As sanctions regimes become highly objective oriented, the Office of Foreign Asset Control (OFAC) is focused on ensuring enforcement and targeting entities involved in violating the sanctions, irrespective of their nationality. The inherent complexity, supplemented by an objective-focused approach, makes sanctions compliance even more important in today’s geopolitical climate. On June 12, 2024, the U.S. Department of the Treasury (Treasury Department) unveiled a comprehensive set of anti-money laundering measures aimed at enhancing transparency and preventing illicit financial activities. These measures, along with the OFAC advisory, bring significant implications for financial institutions worldwide by expanding grounds for imposing sanctions against Foreign Financial Institutions (FFIs) and limiting the provision of certain software technologies to Russia.[1]
Additionally, to curtail Russia’s reliance on foreign IT systems, new prohibitions under Executive Order (EO) 14071 will restrict the supply of specific IT consultancy, design, and support services to the Russian Federation, effective September 12, 2024. These prohibitions align with G7 efforts and aim to disrupt Russia’s military-industrial operations while maintaining exceptions for critical telecommunication and humanitarian services. This comprehensive strategy illustrates the United States’ commitment to undermining Russia’s military capabilities and ensuring that international businesses and financial entities do not inadvertently support Russia’s aggressive actions as well as safeguarding its national security interests
OFAC also sanctioned over 100 Russia-based entities in sectors such as defence, manufacturing, technology, transportation, and financial services. Seven entities involved in major liquified natural gas projects were also sanctioned for their roles in construction, metals, mining, or manufacturing. Simultaneously, the State Department imposed sanctions on over 100 individuals and entities to prevent sanctions evasion and support for Russia’s military. These designations included entities and individuals from China, Belarus, the UAE, Türkiye, Hong Kong, Kyrgyz Republic, Singapore, Moldova, and others, covering sectors like defence, technology, aerospace, and manufacturing. These extensive sanctions by both OFAC and the State Department highlight the risks for non-U.S. persons of being designated under U.S. sanctions programs.
Understanding the New Measures
OFAC is extending its secondary sanctions under Executive Order (EO) 14114, which has been interpreted as a caution to smaller Chinese banks to cease facilitating transactions with sanctioned Russian financial institutions. EO 14114 empowers OFAC to impose sanctions on FFIs engaged in significant transactions or services involving the Russian military-industrial complex. OFAC is now broadening the definition of this military-industrial base to encompass all individuals and entities blocked under EO 14024. As a result, FFIs could face sanctions for significant transactions or services involving a broad spectrum of Russian entities, including major financial institutions.
OFAC has also released updated guidance for FFIs on sanctions related to the Russian military-industrial base, including detailed descriptions of high-risk FFIs and recommendations for mitigating secondary sanctions risk. New and amended FAQs provide further clarification on these changes. Additionally, OFAC has updated the Specially Designated Nationals and Blocked Persons List (SDN List) with new information on the foreign locations and aliases of five sanctioned Russian financial institutions, including those in China, the Kyrgyz Republic, and India.
The Treasury Department has broadened the scope of sanctions under EO 14024, expanding the definition of Russia’s military-industrial base to encompass all persons blocked under this order. This significant move targets foreign financial institutions, increasing their risk of sanctions should they engage in substantial transactions or provide services to any blocked persons, including major Russian banks, like VTB Bank and Sberbank. The expanded definition underscores the U.S. government’s assessment that Russia has strategically shifted its entire economic structure to support its war efforts. Consequently, financial institutions globally must be vigilant and reassess their exposure to these risks, adhering to OFAC’s updated sanctions advisory to implement effective controls and identify potential sanctions risks.
In conjunction with these measures, OFAC has updated the Specially Designated Nationals and Blocked Persons List (SDN List) to include the foreign addresses and aliases of five sanctioned Russian banks, including Promsvyazbank and VTB, highlighting their international presence in cities like Beijing, New Delhi, and Mumbai. The inclusion of the Indian branches of Russian banks like Promsvyazbank, Sberbank, VTB, and Vnesheconombank in the updated SDN List by OFAC carries significant implications for Indian businesses and banks. This implies that any Indian business or financial institution engaging in significant transactions or providing services to these designated branches is now at heightened risk of facing secondary U.S. sanctions.
The recent sanctions on Indian branches of Russian banks are distinct from usual measures, as they specifically target Russia’s use of non-USD financial systems to circumvent traditional sanctions. Unlike traditional sanctions primarily involving USD transactions, these measures extend to non-USD financial systems, broadening the scope of compliance requirements for Indian institutions. Indian banks and businesses now need to be exceptionally cautious in their dealings with these entities to avoid inadvertently violating U.S. sanctions, which could result in severe penalties, including being cut off from the U.S. financial system.
