Reglas de OFAC

Aplicadas a las sanciones financieras de Rusia

Dr. Mike Beck

 Outline

PART I: Importance of Sanctions Compliance

PART II: OFAC Sanctions Programs

PART III: OFAC Russia Sanctions

PART IV: How to Comply

Importance of Sanctions Compliance
 Consequences of Non-
compliance
• The consequences for non-compliance
with U.S. sanctions include:
– Civil penalties: Penalties of up to the greater of
$300,000 or twice the amount of the transaction per
violation.
– Criminal penalties: Fines up to $1 million and/or 20
years imprisonment
– Loss of export privileges: Offending companies may
lose access to U.S. suppliers, components or access to
the U.S. market
– Damage to reputation: Companies that are sanctioned
or charged with violating sanctions may suffer damage
to their brand and frighten away business partners
– Sanctions Listing: Offending companies can be placed
on sanctions lists which severely restrict transactions
with international banks
Increase in use of sanctions over 20
years
Targeting Foreign Entities
 Sanctions & Banks

• Financial institutions are a primary target for U.S. sanctions

• Use of U.S. Dollars ($) in international trade brings sanctions risk
• Penalties on violating banks are among the highest
• Penalties assessed per violation means banks can accrue thousands of sanctions violations in a case
• One transaction = one violation

Source:
Financial Crime News
 U.S. Sanctions

U.S. sanctions pose special risks

Some U.S. sanctions are extraterritorial

• This means some U.S. sanctions are applicable to individuals or entities (companies) outside of the
United States

U.S. sanctions are generally put in two categories:

• Primary sanctions - the most common type: restrict U.S. persons (individuals and companies) from
doing business with or engaging in certain activities with designated individuals and companies.
• Secondary sanctions - an increasingly more common type: restrict non-U.S. persons from doing
business with or engaging in certain activities with designated individuals and companies.
– Extraterritorial sanctions are almost always secondary sanctions
 How U.S. Sanctions Affect
Foreign Companies
There are four primary ways U.S. sanctions affect foreign companies:
I. Foreign companies whose business has a significant U.S. nexus may be considered U.S. persons or
made subject to U.S. laws
• U.S. nexus is when a trader or transaction comes under US jurisdiction, when it might be considered a ”US person"
• Transactions have US nexuses when they involve US persons, are conducted in US dollars, involve US origin goods or
tech, enters US territory, involves property of a US sanctioned person
II. Foreign companies that violate U.S. secondary sanctions, which are extraterritorial, risk
being placed on the OFAC SDN list
III. Foreign companies that provide material assistance or help foreign parties evade U.S.
sanctions risk being placed on OFAC SDN List or Other US Lists
• Material support: when goods, services, or technical support are provided to an SDN
• Sanctions evasion & OFAC’s 50% Rule
IV. Foreign companies that engage in activities that run counter to U.S. policy or threaten U.S.
security or foreign policy risk being sanctioned
OFAC Sanctions Programs
 Who Implements U.S. Sanctions?

• The Office of Foreign Assets Control (OFAC) is the primary

implementing agency for U.S. sanctions
• Based in Treasury Department

• OFAC Responsibilities:
– Maintaining sanctions lists
– Monitoring compliance
– Issuing licenses and denials
– Providing policy guidance

• OFAC Jurisdiction:
– U.S. persons
– Any person dealing in items of U.S. origin
– Non-U.S. persons engaged in sanctionable activity or causing violations Key Sanctions List:
Specially Designated
• Departments of Justice, State, Commerce and Homeland Nationals List (SDN)
Security implement or enforce additional U.S. sanctions
 OFAC Sanctions Programs

OFAC has 38 active sanctions programs

OFAC publishes a list of individuals, groups, and

companies that operate on behalf of sanctioned
countries or that engage in illicit activities – these
are Specially Designated Nationals (SDNs)

OFAC sanctions programs are regularly updated,

adding/removing/editing designations
• Compliance is a dynamic process
 What are Sanctions?

