The speed at which sanctions were imposed left many questions unanswered, resulting in a flurry of calls and messages to attorneys who themselves were trying to understand the ramifications.
Within a week of Russia’s invasion of Ukraine, businesses around the world abandoned ties with Russia to comply with some of the toughest and most coordinated sanctions to date. The speed at which sanctions were imposed left many questions unanswered, resulting in a flurry of calls and messages to attorneys who themselves were trying to understand the ramifications. As with all rapidly changing situations, each business and its dealings are multi-layered and therefore the answers aren’t always straightforward.
Enhanced Due Diligence
It is advisable for all U.S. businesses and legal counsel to educate themselves on the latest sanctions and impose additional protocols for ensuring compliance. The U.S. Department of Treasury website includes an up-to-date resource center to serve as a starting point, but compliance teams should conduct an assessment of their current relationships. Sanctions particularly block Russian individuals and businesses from interacting with the U.S. financial system, including prohibiting transactions.
Nesting, the hiding of accounts within other bank accounts, is of particular concern, as is the “stripping” of identifying information on wire transfers. The tactic makes it difficult to trace transactions and imposes a challenge for business owners and financial institutions. Enhanced due diligence requirements for existing and new customers with ties to Russian businesses or individuals will become imperative. Many financial institutions are also increasing or enhancing internal training and creating special teams to handle these challenges.
It is worth noting that many countries, especially those in Latin America, do not have processes in place to enforce sanctions. They have not followed the example set by the United States, Canada, or the EU, and are continuing business as usual with Russia. U.S. corporations could inadvertently expose themselves through their correspondent relationships and should be particularly careful when evaluating these relationships.
Regulators are particularly worried Russia may try to evade sanctions through the use of crypto and other forms of virtual currency. The White House specifically highlighted virtual currency as a sanction evasion in a March 11 document. The fact sheet goes on to say the Treasury is closely monitoring transactions in both currencies – traditional fiat and virtual—and taking enforcement action as needed.
The Office of Foreign Asset Control (OFAC) is also concerned about ransomware attacks. Russia’s well-documented history of hacking and demanding the usage of blockchain technology to mask ransom payments is expected to increase. OFAC joined other U.S. government agencies in discouraging payment to hackers and warned that liability will fall on the corporation if they are found to be making payments to sanctioned entities.
Sanction Violation Repercussions
Despite the uncertainty and newness of the conflict, sanction violation penalties are well established. Companies, financial institutions, and corporations who choose to continue to transact with Russian entities risk having their assets frozen, facing stiff financial penalties, and reputation damage.
Despite the penalties, some corporations including banks and other financial institutions are planning to stay, even if in a limited capacity. Recent reports indicate Citigroup (C.N), JPMorgan Chase & Co. (JP.N), and Goldman Sachs Group (GS.N) are in fact choosing to stay despite current sanctions. Corporations with significant legal departments and deep pockets may be more risk-tolerant and able to navigate the nuances of sanctions compliance.
Those willing to roll the dice may reap the rewards. Financial institutions and others will have little competition and a clear advantage when Russia re-enters the global market. In the case of banks, maintaining a presence allows them to keep their licenses, which in itself is a difficult and laborious procedure. Even if operations are limited and they maintain minimum manpower, these players will have a clear leg up when the conflict is resolved.
Full article published on Law.com