Insight

The evolving Russian sanctions landscape and what it means for you

Explore U.S. and global sanctions, potential methods of evasion, and actions companies can take to navigate challenges.

Matthieu Chabelard

Matthieu Chabelard

Principal, Advisory - Forensic, KPMG US

+1 917-513-4152

Patricia Lee

Patricia Lee

Director, Advisory - Forensic, KPMG LLP

+1 917-242-5480

Michael Wegh

Michael Wegh

Director Advisory, Forensic, KPMG US

+1 212-872-5752

March 10, 2022

This article dives into:

  • U.S. and global sanctions implemented to date impacting financial sectors, Russian leaders and oligarchs designations, Belarus sanctions, and embargoes
  • potential methods of sanctions evasion, including the use of cryptocurrencies
  • actions financial institutions and fintech companies can take immediately to navigate the challenges presented by the evolving sanctions environment.

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Introduction/Background

The path to the sanctions implemented by the Office of Foreign Assets Control (OFAC) and the United States’ (US) global allies starting on February 21, 2022 began in 2014, with the annexation of Crimea by Russia. This led to OFAC establishing the Ukraine/Russia sanctions program and the Sectoral Sanctions Identifications (SSI) List. These sanctions were driven by Executive Orders (E.O.) 13660, 13661, 13662, and 13685 issued by the President of the US between March 2014 and December 2014. Sanctions included but were not limited to (i) prohibiting US persons and those within the US from engaging in certain debt or equity transactions and US persons from exporting/re-exporting, directly or indirectly, (ii) goods, (iii) services (except for financial services), or (iv) technology in support of Russian oil production.  

On April 15, 2021, President Biden implemented E.O. 14024 “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation.” E.O. 14024 speaks to actions taken by the Russian government, including but not limited to (i) undermining the 2020 US Presidential election, (ii) facilitating cyber-attacks against the US and its allies, and (iii) undermining the security of countries and regions important to US national security, violating international law. The E.O. established a national state of emergency and invoked blocking sanctions. E.O. 14024 and those Executive Orders referenced above, along with their underlying directives, serve as the foundation for many of the OFAC sanctions recently implemented. 

February 2022: A global escalation in sanctions

US sanctions

 

The sanctions implemented by OFAC since February 21, 2022 in response to the conflict in Ukraine have demonstrated a rapid progression in the severity of prohibitions imposed and a clear intent to cause maximum impact on the Russian economy, along with personally targeting President Putin and Russian oligarchs who have benefited from their close relationships with President Putin. Additionally, OFAC has imposed additional sanctions on Belarus for its ties to, and support of, the Russian government. The OFAC sanctions implemented to date can be categorized under four primary themes: (i) Financial Sector sanctions, (ii) Russian Leaders and Oligarchs Designations, (iii) Belarus Sanctions, and (iv) Embargoes, each of which are summarized below:1

Financial sector sanctions

The OFAC sanctions placed on Russian financial institutions (FIs) could be considered the most powerful of the suite of sanctions implemented in response to the Russia-Ukraine conflict to date. OFAC’s response to the conflict commenced on February 21, 2022, following President Putin’s “purported recognition” of areas of the Donetsk and Luhansk regions in Ukraine as independent republics and the deployment of “peacemaking forces” into these regions.2 While the first tranche of sanctions were embargo-focused, subsequent sanctions target the core of the Russian financial system, including the Central Bank of Russia, Ministry of Finance of the Russian Federation, and the National Wealth Fund of the Russian Federation. The prohibition of transactions with these entities through designation via the Non-Specially Designated Nationals (SDN) Menu-Based Sanctions List effectively freezes the assets of these institutions held within the US or by US persons.  Additionally, the SDN designation and subsequent blocking of the Russian Direct Investment Fund, which serves as a direct conduit to investment in Russia, further pressures the Russian economy.

OFAC has also taken unprecedented steps in directly targeting Russian financial institutions. OFAC has fully blocked VTB Bank Public Joint Stock Company (VTB Bank), Russia’s second largest financial institution, as well as 20 VTB Bank foreign financial institution subsidiaries. Public Joint Stock Company (PJSC) Sberbank of Russia (Sberbank) was placed on the Correspondent and Payable-Through Account Sanctions (CAPTA) List via Directive 2 under E.O. 14024. The implementation of CAPTA sanctions on Sberbank requires that by March 26, 2022, all US FIs close any Sberbank correspondent or payable-through accounts and reject any future transactions from Sberbank and its foreign financial institutions (FFI) subsidiaries. As a result, Sberbank has effectively been disconnected from US dollar access and the US banking system as a whole.

