FAQ about Russia Sanctions

In response to Russia's invasion of Ukraine, governments around the world have imposed a slew of sanctions aimed at deterring Russian aggression and bringing the conflict to a close.

Banks, financial institutions, and a variety of other businesses have been impacted by the swift imposition of sanctions, with some of them struggling to keep up with the government's specific measures.

The following are responses to questions posed by attendees during a recent ICA webinar on Russia sanctions, which were intended to clarify what companies can do to protect themselves from sanctions exposure.

In Russia, only a few specific banks have been sanctioned. What is the risk factor for other banks in the same country that have not yet been sanctioned? Should we scrutinize payments from unlicensed banks in the same way?

Given the current state of affairs, predicting the direction of travel on Russia sanctions is difficult. However, there are actions that can be taken.

Firms should review their sanctions risk exposure to Russian financial institutions, as well as their owners and controllers, on a regular basis. This is likely to have an impact on a company's overall risk ratings and appetite for sanctions.

Horizon scanning is also important, as is comparing key jurisdictions' listings to get a sense of the differences. You will be able to see where jurisdictions like the United Kingdom, the United States, and the European Union align—as well as where they don't—and how your company can protect itself as a result. In this regard, it is also critical to understand the commercial and operational risks.

Even if there are no active sanctions against an entity, if payment providers and banks adopt a risk-averse approach, it may be difficult to facilitate payments to Russia.

How far does each regime's extraterritorial reach extend?

A number of jurisdictions now have active unilateral sanctions regimes in place. Perhaps the best examples of extraterritorial reach are the United States, the United Kingdom, and the European Union. This is especially true in the case of the United States, where the international reliance on the dollar and how the country defines a "U.S. person" gives the country more extraterritorial global enforcement options.

Any correspondent banking relationship that provides US dollar clearing facilities will be very careful not to violate US sanctions. This will apply to euro-clearing EU institutions as well. This is one of the reasons why so many businesses around the world are wary of doing business with Russia.

Furthermore, the "nexus" between the United States and the Office of Foreign Assets Control (OFAC) is very broad, and may include the use of U.S. infrastructure. Secondary sanctions can be used by the US, particularly under the Countering America's Adversaries Through Sanctions Act (CAATSA), which means that even companies with limited direct exposure to the US should be aware of the potential impact of US sanctions.

How are European nations dealing with the current situation?

In general, Europe's political response to Russia's invasion of Ukraine has been one of unity, with nearly every European country condemning Russian aggression to some extent. Sanctions against Russian entities have been applied consistently by these countries.

Where sanctions differ between jurisdictions, it is because of their exposure to Russian oil and gas, or their trading in Russian wheat, for example. These differences between jurisdictions clearly add complexity, as they are driven by divergences in geopolitical agendas and focus.

When it comes to European sanctions, however, there is evidence of collaboration.

Take, for example, Switzerland, which is not a member of the EU. As a result of Russia's aggression, Switzerland has imposed broad sanctions on Russian oligarchs and the Russian central bank, as well as a ban on any exports that "could contribute to Russia's military and technological advancement."

Switzerland also adopted EU-mandated restrictions on Russian banks' access to the SWIFT payment network in March.

Switzerland's actions demonstrate the importance of individual country sanctions and how they fit into a larger, multilateral, and largely aligned and coordinated response from their European neighbors.

Firms must assess their global sanctions policy—that is, the lists they screen across all jurisdictions/centers if they are cross-jurisdictional—as well as any country-specific legal requirements that apply to customers or businesses in that jurisdiction.

What are your thoughts on the potential expansion of cryptocurrency transactions to circumvent sanctions, as well as the threat of strengthening the connection between Russia and China through UnionPay, which aims to circumvent Visa and Mastercard's ban?

It is reasonable to expect Russia to seek solutions to the current restrictions, and the use of cryptocurrencies to facilitate the movement of funds is one area that many are eyeing as a possible path.

Banks and other financial institutions should be on the lookout for possible evasion and circumvention red flags.

Corporate vehicles, shell companies, and the use of third parties are examples of these. Corporate vehicles have long been used to conceal ownership, as well as the countries involved and the source of funds. Shell companies are a clear threat because of their ability to conduct international wire transfers in countries other than those where the company is registered, while third parties provide a way to conceal the identities of sanctioned individuals.

Accounts that are newly established and attempt to conduct business with sanctioned institutions, as well as any increase in the formation of new companies in jurisdictions previously associated with Russian financial flows, should be closely monitored. Unusual foreign exchange transactions involving (indirectly) sanctioned Russian institutions will be scrutinized as well.

Finally, two key areas to keep an eye on are cryptocurrencies and assets, which can be used to circumvent sanctions without using traditional banking, and accounts with a sudden increase in transferred value. These should be flagged if they do not have a clear business rationale.

Investments must be approached with greater caution, but what are the most effective ways to mitigate the risks and avoid a sanctions violation?

It is critical that you stay current with your relevant jurisdiction's sanctions body's latest legislation, guidance, and lists.

Sanctions lists, general guidance, sanctions programs, country information, and a license application form are all available on the OFAC website.

The EU's sanctions map contains a helpful, easy-to-understand guide to the EU's current sanctions legislation.

Furthermore, the restrictive measures portal of the European Commission provides a detailed overview of the sanctions imposed on Russian entities.

The Office of Financial Sanctions Implementation (OFSI) of the United Kingdom has issued the following:

• Russia sanctions legislation

• OFSI guidance

• OFSI list (available in various formats)

• U.K. Finance is also an excellent source of UK-based sanctions guidance.

By fLEXI tEAM