As 2022 winds down, all eyes in the compliance world are on 2023 and what new sanctions the year will bring. We know that enforcement will be on the minds of regulators, as they will increasingly target not just sanctions evaders, but also facilitators who allow malign actors to access the US and the global financial system and penalize companies and financial institutions for inadequate compliance efforts.
The United States and western partners have been fostering closer relationships in the aftermath of Russia’s attack on Ukraine, which has almost certainly resulted in enhanced intelligence sharing and more effective enforcement partnerships.
The Russian Elites, Proxies, and Oligarchs (REPO) Task Force was launched in March as a joint effort between the United States, Australia, Canada, France, Germany, Italy, Japan, the UK and the EU to deny and disrupt illicit Russian actors’ ability to access the international financial system. According to the Treasury Department, “The task force, consisting of Finance Ministry and Justice or Home Ministry in each member jurisdiction, each committed to using their respective authorities in concert with other appropriate ministries to collect and share information to take concrete actions, including sanctions, asset freezing, and civil and criminal asset seizure, and criminal prosecution.”
So what’s ahead for the new year?
- Russia and Iran
- China and Hong Kong
- Kleptocracy and corruption
- Human rights
Russia and Iran
We agree with the Atlantic Council and Castellum.AI that Russia will remain the top sanctions target in 2023. As Russian president Putin continues to pummel Ukraine with Iranian unmanned aerial systems (UAS), we assess that the United States will continue targeting individuals and entities globally that help Russia access drones and western technologies and components that help Russia build them.
Although we do not anticipate that Russia’s nuclear conglomerate Rosatom will be sanctioned in the new year, despite pressure from Ukraine and environmental groups and despite calls from some EU members to end Europe’s dependence on Russian nuclear energy, other restrictions on Rosatom may be implemented if Moscow uses tactical nuclear weapons in Ukraine.
Russian oligarchs will also remain a priority for the White House and foreign governments. Several of Russia’s richest men have avoided western sanctions so far, including Vladimir Lisin, Dmitry Rybolovlev, and others.
Iran will also remain a major sanctions target. With the all but certain demise of the nuclear talks between the United States and Iran to revive the Joint Comprehensive Plan of Action (JCPOA) and Tehran’s continued violent suppression of protests and public execution of demonstrators, we expect additional sanctions against Iranian officials for human rights violations both by the United States and international partners, sanctions against additional firms that participate in the manufacture and shipment of drones and other weapons to Russia, and entities that facilitate Iran’s petrochemical trade. Since Iran has not signaled any willingness to scale back its nuclear program, any sanctions relief is doubtful.
We project that companies involved in crypto transactions will need to pay close attention to sanctions regulations and enhance their compliance programs. Virtual currency exchange, Bittrex, in October agreed to pay a $24 million fine to OFAC for violating sanctions against Cuba, Iran, Sudan, Syria, and Crimea, Ukraine. Users from these embargoed regions used the platform in more than $263 million worth of virtual currency transactions. Bittrex had no sanctions compliance program when it began offering its virtual currency services in 2014 and in the next several years only engaged in basic, incomplete customer screening.
Referencing the Bittrex settlement, Treasury Undersecretary for Terrorism and Financial Intelligence, Brian Nelson, in prepared remarks to the Association of Certified Anti-Money Laundering Specialists (ACAMS), highlighted the importance for cryptocurrency platforms to take their compliance obligations seriously.
The next month, OFAC settled with cryptocurrency exchange, Kraken, because of Kraken’s failure to implement appropriate geolocation tools, including an automated internet protocol (IP) address blocking system, resulting in Kraken providing virtual currency transaction services to users in Iran.
We anticipate that OFAC in 2023 will continue focusing on exchanges and mixers, with the expectation that these tech savvy entities will use all the tools at their disposal to proactively decline business with “problematic” clients that exhibit sanctions red flags.
