EXCLUSIVE: Private sector struggles to comply with new, sector-focused U.S. sanctions on Russia

July 31, 2014

By Brett Wolf, Compliance Complete

ST.LOUIS/NEW YORK, July 31, 2014 (Thomson Reuters Accelus) – New and more narrowly targeted U.S. financial sanctions against Russia have created headaches for Wall Street as banks and securities firms struggle to comply, industry sources said. The European Union is weighing similar measures.

The so-called “Sectoral Sanctions Identifications List,” or SSI List, is the first of its kind and was announced by President Barack Obama on July 16. 

It targets key parts of the Russian energy and financial industries, including Rosneft, the flagship oil giant, and natural gas producer Novatek. But it differs from traditional U.S. sanctions, which entirely blacklisted targeted companies and effectively shut down their ability to do any business with U.S. firms.

Instead, the SSI List bars U.S. companies from engaging in any “new debt of longer than 90 days maturity or new equity” with designated firms, an effort intended to punish Russia by increasing its financing costs.

Obama told reporters the measures were “designed to have the maximum impact on Russia while limiting any spillover effects on American companies or those of our allies,” Reuters reported.

However, experts at U.S. banks and broker-dealers say the sanctions, which were issued by Treasury’s Office of Foreign Assets Control (OFAC), were too vague and in some instances left financial institutions guessing at how to comply. They now fear that the lack of specificity may leave them vulnerable to regulatory action in an aggressive enforcement environment.

“The lack of clarity in the sanctions is what is causing the (compliance) burden,” said Rob Rowe, a lawyer with the American Bankers Association’s Center for Legal and Regulatory Compliance. “OFAC definitely needs more staff to handle questions.”

OFAC spokeswoman Hagar Chemali said the agency provides as much guidance as possible and added that firms with questions can reach out directly on a case-by-case basis.

He said, for example, that because the sanctions block new loans to Russia through two development banks, Gazprombank and VEB, the effect on letters of credit is one issue that requires more clarity.

“For instance, what if the arrangement is for a trade deal that will take more than 90 days to complete but the letter of credit is less than 90 days? We’re trying to get a better feel for the impact but some of the large banks that are involved in trade finance are seeking clarity on these and other issues,” Rowe said.

OFAC had foreseen potential compliance challenges prior to issuing the sectoral sanctions. With help from the Securities and Exchange Commission (SEC) several months ago it solicited feedback from the private sector, sources familiar with the matter said.

But the questions put to the private sector were “kind of high-level” and “not product specific,” said a securities industry source. As a result, when OFAC issued the sanctions, confusion reigned, said the source, who spoke on condition of anonymity.

OFAC and the SEC declined comment on the feedback solicitation effort.

“It would have been helpful if we had had a little more open dialogue on the specifics, like ‘If we give you A, B, and C, what would be the issues?'” said the source. “90-day debt is product-specific. What if it wasn’t a 90-day debt but now it’s going to turn into a 90-day debt? There are real nuances.”

A top compliance officer at a large transnational bank said OFAC’s new approach “adds complexity and nuance to the screening process.”

“For some global banks, the issue is further complicated in that a listed customer is OK for overnight currency market activity and short term lending, but not for more persistent entanglements,” said the source, who also asked not to be named. “Global banks then ask ‘Though the shorter term activity is permissible, what will my regulator say?'”

As a result, some banks are considering whether to “exit all arrangements” with the sanctioned Russian entities, “even those permitted under the rules,” the source said.

Another senior compliance officer, who works for one of the largest banks in the United States and also spoke on condition of anonymity, confirmed that bankers “are frustrated that OFAC is not providing more guidance” because the lack of information has led to “serious” compliance challenges.

The day after the sanctions were issued, OFAC held a conference call with hundreds of financial services industry professionals in an effort to answer concerns. Although some issues were cleared-up, others were left undecided, leaving financial institutions in the lurch as they try to comply but worry their efforts will be second guessed by regulators, said two sources who were on the call.

OFAC spokeswoman Chemali declined to comment on the agency’s purported outreach to the private sector prior to the issuance of the sanctions or the compliance concerns that emerged afterward. She also declined to say whether OFAC plans to expand the sectoral sanctions.

However, an OFAC bulletin distributed to the private sector on Wednesday suggested the sanctions may be broadened. The bulletin, which provided sanctions data to the private sector in additional formats, noted that names will be added to the SSI List “as necessary and appropriate.”

Meanwhile, European Union ambassadors on Friday asked the European Commission to draw up a legal text to impose sectoral sanctions on Russia, although there is no final agreement yet to impose them, Reuters reported.

The Commission, the EU’s executive body, has put forward proposals to restrict Russian access to European financial markets, defence and energy techology, according to the Reuters report.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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