The year since Russia’s invasion of Ukraine has been marked by the development of a multi-jurisdictional, multi-agency sanctions regime in the United States, the United Kingdom and the European Union. Although coordination among these parties has been close, the respective regimes are not identical. This complicates compliance for companies by requiring close consideration of all three jurisdictions’ requirements—including on such basic issues as the definition and treatment of blocked property interests—before completing transactions with a potential sanctions nexus. The United Kingdom and the European Union previously exercised quiet enforcement mechanisms, though agencies have begun to ramp up capabilities with increased funding and staffing. Moreover, a growing number of US law enforcement agencies have taken a hand in scrutinizing Russia-related transactions, each with varying priorities and jurisdiction.

This Client Alert discusses sanctions enforcement developments in the United States, the United Kingdom and the European Union, as well as cross-jurisdictional enforcement and coordination efforts, with a particular emphasis on efforts to counter Russia’s circumvention of sanctions measures.

Across the jurisdictions, one thing is clear: enforcement efforts are being staffed and resourced for the long term, and regulators will not tolerate evasive transactions in third countries.

United States

Office of Foreign Assets Control (OFAC). The Treasury Department’s OFAC has long played the primary role in overseeing sanctions policy and civil enforcement. Over the past year, OFAC has sanctioned more than 2,500 Russia-related persons and entities, as well as more than 200 entities associated with Russia sanctions evasion. OFAC has also expanded its comprehensively sanctioned jurisdictions to add the so-called Donetsk and Luhansk People’s Republics to the earlier-sanctioned Crimea region. Deputy Secretary of the Treasury Wally Adeyemo earlier this year elaborated on OFAC’s priorities. His remarks indicate that while Russia remains at the top of the list, other jurisdictions may also be the target of future sanctions, especially those found to be allowing or facilitating the evasion or circumvention of US sanctions.

Deputy Secretary Adeyemo also highlighted as priorities sectors adjacent to Russia-origin crude oil, petroleum and petroleum products as well as semiconductors, microelectronics and other dual-use electronics. Companies that export to or have business relationships with entities in the Caucasus and Central Asian republics, especially those neighboring Russia, may face increased risks. For example, on February 1, 2023, OFAC sanctioned various entities that were part of an evasion network in Russia, Cyprus and Israel for supporting Russia’s military-industrial complex. Transshipment and evasion are reportedly taking place through Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan.

Department of Justice (DOJ). DOJ took on a major role in Russia-related sanctions with the launch of Task Force KleptoCapture—an interagency task force run out of the Office of the Deputy Attorney General and devoted to the investigation and prosecution of sanctions imposed in response to the Ukraine invasion. Over the past year, DOJ has seized more than $500 million in assets and indicted more than 30 individuals and two corporate entities. DOJ has moved beyond the seizure of assets and the indictment of oligarchs to the targeting of persons for enabling the evasion and circumvention of sanctions and export control regulations, especially in support of the Russian war effort. DOJ is also working closely with OFAC to identify assets in the United States with connections to sanctioned Russian individuals that may serve as the basis for criminal enforcement actions. However, DOJ is not relying solely on sanctions violations to target circumvention. Rather, it is also targeting bank fraud, money laundering and wire fraud that rely on email communications being sent or received to advance unlawful schemes.

Sanctions enforcement is likely to accelerate, as DOJ recently announced that it is hiring 25 new prosecutors. It also recently announced the creation of a “strike force” with the Department of Commerce dedicated to enforcing export controls. This enthusiastic enforcement posture marks a shift from previous DOJ practice that did not actively pursue many Russia-related violations at this pace. A recent report counted only 14 criminal cases related to violations of 2014 sanctions placed on Russia following its invasion of Crimea, though this count may be overinclusive—DOJ itself described a March 2022 indictment as “the first-ever criminal indictment charging a violation of US sanctions arising from” the 2014 Russia sanctions programs. DOJ has since filed at least 18 criminal cases involving 39 people related to sanctions violations. And Deputy Attorney General Lisa Monaco has, more than once in the past year, described sanctions as “the new FCPA”—in reference to DOJ’s history of wide-reaching enforcement of the Foreign Corrupt Practices Act.

