Pulling no punches: US President Joe Biden gives a speech on the ongoing war in Ukraine in October 2023. Image: The White House / Wikimedia Commons
Having moved in lockstep with its allies for nearly two years, the US is flexing its muscles as its Russia sanctions response moves into a new phase.
‘Twas the night before Christmas, when all through the house, not a creature was stirring, not even a mouse. Well, unless that house was home to a sanctions compliance banker, in which case all plans will have been cancelled. Stirring there certainly will have been, as they frantically tried to understand the implications of the latest sanctions developments. With the exquisite timing of Santa, the White House came down the chimney with – in the view of this author – a long overdue gift.
When Ukraine’s allies rolled out their sanctions regimes in response to the Kremlin’s full scale invasion in February 2022, both sides of the Atlantic were at pains to emphasise the extent to which coordination was central to their response. Despite some curious gaps between the various sanctions designations, the sense of coordination was real.
And so it remained into 2023, with joint trips to third countries by groups of UK, EU and US sanctions policymakers, agreed communiqués on sanctions by the G7, and a strong sense of shared purpose. But as the months passed, the tensions began to emerge. Notably, the EU’s glacial pace on introducing new sanctions packages contrasted with the more dynamic approach of the US and UK, which even felt it necessary at times to take unilateral action against targets in the EU itself.
After a year of anaemic enforcement action by member states, the toing and froing and watering down by the EU of the 12th sanctions package was, perhaps, the breaking point for the US. And so it came to pass that having waited patiently and avoided deploying the full dynamism of the sanctions authorities at its disposal, on 22 December – at the last moment before most people’s year-end break – the White House made its move. Announcing amendments to existing Executive Orders, the White House made clear that ‘foreign financial institutions that facilitat[e] significant transactions relating to Russia’s military-industrial base may expose them to U.S. sanctions’. Put simply, in its effort to restrict Russian access to key battlefield goods, the US government has made it clear that it will hold banks that process related transactions to account.
Why Does This Make Sense?
Over the past 18 months, RUSI researchers have had the opportunity to visit more than a dozen countries across the EU and its neighbourhood to assess efforts to implement sanctions on Russia. There is generally no lack of will or energy, but there is often a distinct lack of effectiveness as the focus of the sanctions has become more detailed. In particular, over time, the Russia sanctions regimes have become less about freezing assets – something with which banks across the EU are very familiar – and more about disrupting Russia’s access to the key goods required to sustain its military. Curtailing the ability of Russia to procure these key battlefield items has been at the centre of the diplomatic efforts made by the EU, UK and US as their policymakers have toured countries – often bordering Russia – that have emerged as staging posts for trade that would have once travelled directly to Russia from factories in the West. And although the focus of Western allies has been primarily on the trade of goods, this is matched by an accompanying flow of finance that is now coming under heightened scrutiny. If a trader in Kazakhstan wants to buy microelectronics from France, they will need to make a payment – most likely to a French bank. And herein lies the vulnerability that the US authorities are seeking to target.
After a year of anaemic enforcement action by member states, the toing and froing and watering down by the EU of the 12th sanctions package was, perhaps, the breaking point for the US
For decades, banks – unlike many of the manufacturers now at the centre of the sanctions arrayed against Russia – have been required to conduct controls to ensure that they are not processing payments that facilitate sanctions evasion. In recent years, banks such as BNP Paribas, Standard Chartered and ING have faced heavy monetary penalties for facilitating such financial flows. Banks have thus long experienced the responsibility of being on the frontline of sanctions implementation, where they are expected to block transactions related to sanctioned individuals and companies.
The latest step from the US merely ramps up this responsibility. Not only must banks prevent sanctioned customers from using their services, but they must also prevent customers engaged in activities that are subject to sanctions from using their services. As the new Executive Order makes clear, US authorities now have the power to sanction financial institutions ‘determined to have conducted or facilitated any significant transaction, or provided any service, involving Russia’s military industrial base, including the sale, supply, or transfer to Russia of certain critical items’.
Thus, while a French bank would be allowed to process a payment for a French microelectronics company related to the export of its products to Dubai, if those products were to go onward to Russia and the bank could have reasonably suspected that the Dubai entity was acting as a cut-out, then it could expect to face the full force of the US authorities.
During many of our country visits over the past two years, the authorities in both EU and neighbourhood countries have told us directly that they are relying on the controls of their banks to ensure that companies are not breaching the trade sanctions placed on Russia. For example, our February 2023 report on France noted that ‘The strength of understanding of anti-money-laundering and counterterrorist-financing (AML/CFT) risks in the French financial sector, and its supervisors, is a key pillar on which the implementation of Russia sanctions relies’, with representatives from DG Trésor highlighting ‘the benefits they believe stem from a robust national AML/CFT system, suggesting that as trade flows largely involve financial institutions, and French banks have strong AML/CFT transaction and client monitoring systems, they are in an ideal position to also monitor for activity in breach of sanctions, and thus ensure the compliance of their clients. The French sanctions implementation system has thus placed banks on the front line of sanctions implementation, relying on their AML compliance capabilities, which require them to report any suspicious transactions to Tracfin, France’s financial intelligence unit’. The US government is now calling out this reliance on the banking sector.
Banks have long experienced the responsibility of being on the frontline of sanctions implementation; the latest step from the US merely ramps up their level of responsibility
For the past two years, the Kremlin and its intelligence service have worked hard to outsmart Western sanctions, and while Ukraine’s allies have repeatedly targeted companies and individuals facilitating the procurement of sensitive goods and the circumvention of sanctions, the failure of countries to fully engage the private sector – notably banks – in this challenge has been an increasingly glaring gap. The White House’s year-end present for bankers was clear: ‘those who are supplying goods or processing transactions that materially support Russia’s military industrial base are complicit in Russia’s brutal violation of Ukraine’s sovereignty and territorial integrity'.
Banks, you have been warned – Happy New Year!
The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.
Have an idea for a Commentary you’d like to write for us? Send a short pitch to email@example.com and we’ll get back to you if it fits into our research interests. Full guidelines for contributors can be found here.
Centre for Financial Crime and Security Studies