On Monday, March 7, 2022, the ACAMS New York Chapter hosted a virtual event on Ukraine-Russia Crisis: What You Need to Know About The New Sanctions. The event was moderated by Howard Spieler, ACAMS New York Chapter Co-Chair and included the following panelists: Slim Ben Debba, former Global Targeting Section Chief, OFAC and currently Director, MUFG, John Smith, former Director, OFAC and currently Partner, Morrison & Foerster, and Daniel Tannebaum, former Compliance Officer at OFAC, currently Partner, Americas Anti-Financial Crimes Leader and Global Head of Sanctions, Oliver Wyman.
The panel began with an overview of what sanctions have been imposed and are in place as well as what sanctions will become effective in the very near future. The panel noted that the groundwork for the current round of sanctions against Russia was laid in 2014, with multiple Executive Orders signed in 2014. The current sanctions imposed by the Biden administration were implemented via multiple Orders, including EO 14024, through which, inter alia, new blocking and correspondent banking sanctions were imposed against Russia’s largest financial institutions, new debt/equity restrictions against certain companies operating in already-sanctioned as well as new sectors of the Russian economy (mining, transportation, etc.), prohibitions in dealing with the Central Bank of Russia, and EO 14065 which imposed comprehensive sanctions against the so-called Donetsk People’s Republic and Luhansk People’s Republic. Two new Executive Order were also issued following the March 7 ACAMs event, namely EO 14066, which prohibits importations into the United States of Russian oil, gas, coal and certain derivatives, thereof; and EO 14068, which prohibits, inter alia, the importation into the United States of fish, seafood, alcoholic beverages and other products, and the exportation of luxury goods to Russia.
The panel then described the various elements of the recently imposed sanctions regime in more detail. The current additional sanctions against Russia include comprehensive sanctions on the “so-called” Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR), similar to what was done during 2014 invasion of the Crimea region by Russia, additional actions against Russian banks (which include certain licenses and wind-down timetables for those with contracts with Russian oil and gas companies), restrictions to the SWIFT network affecting 7 Russian entities and 7 subsidiaries of theirs effective as of March 12, 2022, prohibitions on transactions with the Russian central bank; export controls as well prohibitions on certain sectors of economy, and new sectoral sanctions that affect the ability to borrow cash.
The panel also noted that Belarus, which has already been subject to various sanctions regimes, were included in the latest round of Russian sanctions because Belarus has been serving as the entry point for the Russian military incursions into northern Ukraine.
The international community has also imposed coordinated sanctions, including the EU, UK, Canada, Australia, Japan, Korea, and Switzerland. The panel noted the unprecedented nature of these Russian sanctions and noted the self-sanctioning that is taking place against Russian interests globally with many companies refusing to do business, choosing to scale back their presence, in Russia and/or closing offices altogether.
The panel also noted that the sanctions against Russian President Vladimir Putin will likely not have a significant impact since most of his personal wealth is masked by ownership through others or is located within Russia, proper. However, it was a strong symbolic effect.
The panel then discussed India’s and China’s position with respect to the Ukraine-Russia Crisis and the current sanctions regime. The panel noted that some of the supportive messaging from Beijing may not reflect the reality of negative impact on Russian/Chinese business relationships since the nature of the conflict is likely far beyond what China anticipated. As for India, there are still sanctions that they can impose, but neither China nor India are actively supporting Russia’s invasion of Ukraine. The panel concluded that outside observers should look to the underlying trade flows (especially gas and oil) to get a sense of India’s and China’s perspective on Russia’s movements into Ukraine. On that front, there has not been an uptick in new business, but a reduction of existing business between China/India and Russia.
The panel then discussed the very public seizure of property of individuals associated with the Russian government and if the unintended impact of sanctions on the Russian people was consistent with the intent of the sanctions policy. With respect to public seizures of property, specifically multimillion dollar yachts in this case, the panel noted that there is actual impact. These are status symbols being seized, but whether or not that prompts a change Putin’s calculus depends on whether a majority of oligarchs are impacted. If so, there could be a change since they control the economic levers in Russia. Notably, the number of Russian oligarchs targeted in this round of sanctions is larger than the sanctions imposed in 2014. From there, the panel noted that sanctions cannot exist without impact on a jurisdictions’ people. Consequently, that is why US sanctions law allows for general licenses to facilitate certain economic activity to continue in order to mitigate the impact to the people. Sanctions also should be commensurate with the actions taken by Russia in this case.