Given the increased focus at DOJ and the Department of the Treasury on targeting circumvention efforts that support the Russian military, companies that produce and export dual-use goods or technologies face a risk of heightened scrutiny. As is the case with OFAC enforcement, companies that export to or have business relationships with the Central Asian republics may face additional risks, especially if their goods are in these sectors. Companies that provide services over the internet also face risks as individuals and entities in the Russia-occupied regions of Ukraine seek to access their services directly or through virtual private networks.

Bureau of Industry and Security (BIS). OFAC and DOJ have also worked closely with BIS, the Department of Commerce component tasked with administering US export controls. In addition to a series of additional controls on the export of items to Russia and Belarus in response to the war, BIS issued a Tri-Seal Compliance Note along with Treasury and DOJ to identify a range of tactics used to evade Russia sanctions in order to “assist the private sector in identifying warning signs and implementing appropriate compliance measures.”

Securities and Exchange Commission (SEC). The SEC has begun to focus on investment advisors and their compliance programs, especially with respect to the receipt and management of funds potentially connected to sanctioned persons. It is also scrutinizing companies’ disclosure obligations under the Securities Act of 1933 and the Securities Exchange Act of 1934 related to any exposure to Russia, Belarus or Ukraine. The SEC’s Division of Corporation Finance has indicated that it will seek additional clarity from companies to understand the impact that their ties to these jurisdictions may have had on their business. Scrutiny will focus on issues such as:

• The extent to which companies are directly or indirectly exposed to these jurisdictions, including through company operations, employee base, investments, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty related to operating in or exiting Russia or Belarus;
• Reliance on goods or services sourced from Russia, Ukraine or countries supportive of Russia, and the extent to which import or export bans have affected company products or commodities; and
• Whether financial statements accurately reflect and disclose changes in value related to impaired asset value, inventories, exchange rates, or changes in the ability to enter into or enforce contracts with customers as a result of Russia sanctions.

The SEC is also evaluating the extent and nature of the role of companies’ boards of directors in overseeing Russia-related risks and compliance, and the effectiveness of disclosure controls and procedures related to financial reporting in light of Russia’s invasion of Ukraine.

European Union

The European Commission (Commission) plays a central role in both the adoption and the subsequent implementation of EU sanctions. Sanctions are based on joint proposals by the Commission and the High Representative of the EU for Foreign Affairs and Security Policy and are adopted by the Council of the European Union (Council), which comprises EU government ministers. EU Member States are responsible for implementing and enforcing sanctions within their respective jurisdictions.

A pivotal EU actor in the Russia sanctions context is the Commission’s Unit E.5, housed within the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA). Unit E.5 oversees the implementation and coordination efforts for the more than 40 EU sanctions regimes currently in place.

• Adoption: The Council adopted 10 sanctions packages, often following the Commission’s proposals. Importantly, European Economic Area member countries Norway, Iceland and Liechtenstein, as well as Switzerland, have moved in lockstep with the EU, largely aligning their national regimes to the European Union’s Russia sanctions.
• Implementation: The Commission, based on the work of Unit E.5, has issued and regularly updates an OFAC-style set of FAQs interpreting the Russia-related regulations. Though the list of more than 500 items is not legally binding on EU Member States, most EU operators abide by it in practice. Unit E.5 officials have emphasized the importance of providing up-to-date sanctions implementation guidance via these FAQs in a manner similar to that of OFAC.
• Coordination: Unit E.5 also represents the Commission in sanctions-related discussions with EU Member States at the Working Party of Foreign Relations Counsellors (RELEX), which focuses on sharing best practices as well as on revising and implementing common guidelines to ensure effective and uniform implementation of EU sanctions regimes.

Unit E.5 recently doubled its headcount to about 20 officials and is working on acquiring additional resources such as improved IT tools to facilitate information sharing.

