New U.S. Sanctions Targeting Russia

New U.S. Sanctions Targeting Russia

January 2, 2024, Covington Alert

On December 22, 2023, the United States further expanded its sanctions targeting Russia. In particular, President Biden signed Executive Order (“E.O.”) 14114, which provides new authority for the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) to impose sanctions on foreign financial institutions determined to have supported Russia’s military-industrial base and to ban imports into the United States of certain Russian-origin goods notwithstanding whether they have been incorporated or substantially transformed into other products outside of the Russian Federation. In a press release announcing E.O. 14114, President Biden described the new measures as designed to “counter evasion” of existing sanctions targeting Russia and “degrade Putin’s war machine.”

E.O. 14114 amends E.O. 14024 to authorize OFAC to impose sanctions against foreign financial institutions that (1) conduct or facilitate any “significant transaction” for or on behalf of persons designated for U.S. sanctions for operating in a sector determined by the U.S. Secretary of the Treasury to support Russia’s military-industrial base, including the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian economy; or (2) conduct or facilitate any significant transaction or provide any service “involving Russia’s military-industrial base,” including the sale, supply, or transfer to Russia of certain items identified by OFAC. OFAC specified categories of such items in a concurrently released determination pursuant to E.O. 14024 (the “Russia Critical Items Determination”). Foreign financial institutions that OFAC identifies as having engaged in the transactions or services identified in E.O. 14114 may be subject to either (1) full blocking sanctions or (2) restrictions on the opening or maintenance of correspondent accounts or payable-through accounts in the United States. The foregoing reflects a notable expansion in U.S. secondary sanctions authorities in relation to Russia.

Separately, E.O. 14114 amends E.O. 14068 to authorize OFAC to prohibit the importation into the United States of certain products that were mined, extracted, produced, or manufactured wholly or in part in the Russian Federation or harvested in Russian waters or by Russian-flagged vessels but incorporated or substantially transformed into a different product outside of Russia. OFAC concurrently issued a determination pursuant to E.O. 14068 (the “Seafood Determination”) identifying certain categories of seafood—salmon, cod, pollock, and crab—subject to these new prohibitions. OFAC also announced its intention to issue a similar determination with respect to certain categories of Russian diamonds processed in third countries.

Additionally, on December 20, 2023, OFAC published Updated Guidance on Implementation of the Price Cap Policy for Crude Oil and Petroleum Products of Russian Federation Origin. This guidance further clarifies OFAC’s expectations for compliance with the price cap adopted by the United States and certain of its allies that applies to the seaborne transport of Russian oil and petroleum products and offers explicit guidance as to what types of attestations and information parties must obtain from counterparties in order to qualify for the safe harbor from OFAC enforcement actions. OFAC expects U.S. service providers to be in compliance with the updated guidance by February 19, 2024.

Section 1(a)(i) of E.O. 14024 provides for the imposition of property-blocking sanctions against any person determined to operate or to have operated in specified sectors of the Russian Federation economy. E.O. 14114 adds a new Section 11 to E.O. 14024 authorizing (in subsection (a)(i)) the imposition of sanctions against any foreign financial institution determined to have conducted or facilitated any “significant transaction” for or on behalf of any person designated pursuant to Section 1(a)(i) for operating or having operated in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy, or any other sector that OFAC later determines to be supporting Russia’s “military-industrial base.” OFAC explained in accompanying guidance that, although the basis for an entity’s designation is already specified in the Federal Register, OFAC “anticipates updating” its List of Specially Designated Nationals and Blocked Persons (“SDN List”) to include new information identifying the sector in which relevant SDNs were designated for operating. See Frequently Asked Question (“FAQ”) 1153. Each of the sectors specified in Section 11(a)(i) is defined in FAQ 1126.

