As the war in Ukraine escalates, the United States, by Executive Order from the President, has issued increasingly restrictive economic sanctions against Russia. As the volatility increases, the challenges facing U.S. financial institutions to avoid processing prohibited transactions also increases. As the effective date for several sanctions approaches, individuals and businesses may attempt to send or receive funds from Russia in connection with transactions that were consummated prior to the issuance of sanctions. This raises several questions from the industry about whether or not transactions should be processed, blocked, or rejected.
TCA encourages its clients to visit the Treasury’s webpages Russian Harmful Foreign Activities Sanctions and Ukraine-/Russia-related Sanctions | U.S. Department of the Treasury. More information about specific targets of sanctions is found in the Treasury’s Press Release. These sites provide the text of all Executive Orders, frequently asked questions and general licenses. It is important to understand the various sanctions and directives that are listed on this website.
Initial sanction orders in February 2022 sought to block assets of certain members of Russian government and oligarchs, and to block transactions from certain Russian banks from the U.S. financial system. The names of sanctioned persons, businesses, and banks were added to the OFAC Specially Designated National (SDN) List. These sanctions also restricted U.S. banks from establishing foreign correspondent relationships with sanctioned banks or from extending credit to them.
As Russia continued its aggression against the sovereignty of Ukraine, The United States levied additional sanctions to restrict the import of several goods from Russia, most notably petroleum. This presents additional risk to U.S. financial institutions, as a transaction to or from Russia could involve a business that is not subject to sanctions but is for import or export of prohibited goods. Financial institutions that elect to process funds transfers connected to Russia should perform significant due diligence to ensure that they understand the purpose of those transactions.
Sanctions do not completely restrict transactions to and from Russia. There are several “general licenses” which allow specific targeted transactions to be conducted. For example, several general licenses were issued for “wind-down” transactions which allow businesses that had contracted prior to the sanctions to purchase prohibited Russian exports to complete transactions that are already consummated. Certain transactions to U.S. persons residing in Russia are still permitted. Many of these general licenses have expiration dates, so if an institution chooses to process a transaction involving Russia, it is important that legal counsel review the terms of the license and/or the institution contacts OFAC to ensure that a transaction does not violate a sanctions order or that the general license being used no longer applies.
To mitigate the risk to your institution, TCA recommends that you take the following steps:
- Review and test screening software following OFAC list updates to ensure that you are using the most current list. Test recently added names to the SDN list and include misspellings to evaluate the effectiveness of the software to identify potential matches, even if staff enters a name incorrectly.
- Provide reminders to staff responsible for processing transactions and opening accounts of the bank’s OFAC procedures for performing scans and escalating potential matches to appropriate staff prior to processing transactions.
- Know the difference between blocking and rejecting. Although institutions may choose not to process transactions involving Russia during this time to mitigate risk of an OFAC violation, if we receive a request to process a transaction, we still must evaluate whether the funds involved in the request would be subject to blocking. We cannot simply tell the customer we won’t process a transaction if funds are subject to sanction requiring blocking
- When in doubt, contact OFAC and legal counsel to evaluate the must current sanctions language and to determine a course of action.
Ensure the Board is aware of the steps taken to understand the Sanctions and the institution’s controls to ensure compliance.
Having trouble navigating the OFAC and Sanctions? TCA can help. Contact us at [email protected] or at (800) 934-7347.
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