China and Hong Kong
The Bureau of Industry and Security (BIS) is receiving a 25 percent increase in its budget, and the increased resources will almost certainly result in more export controls and enforcement. The US government also will likely pay closer attention to Hong Kong companies—especially ones facilitating Russia’s access to chips and military technology—and new Russian firms that are popping up in Hong Kong at more than twice the rate of last year that will probably be used to evade sanctions. The United States has already warned Hong Kong that helping sanctioned individuals and entities can endanger its status as a global financial center after Hong Kong allowed a sanctioned Russian oligarch’s yacht safe harbor in the city.
Language included in the government spending bill signed into law by President Biden indicates that legislators on Capitol Hill will continue focusing their attention on China, examining the effects of current sanctions and restrictions, and assessing whether additional sanctions are warranted.
The State Department this month launched a new Office of China Coordination to help ensure that the United States has the “talent, tools, and resources” to successfully execute US policy and strategy toward China, recognizing that the country is the “most complex and consequential geopolitical challenge” faced by the United States.
We do not anticipate additional blocking sanctions, like those imposed against China’s Xinjiang Production and Construction Corps (XPCC) two years ago for human rights abuses, but we will continue to see enforcement efforts of the Uyghur Forced Labor Prevention Act and the US government will continue examining the use of forced labor by Chinese firms and bar imports from them if appropriate.
Kleptocracy and Corruption
Last year, the Biden administration identified kleptocracy and corruption as core national security interests. The White House anticorruption strategy included resourcing and modernizing the battle against corruption and all forms of illicit finance; improving transparency and information-sharing; strengthening the capacity of international institutions to take on corruption and kleptocracy; and holding corrupt individuals, criminals, and their facilitators accountable by identifying, freezing, and returning misappropriated assets.
We anticipate that kleptocracy and corruption will remain a priority for the White House, especially because they are inherently connected to Russia’s oligarchs and high-level government officials and their efforts to move misappropriated assets and hide them in foreign countries, including in the United States. The US government, therefore, will continue imposing sanctions for gross violations of human rights and significant acts of corruption.
Although secondary sanctions against Russian entities remain an option, the United States also could impose sanctions on companies and entities that service Russian oligarch assets and maintain and fuel their yachts. Gatekeepers who facilitate corrupt actors’ and kleptocrats entry into the global financial system as well as their companies could also face sanctions, as well as foreign banks and financial institutions that continue to facilitate their transactions and their access to the global financial system.
The UN this year recognized access to a clean and healthy environment as a basic human right. Corruption enables environmental crimes, while eroding rule of law and degrading the environment. We assess, therefore, that corrupt governments that enable environmental destruction, wildlife trafficking, and harm to endangered species will see sanctions both from the United States and foreign allies.
In addition to addressing forced labor and violent suppression of protests and demonstrations, we will most likely see efforts to address mass surveillance by countries such as China. We project that companies that provide components to the PRC to advance mass surveillance efforts will see penalties and restrictions. There have been efforts on Capital Hill to include companies such as TikTok parent company ByteDance, Hikvision, and others on the SDN list. Renewed efforts to sanction these and other companies involved in mass surveillance efforts in China may be on the horizon.
This year’s government spending law authorizes more than $126 million for Treasury’s Office of Terrorism and Financial Intelligence to safeguard the financial system against illicit use and to combat rogue nations, terrorist facilitators, weapons of mass destruction proliferators, human rights abusers, money launderers, drug kingpins, and other national security threats. The law specifies that no less than $3,000,000 of those funds will be earmarked to address human rights violations and corruption, including activities authorized by the Global Magnitsky Human Rights Accountability Act.
US firms and financial institutions will need to remain vigilant and monitor regulatory developments, as Russia continues its war in Ukraine with help from Iran, and as Tehran engages in violent suppression of protesters, continues developing its nuclear program, and provides weapons to Russia that enable Moscow to continue its invasion and targeting of Ukrainian civilians. We expect further targeting of individuals and entities that enable sanctions evasion and facilitate the movement of assets by sanctioned individuals and entities. With the US government’s focus on enforcement of sanctions and export restrictions, in-depth research of potential clients, business partners, and supply chains to avoid regulatory and reputational risk will be critical.