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DOJ Launches “Task Force KleptoCapture” in Response to Russian Invasion (March 9, 2022)

Over the last several days, the United States and allies in North America, Europe, and Asia have announced a sweeping expansion of the sanctions levied against Russia and affiliated entities and individuals in the wake of Russia’s invasion of Ukraine.  The additional sanctions target Russia’s largest financial institutions; impose further prohibitions related to new debt and equity for significant state-owned enterprises; and block transactions with Russian President Vladimir Putin, Minister of Foreign Affairs Sergei Lavrov, and additional Russian elites and their family members.  The U.S. Commerce Department similarly implemented stringent export control restrictions that will severely restrict exports to Russia of critical U.S.-origin technologies, as well as certain foreign direct products (FDPs) of such technologies.

In addition to sanctioning Russian targets, the Department of Treasury also announced blocking sanctions against Belarusian individuals and entities, after Russian forces crossed into Ukraine last week from Belarusian territory.

The sanctions landscape remains fluid as Russian forces continue their assault on Ukraine.  Over the weekend, the United States and its allies announced their intention to impose additional measures, the details of which are just coming into focus.  These include the imposition of full blocking sanctions on the Russian Direct Investment Fund, a sovereign wealth fund, as well as the removal of some Russian banks from the SWIFT financial messaging network that links much of the world’s financial institutions and facilitates most international financial transactions.  Further sanctions, including the ratcheting up of existing measures, could be imposed as necessary to exert additional pressure on the Putin regime if fighting continues or worsens.

This rapidly expanding global sanctions framework poses significant compliance challenges for financial institutions and companies with touchpoints in Russia and Belarus.  This article summarizes the sanctions imposed as of Monday morning, February 28, and suggests some practical steps that companies can take to respond to the changes in this space.

Overview of Most Recent U.S. Measures

Financial Institutions. The most notable development regarding financial sanctions was the announcement over the weekend that a number of Russian financial institutions, including the Central Bank of the Russian Federation (a.k.a., the Bank of Russia or Bank Rossii) will be removed from the SWIFT financial messaging system.  While not the complete removal of all Russian financial institutions from SWIFT that some have described as a sanctions “nuclear option,” these more targeted SWIFT sanctions are expected to seriously degrade the ability of the targeted financial institutions to participate in the global financial system.  As of the publication of this post, the targeted banks had yet to be identified.

Prior to the SWIFT sanctions development, new sanctions announced on Thursday included various measures targeting a number of Russia’s more significant banks, including Russia’s two largest financial institutions, the Public Joint Stock Company Sberbank of Russia (Sberbank) and VTB Bank Public Joint Stock Company (VTB Bank), as well as other large banks.

Sberbank, which is majority owned by the Russian government, is the largest financial institution in the country, and holds approximately one third of all bank assets in Russia.  A directive issued by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) requires all U.S. financial institutions to close, by 12:01 AM on March 26, 2022, all Sberbank correspondent or payable-through accounts (CAPTA), and to reject any future transactions involving Sberbank or its foreign subsidiaries, cutting Sberbank off from the U.S. financial system.  These measures also apply to 25 Sberbank affiliates—including banks, trusts, insurance companies, and other businesses—as well as any entities in which Sberbank has a 50% or greater ownership interest.  Notably, Sberbank has not been added to the Specially Designated Nationals (SDN) list.  Thus, U.S. companies may continue some non-U.S. dollar business involving Sberbank outside the United States, to the extent that business complies with the CAPTA directive and any other applicable sanctions.

By contrast, OFAC on Thursday imposed full blocking sanctions on several other major Russian financial institutions, including VTB Bank, the country’s second-largest financial institution, along with 20 of its subsidiaries.  Three additional financial institutions were added to the SDN list, as well: the Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie) and 12 of its subsidiaries, including financial services companies in Russia and Cyprus; the Open Joint Stock Company Sovcombank (Sovcombank) and 22 of its subsidiaries in Russia and Cyprus; and the Joint Stock Commercial Bank Novikombank (Novikombank).  The addition of these entities to the SDN list freezes any of their assets in the U.S. financial system, and prevents U.S. persons from transacting with them.

