How Banks Can Comply With the US Treasury’s Sanctions On Russia’s SPFS?

On 21 November 2024, the “U.S. Department of the Treasury” took a significant step by issuing an alert describing sanctions risks related to joining Russia’s System for Transfer of Financial Messages (SPFS) and sanctioned its largest bank, “Gazprombank,” along with 50 other Russian banks.

These penalties were intended to restrict Russia’s access to the international “financial system,” indirectly limiting its financial power to finance military operations against Ukraine.

According to a press release from the U.S. Department of State, “118 individuals and entities” are sanctioned that are linked with “Russia’s financial services sector”  and encourage its war efforts against Ukraine.

The U.S. Treasury has targeted “Russia’s System for Transfer of Financial Messages (SPFS),” which the Russian government created to replace the SWIFT international payment system.

Russia used it to bypass international sanctions, so from now onward using that system will make any institution face US sanctions as it will indirectly support Russian warplays.

Read this article to get an in-depth insight into major sanctions imposed on Russia by the US, especially the latest restriction on its SPFS.

How Have US And EU Sanctions Targeted Russia Since 2014?

The U.S. government introduced economic sanctions on Russia in 2014 in response to “Russia’s annexation of Crimea” and its continuous support to groups who were fighting in the east of Ukraine.

Key actions targeted Russia’s financial banking policies and systems, such as the financial messaging system of the Bank of Russia, which indirectly helped finance war operations. Imposed sanction were

• Certain Asset freezing of entities and individuals in Russia.
• Limitation on financial transactions with Russian agencies in significant industries.
• Stopping U.S. companies from exporting technology and services for Russian oil projects.
• Stricter restrictions on “U.S. exports” that can be used for military and domestic purposes.

“Russia’s oil revenues are fuelling the fires of war and destruction in Ukraine.”

-David Lammy,  UK Foreign Secretary

United States has worked with other countries, especially with the European Union (EU), to enforce these sanctions on Russia.

In response, Russia banned imports of agricultural products from countries imposing sanctions on Russia, such as the United States.

The finance, energy, and defense sectors were their main target as starting measures for preventing Russia’s financing of military operations in the Ukraine war.

Still, those sanctions are in effect as of December 2024, and the US government took the latest action of putting sanctions on individuals and entities designated by the Department of the Treasury’s Office of Foreign Assets Control (OFAC).

What Are the Recent Sanctions Imposed by the U.S. Treasury?

U.S. Treasury Financial Management System plays a significant role in imposing sanctions. Gazprobank has not been sanctioned before as it manages money for Gazprom, a big gas company that supplies gas to Europe.

• OFAC imposed sanctions on Russia’s largest bank, Gazprombank, which has more than 50 internationally connected Russian banks, more than 40 Russian securities registrars, and 15 Russian finance officials.
• US Department of Treasury issues an alert about sanction risks for entities that will use the Kremlin’s System for Transfer of Financial Messages (SPFS), help Russia evade sanctions, or assist in military operations against Ukraine.
• The U.S. has imposed sanctions on individuals and entities suspected of producing illicit finance and helping Russia evade sanctions, especially using digital assets. Thus, evading sanctions leads to supporting military operations.

According to sources, Treasury Secretary Janet Yellen has stated that the U.S. is targeting sanctions on Russian oil exports. When global oil demand is low, prices will drop, affecting Russia’s economy and operations.

An Overview of Gazprombank and Subsidiaries’ Designation

OFAC sanctions Gazprombank Joint Stock Company with its six foreign subsidiaries. Gazprobank has a significant role in buying military items, thus promoting operations in the war against Ukraine.

The Government of Russia pays its soldiers using this bank and provides bonuses and compensation amounts to Russian families who have lost their family members fighting in the war.

International Sanctions on Gazprombank

Other countries, such as Australia, Canada, New Zealand, and the United Kingdom, have already sanctioned the bank. Gazprobank has subsidiaries in Luxembourg, Hong Kong, Cyprus, Switzerland, and South Africa.

These have also been sanctioned because Gazprobank owns them and controls their regulations.

Russia Sanctions are also affecting the energy, finance, and defense sectors.

Executive Order 14024 and Broader Implications

According to Executive Order (E.O.) 14024, Gazprobank is sanctioned for working in the financial services sector of the Russian Federation economy.

If Gazprobank directly or indirectly owns 50% or more of any business, it will be blocked as per U.S. sanctions even if OFAC does not identify it; likewise, if six subsidiaries own the same shares, the company will face the same sanctions.

SPFS and Its Connection to Russia’s War Efforts

OFAC has warned foreign banks about the risks of being sanctioned for joining Russia’s System for Transfer of Financial Messages (SPFS).

What is SPFS?

• SPFS is an acronym for “Sistema Peredachi Finansovykh Soobshcheniy,”  a component of the financial services sector of the Russian Federation economy.
• The System for Transfer of Financial Messages (SPFS) is Russia’s alternative to the SWIFT financial messaging system.
• The Central Bank of Russia developed SPFS in response to the increasing risk of disconnection from SWIFT, particularly following international sanctions.
• Its operations resemble those of the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
• It makes communication and collaboration easier between banks in Russia and international entities.

SPFS is seen as a tool that Russia could use to bypass U.S.-led financial sanctions. The system facilitates transactions with countries that may be reluctant or unable to use SWIFT due to sanctions on Russia.