Key Considerations for Risk Management
In an era of increasing global financial integration, compliance with international anti-money laundering (AML) regulations is crucial for maintaining the integrity and stability of financial systems. The June 12, 2024, announcements by the Treasury Department, including the OFAC advisory, underscore the importance of vigilance and adherence to stringent AML protocols.[2] This further highlights the need for Indian banks to exercise increased vigilance in transactions involving Russian entities, even those outside the USD framework. For Indian businesses, this means navigating an even more complex landscape of financial restrictions, potentially impacting their cross-border trade and necessitating the exploration of alternative financial networks while straddling extensive compliance requirements. Further to the advisory, financial institutions and companies must implement:
- Enhanced Due Diligence: Financial institutions are now mandated to implement more rigorous due diligence processes, particularly for high-risk customers and transactions. This involves thorough verification of customer identities and continuous monitoring of transaction patterns.
- Beneficial Ownership Reporting: Companies must disclose information about their beneficial owners—those individuals who ultimately own or control the entity. This step is vital for preventing the misuse of corporate structures for money laundering.
- Expanded Reporting Obligations: The new measures include stricter reporting requirements for suspicious transactions. Financial institutions must be proactive in identifying and reporting any transactions that may involve illicit activities.
Takeaways from the OFAC Advisory[3]
The OFAC also issued an advisory for foreign financial institutions emphasising the need for enhanced due diligence and compliance with U.S. sanctions to combat money laundering and illicit financial activities. Indian businesses and banks must integrate these measures to ensure AML protocols and safeguard their operations.
Indian banks must implement more stringent monitoring systems to detect and prevent illicit financial activities that might exploit non-USD channel. Businesses would need to identify and establish relationships with new financial partners that comply with the sanctions, ensuring continuity in international trade and finance. Indian financial institutions must adapt their regulatory frameworks to address these expanded sanctions, ensuring comprehensive compliance and risk management. The OFAC advisory emphasises several critical points that are relevant for Indian businesses and banks to integrate into their AML frameworks:
- Sanctions Compliance: Ensuring compliance with U.S. sanctions is imperative. Indian financial institutions must avoid engaging in transactions with entities and individuals on OFAC’s SDN list.
- Risk-Based Approach: A risk-based approach to AML compliance is essential. This involves assessing the specific risks associated with different customers, products, and geographic locations and tailoring AML measures accordingly.
- Collaborative Efforts: Collaboration with international counterparts and leveraging shared resources and intelligence can enhance the effectiveness of AML efforts. Indian businesses and banks should foster strong relationships with global financial institutions and regulatory bodies.
Conclusion
The heightened risk of secondary sanctions for FFIs necessitates a thorough review and potential overhaul of compliance protocols of Indian businesses and financial institutions to ensure they are not engaged in any activities that could be construed as facilitating significant transactions with the sanctioned Russian banks’ Indian branches. Indian banks, in particular, must strengthen their due diligence and monitoring processes to detect and prevent any prohibited transactions.
As OFAC sanctions are mirrored by many other countries, it becomes imperative to be aware of such parallel sanctions regimes. For instance, under the Japanese Foreign Exchange and Foreign Trade Act, Japan sanctioned a Bengaluru based Indian tech firm (among 10 other firms) with asset freezes and export bans for allegedly assisting Russia in evading sanctions. Failure to comply with the continuously evolving sanctions can lead to significant reputational damage, financial losses, and operational disruptions. Staying informed and adapting to evolving regulatory landscapes is paramount in safeguarding operations and maintaining financial integrity. Integrating enhanced AML measures and maintaining proactive compliance strategies are vital for Indian businesses and banks to fortify their defences against potential sanctions violations, money laundering and contribute to the global effort to curb financial crimes.
Please note the Cyril Amarchand Mangaldas is qualified to practice law in India and the above legal position does not construe a legal advice or create an attorney-client relationship. In case you require legal assistance, please consult a qualified attorney in your jurisdiction.
[1] OFAC also issued a new determination under EO 14071, prohibiting the export of IT consultancy and design services, IT support services, and cloud-based services for enterprise management and design and manufacturing software to Russia. These services cannot be exported, reexported, sold, or supplied from the US or by a US person to Russia without a license or authorization from OFAC. Exemptions are made for services to US-owned entities in Russia and certain wind down and divestiture activities. This prohibition will take effect on September 12, 2024.
A new BIS rule mandates a license for exporting, reexporting, or transferring certain types of EAR99-designated software, including enterprise resource planning, customer relationship management, supply chain management, project management software, computer-aided design, and enterprise data warehousing software. This requirement also applies to software updates, with exclusions for the medical and agricultural sectors.
[2] As Russia Completes Transition to a Full War Economy, Treasury Takes Sweeping Aim at Foundational Financial Infrastructure and Access to Third Country Support | U.S. Department of the Treasury;