Going one step further, the sanctions also have to deter repeated bad behavior, or, in this case, a repeated invasion some time in the future. For example, the panel was asked to speculate - what happens if Putin retreats but Ukraine is left destroyed? The panel speculated that the sanctions should remain in place for some period of time to ensure that Russia does not simply reinvade Ukraine some months down the road once/if sanctions are lifted.
From there, the panel moved to a discussion of how likely it was that Russia could use cryptocurrencies to evade the sanctions imposed by several nations and what banks should do to monitor Russian attempts to evade sanctions or attempts by other parties to evade Russian sanctions. The panel noted that Russia was not going to be able to offset the disruptive effect on the Russian economy by substituting cryptocurrencies for fiat transactions. For that to be successful, the counter trading party to any deal involving the Russian government would be willing to deal in massive amounts of crypto. The currencies are too volatile today to make sense for international trading purposes. In addition, the volumes of cryptocurrency that would be required to help offset the impact of sanctions would need to be massive relative to the size of the crypto trading at this time.
With respect to financial institution monitoring (specific to Russia attempts to evade sanctions), the panel advised that banks should continue to leverage the AML and OFAC compliance policies they currently have in place, but look for outlier transactions and activity, especially transactions or customers with a Russian nexus. In addition, financial institutions should consider conducting supplemental/enhanced due diligence for Russian related risks, including those as they relate to crypto assets or crypto native businesses.
The panel concluded the event with several key takeaways:
(a) Banks should identify Russia/Ukraine exposure with respect to current sanctions restrictions (which have been changing quite frequently) and potential areas of future sanctions, such as the energy sector. [Note, the morning after this panel met, an Executive Order was signed prohibiting the importation of Russia oil and any new investments in that sector]. For companies that have offices and staff in Ukraine or Russia, other considerations include safety of employees and offices, as well as the reputation risk of maintaining business in/with Russia.
(b) The biggest challenge right now is keeping up with the speed of ongoing sanctions globally. The procedures and policies for reacting to sanctions events are typically in place for many large institutions, and they should continue to leverage that infrastructure.
(c) Bank reaction should be similar to what banks have to do, and have done in the past, with respect to conflict areas generally - update sanctions filters, communicate with senior management as well stakeholders internally and externally, using a risk based approach use enhanced due diligence and care for transactions related to Ukraine/Russia or prohibited sectors, and rely on (of perform, if they haven't) exposure assessments to the most volatile areas, including this region.
(d) Derivatives and Securities
(i) There is confusion in the industry as to whether certain transactions are permissible where Russian banks may be involved, and financial crime practitioners must continue to rely on accompanying guidance/FAQs for clarification. Financial institutions can also partner with industry groups to compile specific questions for submission to OFAC.
(ii) In general, OFAC sanctions related to securities are new, and therefore, there is still a dearth of guidance with respect to the implementation and impact of such sanctions that affect very complex types of transactions.
Overview of new U.S. Sanctions as of March 9, 2022:
February 21, 2022 - EO 14065 imposed comprehensive sanctions on the “so- called” Donetsk and Luhansk regions of Ukraine.
February 22, 2022 - OFAC issued Directive 1A under Executive Order (EO) 14024 prohibiting US financial institutions from participating in the secondary market for bonds issued by Russia’s Central Bank, National Wealth Fund, or Ministry of Finance.
February 24, 2022 - OFAC issued Directive 2 under EO 14024 imposing restrictions on correspondent and payable-through accounts on Sberbank, Russia’s largest bank.
February 24, 2022 - OFAC issued Directive 3 under EO 14024 prohibiting financing of any new debt with a maturity of greater than 14 days for 13 large Russian companies and financial institutions (listed in Annex 1).
February 28, 2022 - OFAC issued Directive 4 under EO 14024, prohibiting “any transaction involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation”
March 8, 2022 – The President issued Executive Order 14066, prohibiting the importation into the United States any of the following products of Russian Federation origin: crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products as well as any new investment in the energy sector.
March 11, 2022 – The President issued Executive Order 14068, prohibiting the exportation to Russia of Luxury goods; and, the importation into the United States of fish, seafood, and preparations thereof, alcoholic beverages, and non-industrial diamonds.
In addition to the above, the US sanctioned numerous Russian entities and individuals, including:
Russian banks VEB, VTB, Bank Otkritie, Novikombank, Promsvyazbank and Sovcombank
President Vladimir Putin and Prime Minister Sergei Lavrov
The Russian Direct Investment Fund
Various Russian “oligarchs” and their family members
Certain Belarusian banks
Nord Stream 2 AG pipeline