitions noted above, General License No. 8B permits U.S. persons until June 24, 2022, to conduct transactions “related to energy” with sanctioned Russian financial institutions including VEB, Otkritie, Sovcombank, Sberbank, Alfa Bank, and VTB, as well as the Central Bank of the Russian Federation. However, in order for a U.S. financial institution to engage in transactions authorized under General License No. 8B, all funds transfers must be processed indirectly through a non-sanctioned, non-U.S. financial institution so as not to violate Directive 2.
On April 7, 2022, the Treasury Department announced blocking sanctions against PJSC Alrosa (Alrosa), a Russian state-owned enterprise reported to be the world’s largest diamond mining. Already subject to Directive 3, Alrosa accounts for 28 percent of global diamond mining. Pursuant to General License 9C, transactions ordinarily incident and necessary to dealings in debt and equity of Alrosa (or any entity in which it owns a 50 percent interest, directly or indirectly) issued prior to April 7, 2022 are authorized until July 1, 2022. General License No. 21A permits a wind-down period for U.S. persons having business with Alrosa until June 3, 2022.
Broad Prohibitions on New Investment and the Provision of Certain Professional Services
On April 6, 2022, President Biden issued a broad executive order (E.O. 14071) following upon E.O. 14024 that prohibits: (1) “new investment” in Russia by a U.S. person, wherever located; (2) the export, reexport, sale, or supply, directly or indirectly, from the U.S. or by a U.S. person, wherever located, of “any category of services” as may be determined by the U.S. Secretary of the Treasury (in consultation with the Secretary of State) to “any person located in [Russia];” and (3) “[a]ny approval, financing, facilitation, or guarantee” by a U.S. person, wherever located, of a “transaction by a foreign person” where such transaction is prohibited by the E.O.
A contemporaneous “Fact Sheet” issued by the White House states that E.O. 14071 “builds on the decision made by more than 600 multinational businesses to exit from Russia” and is being coordinated with the European Union and member nations of the Group of Seven (G7). This E.O. is an unusually expansive action by the President, the precise boundaries of which the Treasury Department will define through regulation and other agency action.
On May 8, 2022, the Treasury Department announced its first steps under E.O. 14071 to cut off access to an array of financial, accounting and legal services used by persons in Russia to grow and manage wealth and, according to Treasury, to evade U.S. sanctions. Specifically, OFAC issued a Determination pursuant to E.O. 14071 that U.S. persons are prohibited from providing “accounting, trust and corporate formation, or management consulting services to any person located in the Russian Federation.” The Determination broadly restricts the ability of U.S. accounting firms, law firms, and other financial management and consulting practices from providing a wide range of fairly common transactional services to businesses and individuals located in Russia. Although OFAC has defined the scope of what constitutes the prohibited “accounting services,” “trust and corporate formation services,” and “management consulting services” in a series of FAQs, the listed categories of professional services are exceptionally broad. OFAC amended its FAQ defining these services on May 11, 2022.
Importantly, OFAC issued a general license authorizing the “wind down” of “accounting, trust and corporate formation, and management consulting services” by July 7, 2022.
Prohibitions on the Importation of Russian Crude Oil, Refined Petroleum, LNG and Coal
In response to the ongoing Russian military action in Ukraine, on March 8, 2022, President Biden issued Executive Order 14066 prohibiting the importation of Russian crude oil, refined petroleum, liquified natural gas, and coal.
E.O. 14066 also prohibits U.S. persons from making new investments in the Russian energy sector, or approving, financing, facilitating or guaranteeing transactions with a foreign person that would otherwise be prohibited if performed by a U.S. person. In conjunction with the E.O., OFAC issued General License 16, which authorizes U.S. persons until April 22, 2022, to complete transactions to import Russian oil and gas pursuant to written agreements entered prior to March 8, 2022, but does not authorize entry into new contracts.
Notably, General License 8B remains in effect, which authorizes U.S. persons to engage in certain transactions “related to energy” involving specified Russian financial institutions until June 24, 2022, unless renewed. General License 8B does not, however, authorize any transactions that would be otherwise prohibited by E.O. 14066.
Export Controls and Expanded Prohibitions of Certain Russian Imports and U.S. Exports
On February 24, 2022, the Department of Commerce announced that it would broadly impose stricter export controls on the sale of sensitive U.S. technologies to Russia that have potential military uses.
This was followed on March 11, 2022, by Executive Order 14068, which specifically prohibits the importation of Russian fish, seafood, alcoholic beverages, non-industrial diamonds, and prohibits the exportation, re-exportation, sale or supply, whether directly or indirectly, of any “luxury goods” or “U.S. dollar-denominated banknotes” from the United States to Russia.
