Sanctions Under EO 14114

Who will be first?

JoachimKohler-HB, CC BY-SA 4.0, via Wikimedia Commons

President Biden in late December signed Executive Order (EO) 14114, amending EO 14024 and, among other things, authorizing OFAC to impose secondary sanctions on foreign financial institutions that support Russia’s war machine. I was, quite frankly, surprised that the occasion didn’t include an Annex, listing a few financial institutions designated under the new authority.

But the mere threat of secondary sanctions seems to have been pretty effective. As I wrote in January, certain banks in China, Turkey, and the UAE must be a little nervous, given their ties to Russia. I was right.

Media reports in late January said that at least two state-owned banks in China began reexamining their relationships with Russian entities. Financial institutions in Turkey, which is working to get off the FATF grey list of jurisdictions under increased monitoring for AML regime deficiencies—and still has not successfully done so—are also increasing their scrutiny of transactions linked to Russia, slowing transactions with Russian clients.

Although the mere threat of being cut off from the US dollar for transacting with Russian military entities was effective for some, other banks haven’t gotten the message yet, so Treasury’s Acting Assistant Secretary for Terrorist Financing and Financial Crimes, Anna Morris, paid a visit to Austria last week.

Why Austria?

1 - Because it’s one of the European countries with closest ties to Russia.

2 - Three words: Raiffeisen Bank International (RBI)

Reuters last year reported that OFAC was investigating RBI’s Russia business, since the Austrian lender plays a huge role in Russia’s economy and is one of several banks that has not shut down its business there.

Responding to questions from Reuters, the bank said it had received a request from the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) in January to "clarify payments business and related processes maintained by RBI in light of the recent developments related to Russia and Ukraine."

OFAC had asked Raiffeisen for details of its exposure in Russia, the partially occupied Donbas, Ukraine and Syria, including about the transactions and activity of certain clients, a source told Reuters.

Czechia last year launched an investigation into RBI’s Russia business activities. The Czech Association for the Rights of Citizens and Entrepreneurs filed a complaint against Raiffeisen, accusing it of continuing activities in Russia and sponsoring Moscow’s invasion of Ukraine. And the bank is still listed on Ukraine’s list of “war sponsors.”

Although RBI has not been sanctioned in the past, its record of financial compliance is certainly not squeaky clean.

Reuters last month reported that Austria's financial regulator has been investigating RBI over anti-money-laundering (AML) failures, focusing on the bank’s know-your-customer (KYC) rules.

The Austrian Financial Market Authority in 2018 fined RBI over a breach of due diligence requirements for the prevention of money laundering and terrorist financing after investigating the bank for two years after it was cited in the "Panama Papers" leaks in 2016. The Austrian Supreme Administrative Court in 2019 overturned the €2.7 million fine that was imposed on RBI after the bank appealed. But it’s still not a great look for the bank.

Bill Browder, a prominent Kremlin critic, in 2019 accused Raiffeisen of handling more than $634 million in dirty Russian money. Interestingly, the Austrian Public Prosecutor’s Office declined to take action following that complaint.

The Organized Crime and Corruption Reporting Project (OCCRP) in 2019 reported on the Troika Laundromat—run by the Troika Dialog, a Russian asset manager—that involved a huge offshore network used by oligarchs, business tycoons, and criminals in part to evade taxes and move money out of Russia, as well as to launder illicit funds and to which Raiffeisen was linked.

Raiffeisen made some serious profits since the war began, but the reputational damage cannot be denied, and many, including Ukraine’s ambassador to Austria, accuse the bank’s earnings of being “tainted with blood.” The bank last year was in talks with two potential buyers to sell its Russian business, and at the end of the year, it apparently came up with a risky way to finally offload that cow that involved sanctioned Russian oligarch Oleg Deripaska. Raiffeisen has severed business ties with more than 30 big Russian clients, including oligarchs, since the war began, but leaving outright has proven difficult.

Dividend payments back to parent companies are banned, trapping earnings within Russia, and companies from “unfriendly” countries must have any sale of Russian subsidiaries approved directly by the Kremlin.

The official criteria for approval are onerous: the value of a business will be determined by Russian authorities, and subject to a 50 per cent discount. A seller can then choose to receive the money in installments over several years, or else make a “voluntary donation” equivalent to 10 per cent of the transaction value directly to the Russian government.

So will RBI be the first to be designated under EO 14114? If Anna Morris’s trip last week is any indication, it’s certainly possible. The media is rife with speculation about that possibility.

Reuters outright said that Morris would warn Raiffeisen about its Russia business activities.

The EU Observer said that Morris has threatened Austria’s top bank, warning that it was at risk of being cut off from the US financial system.

All eyes are on Raiffeisen right now, and I would bet it’s at the top of OFAC’s target list.

But there are others.

Western banks have been working to reduce their Russia exposure, but some are still hanging in there, including Dutch ING, Germany’s Commerzbank and Deutsche Bank, and Italy's Intesa SanPaolo and Unicredit. Hungary’s OTP Bank is also operating in Russia, as are some big western players.

So who is going to be first to be designated under EO 14114? Remember, they have to be willfully transacting with Russia’s military-industrial sector, and those transactions have to be significant.