Additionally, new Section 11(a)(ii) of E.O. 14024 authorizes OFAC to impose sanctions on any foreign financial institution that has conducted or facilitated any significant transaction, 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 identified by OFAC. The Russia Critical Items Determination identifies the following classes of items to which Section 11(a)(ii) applies: certain machine tools and manufacturing equipment; semiconductor and related electronics manufacturing materials; electronic test equipment; propellants, explosives, and their precursors; lubricants and lubricant additives; bearings; advanced optical systems; and navigational instruments. OFAC explained in accompanying guidance that it focused on these categories of items because they are “critical to Russia’s war effort,” including for their role in the production of advanced precision-guided weapons. See OFAC Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base (“Guidance for Foreign Financial Institutions”).

In FAQ 1148 and its Guidance for Foreign Financial Institutions, OFAC provided further examples of activities that could expose foreign financial institutions to sanctions risk under the new Section 11(a) of E.O. 14024. Such activities include maintaining accounts, transferring funds, or providing other financial services (such as payment processing, trade finance, and insurance) to persons designated for operating in the specified sectors of the Russian Federation economy or to persons that support Russia’s military-industrial base. OFAC defines “military-industrial base” to include “the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian Federation economy (and other sectors as may be determined pursuant to E.O. 14024),” as well as “individuals and entities that support the sale, supply, or transfer of critical items identified in determinations pursuant to subsection 11(a)(ii) of E.O. 14024.” See FAQ 1151.

Activities that could expose foreign financial institutions to sanctions risk may also include helping persons evade U.S. sanctions on Russia’s military-industrial base by, for example, (a) setting up alternative or non-transparent payment mechanisms; (b) altering or removing customer names and other relevant information from payment fields; and (c) obscuring the true purpose of, or parties involved in, transactions. See FAQ 1148 and OFAC’s Guidance for Foreign Financial Institutions.

Whether a transaction can be defined as “significant” under Section 11(a) of E.O. 14024 depends on the “totality of the facts and circumstances.” See FAQ 1151. Relevant factors include “(a) the size, number, and frequency of the transaction(s); (b) the nature of the transaction(s); (c) the level of awareness of management and whether the transactions are part of a pattern of conduct; (d) the nexus of the transaction(s) to persons sanctioned pursuant to E.O. 14024, or to persons operating in Russia’s military-industrial base; (e) whether the transaction(s) involve deceptive practices; (f) the impact of the transaction(s) on U.S. national security objectives; and (g) such other relevant factors that OFAC deems relevant.” Id. This definition of “significant transactions” is consistent with how OFAC has defined this term in other secondary sanctions measures, including those targeting Russia and Iran.

“Foreign financial institution” is defined in the new Section 11(f) of E.O. 14024, as amended by E.O. 14114, to include “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.” Entities encompassed within this definition include, but are not limited to, depository institutions, banks, money services businesses, operators of credit card systems, insurance companies, securities brokers and dealers, and investment companies.

The new Section 11(b) of E.O. 14024, as amended by E.O. 14114, authorizes OFAC to impose two different types of sanctions on foreign financial institutions that engage in the activities specified in Section 11(a):

• First, OFAC may designate such foreign financial institutions to its SDN List. U.S. persons are broadly prohibited from transacting or dealing with SDNs and entities that SDNs own 50% or more, directly or indirectly, individually or in the aggregate with other SDNs. In addition, the property of SDNs and entities that they own 50% or more must be blocked, or frozen, when it comes into the United States or the possession or control of a U.S. person, except as licensed by OFAC. “U.S. persons” are U.S. entities and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green-card” holders), no matter where located or employed; and persons physically present in the United States.
• Second, OFAC may prohibit the opening of, or prohibit or impose strict conditions on the maintenance of, correspondent accounts or payable-through accounts (“CAPTA”) in the United States by foreign financial institutions that engage in the transactions identified in Section 11(a).

General License 84 provides a 10-day wind-down period for U.S. financial institutions that maintain a correspondent account or payable-through account for a foreign financial institution that becomes subject to CAPTA sanctions pursuant to Section 11(b)(i) of E.O. 14024. During that 10-day period, which begins on the effective date of the imposition of CAPTA sanctions against the relevant foreign financial institution, a U.S. financial institution holding such an account may (a) process transactions through the account, or permit the foreign financial institution to execute transactions through the account, that are for the purpose of, and necessary for, closing the account; (b) transfer funds remaining in the account to an account of the foreign financial institution located outside of the United States; and (c) close the account. The general license does not authorize transactions otherwise prohibited by applicable sanctions, including transactions with parties that are subject to property-blocking sanctions.

