Sanction enforcement landscape in 2024: Accelerated implementation and aggressive enforcement
Sanctions and trade controls clearly dominated the headlines in 2023, as the Russian Federation’s illegal invasion of Ukraine continued seemingly unaffected by a cascade of calls from the international community to cease its offensive military operations and return occupied territory to the Ukrainian people expeditiously.
In addition to the promulgation of the twelfth (and more recently, thirteenth) round of European Union (“EU”) sanctions against that beleaguered nation, the United States continued to designate a plethora of individuals and entities it deemed complicit in Russia’s industrial base and war effort for inclusion on the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) Specially Designated Nationals and Blocked Persons List (“SDN List”). In September 2023, for instance, the United States moved to sanction more than seventy (70) persons and entities complicit in Putin’s war effort, including most notably, major Russian rolling stock manufacturer Transmashholding JSC (“Transmash”), responsible for the mass production of various inputs for the expansion of railways and urban transportation systems that were later militarized to support the mounting of conventional and unconventional infantry and artillery weaponry. In the context of the same action, OFAC took the unusual — although not unprecedented — step of designating several logistics firms including Siberica Oy (Siberica) and Luminor Oy (Luminor) from third party country Finland thought to have been complicit in exercising subterfuge to export a variety of electronic components into the Russian Federation itself. These items conspicuously included UAV cameras, high-performance optical fibers, and lithium batteries — components integral to Russian efforts to militarize unmanned aerial vehicles against the Ukrainian populace.
The "new FCPA"
These efforts were supplemented by Deputy Attorney General Lisa Monaco’s longstanding pledge to prioritize sanctions enforcement as the "new FCPA" — a not-so-subtle allusion to the zeal with which federal prosecutors have pursued violations of the U.S. Foreign Corrupt Practices Act against both entities and individuals with increasing frequency over the course of the past decade. As Monaco boldly reminded industry again in 2023, the Justice Department intended to boldly target orchestrated sanctions evasion schemes in key sectors like transportation, financial technology, banking, defense and agriculture by adding significant prosecutorial resources to the effort. Those efforts clearly bore fruit, as OFAC itself resolved a litany of cases implicating entities as varied as foreign financial institutions and payment card reward systems for violations of multiple sanctions regimes, which often included prohibited transactions in the occupied region of Crimea. On the criminal prosecution front, the U.S. Attorney’s Office for the Southern District of New York (“USAO SDNY”)pursued sanctions violators with impunity including most notoriously, a former Special Agent in Charge (“SAC”) of the FBI Counterintelligence Division in New York, who pled guilty to violating both the International Emergency Economic Powers Act (“IEEPA”) and to prohibitions against money laundering in assisting a Russian oligarch evade U.S. sanctions regulations. For his active role in undermining sanctions activity and subverting U.S. foreign policy objectives, former SAC Charles McGonigal was sentenced to a term of incarceration of 55 months. USAO SDNY similarly announced indictments against a number of New York residents and Canadian nationals for engaging in a sophisticated front scheme to unlawfully source and purchase millions of dollars of dual-use electronics for end-users in the Russian Federation, including most egregiously, entities affiliated with the Russian military. The components sourced and shipped under the guise of these schemes were later found to be of the same make, model and part numbers of seized Russian weaponry on the Ukrainian battlefront. According to government sources, these schemes involved millions of dollars worth of dual-use commodity exports that included semiconductors — key electronic components in virtually every modern technological context.
New sanctions, new scrutiny
With the announcement of the EU’s thirteenth overall package of economic sanctions against Russia in late February 2024 and concomitantly, President Joseph R. Biden Jr.’s much-publicized expansion of sanctions designations to hundreds of new entities and individuals complicit in the Ukrainian war and the recent death of Russian opposition leader Alexey Navalny in a Russian gulag, 2024 promises to be another decisive year for sanctions and export control enforcement. Notably, recent sanctions activity seems to be targeted — among other things — at the Russian Federation’s financial system, which has flaunted traditional banking systems by devising its own mechanism for facilitating and processing payments under the aegis of the notorious “Mir payment card” system. On the same day that the EU’s latest sanctions package was announced, the entity responsible for the oversight and administration of that system — namely, National Payment Card System Joint Stock Company (“NSPK”) — was officially added to OFAC’s SDN List. This follows the Biden Administration’s persistent efforts throughout 2023 to alert financial institutions in particular to suspicious activity involving potential efforts to circumvent existing sanctions regulations and even to utilize secondary sanctions against foreign violators. In a similar vein, businesses should anticipate that any transactions having even the slightest Russian Federation connection will be heavily scrutinized by U.S. financial institutions and are likely to be reported to the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Risk-based due diligence is critical
As always, the key to mitigating the potential for sanctions violations — whether deliberate or unintentional — is risk-based due diligence of parties with Russian Federation and/or Belarusian connections. Even entities in close proximity to these jurisdictions with no discernible ties to illegal activity should be scrutinized for diversion and evasion risks utilizing enhanced due diligence (“EDD”). A robust system of continuous sanctions screening is imperative as the sheer number of organizations and individuals added to international sanctions list increases exponentially. Once considered a luxury, continuous sanctions screening for organizations engaging with high-risk third parties is now a crucial requirement, especially for entities with complex global operations and multiple sensitive touchpoints. The solicitation and disclosure of beneficial ownership information is also part and parcel of ensuring that a customer’s business partners are not operating as front companies for either Russian oligarchs or designated entities. The utilization of contractual provisions — including customized sanctions and export control covenants and the execution of detailed end-user certificates — can assist the organization in proving the existence of mitigating circumstances in the event of an enforcement action. Finally, when in doubt, disclose. Under the voluntary disclosure frameworks maintained by the Treasury, Justice and Commerce Departments, those who report suspected violations of applicable sanctions and export controls will be treated far more favorably than those who fail to report such violations and are later discovered to have been involved in illicit activity. This is all the more imperative as the Commerce Department in particular has incentivized the reporting of trade controls violations by encouraging competing companies to essentially “tell” on each other in exchange for cooperation credit in the context of future proceedings.
Little margin for error
In short, the margin for error in the sanctions and export controls space is narrowing. Organizations that have not implemented robust third-party due diligence, enhanced screening, and sophisticated KYC procedures risk becoming a test case for a lack of diligence in adopting corporate controls sufficient to deter misconduct in the sanctions space.