Additionally, three significant Russian financial institutions—PJSC Bank Financial Corporation Otkritie (Otkritie), Open Joint Stock Company Sovcombank (Sovcombank), and Joint Stock Commercial Bank Novikombank (Novikombank)—are now subject to OFAC blocking sanctions. These three institutions, along with VTB Bank, are also among the seven Russian FIs disconnected from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments platform, an action that is further discussed below.

Russian leaders and oligarchs designation

On February 25th, 2022, the US moved to add Russian Federation President Vladimir Putin; Minister of Foreign Affairs, Sergei Lavrov; General Valery Gerasimov, Chief of the General Staff of the Armed Forces of the Russian Federation; and General Sergey Shoygu, Minister of Defense of the Russian Federation, to the SDN List. Both prior to, and following the designation of these Russian leaders, large numbers of Russian oligarchs, their family members, and business interests were added to the SDN list in an effort to sanction not only those who lead, but also those who have profited from their close ties with the Russian government, and more specifically, President Putin. 

Belarus sanctions

Concurrently, OFAC designated more than 20 Belarusian individuals and entities as a result of Belarus’ support of the Russian government. OFAC’s sanctions are targeted at Belarus’s defense and financial sectors and further expand on sanctions already implemented by OFAC under E.O.s 13405 and 14038, implemented in response to past actions sanctioned by the US government. Two significant state-owned banks and their 50% owned or controlled subsidiaries, Belarussian Bank of Development and Reconstruction Belinvestbank Joint Stock Company (Belinvestbank) and Bank Dabrabyt Joint-Stock Company (Bank Dabrabyt), were designated as SDNs pursuant to E.O. 14038.  

Embargoes

Under E.O. 14065, OFAC implemented sanctions that prohibit new investment3 in Donetsk and Luhansk (referred to by Russia as the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine) (the Covered Regions). Sanctions relative to the Covered Regions also prohibit the direct or indirect import/export of goods, services, or technology, and the approval, financing, facilitation, or guarantee by a U.S person of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a US person or within the US. Blocking sanctions were also placed on the following: (i) property of leaders, officials, senior executive officers, and /or members of the board of directors of an entity operating in the Covered Regions; (ii) entities that operate in the Covered Regions and their owners/controllers or their representatives; (iii) contributions or receipt of contributions, or provision or receipt of any funds, goods, or services subject to blocking; (iv) and those who have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of any person whose property and interests in property pursuant to the E.O.   

Additionally, on March 1, 2022, the “Russian Harmful Foreign Activities Sanctions Regulations” (the Regulations) were published in the Federal Register. The Regulations were enacted to implement E.O. 14024. The regulations published are expected to be expanded further to include a more comprehensive set of regulations, which per the Federal Register may include additional interpretive guidance and definitions, general licenses issued by OFAC, and other regulatory provisions. 

[1] Specific OFAC sanctions and Directives issued to date are subject to general licenses that provide authorization for specific transactions associated with designated individuals, entities, and jurisdictions, as described therein. 

[2]  See Executive Order 14065 of February 21, 2022, Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to Continued Russian Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine.

[3]  EO 14065 sets forth the following language around investment activity: “(a) The following [is] prohibited: (i) new investment in the so-called DNR or LNR regions of Ukraine or such other regions of Ukraine as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State (collectively, the “Covered Regions”), by a United States person, wherever located.”

 

Global sanctions

 

The European Union (EU),4 United Kingdom (UK),5 Japan,6 Switzerland,7 and Australia8 have all implemented sanctions similar to the ones enacted by the US, targeting and freezing the assets of select Russian banks, businesses, politicians, oligarchs, and their families. The US, UK, and EU are also targeting Russian companies, the Central Bank of Russia, and the Kremlin by restricting their ability to access foreign capital markets.