In its accompanying Guidance for Foreign Financial Institutions, OFAC identifies several steps that foreign financial institutions could take to minimize their sanctions risk relating to Russia’s military-industrial base. Such steps include, but are not limited to, (a) reviewing an institution’s customer base for customers involved in Russia’s military-industrial base, who conduct business with designated persons in the targeted sectors of Russia’s economy, or who may be involved in the transfer of specified items to Russia or to jurisdictions previously identified as posing an elevated risk of Russia sanctions evasion; (b) informing customers that they may not use their accounts to do business with entities involved in Russia’s military-industrial base; (c) obtaining risk-based attestations from customers that they do not conduct business in Russia’s military-industrial base; and (d) implementing enhanced trade finance controls related to the items specified in the Russia Critical Items Determination.

Expanded Prohibition on Imports of Russian Products

E.O. 14068 prohibits the importation into the United States of Russian-origin fish, seafood, and preparations thereof; alcoholic beverages; non-industrial diamonds; and any other products of Russian Federation origin identified by OFAC. E.O. 14114 amends E.O. 14068 to authorize OFAC, in a new Section 1(a)(i)(B) of E.O. 14068, to prohibit imports of any of the aforementioned categories of products, as determined by OFAC, that were mined, extracted, produced, or manufactured wholly or in part in the Russian Federation, or harvested in waters under Russian jurisdiction or by Russia-flagged vessels, even if the product has been incorporated or substantially transformed into another product outside of the Russian Federation.

In the concurrently issued Seafood Determination, OFAC identified four categories of seafood subject to the import prohibition in the new Section 1(a)(i)(B) even if incorporated or substantially transformed into another product outside of Russia: salmon, cod, pollock, and crab. OFAC has defined “salmon,” “cod,” “pollock,” and “crab” to include articles defined at certain Harmonized Tariff Schedule of the United States (“HTSUS”) subheadings. See FAQ 1157. General License 83 authorizes, through 12:01 a.m. EST on February 21, 2024, imports into the United States of salmon, cod, pollock, and crab subject to the Seafood Determination, provided that the transactions are pursuant to written contracts or written agreements entered into prior to December 22, 2023. The Seafood Determination prohibits the importation of the covered items into the United States but does not prohibit U.S. persons from engaging in transactions to sell or re-direct shipments outside of the United States. See FAQ 1156. OFAC also announced its intention to issue, at a later date, a similar determination related to the importation into the United States of certain Russian diamonds processed in third countries. See FAQ 1154.

Additionally, the new Section 1(a)(i)(C) of E.O. 14068, as amended by E.O. 14114, authorizes OFAC to impose import prohibitions on products that contain any of the products already subject to import prohibitions under Sections 1(a)(i)(A–B). The new Section 1(a)(i)(D), as amended by E.O. 14114, authorizes OFAC also to impose import prohibitions on products subject to the prohibitions of Section 1(a)(i)(A–C) that transited through or were exported from or by the Russian Federation. OFAC has not yet imposed import prohibitions pursuant to Section 1(a)(i)(C) or (D) of E.O. 14068.

Updated Guidance on Implementation of Price Cap Policy

On December 20, 2023, OFAC updated its guidance with respect to the multilateral price cap on the seaborne transport of Russian-origin crude oil and petroleum products to strengthen the attestation and recordkeeping processes for certain U.S. service providers who wish to take advantage of the price cap’s safe harbor from enforcement actions. The updated guidance includes new expectations for certain service providers to (1) receive attestations within a specified timeframe for each lifting or loading of Russian oil or petroleum products; and/or (2) retain, provide, or receive itemized ancillary cost information with respect to the provision of such services.

