Update on US Secondary Sanctions for Foreign Financial Institutions
Your Existing Compliance Program May Not Safeguard You from Sanctions Risks

As we have discussed in our previous publications, (on Sanctions Compliance and on Secondary Sanctions) sanctions compliance is becoming as relevant as FCPA anti-bribery and corruption compliance, in light of recent geopolitical developments and trends in international enforcement actions.  US jurisdictional powers are very broad and any link to the US (for example, by having a subsidiary, use of the US financial system, reliance on US-originated technology) means that any Israeli company with such nexus to the US should pay close attention to US sanctions enforcement.   

In addition, even companies that do not have any connection to the US, should still be aware of the implications of “secondary sanctions” under US law.  Secondary sanctions is a tool focused on transactions that do not have nexus to the US and may be legal in other jurisdictions.  US enforces secondary sanctions to deter non-US persons from circumventing the effect of primary sanctions and engaging in activities that are deemed contrary to the US national security interests. 

The Office of Foreign Assets Control (OFAC) applies secondary sanctions to non-US persons that lack US nexus for participating in a transaction with an individual included on OFAC’s Specially Designated National (SDN) list. OFAC enforces secondary sanctions not through criminal or civil penalties, like in the case of primary sanctions, but through denial of export licenses or access to the US financial system. In the most severe cases, a foreign person can itself be designated a san SDN.  For instance, a financial institution risks becoming the target of US sanctions itself, if determined by US authorities to have engaged in a targeted activity. 

We are seeing an increased use of “secondary sanctions” by OFAC as a result of Russia’s pervasive use of third counties to evade sanctions. Israeli companies should pay attention to those developments and assess potential implications of those sanctions for their business.  Some of the sanctionable activities include facilitation of a significant transaction on behalf of SDNs.  For Israeli financial institutions that also means, knowingly facilitating significant financial transaction on behalf of SDNs. 

On December 22, 2023,President Biden issued Executive Order (EO) 14114[1],which subjects foreign (non-US) financial institutions (FFIs) that engage in certain activities involving Russia’s broadly-defined military-industrial base to secondary sanctions risks.  EO 14114focuses on conduct that occurs wholly outside of the US and subjects an FFI to secondary sanctions risk not only for direct support to Russia’s specified sectors but also for indirect conduct, such as facilitating a customer’s dealings or providing services to a customer in furtherance of a transaction related to Russia’s specified sectors.  The latter is particularly challenging, as it exposes FFIs to sanctions risks based on facilitation of transactions with parties that are not themselves included on OFAC sanctions lists.  As such, these transactions may not be identified through a regular sanctions screening.  

To mitigate sanctions risks, FFIs should identify and minimize their exposure to any activity related to Russia’s specified sectors and anyone who may be supporting it.  This should be done in addition to baseline customer due diligence and anti-money laundering controls.  Institutions should review its customer base to determine exposure to the specified sectors of Russian economy and communicate compliance expectations to customers, including informing them that they may not use their accounts to do business with designated persons operating in the specified sectors or conduct any activity involving Russia’s military-industrial base.  The specified sectors have so far been defined to include: technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy. Other sectors may be determined to support Russia’s military-industrial base by the Secretary of the Treasury, in consultation with the Secretary of State.   

The US government is particularly concerned with Russia sanctions and export controls evasion through use of third-party intermediaries and transshipment points to circumvent restrictions.  To address these concerns, FFIs should be wary of certain typologies relevant for Russian sanction evasion, such as customers conducting business with newly formed Russian companies or newly formed companies in third-party countries known to be potential transshipment points for exports to Russia or companies or counter parties supposedly involved in production or import-export of sophisticated items with no business history or little-to-no web presence. 

Israeli financial institutions should carefully evaluate whether their existing compliance programs sufficiently safeguard them and are in line with the OFAC Sanctions Advisory,[2]issued on this subject concurrently with the EO 4114.  In addition, Israeli companies should evaluate their overall exposure to Russia in light of OFAC’s message that Russia-related activities pose increasingly greater US sanctions risks.  
[1] https://ofac.treasury.gov/media/932441/download?inline 

*The contents of this message, current at the date of publication, are for reference and general informational purposes only and do not constitute legal advice.  You should contact your attorney to obtain advice with respect to any particular legal matter.  You should not act or refrain from acting on the basis of information in this publication without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.   
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