According to E.O. 14024, any financial institution from another country that has already joined the SPFS or wants to join it will face the same penalties set by the U.S.

Russia uses SPFS to keep international financial connectivity, evade sanctions, and fund its War activities in Ukraine. OFAC considered joining SPFS as a red flag, continuously monitoring who joined it, and will take action against it.

OFAC mandates stakeholders to check whether their financial transactions are conducted by banks linked to SPFS.

Banks connected to address Russia’s financial policies show that using alternative financial systems indirectly helps Russia evade sanctions.

Sanctions and Their Broad Implications

If the U.S. sanctions someone, their property in the U.S. will be blocked, and if residents of the U.S. control their assets, they will be sanctioned, too. Reporting to OFAC is a must.

If a sanctioned person or entity is directly or indirectly linked with a business and owns 50% or more of it, that business will also be blocked. No one can do business or financial transactions with blocked/sanctioned persons.

Limitations of Transaction with Sanctioned Entities

• U.S. persons or entities cannot transact with “blocked property or interests.”
• They cannot provide funds, goods, or services to sanctioned individuals or accept such items from blocked individuals.
• The transaction can be conducted in an exception case where OFAC permits it by granting a license.

Secondary Sanctions for Non-U.S. Persons

• Under Secondary sanctions, people or entities not residing in the U.S. cannot use U.S. financial systems, currency, or other U.S.-backed operations to conduct business with U.S-sanctioned entities.
• Individuals and entities are prohibited from developing strategies and conducting business activities under US currency to evade US sanctions on Russia, as such actions may result in secondary sanctions even if performed outside the country.

Restrictions for Foreign Financial Institutions

• Foreign institutions or banks who are supporting Russia in their military operations by getting involved in transactions.
• Those banks outside the U.S. are at risk of being sanctioned by OFAC.
• OFAC has specific guidance for these scenarios: “Updated Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base.”

Addition and Removal of Entites in SDN List

• OFAC imposes sanctions and decides consequences for violating sanctions
• The goal of penalties is to encourage AML compliance rather than punishing someone.
• OFAC has the authority to sanction people and can remove them from sanctions lists after seeing positive changes in behavior, like following AML regulations
• OFAC maintains an “SDN (Specially Designated Nationals) List” of sanctioned people and entities.

How Can AML Watcher Help Banks Comply with Global Sanctions?

AML Watcher offers an all-in-one solution for sanctions, watchlist, and PEP screening, backed by data from global regulatory bodies like OFAC, the EU, and the UN.

Its features are tailored to help banks effectively manage risks associated with Russia’s SPFS (System for Transfer of Financial Messages), ensuring compliance and operational integrity.

These are:

Global Sanctions Screening

• Screens against global sanctions lists (OFAC, EU, UN) and regional watchlists to ensure compliance with the most up-to-date lists.
• Enables thorough screening of OFAC-sanctioned entities, such as Russian banks, securities registrars, and finance officials linked to SPFS.
• Real-time updates ensure banks stay ahead of newly added entities to sanctions lists.

Efficient Name Screening

• Uses advanced algorithms to match names, aliases, and transliterations for individuals and entities sanctioned under SPFS, reducing false positives while ensuring no sanctioned entity is overlooked.
• Screens customer names and counterparties during onboarding and ongoing transactions, flagging those linked to SPFS-affiliated individuals or organizations.

Secondary Sanctions Risk Screening

• Identifies entities sanctioned in connection with Russia’s SPFS, mitigating risks of penalties under OFAC’s Executive Order 14024.
• Incorporates clear secondary sanctions risk labels, enabling compliance officers to recognize and address potential exposure quickly.
• Reduces compliance workload by streamlining the screening process with real-time updates and actionable insights.

Screening under secondary sanctions enhances overall risk management by flagging indirect risks and ensuring alignment with global regulatory requirements.

Enhanced Due Diligence (EDD)

• Conducts deeper investigations into high-risk customers or regions associated with SPFS, including detailed analysis of their transactions and business networks.
• Provides a granular view of relationships involving entities sanctioned under SPFS.
• Enhanced due diligence improves the accuracy of risk detection while reducing false positives.

Real-Time Transaction Monitoring

• Monitors ongoing transactions for patterns indicative of sanctions evasion or links to SPFS, such as unusual payment flows or attempts to bypass SWIFT.
• Detects suspicious activity tied to SPFS in real-time, allowing immediate intervention.

 Dynamic Risk Categorization

• Assigns risk scores to entities based on direct or indirect exposure to SPFS-related sanctions, prioritizing compliance reviews for higher-risk parties.
• Allows banks to set custom risk thresholds, ensuring a tailored approach to risk management.

Detailed PEP Screening

• Screens Politically Exposed Persons (PEPs) with possible ties to individuals or entities sanctioned under SPFS or Russian government officials, adding another layer of risk assessment.
• Screens for PEPs during onboarding and monitors their activities for ongoing compliance.

 Real-Time Alerts and Notifications

• Provides proactive alerts for regulatory changes, newly sanctioned entities, or changes in risk profiles tied to parties sanctioned under SPFS.
• Helps compliance teams respond promptly to emerging AML risks.

Cryptocurrency Screening

• Detects and tracks crypto wallets that may involve entities sanctioned under SPFS, addressing concerns about sanctions evasion through digital currencies.