In conjunction with these designations, OFAC issued a number of general licenses authorizing certain actions with respect to these entities, including:

  • Wind down transactions involving Otkritie, Sovcombank, VTB Bank and their subsidiaries—but not Novikombank—through 12:01 AM on March 26, 2022.
  • Certain transactions “related to energy” for VTB Bank, Otkritie, Sovcombank, Sberbank, as well as VEB, a financial institution sanctioned earlier last week.
  • Wind down transactions for existing derivative contracts with VTB Bank, Otkritie, Sovcombank, Sberbank, and VEB through May 25, 2022;
  • Divestment by U.S. persons of debt or equity holdings in those same financial institutions through 12:01 AM on May 25, 2022; and
  • Rejection—rather than blocking—by U.S. persons of transactions with Otkritie, Sovcombank, and VTB Bank through 12:021 AM on March 26, 2022.

On Monday morning OFAC issued a new directive prohibiting any U.S. person involvement in any transaction involving the Bank of Russia, the National Wealth Fund of the Russian Federation or the Ministry of Finance of the Russian Federation, including foreign exchange transactions involving them. It also designated the Russian Direct Investment Fund and a related venture fund as SDNs subject to full asset blocking.

Debt and Equity Restrictions.   The Treasury Department on Thursday also imposed new debt and equity restrictions on thirteen entities the White House described as being among “the most critical major Russian enterprises,” with “estimated assets of nearly $1.4 trillion.”  These restrictions are designed to prevent the covered entities from raising money through the U.S. market.

Specifically, U.S. persons and those within the United States are prohibited from transacting or dealing in new debt (of longer than 14 days’ maturity) and new equity issued on or after March 26, 2022 by the targeted entities.  These entities include:

  • Sberbank (financial institution);
  • Gazprombank Joint Stock Company (financial institution);
  • Joint Stock Company Russian Agricultural Bank (financial institution);
  • Public Joint Stock Company Gazprom (natural gas company);
  • Public Joint Stock Company Gazprom Neft (oil producer and refiner);
  • Public Joint Stock Company Transneft (manages petroleum-related pipelines);
  • Public Joint Stock Company Rostelecom (telecommunications company);
  • Public Joint Stock Company RusHydro (power company);
  • Public Joint Stock Company Alrosa (diamond mining company);
  • Joint Stock Company Sovcomflot (maritime and freight shipping company);
  • Open Joint Stock Company Russian Railways (railroad company);
  • Joint Stock Company Alfa-Bank (financial institution); and
  • Credit Bank of Moscow (financial institution).

Putin, Lavrov, and Russian Elites.  Noting that it is “exceedingly rare for Treasury to designate a head of state,” the Biden administration on Friday nevertheless joined Great Britain and the European Union in announcing blocking sanctions against Russian president Vladimir Putin.  The move was largely symbolic, as Mr. Putin is not believed to have any significant U.S. holdings.  Russian Minister of Foreign Affairs Sergei Lavrov and additional members of Russia’s Security Council—Sergei Shoigu and Valery Gerasimov—were also added to the SDN list.  Shoigu and Gerasimov join 11 other members of the Security Council previously sanctioned by the United States.

Late last week, Treasury continued to target Russian elites with close ties to Putin, and on Thursday designated or redesignated additional oligarchs and their family members.  These individuals included: Special Presidential Representative for Environmental Protection, Ecology, and Transport Sergei Borisovich Ivanov and his son Sergei Sergeevich Ivanov; Secretary of the Russian Security Council Nikolai Platonovich Patrushev and his son Andrey Patrushev, who works in Russia’s energy sector; and Rosneft CEO Igor Ivanovich Sechin and his son Ivan Igorevich Sechin.  Elites from the financial sector and their family members were also added to the SDN list, including Sberbank’s First Deputy Chairman of the Executive Board Alexander Aleksandrovich Vedyakhin; and VTB executives Yuriy Alekseyevich Soloviev (as well as his wife Galina Olegovna Ulyutina) and Andrey Sergeyevich Puchkov and his companies Limited Liability Company Atlant S and Limited Liability Company Inspira Invest A.

