The extensive new international sanctions against Russia in response to the situation in Ukraine are a reminder that sanctions compliance is a critical issue for financial and non-financial companies around the world. Learn more about FRA's expertise in this critical area.
A few days ago the US, UK and EU launched new rounds of economic sanctions against Russia in response to its recognition of the so-called Donetsk People's Republic and Luhansk People's Republic in Ukraine. The sanctions had been widely expected, and financial institutions and corporates began executing the compliance steps for which they had been planning. Now, in the light of Russia's full-scale ground invasion of Ukraine, it is inevitable that more widespread and far-reaching sanctions targeting Russia and Russian interests are coming. This will present major challenges for corporations and financial institutions given that Russian economic interests have become deeply embedded, and perhaps welcomed, in many Western economies (which is epitomised by the renaming by many of London as 'Londongrad'). This is a dynamic situation which will stretch the capabilities of any sanctions compliance program and expose the weaknesses of many. Below we offer our thoughts on what we know so far and the steps that organisations need to take now to protect against enforcement risk.
The initial US measures (in response to the recognition of the new "Republics") were characteristically extensive and complex. OFAC added five persons, five vessels, and more than 40 entities to its SDN List, "blocking" (or freezing) the targets' assets within reach of the US and cutting the targets off from direct or indirect access to the US financial system and economy. These sanctions greatly impair the targets' ability to engage in cross-border financial transactions, since US-dollar financing and US correspondent banking is closed to them. And these measures are subject to OFAC's 50% Rule, so any other entity owned 50% or more by one or more of these newly designated parties is also subject to the same blocking sanctions, even if the entity is not itself included on the list.
But there was much more. New investment in, importation of goods and services into the US from, and exportation of goods and services from the US to, the Donetsk and Luhansk regions of Ukraine are prohibited. The US is poised to quickly impose similar measures as to other regions, upon determination by the Secretaries of the Treasury and State. OFAC expanded already-existing prohibitions on dealing in Russian sovereign debt to include the secondary market for ruble- and non-ruble-denominated bonds. And authority is now in place to quickly designate (and so block) additional persons and entities determined to have engaged in a wide variety of activities related to the two regions, including providing "material support" to blocked parties - a term that OFAC defines very broadly so as to provide maximum flexibility in the application and enforcement of US sanctions.
OFAC also issued two general licenses authorizing certain limited dealings with respect to Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank ("VEB"), including a "wind-down" license authorizing for one month transactions necessary to terminate transactions.
And all this is just the start. The White House made clear that "these measures are separate from and would be in addition to the swift and severe economic measures we have been preparing in coordination with Allies and partners should Russia further invade Ukraine" - which has now happened. We will see much more extensive and severe sanctions than these initial ones in very short order. This will be very easy for the US to do: OFAC and Treasury, the State Department, the National Security Council, and the rest of the US sanctions apparatus has been working for several weeks, at least, to be ready to move and keep moving.
The UK and EU have also weighed in with - so far - less extensive but still consequential sanctions, and they, like the US, have made clear the intention to impose much more stringent measures in light of Russia's invasion. Again, we expect to hear the details of those sanctions very soon.
Given that the crisis is quickly getting much worse, banks, other financial institutions, and corporates of all types need to pay close and ongoing attention to events. OFAC expects companies to stay up to speed on US sanctions developments, to a degree commensurate with their size and sophistication and the scope of their international business. And we can safely assume OFAC will enforce these new sanctions aggressively and, where the facts support it, harshly, in light of the importance of the issues at stake. Banks and corporates need to track the sanctions list frequently (at least daily at this point) and make sure their compliance programs are sound and effective.
In practical terms, companies (if they have not already done so) should be immediately and thoroughly assessing any exposure they have to Russia or to Russian persons and entities located anywhere in the world. Understanding potential exposure points will help facilitate a rapid response when new sanctions are announced. Assessment should consider all trading partners or bank customers and crucially include understanding corporate ownership structures to identify any direct or indirect investment from Russian entities or individuals. This may not be easy, particularly where oligarchs may take steps to obscure their ownership, using complex ownership arrangements or proxies, steps that are likely to be increasing given the current situation.
Companies should also be considering the commercial risk inherent in their broader supply chains, anticipating potential disruption due to for example rejected or delayed payments where the new sanctions impact supply or distribution. Financial institutions may wish to review their sanctions screening systems to ensure that they are optimised to deal with the new and complex screening requirements.
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