Economic tool for achieving security and

foreign policy objectives
• Sanctions Types
• Comprehensive: Broad restrictions on trade with a
country (e.g., DPRK)
• Targeted: Prohibitions on certain individuals or entities
(ex: Putin)
• Range from travel bans and asset freezes to widespread
prohibitions on commercial activity

• Sanctions focus on destinations, individual and

entities

• Sanctions are applied to a wide range of actors

for many reasons
• Terrorism, drug trafficking, arms trafficking, human
rights, sanctions violations, proliferation, international
conflicts, violation of international norms and laws
 OFAC Comprehensive Sanctions
Countries/Regions Subject to
Comprehensive sanctions are the most high-risk U.S. Comprehensive Sanctions

Comprehensive sanctions: Cuba

• Restrictions on most all trade with exceptions for items
like food, medicine, and basic consumer goods
Syria
• General Licenses let companies/banks know what
exceptions are available to any restrictions Iran

• While Russia and Belarus are not under comprehensive

sanctions, they are almost as high risk North Korea
• Crimea and the People’s Republics of Luhansk and Donetsk
(see red portion of map) are under comprehensive sanctions
Crimea (DNR & LNR)
 OFAC Secondary Sanctions

Material Support to SDNs and Causing a Violation for a U.S. Person

Foreign financial institutions can become subject to secondary sanctions for “materially supporting’
SDNs

• Section 228 of CAATSA requires the President to impose sanctions on foreign persons if the President
determines that the person knowingly “facilitates a significant transaction or transactions, including deceptive
or structured transactions, for or on behalf of – (A) any person subject to sanctions imposed by the United
States with respect to the Russian Federation; or (B) any child, spouse, parent, or sibling of an individual
described in subparagraph (A).”

“Causing a violation” – Non-U.S. financial institutions face potential liability for causing a sanctions
violation by involving a U.S. person in a transaction that would be prohibited for a U.S. person (e.g.,
transacting through a U.S. intermediary)
 CAATSA

On 2 August 2017, President Trump signed into law the Countering America’s Adversaries
Through Sanctions Act (CAATSA). This law was composed of three parts, one dedicated to
Russia:
 TITLE II: Countering Russian Influence in Europe and Eurasia Act of 2017 (CRIEEA)

CRIEEA expanded existing restrictions on U.S. persons doing business with Russia and added
some potentially significant secondary sanctions targeting non-US persons’ activity
involving Russia and certain operations outside of Russia.

Most of the new Russia sanctions were mandatory, which meant that the U.S. President
must impose them (subject to possible waivers). Congress sought to constrain Trump, not
let him relax sanctions.

Was the first time U.S. implemented mandatory secondary sanctions targeting Russia.
 OFAC’s 50% Rule

• In 2014, OFAC published Revised Guidance on the 50 Percent Rule, which states that, “any entity
owned in the aggregate, directly or indirectly, 50% or more by one or more blocked persons is
itself considered to be a blocked person.”
- "Indirectly" as used in OFAC’s 50 Percent Rule, refers to one or more blocked persons' ownership of shares of an entity
through another entity or entities that are 50 percent or more owned in the aggregate by the blocked person(s)

• FAQs on OFAC 50% Rule: “urges persons considering a potential transaction to conduct appropriate
due diligence on entities that are party to or involved with the transactions or with which account
relationships are maintained in order to determine relevant ownership stakes.”

• Risk areas:
- Fifty percent ownership by one or more SDN
- SDN-controlled entities
- Significant but non-majority ownership by an SDN
- Russian-based entities
- Majority-owned by a sanctioned government
OFAC Russia Sanctions
 Russia’s Invasion & Foreign
Companies
The 24 February invasion of Ukraine by Russia underscores the necessity of
sanctions compliance
A coalition of 37 countries was organized to impose harmonized sanctions and export
controls on Russia and Belarus.