The globally coordinated restrictions on foreign capital markets impedes the ability of Russia to stabilize its economy by tapping into its foreign cash reserves and finance the conflict in Ukraine. Moreover, the sanctions are not confined to the financial sector; the sanctions are spreading to other sectors and geographies and will likely continue to expand over the coming weeks. A number of countries have imposed import-export sanctions or closed air and seaports to Russian traffic. The UK, EU, and Japan have also enacted sanctions against Belarus for its role in the Russia-Ukraine conflict.  

SWIFT disconnection

Another example of the global commitment to a lock-step approach to the implementation of sanctions on Russia is the disconnection of seven Russian banks from the SWIFT platform.9 The EU, in consultation with Canada, the UK, and the US, announced on March 2, 2022 the removal of SWIFT access for Otkritie, Novikombank, Promsvyazbank, Bank Rossiya (Rossiya Bank), Sovcombank, Vnesheconombank (VEB), and VTB Bank in compliance with EU Council Regulation (EU) 2022/345 of March 1, 2022. These institutions will have SWIFT access revoked as of March 12, 2022, a move designed to essentially bar these FIs from international transactions and further isolate Russia’s financial sector and economy.

[4] Timeline - EU restrictive measures in response to the crisis in Ukraine - Consilium (europa.eu), dated March 2022

[5] UK sanctions relating to Russia - GOV.UK (www.gov.uk), February 2022

[6]  PowerPoint プレゼンテーション (kantei.go.jp), February 2022

[7] Switzerland adopts EU sanctions against Russia (admin.ch), February 2022

[8] Russia sanctions regime | Australian Government Department of Foreign Affairs and Trade (dfat.gov.au), February 2022

[9] An update to our message for the SWIFT Community | SWIFT - The global provider of secure financial messaging services, February 2022

 

Impact of US and global coordinated sanctions

 

The implementation of these sanctions by the US and its global allies means that many of the foreign currency reserves held by Russia will not be available for use, as nearly all transaction types and currencies fall within the scope of these sanctions. FIs should consider the impact of these sanctions regardless of where FIs, branches, and subsidiaries are located, through the review of correspondent and payable-through accounts, in addition to relationships with individuals and entities added to OFAC sanctions lists or their equivalent. 

It is noted that while the effects of the global economic sanctions are designed to have maximum impact on the Russian financial sector and its economy, the sanctions needed to be designed to take into consideration the dependency on Russian-produced gas and oil, not only in the EU, but across the globe and the corresponding financial system ramifications. As the situation further develops in Ukraine, further considerations may be given when implementing sanctions on Russian energy and other commodities exported by Russia. On March 8, 2022, the US banned the import of oil, liquefied natural gas, and coal to the US in response to the escalation of the Russia-Ukraine conflict.10

[10]  See Issuance of new Russia-related Executive Order and related General License 16; Publication of new and amended Frequently Asked Questions. 

Potential methods of sanctions evasion

Cryptocurrencies and sanctions risks

There has been much discussion around the potential use of cryptocurrencies to evade sanctions. These conversations have increased in light of the recent actions taken globally to sanction Russia and its oligarchs. As noted in the Fact Sheet released by the White House in response to the first tranche of sanctions, “over 80% of Russia’s daily foreign exchange transactions globally are in US dollars and roughly half of Russia’s international trade is conducted in dollars.”11 Cutting access to the US dollar, which serves as the global reserve currency, will dramatically impact Russian’s economy. Most of these transactions flowing through, and from US-based accounts, would now be blocked, preventing any trade from being conducted between Russia and the rest of the world. Without access to the global financial system, Russia would need to find alternatives. Cryptocurrencies certainly present one of those alternatives.

Like all financial services providers, Virtual Asset Service Providers (VASPs) as defined by the Financial Action Task Force (FATF),12 and others engaging in cryptocurrency transactions, should operate with heightened vigilance as they manage their anti-money laundering (AML) and sanctions-related controls to avoid facilitating transactions involving these newly sanctioned entities. OFAC’s focus on this space has already been noted, with the sanctioning in September 2021 of Suex, a cryptocurrency exchange incorporated in the Czech Republic but operating in Russia, for its part in facilitating financial transactions for ransomware actors, and SUEX’s sister exchange Chatex for facilitating illicit activity.13

Further, as the development of central bank digital currencies (CBDC) has become an emerging area and Russia has recently stepped in. In December 2021, The Central Bank of the Russian Federation completed its prototype of a digital ruble platform. On February 23, 2022, the Bank of Russia stated that 12 banks indicated interest in the newly developed Russian CBDC platform. Three banks participated in a pilot of the platform, and two of them successfully connected to, and executed, digital ruble transfers via mobile banking applications and the platform.14 As a result, Russia now appears to have an established and functional channel for digital ruble exchange for use throughout the Russian Federation.

