Although the war in Ukraine is half a world away, the fighting creates a number of issues for local banks. United States sanctions policies have implications for banks not only for transactions such as SWIFT money transfers but also for the types of business and trade in which bank customers engage with Ukrainian businesses. Bank customers conducting wire transfers to Ukraine risk sending money to a region controlled by Russia; bank customers engaged in the import/export business with Ukrainian businesses risk violating import/export restrictions. Banks, in turn, risk violating U.S. sanctions policies in each of these scenarios.

Common Financial Transfers to and from Ukraine

The banks, individuals, addresses, and regions in which monetary transfers are terminated are important, but it is also important to bear in mind the types of businesses that may be restricted from trading with Ukraine. While a particular financial transaction may terminate in an uncontested area in Ukraine, the underlying items may be subject to additional regulation or prohibition.

In fact, the Bureau of Industry and Security (BIS) and the Financial Crimes Enforcement Network (FinCEN) recently issued a joint alert on increased vigilance for potential Russian and Belarusian export evasion attempts.¹ The agencies warn that companies may attempt to transfer money for regulated items such as aircraft equipment, antennas, breathing systems, cameras, integrated circuits and oil field equipment, to name a few, which require additional regulatory compliance considerations.

The alert specifically states:

Financial institutions with customers in maritime or export/import industries should rely on the financial institutions’ internal risk assessments to employ appropriate risk mitigation measures consistent with their underlying BSA obligations.²

In 2019, the U.S. and Ukraine engaged in $3.5 billion in trade.³ Of this amount, approximately $2.3 billion was in U.S. exports to Ukraine, and $1.2 billion was in U.S. imports from Ukraine. The most commonly traded items were agricultural products, minerals, base metals, machinery, and transportation. These market items seem fairly innocuous, but many smaller market items may be heavily regulated and may require an export license. Among others, some regulated export items were optical sighting systems, integrated circuits for information security, cameras, shotguns and shotgun shells, and lasers. Banks should be alert for businesses engaged in the trade of such regulated products.

Office of Foreign Asset Control and Crimea

The Office of Foreign Asset Control (OFAC) is responsible for the Specially Designated Nationals and Blocked Persons List (SDN). This list is periodically updated to reflect the current sanctions issued by the U.S. President. Prior to the most recent invasion of Ukraine, former President Obama issued sanctions Dec. 24, 2014, to block monetary transfers to the Crimea Oblast or Region of Ukraine.

Given the geographic scope of these sanctions, it is important to provide a brief note on the geography of Ukraine. Ukraine is comprised of several “oblasts,” administrative divisions or regions in Russia and some of its former republics, such as Ukraine. An oblast is similar to a province or region and comprises smaller regions and cities. Crimea was an oblast of Ukraine, and OFAC sanctions often refer to oblasts or regions.

The sanctions issued by President Obama were in response to Russia’s occupation and eventual annexation of the region. Executive Order (EO) 13685 specifically prohibited “new investment in the Crimea region of Ukraine by a U.S. person, wherever located.”⁴

This EO was straightforward and easy enough to follow – if the person or entity resides in the Crimea region, any new business transfer is prohibited. The Crimea Oblast is now (almost) universally considered to be part of Russia. Any transfers to the Crimea Oblast are strictly prohibited due to this EO, but also due to sanctions against Russia in general.

The Oblasts of Donetsk and Luhansk and the Current Conflict

Russia’s most recent invasion of Ukraine has included the recognition of the independence of these regions and/or occupation of parts of the Donetsk and Luhansk Oblasts by Russia.⁵ The occupation of these oblasts led to the issuance of EO 14065 by President Biden. The EO states in part restrictions on “new investment in the so-called DNR or LNR regions of Ukraine or such other regions of Ukraine as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State (collectively, the ‘‘Covered Regions’’), by a U.S. person, wherever located.”⁶

So while EO 13685 prohibiting investment in Crimea was fairly straightforward, the EO 14065 regarding the DNR and LNR is much less clear regarding the locations of transfers that may be restricted. The regions of the prohibition will be determined by the Secretary of the Treasurer and Secretary of State on an ongoing basis. This determination of the “Covered Regions” depends on the advancement of Russian forces to determine the so-called “line of contact.” The line of contact is the stretch of land that separates conflict-affected people in Ukraine from the Russian-controlled areas of eastern Ukraine. This line of contact changes rapidly, even daily or weekly, and this change may be reflected in the determination of the Secretaries of Treasury and State.

This changing landscape created a regulatory nightmare for banks attempting to follow U.S. sanctions policy.

Practical Implementation of the Order and Risk Management

Transfers to and from the former oblasts of Ukraine, now referred to as the DNR and LNR, are prohibited, as are transfers to and from Crimea, but transfers to other regions may also be prohibited. Determining the legality of transfers to regions other than these enumerated areas depends on the current line of contact. But as this line changes, so will the legality of such a transfer; a transfer approved today may be headed for a city occupied by Russia tomorrow.

To avoid engaging in a prohibited transaction, banks must determine their risk tolerance levels in one of three ways: 1) avoid transactions to the covered regions only; 2) avoid transactions to the covered regions and possibly compromised adjacent regions; or 3) avoid transfers to all areas of Ukraine.

The first option of avoiding transfers only to the covered regions of DNR, LHR, and other identified regions carries the most risk. While the covered regions are certainly off-limits, the line of contact will constantly change while the war continues, and adjacent regions may also become subject to sanctions. These persistent changes may result in a transfer that crosses the line of contact, thus violating the EO.

The second option of avoiding transfers to named regions and the oblasts surrounding the conflict area carries less risk, but is administratively difficult to implement. Such a plan avoids any possible prohibited transactions but requires a thorough working knowledge of the oblasts of Ukraine and the conflict regions. Bank transfers to safe regions will not be affected so long as the conflict and line of contact remain in adjacent territories. Such a plan also requires a regular review of the line of contact, affected oblasts and regions, and regular updates to a list of affected postal codes, addresses, and cities to compare scheduled wire transfers. The adjacent and possibly affected territories would include the oblasts of Dnipropetrovsk, Kharkiv, Kherson, and Zaporizhzhia.

Finally, the least risky of all policies is avoiding all transfers to Ukraine and businesses trading with Ukrainian businesses. Such a policy would avoid any inadvertent transfers to areas within or near the conflict area and avoid running afoul of trade licenses and restrictions.

Conclusion

The war in Ukraine has created many complications for U.S.-based banks. The constantly changing line of contact creates risks for banks that transfer money to the region. There are many possible pitfalls in allowing wire transfers to Ukraine or engaging with businesses that trade in regulated goods and supplies shipped to Ukraine. To be sure, banks are in a position to have a unique insight into the war. These business trades and money transfers provide banks with insight such as letters of credit to their customers, the types of banking operations and procedures in the war regions, and the insight gained from locations of termination for wire transfer payments as part of a correspondent banking transaction.

Finally, banks must be mindful and alert to the challenging issues in financing businesses in Ukraine or near the line of contact by implementing a comprehensive policy commensurate with their risk tolerance to mitigate such challenges.