Member State Enforcement Efforts. Member State enforcement efforts are notable for an expansion in the scope of trade scrutinized for sanctions violations, a vigorous though uneven approach to asset freezing and an emphasis on anti-circumvention of sanctions prohibitions. Many states have also increased the resources devoted to enforcement.

• Widened Scope: Traditionally, sanctions enforcement at the EU Member State level focused on sectors such as the military and dual-use goods in addition to asset freezes. Authorities in certain Member States, such as Belgium and France, now appear to be scrutinizing imports and exports of a wider range of prohibited products like various raw materials and industrial goods.
• Varying Scale of Asset Freezes: The top asset-freezing Member States in November 2022 were reported to be Belgium (€3.5bn), Luxembourg (almost €2.5bn), Italy (€2.3bn), Germany (€2.2bn), Austria and Ireland (€1.8bn each), France (€1.3bn), and Spain (more than €1bn). The assets, which belong to 1,239 sanctioned individuals and 116 sanctioned companies, amounted to approximately 90 percent of the €17.73 billion of assets that had been frozen across the EU by that time. By contrast, other EU Member States reported much lower amounts, with Hungary, for example, having frozen just €3,000 in assets.
• Anti-Circumvention: In early February 2023, German authorities searched the premises of three companies, as well as the residences of three suspects, as part of an investigation into possible violations of EU sanctions. One of the three companies is reported to be a German IT wholesaler, suspected of circumventing sanctions on electronic components via an intermediary company in Turkey.
• Increased Resources: EU Member States have also been bolstering their enforcement capabilities by passing new legislation or strengthening their national competent authorities. For instance, the German Sanctions Enforcement Act II, which came into force on January 1, 2023, reorganizes national sanctions enforcement structures, among others, by transferring the powers to investigate and freeze assets from state governments to a Central Office for Sanctions Enforcement. This will enable nationwide enforcement coordination. Other EU Member States, such as the Czech Republic, have focused on increasing the staff of their national institutions and have aimed for a very proactive approach not only as regards sanctions implementation but also in proposing to the Council new additions to the asset freeze list, based on relevant evidence.

EU Enforcement Coordination and Assistance. The Commission has established (and is evaluating several proposals for the establishment of) several new entities and organizations tasked with supporting Member States in enforcement as well as coordinating between them. These include: 

• “Freeze and Seize” Task Force: This entity was set up in March 2022 to ensure EU-level coordination to seize and, where the national law calls for it, confiscate assets of listed sanctioned individuals or companies. This task force works alongside other EU agencies, such as Eurojust and Europol, as well as the Russian Elites, Proxies and Oligarchs (REPO) multilateral task force, to ensure effective cooperation at a global level.
• Greater Support for Member States: The Commission is reported to be planning the launch of an initiative in June that will assist select EU Member States with sanctions enforcement. The project, which is set to run for two years, is meant to focus on identifying gaps in the sanctions regime against Russia, mapping the authorities in charge of asset freezes, exchanging good practices and improving coordination for sanctions enforcement. Costs will be covered by the Council of Europe, a non-European Union organization, and the results will feed into the European Union’s ongoing work on combating sanctions circumvention. The EU Member States participating in this initiative are Czechia, Cyprus, Denmark, Hungary, Lithuania, Malta, Romania, Slovenia and Spain. EU officials have noted that this project could be a precursor to a new EU body to coordinate sanctions oversight.
• New or Expanded Authorities for EU Bodies: Several additional proposals have also been floated. For example, in July 2022, Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and Capital Markets Union, stated that officials were open to creating a new OFAC-like EU agency or expanding the powers of the new Anti-Money Laundering Authority of the EU (AMLA), which is expected to be operational in 2024. The European Public Prosecutor’s Office (EPPO) may also receive additional powers. This body is responsible for investigating and prosecuting crimes against the financial interests of the European Union.

