If compliance officers were expecting a softening of Ukraine-related sanctions against Russia, they may be in for an unpleasant surprise. Recent times have only exposed new efforts to punish Moscow for its hostile actions, which may increasingly complicate the day-to-day jobs for compliance suites.
On March 15, two days short of the five-year anniversary of 2014 sanctions against Russia following its annexation of Crimea, the U.S., E.U., and Canada took coordinated action to further sanction Russia. In response to continued aggression against Ukraine, the Western powers have imposed sanctions on individuals involved in the November 2018 attack on Ukrainian naval vessels near the Kerch Strait. Additionally, the U.S. imposed sanctions on six Russian defense firms, including shipbuilding companies; two individuals involved in the November elections in Russia-controlled eastern Ukraine; and two Russian energy and construction companies operating in Crimea. On March 18, the Australian authorities also took similar measures against several Russians over the Kerch Strait incident.
While these actions underscore the commitment of governments around the world to counter Russia’s continued destabilizing behavior five years after its annexation of Crimea, many companies and banks find it challenging to avoid breaching Ukraine-related sanctions and are scrambling to ensure licenses amidst the increasingly complex legislation.
2014-2015 Sanctions Against Russia
Since their inception in March 2014, Ukraine-related sanctions against Russia have escalated from a few simple visa restrictions to targeting the Russian economy and large corporates as well as key Russian officials and business figures close to the Kremlin.
|Key Dates in Ukraine-Related Sanctions|
|U.S. (and E.U.) imposes visa restrictions and asset freezes against 21 officials in response to annexation of Crimea.|
|U.S. imposes sanctions on 7 officials, including Igor Sechin and 17 companies linked to Putin.|
|U.S. imposes sectoral sanctions aimed at energy, defense, and finance sectors of the Russian economy.|
|U.S. places restrictions on the export of Russian oil and gas technologies.|
|Russia bans import of most food products from U.S. (and the E.U.)|
|U.S. companies banned from supplying goods to some of Russia’s biggest companies.|
|Ukraine peace talks (Minsk II) begin.|
According to international trade attorney, Scott Nance, “The Russia sanctions represent something unprecedented in U.S. sanctions. For the first time, the U.S. has designated as SDNs otherwise-respectable businessmen, not because they are alleged to have any connection with events in Ukraine, or because they represent any threat to U.S. security, but only as a means of putting pressure on President Putin.”
The U.S. Treasury has now imposed Ukraine-related sanctions on more than 650 Russian individuals, entities, and vessels. The consequence has been a crippling financial crisis in Russia and the decline of Russian currency.
Broadly speaking, the current Ukraine-Related sanctions and export controls against Russia are as follows:
- Visa restrictions and asset freezes on key individuals close to President Vladimir Putin, certain government-owned entities, or directly involved in Russian aggression against Ukraine;
- “Sectoral” sanctions restricting U.S. persons from transacting or dealing in “new debt” with a maturity of greater than 14 days of designated Russian banks and defense companies; “new debt” with a maturity of greater than 60 days of designated Russian energy companies; and “new equity” issued by designated Russian banks
- Export restrictions targeting the Russian defense and energy industries.
- A total ban on transactions and economic cooperation with Russian-occupied Crimea.
In response, the Kremlin has retaliated more than once by imposing its own visa restrictions, expelling Western diplomats from its borders, and banning the import of most food products from the U.S. as well as the E.U. The latter ban on food was originally imposed in August 2014 and is, in fact, still in force today.
Recent Sanctions Against Russia
In recent years, the U.S. has further increased Russian sanctions by continuing to designate Russian individuals and companies as well as passing laws that impose sanctions against Moscow.
On August 2, 2017, President Trump signed into law the Countering America’s Adversaries Through Sanctions Act (CAATSA), which imposed sweeping new sanctions on Russia its Title II: The Countering Russian Influence in Europe and Eurasia Act of 2017 (CRIEEA). Among the requirements of CAATSA was to provide certain lists – one naming those individuals that are part of the Russian defense and intelligence sector, and the other a list of “oligarchs and parastatal entities” close to the Russian government. These lists were to serve as a starting point for further sanctions against those individuals named. The law also restricts the power of the Executive branch by including a congressional review mechanism that will allow Congress to potentially block the President from easing Russian sanctions. As of the start of 2019, the Trump Administration has made 29 designations based on new sanctions authorities in CRIEEA, relating to cyber attacks, human rights abuses, and arms sales.
