US Making Russia Sanctions Enforcement 'High Priority,' Law Firms Say
The Biden administration is emphasizing enforcement of Russia sanctions and export controls, making industry compliance with trade restrictions increasingly important, law firms said. Businesses should be taking several due diligence steps to avoid being caught in Russia-related sanctions evasion attempts, they said, and also can take action to protect their business operations in the Russia and Ukraine regions.
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The U.S. in particular has made deterring sanctions evasion a “high priority,” Norton Rose said in a March alert. The firm pointed to the Treasury Department's Financial Crimes Enforcement Network, which issued a guidance and an alert this month to help companies better comply with sanctions (see 2203080016 and 2203170040). The notices, which include examples of red flags that could signal sanctions evasion attempts, underscore the large amount of resources the U.S. is dedicating to enforcement, Norton Rose said.
The firm expects the administration to analyze the steps companies are taking to “monitor and report on transactions that may be characteristic of sanctions evasion.” It also said U.S. prosecutors could specifically be looking at transactions involving shell companies, law firms that have “historically specialized in Russian clientele” or transportation service companies that are owned or have a nexus to sanctioned Russian elites. Those transport services could specifically be used to ship luxury goods to Russian oligarchs who now face strict export controls (see 2203110056), the firm said.
“Red flags listed in the Alert not only serve as a guide to what may constitute potentially suspicious transactions in this area,” Norton Rose said, “but are also an indication of the procedural areas that may be subject to future examiner review and evaluation.”
The FinCEN guidance places financial institutions “on notice” for a range of red flags that require monitoring, Harris Beach said in a March alert. Although financial firms and other companies should keep in mind that “not every transaction” involving a sanctioned person, country or entity is blocked, the firm said that calculus is growing more challenging. “The imposition of Russian and Belarusian sanctions has been rapid and substantial,” the firm said. “This may lead to complex analyses to determine whether a transaction is covered by the sanctions.”
FinCEN specifically noted that sanctioned Russian or Belarusian companies or people may try to evade sanctions through “non-sanctioned financial institutions throughout the world,” Harris Beach said, including through digital currency exchanges. The agency expects companies to “conduct appropriate risk-based customer due diligence" to catch potential sanctions evasion attempts, which may require the use of “innovative tools and solutions.”
And because the U.S. sanctions and trade restrictions are expected to affect “every facet of Russian life,” Pryor Cashman expects officials at the Treasury and Justice departments to enforce the sanctions beyond the Russian sectors explicitly stated by the U.S. “While it is tempting to think that the sanctions are really intended to target only certain industries, like the Russian energy or financial sector,” the firm said in a March alert, “DOJ and OFAC will likely seek to enforce these sanctions wherever applicable.”
The firm also pointed to several specific industries that could see an enforcement focus, including export restrictions on U.S. banknotes, prohibitions on Russian seafood and alcohol, export controls on luxury goods and general payments from Russian clients. The sanctions will “have a substantial impact on U.S. companies that are trying to grapple with how to operate their business dealings with Russian counterparties while also complying with U.S. sanctions,” Pryor Cashman said.
Companies should be reviewing whether they do business with any people or entities recently added to Treasury’s Specially Designated Nationals List, the firm said, “no matter how refined a compliance program a company has in place.” Companies may also need to review their “payment arrangements” with Russian clients to “evaluate the risk of non-payment going forward,” the firm said, and should probably update their compliance programs to account for the new sanctions.
This should include not only “adding new SDNs and [Sectoral Sanctions Identifications] to their existing compliance filters,” the firm said, “but also reviewing their contracting policies to ensure that the company’s contracts and due diligence are as protective as possible.”
Some businesses may turn to investment treaty protections to manage risk and recoup losses stemming from the sanctions and military conflict, Jones Day said in a March alert. Investment treaties can offer property protection in armed conflict zones, the firm said, including for destruction of physical property and “lost profits from disrupted business operations.”
Although Russia doesn’t hold a bilateral investment treaty with the U.S., American businesses can benefit from treaty protection if they have a company established in a third country that does hold a treaty with Russia, the firm said, such as the U.K., Switzerland, Japan, Canada and others.
Jones Day also noted that Russia has in the past been “unwilling” to comply with awards stemming from investment treaties, so awards have typically been enforced in a third state where Russian parties hold assets. This could mean seized Russian aircraft, ships and shares in foreign companies, the firm said.