News

U.S. Treasury announces new sanctions targeting Russian banks, warns foreign financial institutions from using Russian alternative to SWIFT

03 December 2024

The U.S. Department of the Treasury’s Office of Foreign Assets Control has designated dozens of Russian banks including Gazprombank and issued an alert warning foreign financial institutions of the risk of U.S. sanction for using Russia’s alternative to the SWIFT System.

On 21 November 2024, Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury announced that it is designating dozens of Russian banks to the Specially Designated Nationals (“SDN”) List, including Gazprombank. OFAC additionally issued an alert that foreign financial institutions (“FFIs”) face the risk of US sanctions if they use the System for Transfer of Financial Messages (“SPFS”), which is Russia’s alternative international interbank message system to SWIFT.

SDN Designation of Gazprombank and other Russian entities

OFAC designated as an SDN Gazprombank, the third largest bank in Russia by assets, as well as six of its affiliates. Gazprombank is the bank that handles most of the international transactions for Gazprom, the largest gas producing company in Russia. Until now, Gazprombank has been the main financial conduit for energy transactions between the European Union and Russia, and, according to OFAC, Russia also used this bank to pay soldiers and their families. The Gazprombank affiliates designated in OFAC’s action are:

GPB International SA, based in Luxembourg;
GPB Financial Services Hong Kong Limited, based in Hong Kong;
GPB Financial Services Limited and GPB-DI Holdings Limited, based in Cyprus;
Gazprombank (Switzerland) Ltd, based in Switzerland;
GPB Africa and Middle East Pty Ltd, based in South Africa.

OFAC has also designated more than 50 other small-to-medium Russian banks as SDNs.

Under OFAC’s designation, a US person would be prohibited from engaging in virtually any transaction directly or indirectly involving Gazprombank and these other SDNs (and entities owned at 50% or more, directly or indirectly, individually or in the aggregate, by an SDN, per OFAC’s 50% Rule) unless otherwise authorized by OFAC via general or specific license. It is also a violation of US primary sanctions to “cause” a US person to violate US primary sanctions. In addition, there is secondary sanctions risk for FFIs under EO 14114 for processing or facilitating a significant transaction with an SDN, unless a general license applies.

Concurrent with this action, OFAC issued General Licenses (“GL”) No. 113 and No. 114 that authorize certain transactions involving certain of the newly designated entities until 12:01 am EST on 20 December 2024. Specifically:

GL No. 113 authorizes the wind down of transactions involving Gazprombank and other specifically listed SDNs, but does not authorize making payments to these banks (receiving payments from it or terminating agreements to which the bank is a party is authorized by this GL).
GL No. 114 authorizes certain transactions related to debt or equity issued by Gazprombank, and derivative contracts involving this and other specifically listed banks.

Notably, OFAC did not amend its GL 8K to add Gazprombank to the list of entities that are authorized to engage in transactions related to energy with US persons.

Additional designations in the Russian financial sector

Finally, OFAC designated more than 40 Russian securities registrars to the SDN List, due to the Russian government’s requiring the transfer of certain securities to those registrars in order to evade OFAC sanctions on Russia’s National Settlement Depository. OFAC also designated eleven officials of the Central Bank of Russia and four staff at the Shanghai and New Delhi branches of Russian banks for aiding Russia’s sanction evasion efforts.

OFAC alert on secondary sanctions risks facing Foreign Financial Institutions that use SPFS

OFAC has issued an alert warning that FFIs who join the SPFS face the risk of secondary sanctions under EO 14024 for operating in the financial sector of Russia. OFAC stated that it views joining SPFS after the publication of this alert as a red flag and is prepared to more aggressively target FFIs that take such an action. OFAC further cautioned that FFIs should consider their exposure to financial institutions that have joined SPFS, as such banks may be conduits for Russian sanctions evasion.

Since the disconnection of Russian banks from global interbank messaging system SWIFT following Russia’s 2022 invasion of Ukraine, Russia has pushed its partners to join its SPFS alternative in order to restore international financial links to Russian banks.

As a practical implication, Turkish, Chinese and other banks that join SPFS may be exposed themselves to secondary sanctions risks up to and including designation as SDNs, making it less likely that banks will be willing to process financial transactions involving Russia.

Authored by Mark Ye and Deborah Wei.

Next steps

Companies should review their business relationships and financial services providers to ensure that they are not engaged in transactions with any newly designated entities. Companies should also ensure that their banks and other financial institutions are able and willing to process transactions relating to Russia, given OFAC’s new alert to FFIs warning against joining Russia’s SPFS. OFAC’s warning to FFIs against joining Russia’s SPFS will likely make more banks unwilling to process Russia-related payments at all, potentially affecting all clients with business exposure to Russia.

Companies are not required to identify a list of banks that use SPFS or to sever relationships with such banks. However, companies should consider the additional secondary sanctions risks for banks that may use SPFS and identify alternatives in the event such entities are sanctioned. Please contact any of the listed Hogan Lovells lawyers for further information or assistance.