On December 22, 2023, President Joe Biden issued Executive Order 14114, Taking Additional Steps with Respect to the Russian Federation’s Harmful Activities. EO 14114 amends Executive Orders 14024 and 14068 by providing the Office of Foreign Assets Control (OFAC) with the authority to impose certain secondary sanctions on foreign financial institutions (FFIs) that have engaged in significant transactions for or on behalf of certain entities designated under EO 14024, and by expanding upon and clarifying the ban on the importation of Russian-origin fish and seafood, alcoholic beverages, nonindustrial diamonds and gold to include certain products imported from third countries.
On the same date, OFAC also released a sanctions advisory, Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base providing practical guidance for FFIs regarding sanction risks and how to implement corresponding mitigation measures. As discussed in this Alert, EO 14114 in conjunction with the FFI guidance in the sanctions advisory makes clear that FFIs need to identify their sanctions risks and implement controls to minimize their exposure to activity involving Russia’s military-industrial base.
The executive order comes on the heels of Treasury’s Financial Crimes Enforcement Network’s (FinCEN) announcement in November of the largest money penalty in history against an entity that operates the world’s largest virtual currency exchange, Binance Holdings Ltd. and its affiliates, after it turned a “blind eye” to U.S. anti-money laundering (AML) and sanctions laws. FinCEN assessed a civil money penalty of $3.4 billion, imposed a five-year monitorship and required a complete exit from the United States. Concurrently, OFAC’s resolution with Binance included a penalty of $968 million. As part of a separate criminal plea agreement, Binance agreed to pay a total financial penalty of approximately $4 billion and its founder and chief executive officer pleaded guilty to failing to maintain an effective AML program in violation of the Bank Secrecy Act.
The executive order and the historic Binance settlement underscore how Treasury’s enforcement authorities have expanded its sanctions and export control regime—reaching a wider range of misconduct and broadening its jurisdictional reach. To avoid regulatory scrutiny, financial institutions, wherever located, should ensure they adopt a managerial commitment to compliance at the very top, and that risk-based programs and controls are up to date and integrated effectively into their platforms and technology.
In the words of Treasury Secretary Janet Yellen:
We expect financial institutions will undertake every effort to ensure they are not witting or unwitting facilitators of circumvention and evasion of [U.S. sanctions laws]. And we will not hesitate to use the new tools provided by [the executive order] to take decisive, and surgical, action against financial institutions that facilitate the supply of Russia’s war machine.
The Executive Order
To restrict Russia’s activities in certain sectors and to limit transactions or services involving Russia’s military-industrial base, the Biden administration’s latest amendment to EO 14024 authorizes OFAC to impose sanctions on FFIs that conduct or facilitate significant transactions for persons operating in the technology, defense and related material, construction, aerospace or manufacturing sectors of the Russian economy or that involve Russia’s military-industrial base.
EO 14114 authorizes the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce, to sanction foreign financial institutions that have: (i) conducted or facilitated any significant transaction(s) for or on behalf of any person designated for operating in the technology, defense and related materiel, construction, aerospace or manufacturing sectors of the Russian economy; or (ii) conducted or facilitated any significant transaction(s) or provided any service involving Russia’s military-industrial base, including the sale, supply or transfer, directly or indirectly, to Russia of any item or class of items as may be determined by Treasury. Among other things, the executive order pertains to exports to Russia of the following types of products: certain machine tools and manufacturing equipment, manufacturing materials for semiconductors and related electronics, electronic test equipment, propellants, chemical precursors for propellants and explosives, lubricants and lubricant additives, bearings, advanced optical systems and navigation instruments. An OFAC determination, also issued on December 22, 2023, further specifies the classes of items for which transactions would be sanctionable.
The definition of “foreign financial institution” includes any foreign entity that is engaged in the business of accepting deposits; making, granting, transferring, holding or brokering loans or credits; purchasing or selling foreign exchange, securities, futures or options; or procuring purchasers and sellers thereof, as principal or agent. It includes depository institutions; banks; savings banks; money services businesses; operators of credit card systems; trust companies; insurance companies; securities brokers and dealers; futures and options brokers and dealers; forward contract and foreign exchange merchants; securities and commodities exchanges; clearing corporations; investment companies; employee benefit plans; dealers in precious metals, stones or jewels; and holding companies, affiliates or subsidiaries of any of the foregoing. The term does not include the international financial institutions identified in 22 U.S.C. 262r(c)(2), the International Fund for Agricultural Development, the North American Development Bank or any other international financial institution so notified by OFAC.
Notably, the sanctions that Treasury may impose include (1) prohibiting the opening of, or prohibiting or imposing strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States and (2) blocking sanctions against FFIs.
