U.S. Authorizes Secondary Sanctions on Banks Supporting Russia’s Military-Industrial Base

After two years of aggressive sanctions against Russia for its ongoing war in Ukraine, the United States has broadly expanded those sanctions to threaten foreign financial institutions (FFIs) that support Russia’s military-industrial base. On December 22, 2023, President Biden issued Executive Order (E.O.) 14114, which amends two prior Russia-related E.O.s to enable the U.S. government to more easily target sanctions evasion and circumvention tactics employed by the Government of the Russian Federation. Most notably, E.O. 14114 grants the Secretary of the Treasury new authority to impose sanctions on FFIs that conduct or facilitate significant transactions or provide any service involving Russia’s military-industrial base, regardless of whether the FFI engages in such activity knowingly or not, and even where there is no U.S. nexus to the transaction. This action marks the U.S. government’s first use of “secondary sanctions” under the recent Russia sanctions program. This new tool—which has been deployed only in a select number of programs, such as the Iran, North Korea, counter-terrorism, and earlier Ukraine-/Russia-related sanctions programs—reflects the U.S. government’s continued resolve to identify and target activity that evades or circumvents its Russian sanctions.

I. Authorizing Secondary Sanctions on Foreign Financial Institutions

The secondary sanctions provisions included in E.O. 14114 are incorporated as an amendment to E.O. 14024, the backbone of recent U.S. sanctions against Russia. The newly added Section 11 of E.O. 14024 authorizes the Secretary of the Treasury, in consultation with interagency partners, to impose either full blocking (asset freeze) sanctions or less-than-blocking sanctions that prohibit the opening of, or prohibit or impose strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States (“correspondent account sanctions”) on any FFI that is determined to have:

i. conducted or facilitated any significant transaction or transactions for or on behalf of any person designated . . . for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy, or other such sectors as may be determined to support Russia’s military-industrial base by the Secretary of the Treasury, in consultation with the Secretary of State; or

ii. conducted or facilitated any significant transaction or transactions, or provided any service, involving Russia’s military-industrial base, including the sale, supply, or transfer, directly or indirectly, to the Russian Federation of any item or class of items as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce.

The first prong works similarly to secondary sanctions authorities in other U.S. sanctions programs, targeting FFIs that engage in one or more significant transactions for or on behalf of designated persons (i.e., persons added to the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) List of Specially Designated Nationals (SDN) and Blocked Persons (“SDN List”), in this case, for operating or having operated in one of the identified sectors). In newly published Frequently Asked Question (FAQ) 1153, OFAC provided guidance on how to determine which SDNs have been designated for operating in one of these identified sectors.

The second prong represents a more significant expansion of OFAC’s authority. Under this new authority, OFAC can impose blocking or correspondent account sanctions on FFIs that more broadly conduct or facilitate transactions or provide services (e.g., payment processing, trade finance, insurance) that involve Russia’s military-industrial base, including where an FFI facilitates the sale, supply, or transfer to Russia of certain items that have been determined to support Russia’s military-industrial base, even when there is no SDN involved in such transactions. On December 22, 2023, OFAC issued a determination identifying the military-related items that are covered by this prong. Notably, unlike most secondary sanctions authorities,[1] Section 11 of E.O. 14024 does not include a knowledge qualifier. While we expect that OFAC may consider whether an FFI had knowledge (or reason to know) of sanctions-implicating activities in making determinations about which FFIs to target and which type of sanction to impose, the exclusion of an explicit knowledge criteria makes it easier for OFAC to target FFIs for facilitating sanctions evasion.

Concurrent with these actions, OFAC issued several FAQs providing guidance on the scope of the new provisions (see, e.g., FAQ 1151, which defines “foreign financial institution,” as well as other key terms used in the new provisions). The FFI definition largely mirrors FFI definitions under other programs that employ secondary sanctions; however, the Russia FFI definition explicitly includes “insurance companies” and “operators of credit card systems”[2] (whereas in other programs these entities are not specifically listed).

