Key Aspects

OFAC clearly states its expectations for Foreign Financial Institutions to enhance their response to Russia Risk by adopting adequate supplementary new resources “in addition to baseline customer due diligence (CDD) procedures and other anti-money laundering controls” already in place. 

The term 'Foreign Financial Institution' is broadly defined to extend far beyond traditional banking, including, but not limited to, insurances, precious metals dealers, brokers, etc. 

The E.O. provides concrete definitions of what may constitute “Assistance” or “Facilitation” by a Foreign Financial Institution. 

Two types of sanctions are outlined for violations of E.O. 14024 - stemming from the Correspondent Banking System, and in some cases, direct listing as Specially Designated Nationals. 

A specific list of items to avoid is provided as an Appendix to Executive Order 14024 Guidance. The list also provided as Apendix to this short note. 

OFAC’s Pre-Christmas Announcement 

OFAC is known for making significant announcements on Fridays, and December 22, 2023, was no exception. This time, it signaled a tougher stance on Foreign Financial Institutions, following President Biden's amendments to Executive Order No. 14024, intriguingly titled "Executive Order on Taking Additional Steps With Respect to the Russian Federation’s Harmful Activities."

Sanctions for Non-Compliant Foreign Financial Institutions

In summary, the US may cut off access to the dollar and its entire financial system, targeting institutions as Specially Designated Nationals, the so-called SDNs. Below is a brief extract of the provided sanctions, and for details, please follow the link here:

The E.O.’s targeted sanctions will include the prohibition of “the opening of, or imposing strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States”. In some specific cases, it can also directly apply SND blanket sanctions by blocking “all property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person of such foreign financial institution, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in.”

Understanding Foreign Financial Institutions

It is important to clarify that the regulation doesn’t simply refer to banks, but encompasses a wide spectrum of players in the financial system, from payment processors and insurers to dealers in precious metals and pension plans. The actual target list defines “foreign financial institution” as any foreign entity engaged in various financial services, including but not limited to depository institutions, banks, savings banks, money services businesses, and more.

The full list of targets to E.O is understood to be 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. It includes depository institutions; banks; savings banks; money services businesses; operators of credit card systems; trust companies; insurance companies; securities brokers and dealers; futures and options brokers and dealers; forward contract and foreign exchange merchants; 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.”

More Serious Compliance Resources to be Engaged

In OFAC’s Advisory Guidance on E.O. 14024, the US Treasury expects financial institutions to implement additional enhanced due diligence measures “in addition to baseline customer due diligence (CDD) procedures and other anti-money laundering controls” already in place. As in the past with similar situations, this will likely boil down to proof of an obligation of means. In our view, this means that the old saying “nobody was fired for having used…XYZ provider” will not work anymore. Financial Institutions should proactively show and prove they have adequate tools to control their sanction exposure beyond the mere box-ticking exercise.

Clarifying Assistance or Facilitation

In the eyes of OFAC, the following would constitute Assistance or Facilitation:

• 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.
• Maintaining accounts, transferring funds, or providing other financial services for any persons, either inside or outside Russia, that support Russia’s military-industrial base, including those operating in the specified sectors of the Russian Federation economy.
• Facilitating the sale, supply, or transfer, directly or indirectly, of specified items to Russian importers or companies shipping the items to Russia.

Helping companies or individuals evade U.S. sanctions on Russia’s military-industrial base.

This includes:

• Offering to set up alternative or non-transparent payment mechanisms,
• Changing or removing customer names or other relevant information from payment fields,
• Obfuscating the true purpose of or parties involved in payments, or
• Otherwise taking steps to hide the ultimate purpose of transactions to evade sanctions.

Most helpfully, the US Treasury, in a separate note, provides the full list of items determined to be within the scope of the regulation.

List of Items provided by OFAC as part of E.O 14024 Guidance

For assistance to understand and assess how Polixis can help your organization with implication of additional specialised tools and processes please contact Gareth Spiers at: +41 22 340 22 00 or at team (at) polixis.com.