On June 12, 2024, in performance of its Group of Seven (G7) commitments, the U.S. government announced significant new and expanded sanctions and export controls on Russia, including the broadening of the U.S. Department of the Treasury's Office of Foreign Assets Control's (OFAC) authority to impose secondary sanctions under its Russia Harmful Foreign Activities Sanctions Regulations (RuHSR). 

• Pursuant to Executive Order (E.O.) 14024 (which was amended in December 2023), OFAC is authorized to impose blocking sanctions or correspondent banking restrictions (so-called "secondary sanctions") on foreign financial institutions (FFIs) that engage in "significant" transactions involving, inter alia, "Russia's military-industrial base." OFAC has now issued revised guidance defining the term "Russia's military-industrial base" to include: 
  • All persons blocked pursuant to E.O. 14024
  • Any person operating in the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian Federation economy (and other sectors as may be determined pursuant to E.O. 14024)
  • Individuals and entities that support the sale, supply, or transfer, directly or indirectly, of critical items identified in determinations pursuant to E.O. 14024 to the Russian Federation 
• OFAC has issued guidance with respect to these new secondary sanctions in Frequently Asked Questions (FAQs) 1181-1182 and amended FAQs 1146-1148 and 1151-1152. The FAQs include a list of factors that OFAC will consider in determining whether a transaction would be "significant," describe the types of activity for which an FFI can be sanctioned (such as by maintaining accounts for persons sanctioned under E.O. 14024), and confirm that FFIs may continue to conduct or facilitate any transaction(s) or provide any service related to activities that are otherwise authorized or exempted (such as those under General License (GL) 6D).
• OFAC also issued Updated Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia's Military-Industrial Base, which provides, inter alia, examples of activities that could expose FFIs to sanctions risk and examples of controls to mitigate such risk, such as restricted party screening and reviewing an FFI's customer base for certain risk factors.

Key Takeaways

• This expanded threat of secondary sanctions seems particularly geared towards discouraging FFIs in countries that may not publicly adhere to U.S. sanctions from facilitating trade in goods that Russia has sought to obtain to use in its war with Ukraine. Recent designations of entities in China, India, and the United Arab Emirates may suggest that the U.S. government is providing a warning to these countries about the risk of supporting certain activity with Russia, including financial institution activity.
• While other sanctions programs contain a secondary sanctions authority (such as Iran and under Ukraine-/Russia-related sanctions), OFAC has provided very general guidance on what it considers a "significant transaction." Further, since the announcement on June 12, OFAC has not yet designated an FFI under this expanded authority. The first wave of designations under the expanded authority may provide insight into the types of transactions that OFAC deems as "significant" with respect to RuHSR prohibitions.
• While FFIs in particular should be mindful of this new expanded authority and OFAC's updated guidance, persons who hold bank accounts with FFIs known to support activity with or involving Russia (especially those that may support sanctioned persons or Russian technology or defense firms) should carefully review  guidance and be on the lookout for future designations of FFIs under the expanded secondary sanctions authority, as anyone with an account at an FFI designated under this authority may find it difficult to continue to their banking relationship. While OFAC GLs authorizing certain "wind down" activities involving designated FFIs may be issued alongside future designations, such licenses will be likely be highly limited both in terms of the scope of permissible wind down activities and their duration.

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Laura Deegan, ldeegan@milchev.com, 202-626-5942

Caroline J. Watson, cwatson@milchev.com, 202-626-6083

Melissa Burgess, mburgess@milchev.com, 202-626-5914

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Annie Cho, acho@milchev.com, 202-626-1570

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