Importantly, the E.O. lays the groundwork for future bans of just about any Russian imports “as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce,” as well as future bans of U.S. exports of “any other items as may be determined by the Secretary of Commerce, in consultation with the Secretary of State and the Secretary of the Treasury, to any person located in the Russian Federation.”
In addition to these sweeping prohibitions on trade, E.O. 14068 broadly authorizes the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce, to prohibit “new investment in any sector of the Russian Federation economy” by a U.S. person. While specific types of investments were not named in the E.O., we expect the Biden Administration to use this E.O. as a platform to issue future prohibitions on U.S. investment in a wide variety of sectors of the Russian economy.
In conjunction with E.O. 14068, OFAC issued a series of general licenses including General License No. 17, which authorizes the importation of Russian fish, seafood, alcohol, and non-industrial diamonds until March 25, 2022—but only based on contracts entered prior to March 11, 2022. General License No. 18 authorizes the transfer of U.S. dollar-denominated banknotes for noncommercial, personal remittances, and General License No. 19 authorizes U.S. persons located in Russia to engage in transactions necessary for maintaining personal housing, goods and services for personal use, the payment of taxes or fees, and related personal purchases.
Expanded Sectoral Sanctions, Darknet and Virtual Currency Exchanges
On March 31, 2022, the Treasury Department expanded its sectoral sanctions against Russia to include three areas of its economy under E.O. 14024: aerospace; marine; and electronics. This means that Treasury, through OFAC, can sanction more individuals and entities determined to have operated in those sectors. In connection with this announcement, OFAC designated (among other entities) Russia’s largest chipmaker, Joint Stock Company Mikron, which accounts for more than 50 percent of all Russian microelectronics exports.
OFAC also designated a series of Russian entities affiliated with OOO Serniya Engineering (Serniya), which is alleged to have been at the center of a procurement network owned and/or controlled by the Russian government to evade U.S. sanctions. Serniya and its affiliates are alleged to have procured dual-use technology and equipment for Russia’s defense sector.
On April 5, 2022, the Treasury Department sanctioned what it calls “the world’s largest and most prominent dark market,” Hydra Market (Hydra), which operates out of Moscow. ‘Darknets’ are internet-based networks that individuals use to mask their identity, and are most commonly used by persons who accept virtual currency as payment for a host of illegal services and goods, including ransomware. An OFAC investigation found that approximately $8 million in ransomware proceeds transited Hydra virtual currency accounts.
In the same action, OFAC designated Garantex, a virtual currency exchange operated out of Moscow and St. Petersburg. The Treasury Department alleges that over $100 million worth of transactions through Garantex were associated with illicit actors and darknet markets, including ransomware operators and other entities operating through Hydra.
On May 8, 2022, in conjunction with OFAC’s Determination under E.O. 14071 prohibiting certain professional financial services to persons located in Russia, OFAC issued a Determination that the same services sectors of the Russian economy (accounting, trust and corporate formation, and management consulting) are also subject to sanctions under E.O. 14024. OFAC further defined these sectors by FAQ, which it amended on May 11, 2022.
SWIFT
During the February 24 press conference, President Biden was asked whether the United States and its European allies would restrict Russian financial institutions from accessing the Society for Worldwide Interbank Financial Telecommunication (SWIFT) financial messaging network. He answered that, although there was no agreement to do so at that time, it remained an option should circumstances warrant it.
On Saturday, February 26, 2022, as the conflict in Ukraine escalated, the White House issued a joint statement with the leaders of the EU, France, Germany, Italy, the UK and Canada, committing to remove “selected Russian banks” from the SWIFT global messaging system. This unprecedented action would effectively disconnect the affected Russian banks from the international financial system and cripple their ability to transact business globally.
On March 2, 2022, the EU announced that it was excluding seven Russian banks from the SWIFT messaging system. The seven banks are Bank Oktritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, and VEB. Each bank will have 10 days to wind down their SWIFT operations, after which they will be cut off.
Notably, two of Russia’s largest banks, Sberbank and Gazprombank, were not among those banks excluded from SWIFT because they remain primary channels of payment for Russian oil and natural gas to Europe. However, on May 4, 2022, the EU announced plans to remove Sberbank from SWIFT, notwithstanding its continued importance as a channel for Russian oil and natural gas payments.