Additionally, the use of cyber-attacks to hack and steal digital assets continues to be a threat and, pursuant to the United Nations (UN), a tool used by North Korea to evade sanctions. A recent UN report sets forth that North Korea has stolen millions of dollars in cryptocurrency in an effort to fund its nuclear missile program.15 As the Russian government has demonstrated its ability to conduct cyber-attacks to further its national interests in the past, the use of hacking and other cyber-related attacks in the face of the sanctions recently implemented is an area for consideration and of potential concern.

As part of remarks made on March 2, 2022, US Treasury Secretary Yellen noted that the US will continue to monitor the risks potentially raised by the use of crypto assets by Russia to evade sanctions. Secretary Yellen stated, “I often hear cryptocurrency mentioned and that is a channel to be watched,” and further added “many participants in cryptocurrency networks are subject to anti-money laundering and sanction rules. It’s not that that sector is completely one where things can be evaded.”16 An example of Treasury’s ongoing efforts to address the need to monitor crypto-related transactions for compliance with OFAC sanctions is the guidance released to the virtual currency industry on October 15, 2022, “Sanctions Compliance Guidance for the Virtual Currency Industry”.17

Additional circumvention methods

In addition to the potential use of cryptocurrencies to evade sanctions, focus should remain on the other “traditional” methods of sanctions evasion. Specifically, the use of shell companies to disguise the beneficial owners of assets and entities, and shell entities established and/or located in jurisdictions with a shared border or nexus to a sanctioned jurisdiction have historically been, and continue to be, used as a tool to circumvent sanctions. Correspondent banking transactions present heightened risk relative to sanctions evasion, as the true originator of a transaction(s) and/or its purpose may not be transparent to the intermediary or correspondent bank. Trade finance transactions also raise heightened sanctions evasion risks, as the use of falsified documents around the origin/type of goods being financed, and the transport of goods (e.g., falsified vessel and flag records, port of origin, shipping routes), are well established methods used in attempts to circumvent sanctions. FIs need to increase diligence and assess whether existing controls in place can effectively mitigate the risks relevant to sanctions circumvention efforts.18

[11] White House Press Release, Fact Sheet: United States Imposes First Tranche of Swift and Severe Costs on Russia | The White House (https://www.whitehouse.gov/briefing-room/statements-releases/2022/02/22/fact-sheet-united-states-imposes-first-tranche-of-swift-and-severe-costs-on-russia/), February 2022

[12] Documents - Financial Action Task Force (FATF) Glossary, (https://www.fatf-gafi.org/glossary/u-z/), as of March 2022

[13] US Department of Treasury Press Release, Treasury Takes Robust Actions to Counter Ransomware | US Department of the Treasury and Treasury Continues to Counter Ransomware as Part of Whole-of-Government Effort; Sanctions Ransomware Operators and Virtual Currency Exchange | US Department of the Treasury, (Treasury Takes Robust Actions to Counter Ransomware | U.S. Department of the Treasury), September 2021 

[14 Article, T-HQ technology and business: Here’s everything, we know about Russia’s central bank digital currency (https://techhq.com/2022/02/digital-ruble-heres-everything-we-know-about-russias-central-bank-digital-currency/), February 2022

[15] Article, “North Korea: Missile programme funded through stolen crypto,” UN report says (https://www.bbc.com/news/world-asia-60281129), February 2022

[16] Article, “Yellen Monitoring Russian Efforts to Evade Sanctions with Cryptocurrency” (https://www.wsj.com/livecoverage/russia-ukraine-latest-news-2022-03-02/card/yellen-monitoring-russian-efforts-to-evade-sanctions-with-cryptocurrency-other-means-dhy4TMH4fBOAzRerlFNd), March 2022

[17] Sanctions Compliance Guidance for the Virtual Currency Industry (virtual_currency_guidance_brochure.pdf (treasury.gov), October 2021

[18] Article, Preventing and Detecting Sanctions Evasion Schemes - ACAMS Today (Preventing and Detecting Sanctions Evasion Schemes - ACAMS Today), September 2019