Regardless of whether a bank does business with Russia (or Belarus), Russia sanctions and
the coalition of countries have compliance impacts globally:
 These countries have shown a willingness to use SWIFT delisting as a punishment
 Russian and Belarus persons will seek to exploit compliance weaknesses to engage in sanctions evasion
 As the crisis continues, foreign companies could be at risk if their government’s policies diverge from that of
the coalition’s
 Pre-Invasion Russia Sanctions (Obama & Trump)

After Russia entered Crimea in 2014, the Obama administration launched a three-pronged sanctions
strategy

1. List-based sanctions: 120+ persons (individuals, entities and organizations made subject to blocking
sanctions)
• Executive Orders 13660 (6 March 2014) and 13661 (17 March 2014)
2. Sectoral sanctions: Sanctions targeting the growth of key companies in Russian financial, energy and
defense sectors
• Executive Order 13662 (20 March 2014)
• Creation of Sectoral Sanctions Identifications (SSI) List
3. Regional comprehensive sanctions: Comprehensive sanctions placed on Crimea & DNR/LNR
• Executive Order 13685 (19 December 2014)

Finance Sector Energy Sector Defense Sector

Unable to raise capital via Unable to raise capital via new long-term debt Unable to raise capital via new
new long-term debt or equity or acquire U.S. technology for key projects long-term debt
 Russia Sanctions Overview

Since Ukraine invasion, global coalition has sanctioned Russia and Belarus

Overview of U.S./EU sanctions and export controls on Russia/Belarus since February 2022
• Full blocking sanctions on Putin, Russian leadership, Duma members, key banks and defense firms, and
Belarussians
• Restrictions on Russian Central Bank
• Removal of major Russian banks from SWIFT system
• Ban on dual-use exports to Russia and Belarus
• Restrictions on military end-users
• Import bans on Russian/Belarussian gold, oil, diamonds, seafood and alcohol
• Outbound investment ban to Russia
• Restrictions on purchasing of Russian sovereign debt
• Closure of ports and airspace to Russian vessels and aircraft

37 country coalition has imposed controls on Russia

• EU, United Kingdom, other non-EU countries in Europe (including Switzerland), Canada, Australia, New Zealand,
Japan, South Korea, Singapore, and Taiwan, among others, have imposed sanctions, export controls, or both in
response to Russia’s war against Ukraine.
 Russia Sanctions:
Biden Executive Orders
Pre-Invasion
Executive Order 14024 (19 April 2021): authorizes sanctions against Russia for its harmful foreign activities, including
violating core principles of international law such as respect for the territorial integrity of sovereign states.
• Resulted in the publication of the Russian Harmful Foreign Activities Sanctions Regulations (1 March 2022)
Post-Invasion
Ukraine-related/Russia-Related Sanctions
Executive Order 14065 (21 February 2022): When Russia recognized DNR/LNR as independent, U.S. put blocking
sanctions on DNR/LNR.
Russia Harmful Activities Sanctions
Executive Order 14066 (8 March 2022): bans import of Russian oil, liquefied natural gas, and coal to the United States
Executive Order 14068 (11 March 2022): bans import of certain Russian origin products, blocks export of luxury goods to
Russia, bans investment in any sector of the Russian economy, and bans exports of US banknotes to Russia.
Executive Order 14071 (6 April 2022): bans new investment in Russia by U.S. person, wherever located; bans export of
certain services; and bans any approval, financing, facilitation, or guarantee by a United States person, wherever located,
of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if
performed by a U.S. person or within the U.S.
 Russia: SWIFT Removals
March 2022: US & EU removed 7 Russian banks
• SWIFT Removal is a major escalation from the SWIFT system
1. Bank Otkritie
• Carnegie Endowment estimated about 300 2. Novikombank
Russian banks and financial institutions 3. Promsvyazbank
used SWIFT 4. Bank Rossiya
5. Sovcombank
• Most SWIFT transactions were conducted 6. Vnesheconombank (VEB)
in dollars, euros, and pounds sterling
7. VTB Bank

