Russia-related sanctions: US Issues important advisory on ensuring compliance with Crimea sanctions regime and expands sanctions designations

The US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) recently added a number of new persons and individuals to the US's Specially Designated Nationals ("SDN") and Sectoral Sanctions Initiative ("SSI") lists. OFAC also issued new guidelines to strengthen compliance with the existing Crimea sanctions regime. While Treasury Department officials noted that the measures were intended to “maintain,” not “escalate,” the sanctions regime, the new OFAC guidelines put financial institutions on notice that OFAC will focus on tightening enforcement of the Crimea sanctions and preventing their evasion.

New OFAC Crimea Guidelines

OFAC's guidance regarding enforcement of the Crimea embargo follows an OFAC investigation that found evidence of on-going attempts to evade the sanctions regime created by Executive Order (“E.O.”) 13685 on December 19, 2014, which prohibits virtually all transactions by US persons or from US soil with Crimea. OFAC highlighted parties’ omission or obfuscation of Crimean address information in Society for Worldwide Interbank Financial Telecommunications (“SWIFT”) messages, references to the relevant addresses being within Russia rather than Ukraine, and misidentification of Crimean counterparties in trade transactions.

OFAC urged US financial institutions to exercise caution and mitigate their risk by taking the following specific steps:

• Monitoring: Banks should broaden the scope of their transaction monitoring systems to filter for a wider array of place names and locations in Crimea.
• Investigation: Where individuals or entities have previously violated or attempted to violate the Crimea sanctions or where payment instructions lack complete address information, banks should exercise caution and request additional identifying information.
• Communication: Banks should clearly communicate the prohibition on the direct or indirect exportation or re-exportation of goods, technology, and services from the United States to Crimea to their partners.

OFAC’s recommendations effectively shift more of the burden in accurately identifying and interdicting prohibited transactions to American financial institutions. While no fines have yet been issued under the Crimea sanctions regime, the US and EU have been active in sanctions enforcement, imposing fines reaching into the hundreds of millions of dollars in the last year.

Expanded Sanctions Designations

OFAC also added 26 individuals and entities to the SDN List and 35 entities to the SSI List pursuant to the authority of four previous executive orders. Treasury Department officials cited the additions as necessary to maintain the effectiveness of the current sanctions regime until the full implementation of the Minsk Agreement by Russia.

The additions to the SDN list were largely limited to associates of previously-designated individuals and entities. Thirteen individuals and entities were targeted specifically for their association with persons viewed by OFAC as serious and sustained violators of the sanctions regime. These included associates of previously designated Russian billionaire gas trader Gennady Timchenko and Putin ally Boris Rotenberg, as well as individuals and entities linked to Russian arms manufacturer Kalashnikov Concern. Four former Yanukovych-regime officials and associates, as well as five Crimean port operators and one ferry operator were also included.

The 35 additions to SSI List consisted entirely of subsidiaries majority-owned by Russian state development bank Vnesheconombank and Russian state oil concern Rosneft. The subsidiaries were already governed by E.O. 13662 (July, 2014), but are now specifically named for the first time.

Conclusions

The new guidelines and additions to the SDN and SSI Lists likely were timed to reinforce recent efforts by the United States’ international partners, including the EU’s decision last month to extend sanctions against Russia that were due to end in July and Canada’s move to supplement its own sanctions regime with the addition of 14 legal entities and three individuals to its sanctions list. OFAC's actions indicate that, absent a durable resolution of the unrest in Ukraine, US sanctions relating to Russia and Ukraine are likely to be tightened further in the future.

For further information, please contact Scott Balber, Partner, Susannah Cogman, Partner, Jonathan Cross or your usual Herbert Smith Freehills contact.