Asset Confiscation. The European Union has also been considering various legal options for the confiscation of Russian state and private assets as a way to pay for the reconstruction of Ukraine. In May 2022, the Commission put forward a proposal for a directive that would modernize EU asset recovery rules and expand the option to confiscate assets from a wider set of crimes, including the violation of EU sanctions. This would facilitate the confiscation of private assets where circumvention has occurred, but only after a criminal conviction. The proposal is now under discussion by the European Parliament and the Council.

The G7 countries, the European Union and Australia have also frozen approximately $300 billion worth of Russian Central Bank reserves. Two-thirds of these reserves are currently held in the European Union, with more than $211 billion reported to be held in Belgium and $23 billion in another, unnamed EU Member State. These assets, however, enjoy a strong protection against confiscation under the rules of international law governing sovereign immunity.

In February 2023, the European Union set up a working group on Russian frozen assets to assess various options for the possible confiscation or management of these assets. In that context, the Commission is considering investing the frozen Russian Central Bank reserves to generate returns that could help fund Ukraine’s reconstruction. According to the Commission, such an investment is expected to generate returns of around 2.6 percent. Upon the lifting of the sanctions, the Russian Central Bank would be able to recover the capital as well as any returns that were contractually agreed upon prior to the freezing of the assets. However, any returns in excess of that could be earmarked for Ukraine’s reconstruction.

As noted above, the Commission’s “Freeze and Seize” Task Force also has an important role in that context, being responsible for coordinating action at the EU level, in collaboration with other EU agencies and the REPO multilateral task force.

Focus on Anti-Circumvention. The Commission has been strengthening the implementation of existing sanctions, with a particular focus on anti-circumvention. As part of the eighth sanctions package against Russia (adopted on October 5, 2022), the European Union introduced a new listing criterion that allows for the sanctioning of individuals who facilitate sanctions circumvention. Subsequently, in its 10th package (adopted on February 25, 2023), the EU also imposed additional reporting obligations for asset freezes: EU persons must report to the competent EU Member State authorities any information on funds/economic resources that are owned or controlled by a sanctioned person and have been subject to any move, transfer or alteration in the two weeks preceding the sanctioning of the person in question.

Anti-circumvention measures are expected to be a central component of subsequent EU sanctions packages. After the adoption of 10 sanctions packages against Russia, several EU countries have pushed the Commission to switch its focus from the adoption of new sanctions on Russia to the enforcement of the existing ones. This follows reports that prohibited goods, such as advanced chips and integrated circuits made in the European Union or other allied nations, are shipped to Russia through third countries such as Turkey, the United Arab Emirates and Kazakhstan.

At the time of writing, there are ongoing negotiations for an 11th sanctions package, with an expected focus on anti-circumvention efforts. According to some reports, the European Union is discussing restricting access to the European Union single market for countries, individuals or companies that circumvent sanctions by, for example, reexporting banned goods to Russia. It remains unclear whether such a measure will be part of the 11th sanctions package. Some EU Member States, such as Germany, have stated that future measures should also include the introduction of end user controls on prohibited products.

Proposal to Criminalize the Violation of EU Sanctions. In December 2023, the Commission issued a proposal for a directive to harmonize criminal offenses and penalties for the violation of EU sanctions. One such offense is the circumvention of sanctions, which can occur through concealing funds or economic resources, concealing ultimate ownership, failing to comply with reporting requirements, or even failing to cooperate with administrative authorities.

The proposal also sets out common basic standards for penalties. Depending on the offense, individuals could be liable to a maximum penalty of at least five years in prison. Companies could be liable to penalties of no less than 5 percent of their total worldwide turnover in the business year preceding the fining decision. The proposal is now under discussion by the European Parliament and the Council, both of which need to agree on joint text for the directive, which will then be published and enter into force.

United Kingdom

The Office for Financial Sanctions Implementation (OFSI) is the UK agency responsible for the implementation and civil enforcement of financial sanctions. Created in 2016 and based on OFAC, OFSI was expected to be at the forefront of the United Kingdom’s stated ambition to enforce sanctions more robustly using its autonomous post-Brexit regime. In 2017, OFSI was given the power to issue fines, but it has been criticized for its perceived lackluster enforcement track record to date.