VISA and Mastercard
On March 5, 2022, VISA and Mastercard announced that they had decided to suspend network services in Russia and would cease supporting all transactions in the coming days. Cardholders of VISA and Mastercard cards issued by Russian banks may, however, still use their cards for transactions within Russia, but not outside of Russia or for international online payments, and only until those cards expire. Cardholders with cards issued by non-Russian banks also will not be able to use their VISA and Mastercard cards within Russia. Several Russian banks now cut off from using the VISA and Mastercard networks have announced that they intend to start issuing cards using the Chinese-owned UnionPay system, coupled with Russia’s Mir payment network, to avoid impacts to their customers.
Task Force KleptoCapture
In a related development, on March 2, 2022, Attorney General Merrick Garland announced the creation of a new interagency task force called “Task Force KleptoCapture,” which will be dedicated to enforcing U.S. economic sanctions, export controls and other economic countermeasures directed against Russia. The Task Force’s mission will include investigating and prosecuting violations of U.S. sanctions pertaining to Russia, combating attempts to undermine or circumvent sanctions against Russian financial institutions, targeting the use of cryptocurrency to evade sanctions and using enforcement powers including civil and criminal asset forfeiture against seized assets. The Task Force will be managed out of the Office of the Deputy Attorney General and will include personnel from numerous law enforcement agencies including the FBI, the U.S. Marshals Service, the U.S. Secret Service, the Department of Homeland Security, the Internal Revenue Service, and the U.S. Postal Inspection Service.
FinCEN Alerts
On March 7, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a ten-page alert to the U.S. financial services industry to be vigilant against efforts to evade U.S. economic sanctions against Russia. The alert provides select red flags to identify potential sanctions evasion activity and reminds financial institutions and other financial services businesses of their obligations to report suspicious activity under the Bank Secrecy Act. In particular, FinCEN warns of suspicious transactions tied to the use of convertible virtual currencies, or CVCs, by blocked persons through unsanctioned Russian or Belarusian banks.
On March 16, 2022, FinCEN issued a second alert notifying U.S. financial institutions of the importance of identifying and promptly reporting suspicious activity involving real estate, luxury goods, and other high-value assets of sanctioned Russian individuals and their proxies. The alert sets forth dozens of “red flags” indicative of suspicious transactions involving commercial or high-end residential real estate, precious metals, stones and jewelry, high-value artwork, and other high-value assets like vehicles and yachts belonging to sanctioned Russian individuals and their agents. FinCEN states that such transactions may be employed to evade expansive U.S. or other foreign country sanctions imposed on certain designated wealthy Russian individuals and their proxies in response to Russian operations in Ukraine.
In conjunction with the alert, FinCEN also announced that the Treasury Department was launching a new initiative called the Kleptocracy Asset Recovery Rewards Program, which would offer a bounty of up to $5 million (or larger, if approved by the Secretary of the Treasury) for information leading to the seizure, forfeiture, or repatriation of “stolen assets” linked to foreign government corruption and the proceeds of such corruption. Congress established the Program to combat foreign government corruption under Sections 9701-9703 of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. No. 116-283). FinCEN states that an initial focus of the Program will be the recovery of “stolen assets” by individuals and their associates linked to the Russian Government.
FinCEN also announced that the Departments of the Treasury and Justice had launched a new multinational task force called the Russian Elites, Proxies, and Oligarchs (REPO) Task Force with counterparts from Australia, Canada, the EU, France, Germany, Italy, Japan and the UK. The primary purpose of the Task Force will be to coordinate and ensure the effective implementation of sanctions against Russia including through the sharing of information with relevant task force members, to deprive sanctioned individuals and entities access to the international financial system, and to take “concrete actions” including the seizure and forfeiture of assets, and criminal prosecution.
Take-Aways
Compliance professionals at U.S. companies and their foreign subsidiaries and affiliates should continue to monitor closely the unfolding events in Ukraine and the widening sets of sanctions being rolled out by the U.S. Treasury and Commerce Departments, among other federal government agencies charged with implementing U.S. economic sanctions. While many of the new sanctions programs have a short grace period built in for winding down business and financial transactions, U.S. companies and their subsidiaries doing business with Russian or Ukrainian interests should move swiftly to rescreen their client, customer, vendor and contractor databases; ensure that their compliance frameworks are updated; and verify that their payment processes with those parties are compliant and viable, among other risk mitigation measures.
The array of economic sanctions imposed by the United States and our European allies is nothing short of a sea change in the world economy. Unfortunately, as these sanctions multiply and create further separation between Russia and the rest of the international business community and the U.S. financial system in particular, we can expect to see significant business disruption to U.S. companies operating in the global economy.
This is a very fluid situation and Manatt is closely monitoring developments and will continue to provide information and insights as they become available.