OFAC also issued a Compliance Advisory on these expanded authorities to provide guidance to FFIs. Importantly, this advisory provides examples of activity that could expose FFIs to sanctions risk and includes recommendations on how to identify and mitigate such risks. OFAC also encouraged FFIs to review its “Framework for OFAC Compliance Commitments” for guidance on best practices in developing and maintaining a risk-based sanctions compliance program.

While E.O. 14114 adds the authority to target FFIs with secondary sanctions, OFAC has not yet used this authority. To prepare for future sanctions, OFAC issued General License (GL) 84, which authorizes certain wind down activities involving any FFI targeted by correspondent account sanctions in the future.

The expansion of OFAC’s targeting authority follows OFAC’s increased focus on designating facilitators of evasion (most recently sanctioning over 150 facilitators of evasion and other persons contributing to Russia’s military-industrial base) and the U.S. government’s publication of both multilateral and multi-agency guidance on how to counter sanctions evasion. FFIs—particularly those located in jurisdictions that present a higher risk of Russian sanctions evasion—should closely review the new authorities and the Compliance Advisory to ensure they have sufficient controls and mitigation measures in place to guard against these risks.

II. Expanding Import Prohibitions for Certain Russian Goods

E.O. 14114 also amends and expands existing prohibitions targeting the import of certain Russian products into the United States under E.O. 14068, which previously targeted the importation into the United States of Russian-origin fish, seafood, and preparations thereof; alcoholic beverages; non-industrial diamonds; and gold.[3] E.O. 14068, as amended, maintains and expands these prohibitions to enable the Secretary of the Treasury to target additional products that may contain targeted Russian-origin products, even when incorporated or substantially transformed into another product in a third-country prior to import into the United States.

Concurrent with the amendment to E.O. 14068, OFAC issued a determination prohibiting the import and entry into the United States of salmon, cod, pollock, or crab produced wholly or in part in the Russian Federation, or harvested in waters under the jurisdiction of the Russian Federation or by Russia-flagged vessels, notwithstanding whether such items have been incorporated or substantially transformed into another product in a third-country (the “Seafood Determination”). This new prohibition takes effect immediately; however, OFAC concurrently issued GL 83, which allows for the import of seafood derivative products covered by the Seafood Determination into the United States until February 21, 2024, provided the imports are conducted pursuant to written contracts or agreements entered into prior to December 22, 2023.

At this time, the Seafood Determination is the only determination that has been issued under the newly expanded import prohibition categories. However, OFAC indicated that it intends to target Russian diamonds that are processed in third countries under these expanded prohibitions in the near term, and the expanded import prohibition framework now established in amended E.O. 14068 will enable the Secretary of the Treasury to quickly target additional categories of items in the future via additional determinations.

Conclusion

The broad expansion of U.S. sanctions authorities to threaten secondary sanctions on FFIs supporting Russia’s military-industrial base demonstrates the resolve of the U.S. government to target any actions that help the Russian Federation support and fund its war in Ukraine. The U.S. government has become increasingly focused on identifying and targeting third-country parties that are enabling, facilitating, or supporting Russia’s war efforts. The recent expansion of U.S. sanctions authorities—which increases sanctions risk for FFIs that do business involving Russia—may lead global financial institutions to reexamine their overall exposure to Russia, given the new threat of secondary sanctions for FFIs. Over the next year, we expect to see continued targeting of third-country actors, including FFIs that may be targeted under the new secondary sanctions authorities, and swift action against new Russian tactics to evade sanctions.

[1] See, e.g., the correspondent account sanctions under the North Korea program (31 C.F.R. § 510.210) and certain correspondent account sanctions under the Iran program (31 C.F.R. § 561.201).

[2] This definition mirrors the FFI definition in E.O. 14024’s Directive 2 (Feb. 24, 2022) authorizing the imposition of correspondent account sanctions on FFIs operating in the financial services sector of the Russian Federation economy.

[3] While Russian gold was not targeted under E.O. 14068 initially, the E.O. gave the Secretary of the Treasury the authority to target additional products, and, on June 28, 2022, the Secretary of the Treasury issued a determination identifying gold of Russian Federation origin as subject to this prohibition. This determination was reissued on December 22, 2023, to make certain technical updates in light of the amendment of E.O. 14068.