With the imposition of sweeping new sanctions on Russia and Belarus following the invasion of Ukraine, federal financial regulators are issuing warnings about efforts to evade these actions. On Monday, March 7, 2022, the Financial Crimes Enforcement Network (FinCEN) issued an alert about the potential evasion of the sanctions (FIN-2022-Alert001). FinCEN’s acting director said, “In the face of mounting economic pressure on Russia, it is vitally important for U.S. financial institutions to be vigilant about potential Russian sanctions evasion, including by both state actors and oligarchs.” The FinCEN alert provided a list of 10 red flags to assist financial institutions in identifying potential sanctions evasion activity and reminded financial institutions of their duty under the Bank Secrecy Act to file suspicious activity reports (SARs), including transactions involving digital currency, which FinCEN often refers to as convertible virtual currency.
FinCEN stated that it is critical that financial institutions quickly identify potential sanctions evasion activity and file SARs. The alert specifically mentioned cryptocurrency exchangers and administrators with visibility into cryptocurrency transactions. FinCEN reminded financial institutions to conduct appropriate risk-based customer due diligence on their customers and that they should also employ innovative tools and solutions. Finally, FinCEN asked all financial institutions to maximize the sharing of information with each other under Section 314(b) of the USA PATRIOT Act. When filing SARs on potential Russian sanctions evasion, financial institutions should use the following key term in SAR field 2: “FIN-2022–RUSSIASANCTIONS.”
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions related to the Russian financial services sector pursuant to Executive Order 14024, including:
- Correspondent and payment processing prohibitions on certain Russian financial institutions
- Blocking of certain Russian financial institutions
- Expanding sovereign debt prohibitions to new issuances in the secondary market
- Prohibitions related to new debt and equity for certain Russian entities
- Prohibitions on transactions involving certain Russian government entities, including the Central Bank of the Russian Federation.
OFAC also sanctioned numerous Russian elites, their family members, Russian disinformation outlets, and Russian defense-related firms. In a related action, OFAC sanctioned certain Belarusian persons, including financial institutions.
FinCEN cautioned that sanctioned Russian and Belarusian actors may attempt to evade sanctions through non-sanctioned financial institutions throughout the world. The sanctions evasion could also occur through digital currency exchangers and administrators. FinCEN encouraged financial institutions to review FinCEN’s previous guidance concerning senior foreign political figures, their families, and their associates (often referred to as politically exposed persons or PEPs).
Red flags identified by FinCEN include:
- Use of legal entities or arrangements to hide ownership, source of funds, or countries involved.
- Use of shell companies to conduct international wire transfers involving countries distinct from the country of the company’s
- Use of third parties to hide the identity of sanctioned persons and/or PEPs.
- Accounts that suddenly increase in value without a clear economic or business rationale.
- Countries previously associated with Russian financial flows showing a notable recent increase in new company formations.
- New accounts that attempt to send or receive funds from a sanctioned institution or an institution removed SWIFT.
- Non-routine foreign exchange transactions that may indirectly involve sanctioned Russian financial institutions.
- Transactions involving certain higher-risk IP addresses including ones located in Russia, Belarus, and other FATF identified high-risk countries.
- Transactions connected to digital currency addresses listed on OFAC’s Specially Designated Nationals and Blocked Persons List.
- Transactions involving a digital currency exchanger or money service business located in a high-risk country.
The imposition of Russian and Belarusian sanctions has been rapid and substantial. It is important to note that not every transaction involving a sanctioned individual, country, or entity is prohibited. This may lead to complex analyses to determine whether a transaction is covered by the sanctions. The FinCEN alert places financial institutions on notice of red flags when monitoring customer activity for suspicious activity and when determining whether to file a SAR. If your institution has any questions related to this FinCEN alert, or related matters concerning regulations of certain transactions, please contact Partner Constantine Lizas of our Financial Institutions and Capital Markets team or the Harris Beach attorney with whom you usually work. Constantine was most recently the FDIC’s lead Counsel for Bank Secrecy Act/anti-money laundering matters.
If you have any questions about the matters in this Legal Alert or any other legal issues, please contact Ross B. Hofherr at (212) 313-5482 / email@example.com, Constantine P. Lizas at (202) 975-9780 / firstname.lastname@example.org , or the Harris Beach attorney with whom you usually work.
This alert does not purport to be a substitute for advice of counsel on specific matters.
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