Tier 1 Actor Expectations

Tier 1 Actors are those that have regular and direct access to price information as part of the ordinary course of their business (such as commodities brokers or oil traders). OFAC has updated its guidance for Tier 1 Actors to clarify that the requirement to maintain and retain information showing that Russian oil or petroleum products for maritime transport were purchased at or below the price cap includes a requirement to obtain and maintain itemized ancillary cost information as relevant to a given contract or transaction.

• For “free on board” or “FOB” trades, Tier 1 Actors must keep an itemized record of all known costs negotiated at the start of the trade transaction.
• For “cost, insurance, and freight” or “CIF” trades, Tier 1 Actors must keep an itemized record of all known costs negotiated at the start of the trade, port dues and service charges at the point of loading/export, and relevant insurance and freight costs.
• OFAC has advised that itemized ancillary costs may vary across other trade contracts and terms, but should include at least those costs negotiated at the start of the trade transaction in question.

Tier 2 Actor Expectations

Tier 2 Actors are those that are sometimes able to request and receive price information from their customers in the ordinary course of business (such as financial institutions, ship/vessel agents, and customs brokers). OFAC has updated its guidance with respect to ship/vessel agents and customs brokers (but notably not with respect to financial institutions) to require that they request and retain price information to the extent practicable or, when not practicable in the ordinary course of business, obtain a signed attestation from any counterparties within 30 days of each lifting or loading of Russian oil or petroleum products. OFAC also recommends that Tier 2 Actors update their information collection structure to receive per-voyage attestations from counterparties as needed.

If a counterparty fails to provide such an attestation, Tier 2 Actors should request one immediately on discovery of the failure. If a counterparty refuses to provide an attestation, the Tier 2 Actor will be provided a safe harbor from OFAC enforcement if it has requested the attestation from its counterparty, discloses to OFAC the counterparty’s refusal to provide an attestation or other requested information, and ceases to do business with the counterparty in question.

Tier 3 Actor Expectations

Tier 3 Actors are those who do not regularly have direct access to price information in the ordinary course of business (such as shipowners/carriers, insurers/P&I clubs, reinsurers, and flagging registries). OFAC has provided updated guidance for obtaining attestations from counterparties based on type of Tier 3 Actor and for some Tier 3 Actors, obtaining additional information upon request:

• Shipowners/carriers must obtain attestations from counterparties prior to each loading or lifting of Russian oil or petroleum products, and must require their Tier 1 Actor counterparties to share additional information upon request, to include at a minimum ancillary itemized cost information such as freight insurance. Triggers for requiring additional information include becoming suspicious about a potential violation of the price cap in the course of due diligence or the receipt of information about a suspected violation.
• Insurers/P&I clubs must obtain attestations from counterparties within 30 days of each lifting or loading of Russian oil or petroleum products. They must also require their counterparties to obtain and share additional information upon request, including at minimum itemized ancillary cost information such as freight insurance, for instance when they suspect a violation of the price cap is occurring or has occurred.
• Reinsurers are not required to obtain signed attestations, but may choose to do so, and may otherwise obtain safe harbor from enforcement actions through the use of sanctions exclusion clauses in policies or contracts, as well as exclusion clauses for activities specifically related to maritime transport of Russian oil or petroleum products purchased above the price cap.
• Flagging registries must obtain attestations from counterparties within 30 days of a vessel lifting or loading Russian oil or petroleum products. Flagging registries are further permitted to require by contract or other enforceable means that their customers be de-flagged if they fail to provide this documentation (or violate the price cap policy).

OFAC recommends that Tier 3 Actors update their information collection structure to receive per-voyage attestations from counterparties as needed.

As with Tier 2 Actors, if a counterparty fails to provide such an attestation, Tier 3 Actors should request one immediately on discovery of the failure. If a counterparty refuses to provide an attestation, the Tier 3 Actor will be provided a safe harbor from OFAC enforcement if it has requested the attestation from its counterparty, discloses to OFAC the counterparty’s refusal to provide an attestation or other requested information, and ceases to do business with the counterparty in question.

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We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.