In response to the Russian invasion of Ukraine, the last two weeks have seen the imposition of several rounds of sanctions against Russian and Belarussian individuals, banks, and other business. How effective these sanctions are will depend entirely on their enforcement, and this is an area where whistleblowers have the potential to play an outsized role. In this article, we will discuss who and what is covered by the sanctions, their potential impact, and possible pathways for whistleblower reporting.
Most of the new sanctions are contained in Executive Order 14065: Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to Continued Russian Efforts to Undermine the Sovereignty and Territorial Integrity of Ukraine. These sanctions build on and expand prior Executive Orders issued against Russia, including three Executive Orders issued in March of 2014—concurrent with Russia’s illegal annexation of the Crimea region of Ukraine, see here, here, and here—and a fourth issued in December of the same year (see here).
The most recent list of sanctions targets the core infrastructure of Russia’s financial system by preventing “United States persons”—a term which includes U.S. citizens, permanent residents, entities organized until the laws of the U.S. or any U.S. jurisdiction, or, the catch-all, “any person present in the United States”—from engaging in transactions with persons (individuals and entities) recently added to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”). United States persons are further required to block or freeze and property or interests in property belonging to those on the SDN List. The same rules also apply to entities that are 50% or more owned (directly or indirectly) by entities or individuals on the SDN List. The Executive Orders also authorizes the blocking of “property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person (including any foreign branch)” where that property belongs to an individual or entity on the SDN List.
The full list of sanctioned actors (current as of time of writing) can be found here, and is also available on the Treasury Department’s website. Helpfully, the website includes not only the complete list of sanctioned entities, but a list of recent changes to that list, allowing one to easily check for new additions. For the first time, the SDN List includes sanctions against some of Russia’s largest financial institutions, which will limit the Russian government’s ability to raise funds. We have already seen a multi-day closure of the Russian stock market as a result of these sanctions, and it can be anticipated that there will be additional long-term negative impacts.
Many U.S. banks and other businesses regularly transact with the Russian companies and banks subject to these new restrictions, and will require substantial due diligence, particularly to ensure compliance with the 50% ownership rule. Unfortunately, it may be the case that firms that previously profited from relationships with Russian entities now on the SDN List may be tempted to violate these new sanctions. Indeed, the FCPA Blog recently described sanctions as a corruption “superspreader” event: the more restrictive sanctions become, the more profitable under-the-table trading can be.
This is where whistleblowers can come in: individuals with knowledge of violations may be able to expose bad behaviors, and possibly earn a whistleblower award for doing so. For example, a sanctions violation could contravene the Foreign Corrupt Practices Act (“FCPA”), a broad law that applies to U.S. and foreign companies listed on American stock exchanges, and those requires to file period reports with the Securities and Exchange Commission (“SEC”). Sanctions violations are typically enforced by OFAC, while the FCPA is jointly enforced by the SEC and Department of Justice. If the whistleblower has knowledge of sanctions-related violations of the books and records or internal accounting control provisions of the FCPA, this may open the door to a whistleblower action under the SEC’s whistleblower reward program. For example, in 2019 the SEC settled with a Wisconsin-based company for, among other things, “create[ing] false records to conceal transactions with a state-controlled Cuban telecommunications company, which were subject to U.S. sanctions and export control laws.” (See press release here.)
Attorney General Merrick B. Garland has also recently announced the launch of Task Force KelptoCapture, which is intended to “leverage all the [Justice] Department’s tools and authorities against efforts to evade or undermine the economic actions taken by the U.S. government in response to Russian military aggression.” Individuals—whether based in the U.S. or around the world—can report violations of this nature through the federal False Claims Act.
The Bank Secrecy Act’s (“BSA”) recently-amended Anti-Money Laundering Whistleblower Program may provide a third reporting pathway: as currently written, the program allows individuals with knowledge of violations of the BSA to come forward, and provides a financial incentive to do so. Indeed, the Financial Crimes Enforcement Network (“FinCEN”) recently issued an alert to financial institutions to be “vigilant against efforts made to evade the expansive sanctions and other U.S.-imposed restrictions” on Russia, and provided a series of “red flags” to watch for. However, the BSA focuses on bank compliance, and, as a result, violations of the BSA only account for a small set of all money laundering violations. There are many examples of sanctions that fall outside the purview of the current BSA AML whistleblower program, and which would leave a would-be whistleblower without recourse. (For a more complete discussion of this issue, see Poppy Alexander’s article in Fortune.)
Finally, it is also worth noting that the European Commission has also rolled out a whistleblower tool to facilitate the reporting of potential sanctions violations. A transatlantic task force has also been announced, with the leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States committing to the “effective implementation” of their collective financial sanctions. While there is building global support for these financial penalties, the effectiveness of the sanctions in holding Russia to account will only be as effective as their enforcement. Whistleblowing isn’t an easy path, but the information whistleblowers can provide will be critical to this task.
If you are aware of a potential sanctions violation, or even if you just want more information on the Whistleblowing practice at Lundin PLLC, contact Alexandra M.C. Douglas.