What Financial Institutions and Companies Doing Business Globally Should Know About President Biden’s Latest Executive Order Regarding Russian Sanctions

January 4, 2024
Mark Thurber

In late December 2023, President Biden issued Executive Order (“E.O.”) 14114, “Taking Additional Steps With Respect to the Russian Federation’s Harmful Activities.” E.O. 14114 amends E.O. 14024 and E.O. 14068 by granting the Office of Foreign Assets Control (“OFAC”) the power to apply secondary sanctions on Foreign Financial Institutions (“FFIs”) that knowingly—or unknowingly—conduct significant transactions for certain entities listed under Executive Order 14024, or engage in significant transactions or provide services related to the Russian military-industrial base.

E.O. 14114 also broadens and clarifies the prohibition on importing Russian fish and seafood, alcoholic beverages, non-industrial diamonds, and gold into the U.S.

On the same day President Biden issued E.O. 14114, OFAC issued a Compliance Advisory, “Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base,” which gives practical guidance for FFIs on how to identify sanctions risks and implement corresponding controls, and provides additional guidance regarding E.O. 14114.

 

Overview of E.O. 14114 and OFAC’s Compliance Advisory

Secondary sanctions

The key takeaway from E.O. 14114 is that OFAC now has the authority to impose secondary sanctions on FFIs that it determines have engaged in two categories of conduct.

The first category is knowingly or unknowingly conducting or facilitating significant transactions for persons designated under Section 1(a)(i) of Executive Order 14024, operating in sectors like technology, defense, aerospace, or manufacturing in Russia, or any other sectors deemed supportive of Russia’s military-industrial base by the U.S. Secretary of the Treasury in consultation with other relevant authorities.

The second category is conducting or facilitating significant transactions, or providing services, related to Russia’s military-industrial base, including the sale, supply, or transfer of specified items to Russia, as determined by the U.S. Secretary of the Treasury in consultation with other key departments.

Though E.O. 14114 does not define “significant transactions,” OFAC’s FAQ 1151 explains that OFAC “may consider the totality and the facts and circumstances” when determining whether a transaction is significant, and will consider some or all of the following factors:

      1. The size, number, and frequency of a transaction;
      2. The nature of a transaction;
      3. The level of awareness of management, and whether a transaction is part of a pattern of conduct;
      4. The nexus of a transaction to persons sanctioned pursuant to O. 14024, or to persons operating in Russia’s military-industrial base;
      5. Whether a transaction involves deceptive practices;
      6. The impact of a transaction on U.S. national security objectives; and
      7. Such other relevant factors that OFAC deems relevant.

OFAC’s Compliance Advisory and its FAQ 1148 provide examples of activities that could expose FFIs to sanctions risks. These include:

      1. Maintaining accounts, transferring funds, or providing other financial services (e. payment processing, trade finance, and insurance) for any individuals OFAC designates as Specially Designated Nationals and Blocked Persons (SDNs) within a sector of Russia’s military-industrial base, or non-SDNs who operate in such a sector;
      2. Directly or indirectly facilitating the sale, supply, or transfer of specified items to Russian importers or companies shipping the items to Russia; and
      3. Helping companies or individuals evade U.S. sanctions on Russia’s military-industrial base, including by offering to set up alternative payment mechanisms or by changing or removing customer names or other relevant information from payment fields.

The sanctions that can be imposed on FFIs that violate E.O. 14114 include:

      1. Prohibiting the opening of, or prohibiting or imposing strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the S. for such FFIs (i.e., CAPTA sanctions); or
      2. Blocking sanctions against such FFIs (e., designation as an SDN).

Further, individuals or companies attempting to evade U.S. sanctions on Russia’s military-industrial base also expose themselves to sanctions risk under E.O. 14114 if they engage in activities such as obfuscating a payment’s purpose or hiding a transaction’s purpose.

Importantly, the authority to enforce secondary sanctions on FFIs found to have engaged in or assisted in any significant transaction or transactions for, or on behalf of, any individual designated under Section 1(a)(i) of E.O. 14024 for operating in specific sectors of the Russian economy, does not extend to transactions involving individuals designated in all sanctioned sectors of the Russian economy.

 

Expansion of ban on importation of certain Russian-origin products

E.O. 14114 also broadens and clarifies the prohibition on importing Russian fish and seafood, alcoholic beverages, non-industrial diamonds, and gold into the U.S. It extends this ban to certain products imported from other countries when the products imported are “mined, extracted, produced, or manufactured 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 products have been incorporated or substantially transformed into other products outside of the Russian Federation.”

 

What now for financial institutions and other companies that do business globally?

Through E.O. 14114 and OFAC’s related guidance, the U.S. government is putting FFIs on notice that it expects them to perform heightened customer due diligence when engaging in transactions or other activities with a nexus to Russia. FFIs can now become subject to U.S. sanctions themselves for engaging in certain conduct, regardless of whether they had knowledge that such conduct was prohibited. In other words, FFIs will be held strictly liable moving forward when engaging in the kinds of conduct covered by E.O. 14114.

In addition, the U.S. government has increased the stakes for companies doing business globally where raw materials are harvested from the Russian Federation, regardless of whether those products have been “incorporated or substantially transformed into other products outside of the Russian Federation.”

For individuals or clients having or forming relationships with FFIs it can be expected that already-extensive Know Your Client (KYC) requirements and documentation will continue to increase in volume and complexity, particularly on financings that involve borrowers or investors from the Russian Federation or from countries or entities routinely dealing therein.

 

 

Mark Thurber, a partner at KN Legal, has led transactions across varied sectors of the energy and infrastructure industries, including upstream, midstream, and downstream oil and gas, thermal power, renewable power, LNG, carbon gasification, energy transition, petrochemicals, private M&A, and construction and procurement. He has done deals on every continent and has represented or worked with foreign governments in commercial and regulatory energy and infrastructure development roles. He can be reached at m.thurber@knlaw.com.

 

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