Sanctions Watch

Roundup: January 1 - January 31, 2023

January 31, 2023

Russia will continue to dominate sanctions-related headlines, particularly with the pending oil price cap determinations. Iran sanctions are increasingly targeting systemically significant targets, while Congress continues to slowly organize with a focus on China. 


During the reporting period, Russia sanctions efforts continued to focus on the oil price cap and, as part of the next sanctions package to be implemented on February 5, placing limits on high and low-value exports such as diesel and fuel oil, respectively.  In response, Russia will likely ban the sale of its crude oil, and high and low-value products that will likely go into effect on February 1, in advance of the G-7 restrictions. There are additional measures under consideration given the trajectory of Russia sanctions, particularly with respect to asset forfeiture. Estonia is considering legislation to allow the government to seize Russian assets, and it is under active discussion in the EU to include over $300 billion in Russian Central Bank reserves and billions more in frozen assets owned by sanctioned Russian individuals. The EU is also working on its 10th package of sanctions, which may include imposing sanctions or restrictions against Russian state nuclear energy company Rosatom. The primary question is whether the Biden Administration would also impose sanctions against Rosatom. Additionally, there is an active debate within the EU on whether to designate  Rosatom, which could also spill over into the U.S.  

The Administration also continued to impose sanctions and other restrictive measures on Russian individuals and entities. During the reporting period, the Financial Crimes Enforcement Network (FinCEN) designated Bitzlato, a virtual currency exchange, as a primary money laundering concern linked with Russian illicit financing in what was the first order is the first to be issued under Section 9714 of the Combating Russian Money Laundering Act. This is significant because it is the first exercise of new authorities provided to the Administration by Congress prioritizing specially Russia-associated money laundering that replicate those targeting anti-money laundering (AML) and counter-terror finance (CTF) generally. The Treasury Department also designated the Wagner Group as a Transnational Criminal Organization (TCO) in a likely attempt to broaden the types of assets that could be blocked in the future given two high-profile indictments: one regarding the operation of a yacht owned by sanctioned Russian oligarch Viktor Vekselberg and a second regarding a former senior FBI agent acting as an agent for Russian oligarch Oleg Deripaska.     

An area that the Administration or Congress may turn to in terms of additional sanctions and restrictive measures is to address attempts by the Russian central bank to start developing a cross-border payment settlement system using a central bank digital currency (CBDC).  According to public reports, Russia will examine either separate bilateral agreements with Russia to integrate their CBDC systems such as what they have discussed with Iran, or a singular platform for Russia to interact with other countries on CBDC-related matters. This is an area where we expect to see additional scrutiny given the emphasis on the part of the Administration, UK, EU, and other G-7 partners on targeting sanctions evasion networks. Another notable sector receiving additional scrutiny is the real estate sector; FinCEN recently issued an advisory for U.S. financial institutions to watch for Russian oligarchs seeking to evade sanctions by investing in commercial real estate through complex financing methods and opaque ownership structures to include offshore vehicles.


The Commerce Department extended export controls currently in place for China on advanced computing integrated circuits and semiconductors to items to Macau. This is significant because Commerce determined that Macau was a potential jurisdiction of concern with respect to the potential diversion of these items from Macau to China. This is particularly important in light of the multilateral controls that the U.S. has been advancing with the Netherlands and Japan regarding the export of such chips to China. 


Iran has remained a focal point of Administration sanctions policy and will likely continue to do so as the prospect of reentering the Iran nuclear agreement continues to fade. Key areas of concern remain Iran’s reaction to recent protests and supply of unmanned aerial systems and possibly other military equipment to Ukraine. Against this backdrop, the Administration has taken a number of different actions within the reporting period. Treasury most recently took aim at Hizballah by designating one of Hizballah’s chief financial advisors Hassan Moukalled and his money service business CTEX Exchange, in addition to issuing rewards for information on Hizballah financiers in Guinea. The Administration began targeting structurally significant targets in Iran under human rights authorities, beginning with the IRGC cooperative foundation and its key financiers. During the reporting period, Treasury also designated executives and board members of the Iranian aerospace company Qods Aviation Industry over the organization’s production and delivery of unmanned aerial vehicles to Russia under proliferation-related sanctions.  Expect these types of designations to continue and increase as Russia’s offensives in Ukraine continue.  


