In a national address on Thursday, President Joe Biden unveiled a number of "severe" sanctions on Russia to cut the country off from financial markets, announcing new restrictions on the country's largest banks and additional members of Russian President Vladimir Putin's inner circle.
The U.S. earlier this week had rolled out a range of sanctions that blocked transactions with separatist regions in eastern Ukraine, two Russian banks and dozens of their affiliates, and various individuals.
Biden said Thursday that he has extended the sanctions to block a handful of Russian banks that together hold more than $1 trillion in assets — including its largest and second-largest banks, Sberbank and VTB Bank, and their subsidiaries — from doing business in the U.S., along with additional export controls and blocks of Russian elites who "personally gain from the Kremlin's policies."
"That means every asset they hold in America will be frozen," Biden said. Together with NATO allies, "We will limit Russia's ability to do business in dollars, euros, pounds and yen," Biden added, hindering Russia's ability to be "part of the global economy" and helping to cut off funding to its military.
The U.S. sanctions target nearly 80% of all banking assets in Russia, the U.S. Department of the Treasury said in a statement Thursday. And Russian financial institutions conduct about $46 billion worth of foreign exchange transactions globally, 80% of which are in U.S. dollars, the Treasury noted.
"The vast majority of those transactions will now be disrupted," according to the statement.
But attorneys who specialize in economic sanctions told Law360 that the stricter sanctions, which Biden had previously reserved to maintain leverage on Putin to deter invasion, could also have economic impacts on the entire world, including serious compliance burdens on U.S. and other multinational banks.
"When you have an expansion of a [sanctions] program — any time you're increasing the volume and complexity — you will need more resources to tackle that," said Alexandra Baj, a Steptoe & Johnson LLP partner and deputy chair of its international trade and regulatory compliance group.
Biden pointed out that the sanctions sent Russia's stock markets plunging while causing its borrowing rates to spike. But the Dow Jones Industrial Average was also down more than 500 points Thursday before swinging into the green by market close, serving as a reminder that the economic impacts of the invasion and resulting sanctions don't operate in a vacuum.
For large U.S. and other multinational banks, attorneys said, the level of complexity and the costs to financial institutions of complying with the new sanctions have increased — and they're under a deadline. U.S. financial institutions must stop processing transactions involving the designated financial institutions and reject such transactions by March 26 unless certain exemptions apply, according to the Treasury statement.
Before Thursday, the Biden administration had been reserving some of the toughest sanctions available to maintain leverage against a Russian invasion of the Ukraine, noted James Treanor, special counsel with Cadwalader Wickersham & Taft LLP whose specialties include U.S. economic sanctions.
"There was an incentive to hold off on the most severe sanctions, given their collateral impacts on businesses in the U.S., Europe and elsewhere," Treanor said.
The sanctions "could prove to be a real compliance challenge" to U.S. banks, he added, increasing the volume of transactions that must be blocked and the number of relationships affected.
"Some of it will be making sure you have the systems and software in place to handle it," Treanor said. "But there could be more of a hands-on, case-by-case approach demanded by certain sanctions that will be more people intensive, which could require shifting resources or potentially bringing on additional compliance staff."
In addition, Treanor noted that while the initial sanctions imposed earlier this week had fully blocked transactions with designated Russian individuals, the larger, more impactful sanctions could come with certain carveouts, exemptions and wind-down periods.
"Despite the best efforts of the [U.S.] Treasury and [Office of Foreign Assets Control], there will be gray areas and ambiguities to how the sanctions apply to different scenarios," he said. "My hope is you would have a wind-down period and other authorizations to give both the industry and regulators time to understand how the sanctions apply in practice."
The biggest initial challenge will be identifying the vast array of companies, entities and individuals that are covered by the sanctions, attorneys said.
Under OFAC's 50% Rule, all majority-owned subsidiaries of sanctioned banks are also subject to restrictions. Banks will need to implement procedures to screen those entities too, and under OFAC rules must report any blocked or rejected transactions within 10 business days.
"The biggest resource demand is the effort to rapidly identify every exposure to one of these new sanctions targets, lock it down, freeze it and prevent them from, say, making a withdrawal from an account," said David Stetson, a Steptoe partner and former senior lawyer with OFAC. "The reporting requirements are the tail end of that once you've found the exposure and have locked it down."
To screen large, complex Russian institutions, U.S. banks will need to monitor transactions funneled through subsidiaries with different IT systems or customer databases, Stetson noted. The Biden administration has also imposed regional sanctions, which will require screening for keyword searches across transaction information to spot potential red flags, such as city and airport names, he said.
In instances where entities attempt to obscure the origins of payments or wire transfers, "that becomes a cat-and-mouse situation," Stetson said, noting that OFAC has in the past doled out penalties against non-U.S. financial institutions for stripping out that information.
Among U.S. banks, the big entities that deal most with Russia's banking system are bound to be most heavily hit by the compliance burdens of the sanctions, attorneys said.
"The large international banks that operate through the U.S. and other large international banks that rely on U.S. branches all will be presented with very significant compliance challenges," said Andrew S. Jacobson, a Seward & Kissel LLP senior associate and member of the firm's economic sanctions and cross-border regulatory practice. "The same thing can be said with energy companies importing Russian natural gas [and] transportation companies."
Generally, financial crime compliance costs will increase as more sanctions are brought and as they increase in complexity, attorneys noted. One obstacle will be implementing screening tools to track the dozens — if not hundreds — of subsidiaries of the sanctioned Russian banks, Jacobson noted.
And when it comes to screening the transactions of Russian elites, the task becomes particularly tricky and burdensome, added Baj of Steptoe.
"Russia is a complicated place to work because there's less transparency often in ownership and there's so much ownership concentrated among what Biden described as Russian elites, with many different layers," Baj said. "It can be complicated trying to figure that out."
U.S. institutions and multinationals with operations in the U.S. have historically faced hefty fines for failing to support economic sanctions, in some cases paying billions of dollars in penalties through deferred prosecution agreements with the U.S. Department of Justice tied to anti-money laundering charges.
But some signs suggest that banks may have gotten the message. Projected financial crime compliance spending by U.S. financial institutions increased one-third to $35.2 billion in 2020 compared to the previous year, according to a recent report from LexisNexis Risk Solutions. LexisNexis Risk Solutions is owned by RELX, parent company of Law360.
Big banks have undergone a major shift in compliance culture, leading to a "culture of understanding sanctions" and making them more equipped to comply with the new sanctions requirements than ever before, said Michael Parker, head of the anti-money laundering and sanctions practice at Ferrari & Associates PC and a former federal prosecutor with the DOJ's money laundering and asset recovery unit.
"I think the plumbing is there to understand what needs to be done going forward," said Parker, who is also a former OFAC sanctions investigator. "There's a high degree of sophistication around understanding the requirements of economics sanctions requirements and who they need to block, and that's been part of the maturation of the financial services industry."
--Editing by Alanna Weissman and Emily Kokoll.
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