• White House: transacting with “de-

SWIFTed" banks all but impossible, June 2022: EU removed 3 more banks
prompting most banks to "simply stop 1. Sberbank (Russia's largest bank)
transacting altogether" with those 2. Russian Agricultural Bank
targeted 3. Credit Bank of Moscow
 Russia: Military end-user (MEU) Sanctions

On 24 February, the Commerce Dept. and the Bureau of Industry and Security (BIS) issued the
“Implementation of Sanctions Against Russia Under the Export Administration Regulations (EAR),”
(Russia Sanctions rule).”

While not administered by OFAC, the Russia Sanctions rule has wide ranging consequences. A similar
rule was issued regarding Belarus.

The Russia Sanctions Rule: applies “restrictions on Russian ‘military end users’ and ‘military end uses’
cover all items subject to the EAR with exceptions for food and medicine designated as EAR99.”

The strong response to Russia has comingled powers between sanctions authorities (OFAC) and
export control authorities (BIS), creating further confusion.
 Russia: General Licenses are available

General licenses (GL) are

regulatory provisions that
authorize otherwise prohibited
transactions
• There are 35+ GLs applicable to
Ukraine-related/Russia-related
Sanctions and Russia Harmful
Foreign Activities Sanctions
How to Comply
 Sanctions Compliance

Sanctions compliance should be dynamic and ongoing

Regardless of sanctions type or market, the basic process for sanctions compliance remains
the same:

• Establish a sanctions compliance program: sanctions compliance, as a part of a larger compliance system and
screening system.
• Designate empowered officials within relevant offices and subsidiaries to be able to review and halt
transactions if necessary
• Screen clients, suppliers, shippers and end-users against official sanctions lists
• Retain records of screenings, government and client communications, and due diligence actions taken.
• Conduct audits, both internal and external at regular intervals to stress test the system
 Elements of Sanctions Compliance

A Framework for OFAC Compliance Commitments outlines the

five elements of a sanctions compliance program (SCP):
Sanctions Compliance
OFAC Framework Issued in 2019 and highlighted 10 root causes of sanctions Program Elements
violations:

1. Lack of a formal SCP

2. Misunderstanding OFAC Regulations 1. Management Commitment
3. Facilitating Transactions by Non-U.S. Persons (Subsidiaries/Affiliates)
4. Exporting or Re-exporting U.S.-origin Goods, Technology, or Services to SDNs 2. Risk Assessment
5. Utilizing the U.S. Financial System, or Processing Payments to or through U.S. Financial
Institutions, for Commercial Transactions Involving OFAC-Sanctioned Persons or
Countries 3. Internal Controls
6. Sanctions Screening Software or Filter Faults
7. Improper Due Diligence on Customers/Clients (e.g., Ownership, Business Dealings, 4. Testing & Auditing
etc.)
8. De-Centralized Compliance Functions and Inconsistent Application of an SCP
9. Utilizing Non-Standard Payment or Commercial Practices
5. Training
10. Individual Liability
 Sanctions Lists

• Governments and international organizations often designate persons (individuals or entities) for
sanctions by placing them on a sanctions list
• Companies must screen against relevant sanctions lists to ensure trade or other economic activity is
permitted or if a license is required to proceed with transactions
• For sanctions compliance, end user screening and awareness of transactions with high-risk (sanctioned)
destinations is key
• The easiest way to screen is to check client/supplier/end-user details (name, address, business
information) against a Consolidated Screening List (CSLs)

Example:
U.S. sanctions
designations
 Sanctions Screening Databases

United States: Consolidated Screening List – search engine of sanctions and export control lists
• Requires no login
• May lag regulatory updates by a few days
• Has fuzzy search setting for misspellings and close matches