The Administration renewed licenses related to the PDVSA/Citgo bonds during the reporting period, but they also provided guidance on a favorable licensing policy toward those seeking to apply for a specific license in an effort to reach an agreement on restructuring bond payments.   

Concurrently, the Administration reportedly has granted a license to Trinidad and Tobago to develop the Dragon gas field located in Venezuelan territorial waters, allowing it to conduct certain transactions with the sanctioned state-run oil company PDVSA. It was also reported that Trinidad and Tobago would pay Venezuela for its natural gas produced with humanitarian supplies, consistent with U.S. sanctions prohibiting cash payments to the government.


The Administration continues to highlight the need to guard against sanctions overcompliance. This past month Treasury Undersecretary Brian Nelson traveled to Seattle, San Francisco and San Diego in the coming weeks to warn banks against over-compliance and convince them not to cut eligible people off from financial services. Given the Administration’s emphasis on enhancing the effectiveness of humanitarian exemptions, including through the recent issuance of multiple general licenses, this trend can be expected to continue.

Anti-Money Laundering

The reporting period also saw several developments that will impact both the AML and cryptocurrency space. The first was the report that a political agreement at Council level has been reached on the proposed Anti-Money Laundering Regulation (AMLR) and the new 6th Anti-Money Laundering Directive (AMLD6) pending first reading of such legislative texts at the European Parliament. The Council is now in a position to commence negotiations with the European Parliament, for the eventual agreement and adoption of the final version of the legislative text that may include the following changes: applying regulations to those trading in precious metals, precious stones, and cultural goods; harmonizing as much as possible the interpretation of the elements of “ownership” and ‘control;” applying that beneficial ownership standard in the case of express trusts, foundations, and collective investment; and the prompt transcription into EU law/regulations of FATF listings of monitored and high-risk jurisdictions.  This is important as it tracks efforts within the U.S. to extend AML requirements to other similar professions, and such advances may provide support and encouragement to such efforts in the U.S. 


With a slow opening of Congress, the committee formation process has suffered, with committees not only slow to organize but secure their budgets and hire staff.  Nonetheless, the membership of the committee clearly displays a focus on defense (Rep. Rob Wittman (R-VA), Rep. Jim Banks (R-IN)), and financial services (Rep. Andy Barr (R-KY) and Rep. Blaine Leutkemeyer (R-MO)) as key areas of focus for the Committee.  The relationships between the select China committee and the national security committees in the House appear to be good, with the China committee likely to serve as a clearing house for ideas that may then be taken up legislatively by the standing committees. Already, Chairman Mike McCaul (R-TX) of the House Foreign Affairs Committee has stated that he intends to mark up legislation banning TikTok in the U.S. Already legislation has been introduced sanctioning the misappropriation of personal data, and the origins of COVID-19, so we may expect a flurry of legislation at the outset of the Congress.  It will also be important to monitor the fentanyl debate in Congress given the interlinks between Chinese-origin precursors and cartel activity.  


The Russia debate continues to center around aiding — both military (i.e., tanks) and civilian (i.e., budget support) — the Ukrainian government, and the coming spring offensives for both Russia and Ukraine.  Cabinet shakeups within the Ukrainian government may cause some Members to increasingly focus on those issues, which has a spillover effect into oversight of US. assistance AML discussions. Sanctions and export controls will also likely be considered not only as a means of enforcing the oil price cap and denying Russia critical resources for continuing the war, but as a way to bring those supportive and opposed to increased U.S. assistance to Ukraine together. 


The House has already passed a resolution supporting Iranian protestors and is likely to move additional Iran-related legislation to include that targeting Iran itself, as well as the regime’s network such as Hamas and Hizballah. Expect Congress to increasingly focus on Iran-Russia and Iran-China ties, with legislative and other initiatives focused on those areas, in addition to the protests. 

On February 5, the second round of G-7 sanctions/restrictions will be imposed on Russia as part of the oil cap. Bipartisan criticism may set the stage for a congressional sanctions push. China-focused legislation will also continue to take shape, particularly if the Administration issues regulations for outbound investment screening to China.