OFAC Expands Secondary Sanctions Targeting FFIs Transacting with Sanctioned Russian Persons

Nearly six months after President Joe Biden signed an executive order (EO) authorizing secondary sanctions against Foreign Financial Institutions (FFIs) conducting or facilitating significant transactions with certain sanctioned persons, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) has announced an interpretation that significantly expands this authority. This announcement follows months of public warnings from the Biden Administration that it plans to crack down on efforts to facilitate Russian sanctions evasion. FFIs conducting business in Russia – or with non-Russian persons sanctioned under EO 14024, as discussed below – now face significant U.S. sanctions risk of their own.

Background

Since Russia invaded Ukraine in February 2022, the U.S. has continually issued and expanded sanctions authorities targeting various aspects of the Russian economy. One of these, EO 14114, signed by President Biden on Dec. 22, 2023, authorized OFAC to impose blocking sanctions on FFIs that conduct or facilitate "significant transactions" on behalf of any person designated under EO 14024 (which authorizes one element of the Russian sanctions regime, the Russian Harmful Foreign Activities Sanctions Regulations (RHFASR)) for operating or having operated in the "technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy" or involving "Russia's military-industrial base" (among other things). The definition of "military-industrial base" itself was quite broad; at the time, OFAC defined the term to include the Russian technology, defense and related materiel, construction, aerospace, manufacturing sectors and persons that support the sale, supply or transfer of certain military-related goods.

Changes Under the Recent Announcement

OFAC announced revisions to its interpretation of "military-industrial base" on June 12, 2024, that significantly expand who could be considered to be part of Russia's military-industrial base. In FAQs 1151 and 1181, OFAC stated that Russia's military-industrial base now includes "all persons blocked pursuant to E.O. 14024" in addition to the previous categories.

The Treasury Department noted this expanded definition "reflects Treasury's assessment that Russia has re-oriented its economy and marshalled all parts of its government toward supporting its reprehensible war effort." This follows several months of warnings from OFAC and other U.S. government agencies urging the private sector to be vigilant regarding Russian sanctions evasion efforts. FFIs now risk being sanctioned for conducting "significant transactions" or providing services to any person designated under EO 14024, which includes several large Russian banks, such as VTB Bank Public Joint Stock Company and Public Joint Stock Company Sberbank of Russia.

In FAQ 1151, OFAC noted it will consider a variety of factors in determining whether a transaction is "significant," including "(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 E.O. 14024, or to persons operating in Russia's military-industrial base; (e) 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." The breadth of this definition affords OFAC wide latitude to make its own determination regarding whether given conduct rises to the level of a "significant transaction," which could potentially implicate transactions that the parties to the transaction consider minor.

Conclusion

FFIs continuing to do business in Russia or with non-Russian entities designated under EO 14024 should carefully evaluate their activities to determine whether they now face sanctions risk as a result of these relationships. OFAC's new interpretation does not mean that all business activities in Russia are now prohibited, but it significantly raises the risks of continuing to do business with Russian entities or non-Russian entities designated under EO 14024. FFIs operating in Russia should have a robust compliance plan to help ensure compliance with applicable laws. FFIs should also align their business activities with their risk management objectives.

For more information on the implications of this announcement or assistance with complying with U.S. sanctions regulations, please contact the authors.

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