Compliance Blog

I am sure everyone reading this blog is aware of Russia’s invasion of Ukraine and the devastation it is causing there. In response to this invasion the United States and other nations have imposed sanctions against Russia. But what are sanctions and what does this mean for your credit union?

What are Sanctions?

Generally, sanctions are economic penalties levied against individuals or entities wherein others are penalized if they transact with the sanctioned individual/entity. For example, if the U.S. sanctions John Doe and a credit union carries out a wire transfer into a bank account owned by John Doe, the credit union could be penalized. Credit unions should also remember that sanctions can target banks or other entities. Thus, if a bank is sanctioned and Jane Doe requests a wire transfer to an account at the sanctioned bank, the credit union could be penalized for carrying out such a transaction even though Jane Doe is not sanctioned. Finally, sanctions can target countries in general. For example, according to OFAC FAQ #456 the United States prohibits the “exportation and reexportation of goods, services (including financial services)” to North Korea.

Now that we know that credit unions can be penalized for transacting with sanctioned individuals/entities, how do credit unions determine whether an individual or entity has been sanctioned? Fortunately, the Office of Foreign Asset Control (OFAC), the organization that oversees U.S. sanctions, maintains a list of sanctioned individuals/entities. Here is a link to OFAC’s page on specially designated nationals and blocked persons list (SDN list) and here is a link to OFAC’s page on non-SDN lists. Fortunately, for those who are not sure whether to look at the SDN list or non-SDN list, OFAC provides a consolidated search tool for all SDN and non-SDN lists. However, credit unions should still be careful, as OFAC states that the “use of Sanctions List Search is not a substitute for undertaking appropriate due diligence.” For help with assessing OFAC name matches, OFAC has published this FAQ and interactive questionnaire that credit unions may find useful.

To search for country specific sanctions, credit unions should review OFAC’s page on active sanctions and country information. Within each country-specific page is all of the relevant documents (executive orders, statutes, directives…etc.) regarding sanctions for a particular country. A useful place to start would be each countries FAQ.

What is Going on With the Russian Sanctions?

Over the past couple of weeks, the NAFCU Compliance helpline has received numerous questions from member credit unions regarding the recent Russian sanctions. One of the biggest questions has been whether a credit union is prohibited from transacting with all Russian nationals/entities or anything with a Russian address. As of March 8, 2022, the U.S. sanctions in question target specific individuals/entities and do not ban all transactions and services with Russia, unlike the North Korean sanctions mentioned above.

There are two major set of sanctions against Russian entities, the first is the “Russian Harmful Foreign Activities Sanctions” (RHFAS) and the second is the “Ukraine-/Russia-Related Sanctions” (URRS). Much of the recent activity has occurred in relation to the RHFAS sanctions and I will be focusing on those.

In order to understand what the RHFAS sanctions accomplish, credit unions should review the underlying executive order for the sanctions and the Directives issued by OFAC. These directives provide some explanation of what and who is sanctioned. As of March 8, 2022, OFAC has published the following four directives:

1.       Directive 1A (February 22, 2022)

a.       Targets the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation;

b.       Prohibits participation in both the primary and secondary market for ruble and non-ruble denominated bonds issued by the targeted entities; and

c.       Prohibits lending to the targeted entities using rubles or non-ruble denominated funds.

2.       Directive 2 (February 24, 2022)

a.       Targets entities listed in Directive 2 under “Annex 1;”

b.       Prohibits opening or maintaining accounts for the targeted foreign financial institutions, their property or interests in property; and

c.       Prohibits processing transaction that involve the targeted foreign financial institutions, their property or their interests in property.

3.       Directive 3 (February 24, 2022)

a.       Targets entities listed in Directive 3 under “Annex 1;”

b.       Prohibits transactions in, provision of financing, and other dealings for new debt or equity, that have a maturity timeline longer than 14 days, to the targeted entities, their property or interests in property if the debt or equity was issued on or after March 26, 2022; and

c.       Prohibits transactions in, provision of financing, and other dealings for new debt or equity, that have a maturity timeline longer than 14 days, to entities that are later determined to be subject to Directive 3, their property, or interests in property where the new debt or equity is issued on or after 30 days from the date that such entities were determined to be subject to Directive 3.

4.       Directive 4 (February 28, 2022)

a.       Targets and prohibits “any transaction involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities.”

Beyond these four directives, credit unions should note that there are other entities and individuals that are targets of U.S. sanctions but not listed in a directive. As of March 8, 2022, a search of OFAC’s sanctions list show at least 53 sanctioned individuals, 195 entities, 2 aircraft, and 6 vessels subject to sanctions under the RHFAS sanctions.

Credit unions should be aware that sanctioned individuals and entities may attempt to circumvent the sanctions. On March 7, 2022, FinCEN published FIN-2022-Alert001 “FinCEN Advises Increased Vigilance for Potential Russian Sanctions Evasion Attempts.” If credit unions are worried about evasion attempts, the alert provides useful information that can help credit unions comply with U.S. sanctions.

Finally, I want to caution credit unions that the situation with Russia is fluid, and this blog may become inaccurate or outdated after the dates referenced above. For the most up to date information credit unions, should review the RHFAS page and the URRS page.