The U.S. Expands Secondary Sanctions Regime to Non-U.S. Financial Institutions

On 22 December 2023, President Biden issued the “Executive Order on Taking Additional Steps With Respect to the Russian Federation’s Harmful Activities” (the “Secondary Sanctions Executive Order”), which amended prior executive orders to expressly allow the United States to impose secondary sanctions on non-U.S. financial institutions that facilitate prohibited transactions.

A secondary sanction is a sanction imposed by the United States on a non-U.S. party who transacts business that would otherwise be prohibited were such non-U.S. party a U.S. party.  Through the “Countering America’s Adversaries Through Sanctions Act of 2017”, the United States has always given itself the theoretical power to impose secondary sanctions against non-U.S. parties in respect of their business activities in Russia.  However, until the release of the Secondary Sanctions Executive Order, the United States had rarely invoked this power to impose secondary sanctions, nor had it defined the parameters under which it is to be exercised.

The Secondary Sanctions Executive Order, for the first time, identifies a sector that may be the target of secondary sanctions, namely “non-U.S. financial institution”, a broadly defined term to include settlor banks.  It also empowers the Office of Foreign Assets and Control of the U.S. Department of Treasury (OFAC) to identify prohibited transactions, which would invite secondary sanctions were “non-U.S. financial institutions” to be involved with them.  The transactions that would invite secondary sanctions under the Secondary Sanctions Executive Order as set forth by OFAC through a determination on 23 December 2023 are set forth in Appendix A^[1].

The types of secondary sanctions that may be imposed on “non-U.S. financial institutions” under the Secondary Sanctions Executive Order include prohibitions or restrictions on “correspondent accounts or payable-through accounts in the United States”, and transaction restrictions whose effect is the same as a Specially Designated National (SDN) designation.  In a SDN designation, all U.S. property of the designated entity in the United States is blocked, and U.S. persons are prohibited from making or receiving “any contribution or provision of funds, goods, or services” to/from such person.

In an advisory note issued by OFAC on 23 December 2023, OFAC provided examples of actions that could expose “non-U.S. financial institutions” to liability, such as i) “maintaining accounts, transferring funds, or providing other financial services (i.e. payment processing, trade finance, insurance” for persons engaged in prohibited transactions; ii) “facilitating the sale, supply, or transfer, directly or indirectly, of the specified items to Russian importers or companies shipping the items to Russia”; iii) evasion, such as “offering to set up alternative or non-transparent payment mechanisms, changing or removing customer names or other relevant information from payment fields, obfuscating the true purpose of or parties involved in payments, or otherwise taking steps to hide the ultimate purpose of transactions to evade sanctions”.  The policy intent appears to be to discourage the use of intermediaries or third countries to facilitate the trade of dual-use goods to Russia that the United States deems to be unacceptable.  

While no “non-U.S. financial institutions” have actually been sanctioned, the Secondary Sanctions Executive Order may lead to more robust sanctions screening checks at non-U.S. banks, as well as heightened export diligence in other parts of the supply chain, in respect of the prohibited items set forth in Appendix A^[1].