To mitigate the risk of violating sanctions, FFIs should take care to make sure their screening is comprehensive and fully consistent with U.S.-based sanctions lists, including implementing know-your-customer protocols that identify names and entities on the U.S. sanctions lists. OFAC provides additional guidance to FFIs in its sanctions advisory, advising FFIs to identify exposure to activity involving Russia’s military base and to implement mitigation measures, such as conducting sanctions risk assessments, communicating compliance expectations to customers, obtaining attestations from certain customers and taking appropriate mitigation measures regarding any customers engaged in high-risk activities or who fail to respond to requests for information, including restricting accounts.
Insights from the Binance Resolution
Treasury, through FinCEN, OFAC and IRS Criminal Investigation, announced on November 21, 2023, its historic resolution with Binance for violations of U.S. AML and sanctions laws.
Among other violations, there was no commitment to compliance among Binance’s senior management: The chief compliance officer and CEO devised a plan to assist U.S. users to conceal their presence on Binance’s platform and bypass Binance controls. Binance delayed implementing an effective AML program: Many account holders were exempt from Know-your-customer protocols and no suspicious activity reports were filed. And it deliberately created mechanisms to mask the origin and destination of transactions associated with sanctioned countries, individuals and entities.
The Binance consent decree reveals the pitfalls and risks associated with flimsy AML and sanctions compliance programs. By failing to comply with AML and sanctions obligations, Binance enabled a range of illicit actors to transact freely on its platform: It facilitated financing for terrorist activities, created a haven for ransomware attackers, allowed money launders to transact freely, and permitted U.S. users to conducted business with sanctioned jurisdictions like Iran, North Korea, Syria and the Crimea region of Ukraine.
FinCEN’s resolution with Binance assesses a civil money penalty of $3.4 billion, imposes a five-year monitorship and requires significant compliance undertakings, including ensuring Binance’s complete exit from the United States. OFAC’s settlement agreement assesses a penalty of $968 million and requires Binance to abide by a series of robust sanctions compliance obligations, including full cooperation with the monitorship overseen by FinCEN.
The resolution highlights U.S. government agency enforcement priorities. As war efforts continue in Russia, cybersecurity threats from Iran, Russia and North Korea increase, and terrorist organizations like Hamas and Hezbollah continue to wreak havoc, FinCen, Treasury, DOJ and other agencies will increase efforts through the hammer, and otherwise, to ensure companies are compliant with U.S. sanctions and AML laws.
Key Takeaways
2023 featured more coordination among U.S. government agencies with respect to the enforcement of U.S. AML, sanctions and export controls laws than ever before. In addition to the coordination regarding the Binance settlement, FinCEN in 2023 issued multiple joint alerts with the Department of Commerce’s Bureau of Industry and Security (BIS), containing the first-ever key term for financial institutions to use when filing suspicious activity reports for global export evasion, and regarding Russian evasion of U.S. export controls, detailing evasion typologies, introducing nine new high priority Harmonized System codes to inform U.S. financial institutions’ customer due diligence, and identifying additional transactional and behavioral red flags.
Treasury continues to demonstrate its commitment to actively enforcing AML and sanctions laws, and is increasingly working with other U.S. government agencies to do so. Financial institutions, wherever located, should take note that Treasury’s authority to enforce those laws are broad, reach a wide range of misconduct, and can apply to both U.S. and foreign persons.
As noted above, to mitigate the risk of violating sanctions, FFIs should ensure their screening is comprehensive and fully consistent with U.S.-based sanctions lists, identify their exposure to activity involving Russia’s military base, and implement appropriate controls as needed, such as conducting sanctions risk assessments, communicating compliance expectations to customers, requesting additional information from certain customers, and appropriately mitigating the risks associated with any customers engaged in high-risk activities or who fail to respond to requests for information, including by restricting accounts.
About Duane Morris
Attorneys in the firm’s International Group have considerable experience in assisting clients on a wide range of matters involving U.S. economic sanctions and export controls. Such assistance includes: advising on the viability of proposed transactions; applying for and obtaining licenses and other kinds of export authorizations U.S. government agencies (e.g., OFAC, BIS and Directorate of Defense Trade Controls); and developing, implementing and assessing trade compliance programs for companies.
Attorneys in the firm’s White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Group have considerable experience in representing corporate and individual clients in all stages of government investigations and civil and criminal cases, and on a wide range of matters, including violations of U.S. AML laws and the Bank Secrecy Act.
For More Information
If you have any questions about this Alert, please contact Geoffrey M. Goodale, Tarsha A. Phillibert, Hope P. Krebs, Nanette C. Heide, Lauren E. Wyszomierski, any of the attorneys in our International Practice Group, any of the attorneys in our White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Group or the attorney in the firm with whom you are regularly in contact.
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