United States: Sanctions List Search -- search engine of OFAC lists

European Union: Consolidated Financial Sanctions List – requires download in PDF, CSV, XML
• Requires EU login
• Needs to be redownloaded often to access recent updates
• Control + F with available screening information

United Kingdom: OFSI Consolidated Search List – search engine for UK sanctions
• Requires no login
• Has fuzzy search setting for misspellings and close matches

General: Open Sanctions – open-source screening resource with API feed

United Nations: United Nations Security Council Consolidated List – search UNSC sanctions
 Russia Red Flags (March 2022 FINCEN Alert)

Russia is eager to circumvent the sanctions coalition

Be alert for the following:

• Use of corporate vehicles (i.e., legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source
of funds, or (iii) countries involved, particularly sanctioned jurisdictions.
• Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from
company registration.
• Use of third parties to shield the identity of sanctioned persons and/or PEPs seeking to hide the origin or ownership of funds, for
example, to hide the purchase or sale of real estate.
• Accounts in jurisdictions or with financial institutions that are experiencing a sudden rise in value being transferred to their
respective areas or institutions, without a clear economic or business rationale.
• Jurisdictions previously associated with Russian financial flows that are identified as having a notable recent increase in new
company formations.
• Newly established accounts that attempt to send or receive funds from a sanctioned institution or a financial institution removed
from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
• Non-routine foreign exchange transactions that may indirectly involve sanctioned Russian financial institutions, including
transactions that are inconsistent with activity over the prior 12 months. For example, the Central Bank of the Russian Federation
may seek to use import or export companies to engage in foreign exchange transactions on its behalf and to obfuscate its
involvement.
 Russia Red Flags (March 2022 FINCEN Alert)

Russia sanctions evasion tactics are sophisticated

Be alert for the following:

• Sanctioned persons using “associates” such as family members to:
1. Transfer assets such as shareholdings in holding companies to trusted proxies such as relatives or employees;
2. Sell or transfer assets at a loss in order to realize their value before sanctions take effect;
3. Divest investments to ensure ownership stakes are below the 50% threshold or relinquishing previous controlling stakes.

Be aware of sanctions evasions efforts by proxies:

A sanctioned person may relinquish an asset but retain influence through a proxy. Facilitation requires:
1. The criminal activity not happening, or being more difficult, without the enabler;
2. Assisting a suspect to evade scrutiny by distancing the suspect in some way from the offence; and/or
3. Allowing a suspect to benefit by laundering proceeds or assisting with doing so.
 Case Study: MidFirst Bank

July 2022: OFAC issued a Finding of Violation (FOV) to

MidFirst – a private U.S. bank

Violation: Maintaining accounts for and processing of 34

payments on behalf of two individuals added to OFAC’s List of
Specially Designated Nationals (“SDN List”) for 14 days post-
designation.

Cause: MidFirst’s misunderstanding of frequency of its

vendor’s screening of new names added to the SDN List
against its existing customer base.
• MF’s vendor conducted daily screens of only new customers; the whole
customer base was only screened once a month
• Depending on timings of SDN List updates, MF could be doing business with
SDNS for up to 30 days
• Upon the first monthly screening post-listing, MF’s vendor realized the
violation
 Case Study: MidFirst Bank (MF)

OFAC’s Violation Assessment:

• Aggravating Factors: MF had reason to know and maintained the violating
accounts for two weeks
• Mitigating Factors:
• Main violations occurred within two weeks or even several hours post-
designation
• Violating transactions were small amounts
• Upon discovering the violations, MF’s vendor began screening existing
accounts more regularly
• MF implemented new manual process for updates to OFAC lists
• MF cooperated with OFAC
• MF had no other OFAC infringements in the past 5 years

OFAC determined no financial or criminal penalty necessary

MF recognized its appropriate “risk-based approach” and

altered screening practices accordingly.