Additional General Licenses.  In addition to the general licenses described above, OFAC on Thursday also issued a number of general licenses permitting certain transactions with the newly-sanctioned Russian entities.  These general licenses authorize certain transactions related to:

Russia Export Control Restrictions.  As part of the package of sanctions, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), implemented a series of stringent export controls intended to cut Russia off from a wide swath of U.S. technologies and FDPs derived from, incorporating or using such technologies.  These export controls, all falling under the Export Administration Regulations (EAR), are designed to degrade Russia’s industrial base by limiting its access to technologies Russia does not produce domestically, with a key focus on defense, aerospace and maritime activities. Under these new restrictions:

  • All items falling under an Export Control Classification Number (ECCN) on the Commerce Control List (CCL) categories covering electronics, computers, telecommunication, information security, sensors and lasers, navigation and avionics, marine, aerospace and propulsion will require a license in order to be exported or re-exported to Russia.
  • Any application for a license to export or re-export to Russia will be subject to a policy of denial, with extremely limited categories of transactions eligible for a case-by-case review.
  • Existing restrictions on exports both to entities designated as Russian military end-users (MEUs) and for purposes designated as military end uses are being expanded to cover all items subject to the EAR with limited exceptions.
  • Two new FDP rules have been implemented to significantly restrict the export to Russia of certain foreign-produced items that are the direct products of or utilize U.S.-origin software or technology.
  • The ability to utilize license exceptions for exports to Russia has been significantly limited.
  • Forty-nine entities have been added to the BIS Entity List, with a license required in order to export to them any item subject to the EAR, subject to a policy of denial.
  • The so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine have been subjected to comprehensive export, re-export and transfer restrictions, bringing them in line with comparable restrictions on exports to Crimea.

Australia, Canada, the EU, Japan, New Zealand and the United Kingdom have announced plans to implement similar export controls.

Belarusian Blocking Sanctions. Finally, due to Belarus’s support for, and facilitation of, Russia’s invasion, OFAC on Thursday sanctioned 24 Belarusian individuals and entities, including two state-owned banks, nine defense firms, and numerous individuals tied to Belarus’ defense industry or the Lukashenka regime.  The full list of sanctioned entities and individuals is available here.  OFAC issued two general licenses in concert with these measures permitting the ongoing conduct of the official business of the United States Government and of the UN and other international organizations.

Summary of Current U.S. Sanctions, Including Most Recent

Over the weekend, the United States and its allies jointly announced their intention to take further steps to reinforce current sanctions, including the targeted SWIFT sanctions discussed above, as well as additional restrictions on the Bank of Russia, limitations on golden passport transactions by wealthy Russians, and formation of a transatlantic task force to identify and freeze the assets of sanctioned parties. Accordingly, the sanctions landscape remains somewhat fluid.  As of the publication of this article, the U.S. sanctions imposed through the course of last week have had the following cumulative effect:

  • Pursuant to Executive Order 14065 and related amendments to the EAR, the so-called DNR and LNR are subject to a functional trade embargo comparable to that imposed on the Crimea Region of Ukraine following its annexation by Russia in 2014.
  • The Bank of Russia and several other financial institutions yet to be identified are being removed from the SWIFT financial messaging system.
  • Most of Russia’s significant financial institutions have been added to the SDN List and are now subject to blocking sanctions under Executive Order 14024, including:
    • VEB and related subsidiaries.
    • Promsvyazbank Public Joint Stock Company (PSB), and related subsidiaries.
    • VTB Bank and related subsidiaries.
    • Otkritie and related subsidiaries.
    • Sovcombank and related subsidiaries.
    • Novikombank and related subsidiaries.
    • Russian Direct Investment Fund (RDIF).
    • Russian Venture Company (RVC).

Various wind-down periods are in effect in connection with these blocking actions, pursuant to general licenses issued under Executive Order 14024.

