December US sanctions: focus on restrictions on foreign financial institutions working with Russian companies

The term “foreign financial institution” (FFI) means any foreign entity that is engaged in the business of accepting deposits; making, granting, transferring, holding, or brokering loans or credits; purchasing or selling foreign exchange, securities, futures or options; or procuring purchasers and sellers thereof, as principal or agent. Thus, foreign financial organizations may include not only credit institutions directly, but also operators of credit card systems, trust companies, brokers, exchanges and other organizations providing financial services.

As restrictive measures, the Secretary of the Treasury, in consultation with the Secretary of State and in some cases with the Secretary of Commerce, may prohibit such an FFI from opening and maintaining correspondent and payable-through accounts or impose blocking sanctions on such an FFI, including blocking all property and interests in property that are in the United States.

Although foreign banks already bore the risks of secondary sanctions under CAATSA[3], the restrictions under Executive Order 14114 primarily increase risks for banks and other FFIs of "friendly" countries. This is because the new restrictions establish the possibility of applying restrictive measures even in situations where the relevant transactions are made in any currency, and not only in U.S. dollars[4].

Please note that the conditions for imposing secondary sanctions on FFIs under the new provisions on transactions involving specified items (sec. 11(a) (ii)) do not require sanctioned status from the FFI party under such a transaction. Therefore, changes to the list of specified items should be monitored.

OFAC's clarifications[5] to the Executive Order provide a sample list of criteria for determining the significance of a transaction, which include, among other items, the frequency of transactions, the nature of the transactions, and the level of awareness of management of the nature of the transactions. This allows a broad qualification of specific transactions and their significance for the purpose of imposing sanctions.

Based on OFAC's recommendations[6], in order to reduce the risk of being sanctioned, FFIs will be required to apply enhanced customer due diligence procedures: reviewing the institution’s customer base to determine exposure to involvement in the specified sectors of the Russian economy, informing clients that they may not use their accounts to do business with designated persons operating in the specified sectors or conducting any activity involving Russia’s military-industrial base, and implementing enhanced trade finance controls related to the specified items.