Are Payments to a U.S. Company Through a Sanctioned Russian Bank Prohibited?
Washington D.C. (May 5, 2022) - In Executive Order 14204 of April 15, 2021 (E.O. 14024) (Order), the President found that specified harmful foreign activities of the Government of the Russian Federation, among other things, constituted an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States, and declared a national emergency to deal with that threat. To implement the Order, the Treasury Department’s Office of Foreign Assets Control (OFAC) has issued several directives prohibiting U.S. persons from engaging in a wide variety of activities in the Russian financial services sector, including activities relating to Russian sovereign debt, issuance of new debt and equity of entities subject to U.S. sanctions, and transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
Directive 2, issued under the Order on February 24, 2022, prohibits “payable-through accounts” (discussed below) and processing of transactions for certain blocked financial entities. It provides that “the following activities by a U.S. financial institution are prohibited, except to the extent provided by law, or unless licensed or otherwise authorized by [OFAC]: (1) the opening or maintaining of a correspondent account or payable-through account for or on behalf of foreign financial institutions determined to be subject to the prohibitions of this Directive, or their property or interests in property; and (2) the processing of a transaction involving foreign financial institutions determined to be subject to the prohibitions of this Directive, or their property or interests in property.”
U.S. financial institutions include, among other entities, banks, money services businesses, credit card systems, insurance companies, securities brokers and dealers, investment companies, securities and commodities exchanges and branches of foreign banks that are located in the U.S.
These restrictions seem clear, but questions have arisen as to whether these prohibitions are absolute. That is, are there exceptions?
For purposes of Directive 2, a “payable-through account means “a correspondent account maintained by a U.S. financial institution for a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a subaccount, in banking activities usual in connection with the business of banking in the United States.”
Directive 2 lists Public Joint Stock Company Sberbank of Russia – the largest financial institution in Russia – and many of its subsidiaries and affiliates (Sberbank), as subject to its prohibitions, which became effective on March 26, 2022. However, if the activity is licensed or otherwise authorized by OFAC, such activity would not be prohibited. OFAC general licenses (GL) allow all U.S. persons to engage in the activity described in the general license without needing to apply for a specific license. These general licenses are often updated and should be checked frequently.
OFAC has issued several GLs authorizing certain transactions otherwise prohibited under Russia-related sanctions. Among them are transactions related to agricultural commodities, medicine and medical devices, software updates, overflight payments, air ambulance services, and energy. Generally, these licenses allow identified transactions to occur through June 24, 2022.
For example, GL 8B allows activity with six blocked Russian banks, including Sberbank, to engage in certain energy related transactions. However, this license also prohibits payable-through account transactions pursuant to the provisions of Directive 2. Consequently, all six Russian banks are allowed to engage in certain energy related transactions, but as Directive 2 relates only to Sberbank, the five other named banks would not be subject to the payable-through prohibition.
The executive orders, directives, and general licenses that have been issued to give direction in dealing with Russian blocked entities and individuals are complex and must be carefully reviewed in analyzing what transactions U.S. financial institutions are able to conduct. As the example above illustrates, the interplay among various prohibitions and exceptions can be complicated. Further, existing directives and GLs are subject to revision and various expiration dates. In addition, new sanctions and exceptions to those sanctions, as well as legislation relating to Russian harmful activities, are expected in the future.
Lewis Brisbois’ attorneys are advising clients on the many dimensions of this issue and are available to assist businesses in navigating these exceptional challenges. Please contact the author or editors of this alert or other members of the firm’s Ukraine Conflict Response team for assistance.
Thomas A. Brooks, Partner
Jane C. Luxton, Managing Partner - Washington, D.C.
Andrew Pidgirsky, Partner