  • Pursuant to Directive 4 under Executive Order 14024, the Bank of Russia, the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation have been cut off from U.S.-related asset transfers and foreign exchange transactions.
  • Pursuant to Directive 2 under Executive Order 14024, Russia’s largest bank, Sberbank and its subsidiaries have had access to the U.S. financial system severed through prohibitions on U.S. financial institutions maintaining correspondent and payable-through accounts or processing transactions involving the targeted entities, subject to wind-down periods under a related general license.
  • Thirteen of Russia’s most critical enterprises and entities are subject to new debt and equity restrictions under Directive 3 under Executive Order 14024. These restrictions are designed to limit their ability to raise money through U.S. markets, and target:
    • Sberbank
    • AlfaBank
    • Credit Bank of Moscow
    • Gazprombank
    • Russian Agricultural Bank
    • Gazprom
    • Gazprom Neft
    • Transneft
    • Rostelcom
    • RusHydro
    • Alrosa
    • Sovcomflot
    • Russian Railways
  • U.S. financial institutions are prohibited from engaging in certain activities relating to Russian sovereign debt, pursuant to Directive 1A under Executive Order 14024.
  • Scores of Russian elites have been designated as SDNs under Executive Order 14024.
  • Two dozen Belarusian entities and individuals have been designated as SDNs pursuant to Executive Order 14038.
  • The owner and operator of the Nord Stream 2 pipeline, and its head corporate officer, have been added to the SDN list pursuant to Executive Order 14039, with a short wind down period authorized under a related general license.
  • Exports to Russia of many U.S.-origin technologies and related FDPs have been severely restricted.

Next Steps

Speculation remains as to what further sanctions may be imposed in response to the situation in Ukraine.  While the developments over the weekend dialed the sanctions pressure up, recent press reporting indicate the Biden Administration is considering further sanctions against all of Russia’s banks, as well as potential sanctions against its cryptocurrency market.  Those and other sanctins, such as a countrywide SWIFT exclusion, could still be in the offing.

Notably, the Russian energy industry has been left largely untouched to date, including with a new general license issued Monday morning to allow energy-related transactions involving several of the blocked or otherwise restricted banks.  This reflects the importance of Russia being able to continue supplying energy to global markets, but could also be a sanctions option being left in reserve.

While the sanctions do significantly impact the Russian economy, financial system and certain industrial players, they have not touched most Russian commercial parties.  To the extent transactions with those commercial counterparties will not otherwise violate the sanctions and export controls, and remain commercially viable, they can proceed—albeit with care.  For companies with continuing potential exposure to Russian markets, we recommend they consider:

  • Establishing daily monitoring of sanctions lists to determine whether customers, partners, vendors, or other contracting parties have been added;
  • Confirming that any third-party due diligence/sanctions screeners are regularly updating SDN lists so transactions do not slip through in this rapidly evolving environment;
  • Evaluating the continued viability of relationships with entities in Russia and/or Belarus, given the potential duration of the conflict and related sanctions;
  • Factoring in that U.S. and European financial institutions implementing the sanctions as they process transactions involving Russia will be adopting protective internal policies and making conservative discretionary decisions regarding the propriety of specific transactions;
  • Assessing accounts payable and receivable for Russian parties, as pending transactions may need to be suspended on short notice and may be impacted by the SWIFT and other bank-related sanctions imposed to date;
  • Reviewing policies and procedures related to sanctions to ensure they are up to date, particularly as we expect the sanctions regime to expand—potentially rapidly—in the coming days and weeks;
  • Considering whether to accelerate sanctions compliance training this year so employees are refreshed on these issues sooner rather than later;
  • Incorporating language about sanctions compliance – both generally and specific as to Russia – into senior leaders’ compliance messaging;
  • Ensuring, for entities in the financial and cryptocurrency spaces, that KYC and due diligence processes are designed to identify and weed out sanctioned individuals and entities, as transactions with sanctioned Russian entities will probably become an attractive area for enforcement actions over the next year;
  • Planning how to react in the event of a potential Russian ransomware or cyberattack, which may become more likely in the coming months. Recent OFAC guidance highlights the sanctions risks associated with ransomware payments and encourages companies subject to attack to consult with federal law enforcement on a response so as to not violate sanctions through their payments;
  • Similarly, companies should become aware of any reporting obligations (g., DFARS 252.204-7012 for government contractors and state-based reporting requirements related to PHI/PII) related to cyber breaches.

If you have further questions about the impact of these sanctions, or the breadth and capabilities of our practice, please contact the authors of this article.