Challenges presented by the evolving sanctions environment

The sanctions implemented in response to the Russia-Ukraine conflict present a multitude of challenges to FIs, both traditional and non-traditional, and other legal entities. First and foremost, the unprecedented speed, fluidity, and magnitude of sanctions implemented are beyond any historical OFAC (or global sanctions) actions taken, resulting in real-time impacts on an organization’s sanctions compliance functions. Since February 21, 2022, compliance has moved to top of mind in regard to sanctions compliance functions, Know Your Customer processes (KYC), and transaction monitoring and filtering functions. Resource prioritization around these areas has raised challenges and will continue to do so.  Where does an organization look first and what is the most effective way to gain comfort around potential heightened sanctions risks and exposure? Some areas to consider are as follows:

  • Ongoing monitoring of OFAC updates and the assessment of sanctions risks presented or heightened by changes in OFAC sanctions (and those implemented by other jurisdictions, as applicable).
  • Reviewing and analyzing existing sanctions risk assessments to identify areas of potential heightened or new risk exposure (e.g., geographic risks, vendor risks).
  • Updating and testing of filtering and screening tools to verify that screening is taking place against the most current lists, inclusive of any systems customizations (e.g., “White Lists”).
  • Ongoing monitoring of risks associated with cryptocurrencies (e.g., hacked assets, activity which may be related to ransomware attacks). 
  • Reviewing transaction monitoring rules designed to detect jurisdictional risk and considering any potential need for adjustment.
  • Implementing the use of geolocation tools, IP address blocking controls, and analytics to detect and block access from sanctioned jurisdictions.
  • Resourcing: Upticks in alert volumes may result from the implementation of OFAC and other global Russia-related sanctions. Additional efforts may be necessary to clear potential matches associated with newly implemented sanctions.
  • Enhancing monitoring of compliance with the OFAC 50% Rule.19 The E.O.s and Directives recently released speak directly to the impacts of sanctions on entities that are directly or indirectly owned by a sanctioned entity. The 50% rule sets forth:
    • An entity that is 50% or more owned in the aggregate, directly or indirectly, by one or more blocked persons, is automatically treated as designated/sanctioned even though the entity is not on a sanctions list.
      • Direct Ownership: One or more blocked person(s) own shares in an entity
      • ­Indirect Ownership: One or more blocked person’s ownership of shares of an entity through another entity or entities that are 50% or more owned in the aggregate by the blocked person(s).

This rule underscores the fact that OFAC’s lists are not exhaustive and the importance that US entities conduct robust client and counterparty due diligence when considering and executing transactions.

  • Assessing client populations to identify those that should be reviewed in light of the latest sanctions, verifying that new exposures do not go unidentified, and that clients are appropriately risk rated. Additionally, consideration should be given to loan portfolios, participations, and other areas where sanctions risks and exposure may be increased.
  • Increasing diligence around and monitoring of trade finance transactions. 
  • Assessing and strategizing existing controls to address potential attempts to evade the new sanctions (i.e., use of cryptocurrencies, alternative currencies issued by jurisdictions that have not implemented sanctions against Russia).   
  • Developing and delivering ongoing training and providing updates on sanctions developments to relevant business lines and resources.
  • Verifying that recusal policies are in place for US persons, where warranted. 

[19] https://home.treasury.gov/system/files/126/licensing_guidance.pdf

 

How KPMG can help  

KPMG LLP’s subject matter professionals are available to assist with the aforementioned challenges and advise on next steps in this fluid sanctions environment, including traditional financial institutions and financial technology (fintech) companies. Our professionals are well-versed in all client types and experienced in sanctions compliance and the overarching Financial Crimes compliance space and can collaborate with your teams to assist with:

  • review and enhancement of risk assessments, including the unique risks and controls associated with cryptocurrency
  • sanctions compliance program design and enhancement across multiple client types
  • sanctions screening and filtering systems testing and validation, including blockchain monitoring   
  • ­Know Your Customer process enhancement, transformation, and remediation
  • ­investigation support related to the anticipated wave of investigations that may result from the initial application of these broad new sanctions. 

With fully integrated, cross-functional teams, we are ready and committed to providing meaningful and scalable approaches and guidance to clients in support of sanctions compliance. 

 

Erik Krusch was a contributing author.

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