Are You Prepared to Comply With the Evolving U.S. Sanctions Regime?

The United States and other countries around the globe have imposed severe economic sanctions on Russian individuals, banks, and other entities in response to Russia’s ongoing invasion of Ukraine...

The United States and other countries around the globe have imposed severe economic sanctions on Russian individuals, banks, and other entities in response to Russia’s ongoing invasion of Ukraine. The new sanctions create additional compliance burdens for financial institutions and other businesses that operate internationally and highlight the importance of establishing clear policies and procedures to vet international transactions.

Economic Sanctions 101

The United States uses economic sanctions to promote its foreign policy goals and protect national security. The subject of sanctions can range from entire countries to specific individuals. Therefore, it is imperative that companies conducting business overseas have policies and procedures in place to effectively screen transactions.

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions. As part of its enforcement efforts, OFAC also publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. These individuals and companies are called “Specially Designated Nationals” or “SDNs.” The assets of SDNs are blocked and U.S. persons, including banks, insurers and other financial institutions as well as insurance producers and third-party administrators, are prohibited from engaging in any financial transactions with persons on the SDN List, unless OFAC has authorized otherwise or by obtaining a separate license for a particular transaction.

U.S. Sanctions Imposed in Response to Ukraine Invasion

Since Russia launched a full-scale invasion of Ukraine on February 24, 2022, OFAC has imposed several rounds of increasingly significant sanctions. The sanctions restrict U.S. purchases of Russian bonds and the ability of Russia’s largest bank (Sberbank) to transact in U.S. dollars. The sanctions also prohibit all U.S. transactions with and block any U.S.-based assets of Russia’s second largest bank (VTB) and three other systemically important financial institutions in Russia, as well as two Russian state investment funds (VEB and RDIF, Russia’s sovereign wealth fund).

Other U.S. federal agencies have also taken action. On February 24, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) filed a notice of a new rule that restricts the transfer of certain technologies to Russia. Covered technologies include electronics; computers; telecommunications and information security; sensors and lasers; navigation and avionics; marine; and aerospace and propulsion. Additionally, the new rule restricts the export of goods produced in foreign countries using controlled U.S. technology.

The United States has also imposed sanctions alongside its allies. Most notably, on February 26, the leaders of the European Union, France, Germany, Italy, the United Kingdom, Canada, and the United States announced that specific Russian banks will be removed from the SWIFT (Society of Worldwide Interbank Financial Telecommunication) financial messaging system. The SWIFT system, which is used to send payment instructions to other banks, is relied upon by Russian financial institutions to process cross-border financial transactions.

NYDFS Industry Letter Regarding OFAC Compliance

Financial institutions are particularly impacted by the new Russian sanctions. To assist with compliance, the New York Department of Financial Services recently issued an industry letter. According to the NYDFS guidance, regulated entities should take the following actions immediately:

• Monitor all communications from the Department, the U.S. Department of the Treasury, OFAC, and other Federal agencies on a real-time basis to stay abreast of the latest developments to ensure that systems, programs, and processes remain in compliance with all the requirements and restrictions imposed.
• Review transaction monitoring and filtering programs to make any modification that is necessary to their systems to capture the new sanctions as they are proposed, and to ensure continued compliance with all applicable laws and regulations.
• Monitor all transactions, particularly trade finance transactions and funds transfers, to identify and block transactions subject to the OFAC sanctions and follow OFAC’s direction regarding any blocked funds.
• Ensure that OFAC compliance policies and procedures are being updated on a continuous basis to incorporate these sanctions and any new sanctions that may be imposed on additional entities.

NYDFS is also warning that the Russian invasion dramatically increases the risk that virtual currency transfers may be used to evade sanctions, including through transmission of virtual currency to or from users located in comprehensively sanctioned jurisdictions. Accordingly, its guidance also provides that “all regulated entities engaging in virtual currency business activity — including but not limited to a BitLicensee or a Limited Purpose Trust Company — must have tailored policies, procedures, and processes to protect against the unique risks that virtual currency present including through implementation of existing federal and Department guidance related to sanctions compliance.”

Broader Message on Sanctions Compliance

Russia is not the first and will likely not be the last U.S. trade partner to face sanctions. Accordingly, it is imperative that all U.S. businesses operating internationally have a compliance plan in place.

Having a comprehensive policy helps ensure that your key personnel understands the importance of due diligence with regard to U.S. sanctions. It also provides a framework for properly vetting international transactions and transaction partners for potential compliance concerns.

In light of the dynamic nature of U.S. economic and trade sanctions, policies and procedures must be reviewed regularly and capable of adjusting rapidly to changes. At Scarinci Hollenbeck, our experienced business attorneys can help you conduct an individualized risk assessment and determine what internal controls you need to properly identify activity that may be prohibited by the evolving U.S. sanctions program.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Teddy Eynon, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.