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The expansion of sanctions against the Russian financial sector—both in terms of sanctionable conduct and designations—appears to be one of the more likely courses of action for the Administration over the next 60-120 days. It may include an increase in the severity of sanctions against already-designated Russian banks, and additional restrictions on the Central Bank of Russia—either through a combination of administrative action, congressional action, or pressure, or both. This is the first of two Sanctions Watches reviewing possible future measures by the Administration in the Russian financial sector. on before leaving town.
While it is likely that the US will target additional sectors of Russia’s economy for sanctions in response to continued Russian operations in Ukraine, the expansion of sanctionable conduct in existing sectors will likely continue—particularly in Russia’s financial sector. Central to increasing the effect of the financial sector sanctions effort are additional measures expanding the scope of sanctionable conduct and/or an increase in the quality and quantity of sanctions designations.
PATRIOT ACT Section 311. It is necessary to first examine where the Administration could expand the range of sanctionable conduct within the financial sector. One area for expansion is the use of Section 311 of the USA PATRIOT Act to target Russia as a jurisdiction. It authorizes the Secretary of the Treasury to designate a bank, financial institution, or even jurisdiction to be of primary money laundering concern (PMLC). A PLMC designation is based on whether the institution or jurisdiction is utilized to promote money laundering, among other factors. The designation as a PLMC imposes a range of restrictive measures that, while not technically sanctions, have the effect of sanctions due to either imposing significant due diligence measures for US banks or outright prohibiting US banks and financial institutions from providing services to any financial institutions with a link to a PMLC.
Like minded nations may be taking such an approach. A March 16 joint statement from the Financial Intelligence Units of Australia, Canada, France, Germany, Italy, Japan, the Netherlands, New Zealand, the United Kingdom, and the United States on the threat of Russian illicit finance pledging increased coordination. Similarly, on March 7, 2022, the Financial Crimes Enforcement Network (FinCEN) issued guidance alerting all financial institutions in the United States to be “vigilant against efforts to evade the expansive sanctions and other U.S.-imposed restrictions implemented in connection with the Russian Federation’s further invasion of Ukraine.” Of note was the advisory’s warning that sanctioned Russian and Belarusian individuals and entities could evade sanctions by operating through non-sanctioned Russian and Belarusian financial institutions and financial institutions in third countries, particularly convertible virtual currency exchangers and administrators that retain at least some access to the international financial system.
Targeting the Mir Payments System. The Administration could extend sanctions against the Central Bank of Russia to target international payments operated by the Mir system, a Russian payment processing system. In early March, credit card networks Visa, Mastercard, and American Express suspended operations in Russia in response to Moscow’s invasion of Ukraine. Visa and Mastercard cards issued by Russian banks are still working within Russian borders due to the operations of Mir. The Russian government established Mir in 2014 after Russian forces seized Ukraine’s Crimean Peninsula, amidst Moscow’s concern that it would be cut off from international payment systems. While Mir has mostly been used for bank transfers related to welfare or pension payments, it does have an international footprint, and Russia has been eager to bring other countries into the Mir system since its inception. China’s UnionPay – an international payment system that received international status in 2005 and can be used for payments worldwide – may provide Mir a lifeline. Numerous Russian banks, including Sberbank and Alfa-Bank that were recently designated as Specially Designated Nationals And Blocked Persons List (SDNs), have indicated they may issue Mir-UnionPay co-badged cards.
Targeting the System for the Transfer of Financial Messages (SPFS). The Administration could also extend the application of sanctions against the Central Bank of Russia to target SPFS, Russia’s specialized messaging services alternative to SWIFT, or international transactions. It was developed in 2014 during the last Russian incursion into Ukraine amid fears that Russian banks could be kicked off SWIFT in retaliation. According to Russia’s Central Bank, SPFS had 338 users as of March 3. They include major Russian financial institutions and other companies as well as a relatively small number of foreign banks, many of them subsidiaries of Russian banks. The system currently handles about one-fifth of Russia’s total domestic payments. Moscow and Beijing have previously discussed linking SPFS and China’s Cross-Border Interbank Payment System as part of their broader efforts to undermine the effectiveness of U.S. sanctions.