Legal Alerts

OFAC Extends Compliance Oversight to Foreign Financial Institutions

Washington, D.C. (February 2, 2024) - On December 22, 2023, the Office of Foreign Asset Control (OFAC) issued a Sanctions Advisory that provides guidance to “foreign financial institutions that conduct or facilitate significant transactions or provide any service involving Russia's military-industrial base.” The Advisory implements an amendment to Executive Order 12024 (EO) that grants OFAC new authority to exert jurisdiction over foreign financial institutions that now run the risk of being sanctioned by OFAC.

Which Foreign Financial Institutions Are Affected?

The term “foreign financial institution” is very broadly defined. It includes not only banks, but also any entity engaged in purchasing or selling foreign exchange, securities, futures or options, or procuring purchasers and sellers thereof, as principal or agent. It also includes “money services businesses; operators of credit card systems; trust companies; insurance companies; securities brokers and dealers; futures and options brokers and dealers; 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.”

Prohibited Transactions

The Advisory is issued to “provide guidance to foreign financial institutions on the amendments to E.O. 14024, including practical guidance on how to identify sanctions risks and implement corresponding controls.” A foreign financial institution can be sanctioned if it (i) was involved, directly or indirectly, in any “significant transaction or transactions for or on behalf of any person designated pursuant to E.O. 14024 for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy”; or (ii) was involved in 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.”

What kind of transactions could trigger OFAC’s enforcement against foreign financial institutions? If a financial institution has conducted or facilitated any significant transaction or service with Russia’s military-industrial base that includes OFAC-identified items or classes of items, foreign financial institutions are at risk of enforcement actions. 

The specified items are critical for Russia’s war effort, including the production of advanced precision-guided weapons and other critical items, and Russia is actively working to import them from third countries to fuel its war machine.

Specifically, these items include certain machine tools, semiconductor manufacturing equipment, electronic test equipment, propellants and their precursors, lubricants and lubricant additives, bearings, advanced optical systems, and navigation instruments.

Additionally, foreign financial institutions are prohibited from opening correspondent accounts or payable-through accounts in the United States or they can be subject to strict conditions on the maintenance of such accounts. 

Examples of Activity that Could be Subject to Sanctions

What kinds of activities could expose foreign financial institutions to sanctions risk? Examples given in the Advisory include:

  • 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 for 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 the specified items to Russian importers or companies shipping the items to Russia.; or
     
  • Helping companies or individuals evade U.S. sanctions on Russia’s military-industrial base. This includes:
  1. offering to set up alternative or non-transparent payment mechanisms,
  2. changing or removing customer names or other relevant information from payment fields,
  3. obfuscating the true purpose of or parties involved in payments, or
  4. otherwise taking steps to hide the ultimate purpose of transactions to evade sanctions.

How Can Foreign Financial Institutions Mitigate the Risk of Sanctions?

OFAC strongly encourages organizations and individuals subject to U.S. jurisdiction, as well as foreign entities that conduct business in or with the United States, to employ a risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program (SCP). While each risk-based SCP will vary depending on a variety of factors, OFAC advises that each program should be predicated on and incorporate at least five essential components of compliance: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.

In addition to having strong risk mitigation procedures in place, foreign financial institutions must be mindful of red flags when engaging in business dealings that could involve transactions with sanctioned countries, individuals, products, or services. 

Among the red flags are: (1) transactions involving companies that are physically co-located with or have shared ownership with an entity on the BIS Entity List or the Department of the Treasury’s Specially Designated Nationals and Blocked Persons List; and (2) transactions associated with atypical shipping routes for a product and destination.

Types of Sanctions

What can OFAC do if it determines that a foreign financial institution has engaged in a prohibited transaction? OFAC has broad powers to impose stringent penalties on sanctions violators. 

Pursuant to the EO, OFAC may prohibit the opening of, or prohibit or impose strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States. It also can restrict transferring funds, or providing other financial services to persons, either inside or outside Russia, that operate in the specified sectors of the Russian Federation economy.

Furthermore, OFAC has the power to block all property and interests in property that are in the United States now or in the future, or that currently, or in the future, come within the possession or control of any United States person of such foreign financial institution. The EO also gives OFAC the power to impose restrictions such that any property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in.

Takeaway

While OFAC will continue to oversee compliance with sanctions laws and regulations by US financial institutions, its jurisdiction has been greatly expanded by the amended EO. Foreign financial institutions now will be subject to OFAC scrutiny. In addition to the very broad definition of foreign financial institution, any entities that are owned, directly or indirectly, 50% or more by one or more blocked foreign financial institution, also are subject to OFAC’s jurisdiction.

For further information on the requirements for foreign financial institutions to comply with U.S. economic and trade sanctions programs against targeted foreign governments, individuals, groups, and entities in accordance with national security and foreign policy goals and objectives, please contact the author of this alert or any member of the Lewis Brisbois' Ukraine Conflict Response Practice.

Author:

Thomas A. Brooks, Partner

Editors:

Jane C. Luxton, Managing Partner - Washington, D.C.

Andrew Pidgirsky, Partner

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