Weak Enforcement to Date. Since its inception, OFSI has issued only eight fines worth a combined £20.8 million. Almost that entire total is accounted for by a single fine of £20.5 million levied against Standard Chartered bank in 2020 for sanctions breaches related to Russia’s annexation of Crimea in 2014. In the past year, OFSI has imposed only two monetary penalties totaling £45,000, despite receiving 236 reports of potential breaches in the nine months following the invasion of Ukraine alone.

The lack of recent enforcement is perhaps unsurprising given OFSI’s focus on implementing the new Russia sanctions regime. Between February 22 and October 20, 2022, £18.39 billion worth of Russian assets were reported to have been frozen, a vast increase from the £44.4 million that had been reported as of September 2021. OFSI has also added 1,271 new designated persons to its list of those subject to sanctions and issued 33 new general licenses in relation to Russia, which allow parties to undertake activities that would otherwise be prohibited by sanctions legislation, without the need for a specific license.

Increased Resources Signal Future Enforcement Severity. With the unprecedented expansion of sanctions imposed against Russia, OFSI is taking steps to bolster its enforcement capability. It has doubled its staff headcount to over 100 full-time employees and helped develop new legislation to enhance its enforcement powers. For breaches committed after June 15, 2022, OFSI can impose civil monetary penalties on a strict liability basis (i.e., irrespective of any knowledge or suspicion). In addition, OFSI now has the power to publicly “name and shame” a person who it concludes has breached sanctions, even where no other formal action has been taken against the person.

Businesses undoubtedly face a greater risk of being fined and/or suffering reputational damage with the advent of OFSI’s new powers, although the agency has yet to make use of these. In particular, given the new strict liability regime, a company that conducts good faith due diligence on a counterparty could nonetheless incur liability if it makes an incorrect assessment as to whether that party is owned or controlled by a designated person. In March 2023, OFSI updated its enforcement guidance to clarify that, in such cases, it will consider the degree and quality of due diligence conducted to investigate ownership and control deciding whether to take enforcement action. The guidance sets out a non-exhaustive list of factors that companies should consider when conducting due diligence, which was analyzed in a previous Client Alert.

In the year ahead, we expect to see enforcement activity increase as OFSI makes greater use of its new capabilities and expanded workforce and responds to political pressure to enforce the new Russia sanctions robustly.

Interagency Cooperation. As with OFAC, OFSI works with multiple partner agencies to ensure that enforcement is coordinated across the government. This includes the Financial Conduct Authority, which is responsible for ensuring that the firms it supervises have adequate systems and controls to comply with financial sanctions, and the National Crime Agency (NCA), which is responsible for criminal enforcement of sanctions breaches (and to which OFSI refers the most serious cases).

In July 2022 the UK government established a new NCA unit, the Combatting Kleptocracy Cell (CKC), to investigate sanctions breaches and money laundering by corrupt elites in the United Kingdom. The CKC has arrested several “enablers” suspected of helping designated persons avoid UK sanctions. The NCA itself, however, has complained that the CKC’s efforts are being hampered by a lack of funding: NCA agents receive approximately one-third of the funding per officer provided to their US counterparts. The NCA’s budget for 2022–2023 is £800 million, but in 2019 the former head of the agency said the NCA needed over £1 billion a year to do its job effectively. This figure has likely increased, as this statement was made prior to the onset of the economic crises wrought by Covid and rising inflation.

International Cooperation. Given the UK agencies’ resource issues and limited track record in sanctions enforcement, it is unsurprising that they have prioritized collaboration with counterparts in other jurisdictions. In the aftermath of the invasion of Ukraine, OFSI completed more than 75 engagements with over 50 countries, a significant increase compared with previous years. A notable outcome of this engagement was the announcement in October 2022 of an “enhanced partnership” between OFAC and OFSI, pursuant to which the agencies will exchange best practices, enhance working relationships and pool their expertise. The experience of OFAC, which was founded in 1950, will be of particular benefit to the newly established OFSI and will enhance its ability to take on more complex enforcement cases.