Despite relieving Russian aluminum company – Rusal – of sanctions in early 2019, Russian sanctions show few signs of slowing. Most recently, in February 2019, a bipartisan group of senators has introduced new legislation called the Defending American Security from Kremlin Aggression Act (DASKAA) to punish Russia for interfering in U.S. elections, and for and aggression in Ukraine. If it succeeded, the bill would impose sanctions on Russian banks, new debt, natural gas investments, key political figures and oligarchs.
|Recent Sanctions Against Russia|
|U.S. President signs CAATSA into law, which imposes new sweeping sanctions on Russia|
|U.S. publishes “Kremlin dossier”, a list of 210 people including: all of Russian government, presidential administration, heads of state firms, and oligarchs|
|U.S. makes first use of CAATSA, imposing sanctions on 19 individuals for malicious cyber-related activities in connection with 2016 U.S. elections.|
|U.S. (and over 20 Western countries) expels 60 diplomats and closes Russian consulate in Seattle.|
|U.S. designates 38 Russian business tycoons, including several oligarchs with business interests around the world|
|2019 (Jan)||OFAC lifts sanctions on three entities associated with Oligarch Deripaska, including the 2nd largest aluminum producer in the world, Rusal.|
|Congress introduces the Defending American Security from Kremlin Aggression Act (DASKAA)|
|U.S. EU, Canada and Australia impose sanctions on individuals who orchestrated the November 2018 attack on Ukrainian naval vessels near the Kerch Strait. Additionally, the U.S. imposes sanctions on 6 Russian defense firms; 2 individuals involved in the November elections in Russia-controlled eastern Ukraine; and 2 Russian energy and construction companies operating in Crimea.|
When asked, U.S. officials state that Russian sanctions have been broadly effective, and key European officials are on the record as saying that the sanctions will only be removed upon full implementation of Minsk II.
Future Russian Sanctions and Implications for Compliance Suites
The shaky political relationship between the U.S. and Russia has led to a number of challenges for compliance suites and international companies looking to remain compliant with global rules.
Glenda Juliano, AML & Trade Control Analyst for Franklin Templeton, shares her recent experience: “Not long ago, I conducted an exposure review on the Russia market. While the geopolitical landscape remains extremely volatile, there are many characteristics that also indicate sanctions are here to stay but not necessarily permanent. One change we recently saw, for the first time in many years, Rusal being de-listed. In my opinion, this indicates positive change.”
Other experts in the field were not so optimistic about Russian sanctions changing for the better. Thomas E Nollner, Principal at Financial Forensics Limited, LLC thinks that, “as the different investigations being currently conducted evolve, we will see that the Russians have been heavily involved with hacking our nation’s computer systems and trying to influence our political system. Based on these factors, I see sanctions related to the Russian nation and to Russian nationals increasing.”
Attorney Scott Nance agrees with Mr Nollner: “The Russia sanctions are so caught up in internal American politics that it is impossible to predict where they will go, however, the evidence is very clear that Russia in fact sought to help Trump in the 2016 election. If the Democrats win in 2020, there is a good chance that sanctions against Russia will tighten.”
But what does this mean for compliance suites and what will the challenges be going forward?
In the future, Tom Nollner sees regulators and investigators “focusing more of their time and resources on institutions that has ANY type of financial relationship with Russia, Russians, and any country closely related to Russia. He goes on to say that, “if [he] was the compliance officer of a financial institution, [he] would closely review any accounts, transactions, relationships or any type of business that the institution had with the aforementioned activities as well as any country or person who is in any way close to or influenced by Russia or the Russians.”
According to Glenda Juliano of Franklin Templeton, “the risks associated with dealing with individuals/financial institutions in Russia is two-fold: regulatory and reputational. She continues by saying that, “it takes great understanding of the application of sectoral sanctions to be able to navigate the waters so compliance officers should be curious and take steps to gain understanding of sectoral sanctions and how they apply to their specific clients/situation and should always partner with AML. She concludes with a warning that, “the lack of expertise in intricacies of identifying UBO’s, aggregating ownership to apply 50% rule, double use products and such, can potentially lead to OFAC enforcement actions and reputational damage.”