The imposition of US and European sanctions on Russia could create an unprecedented compliance headache for financial institutions, legal professionals are warning. 

Western governments continue to threaten Russia with restrictions on trade and financial flows if it embarks on military action against neighbouring Ukraine. The Kremlin denies it plans to launch an attack, but has built up vast numbers of troops along its Ukrainian border while issuing security-related demands to the US and its allies. 

The prospect of fresh restrictions has rattled markets, including in banking, payments, metals and agricultural goods trade. 

If sanctions were imposed, it would not be the first such action against the Kremlin. In 2014, the US placed restrictions on several Russian institutions, including its largest lender Sberbank and several energy giants, including Gazprom and Rosneft. 

However, speaking at last week’s Sanctions Space Summit – a two-day virtual event hosted by the Association of Certified Anti-Money Laundering Specialists (ACAMS) – trade sanctions experts believe new measures would present a first-of-its-kind challenge to financial institutions active in the region. 

“If we take a step back, then what’s being proposed doesn’t come close to what’s already in place on North Korea, or even on Cuba,” said Adam Szubin, a member of US law firm Sullivan & Cromwell’s financial services group and a former director of the US Office of Foreign Assets Control (Ofac). 

“Current sanctions on Russia… might be at a two, or two and a half [out of 10], and what I hear the administration talking about is taking them up to a five or a six.  

“But that’s probably not the right way of looking at things if you’re looking at macro-economic impacts, because Russia is one of the 20 largest world economies, and the level of financial flows is exponentially greater than what you have in Iran, North Korea, Cuba or Sudan. So I think in that sense, we’re heading into uncharted territory.” 


Legal challenges 

Jessica Bartlett, global head of financial crime legal at Barclays, said one complication is that restrictions imposed by the US might not be matched exactly by those from the EU or the UK. That would create a “very complex environment” for financial institutions. 

“Even when there is convergence, it’s not going to be uniform,” she said.  

“There are going to be differences. There could be big differences that you’ll need your legal and compliance professionals to be looking at closely to make sure that you fully understand what the obligations are and how you’re going to conduct your risk assessments appropriately.” 

One example is that Ofac’s so-called 50% rule – where any property or interest that is more than 50%-owned by a sanctioned entity is automatically subject to the same sanctions – is not matched in the EU’s equivalent regime, where the emphasis is on ownership and control. 

A further complication could arise from long-term project finance agreements, where contracts may have been entered into decades previously “in a very different political and sanctions environment”. 

“That can create some legal challenges for everyone to work through,” Bartlett said. 

John Smith, a partner at Morrison & Foerster and another former Ofac director, said another area where Washington and Brussels may diverge is when Russian entities have potential links to Europe. 

In 2014, he explained, it was more challenging for the EU to impose sanctions because Russian individuals or companies may have residence within a member state. 

“Where it became a sticking point were on those particular sanctions – powerful sanctions, powerful designations – that the EU simply did not want to go forward with,” Smith said. “[That was] partly because many of the sanctions designations might have impacted actors that had their tentacles within the EU.” 

For financial institutions, the result could be “a legal and logistical nightmare”, he warned. 


Uncertainty ahead 

A further complication could be the knock-on effect on banks’ dealings in China. Szubin told the conference he expects Chinese institutions would pick up some of the business exited by US and European lenders, noting forthcoming bilateral talks between the two nations’ leaders. 

Smith said he expected the US administration may extend sanctions to Chinese companies that partner with blocked Russian entities, particularly those “that aren’t too big to sanction… that can be picked off, and a lesson can be given”. 

That said, some of the potential complexity could be eased if the US applies some flexibility in its imposition of sanctions – something it has increasingly shown willingness to do. 

In the case of Ethiopia, for instance, he said Ofac opted to waive the 50% rule on certain designations. Authorities can also issue guidance stating that specific conduct, activities or entities do not fall within the scope of secondary sanctions. 

As of press time, the UK’s foreign and defence ministers are reportedly travelling to Moscow to negotiate an end to the stand-off. However, according to Reuters, Russia’s ambassador to London has said any conversation will be “fairly short” if the UK continues to threaten sanctions. 

Compared to 2014, Russia has built up greater resilience to sanctions from Western governments, building up foreign exchange reserves and decreasing the percentage of government bonds that are foreign-owned. 

The EU is also vulnerable to retaliatory action restricting Russian gas exports, particularly after price surges have caused unrest in several European countries.