Cross-Jurisdictional Anti-Circumvention Focus

In addition to the above efforts to amplify enforcement efforts, the three jurisdictions have begun focusing on the role that third countries play in allowing Russia to circumvent sanctions prohibitions.

For example, officials from the three jurisdictions recently convened an industry meeting on the sidelines of the World Bank Group and International Monetary Fund spring meetings to discuss continued efforts to counter sanctions evasion. The officials included Deputy Secretary of the Treasury Wally Adeyemo; European Commissioner for Financial Stability, Financial Services and Capital Markets Union Mairead McGuinness; and HM Treasury Director General for International Finance Lindsey Whyte.

Similarly, the European Union appointed David O’Sullivan as EU Sanctions Envoy. O’Sullivan, the former EU Ambassador to the United States, convened a forum with US Sanctions Coordinator Ambassador Jim O’Brien and Director of the UK’s Sanctions Directorate David Reed, along with others, to continue coordination on Russia sanctions. The three coordinators traveled to the United Arab Emirates together in January, with other travel planned.

The United States has emphasized the importance of working with allies to combat Russian evasion of sanctions through official meetings and alerts.

• Sanctions-Related Travel by Senior Treasury Department Officials: Under Secretary for Terrorism and Financial Intelligence Brian Nelson will be traveling to Switzerland, Italy, Austria and Germany in late April to meet with jurisdictions and entities that have continued exposure to Russia. Similarly, Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg will be traveling to Kazakhstan and Kyrgyzstan to join counterparts from the European Union, the United Kingdom, and the US Department of Commerce to enhance sanctions compliance and counter evasive transactions.
• OFAC Alert on Evasion of Russian Oil Price Cap: OFAC recently issued an alert stating that some tanker ships receiving US services may be manipulating their Automatic Identification Systems (AIS) to disguise Russian port calls, especially involving oil exported through the Eastern Siberia Pacific Ocean pipeline and ports. OFAC considers this behavior to be evidence of possible evasions of the price cap.

The United States has also established the REPO multilateral task force to facilitate cooperation between the United States and its allies.

Best Practices in Global Compliance

The heightened enforcement posture of more well-resourced enforcement agencies, along with a cross-jurisdictional focus on evasive transactions in third countries, creates new risks for enterprises operating around the world. Companies must have a complete picture of their global operations and would benefit by developing several touchpoint maps: 

• Jurisdictional Touchpoints: Although Russia is clearly a target of this international sanctions regime, law enforcement agencies are expanding their focus not only to jurisdictions that appear to overtly support the Russian war effort, such as Belarus, but also to countries where circumvention has occurred in the past, e.g., China and the Central Asian republics. Companies’ compliance functions should seek to fully understand the scope of their business relationships in these jurisdictions, including with entities that may operate there, to ensure that their products or services are not being unwittingly transshipped to sanctioned jurisdictions. Companies that provide software or other services over the internet should maintain controls to prevent unintentional exports of their services to the Russia-occupied regions of Ukraine.
• Product Touchpoints: Enforcement agencies’ focus on the flow of certain dual-use items to Russia creates potential risk for companies in sectors otherwise not associated with the defense sector. For example, low-end chips used in household goods like refrigerators, as well as certain vehicles, may also have dual-use capabilities—and have been a major part of increased trade flows to Russia. Companies’ compliance functions should fully understand the extent to which their products may have dual-use capabilities that put them at a risk of diversion. This may be the case even if these items do not currently require an export license.
• Regulatory Touchpoints: The growth in the number of agencies and jurisdictions with a hand in Russia-related enforcement underscores the importance of cross-functional and cross-border communication within companies. Compliance functions in the United States, the United Kingdom and the European Union should coordinate to ensure robust communication with each other to understand their respective regulators’ postures. These teams should also be liaising frequently with sales and other functions to develop advance awareness of potential regulatory scrutiny and ensure full adherence to the relevant due diligence procedures.