OFAC vs. the EU: A New Super Competitor in Sanctions Enforcement?

Are you tired of hearing about Russia’s sanctions evasion schemes? Well, it looks like the Netherlands and a dozen other EU member states are taking a serious stand!

According to a recent article from EURACTIV, the Netherlands has proposed the establishment of a centralized EU sanctions watchdog to tackle mass circumvention of the bloc’s sanctions against Russia from Brussels. This proposal has already received support from countries like Germany, France, Spain, and Italy.

The Dutch Foreign Minister, Wopke Hoekstra, who is leading the charge, stated that Russia suffers greatly from the EU’s restrictive measures, but “at the same time, they are being evaded on a massive scale.” The new sanctions headquarters would establish a watch list of sectors and trade flows with a high circumvention risk, with the aim of fighting circumvention by pooling member states’ information and resources.

Hoekstra believes that the EU currently has too little capacity to analyze, coordinate, and promote new sanctions, which is why he wants to establish a sanctions headquarters in Brussels. The proposal includes measures to strengthen the feedback loop between enforcement practice at the national level and EU level, strengthen the EU point of contact for sanctions circumvention, identify concrete steps for diplomatic outreach with partners and expand listing capacities.

What does this mean for the EU? Well, it means that they will be able to use the full strength of their collective economic strength and criminal justice systems against those who assist in sanction evasion. This includes naming, shaming, sanctioning, and prosecuting those who assist in evading sanctions. The Dutch proposal also suggests a stronger targeting of third countries that are not aligned with the West’s sanctions against Russia or help in their circumvention (two “permissive jurisdictions” come to mind: the UAE and Turkey“).

Now, some of you may be wondering, “What about the United States?” As most of you may know by now, the US has a similar program called the Office of Foreign Assets Control (OFAC), which administers and enforces economic and trade sanctions based on US foreign policy and national security goals. Well that only gets more convoluted when OFAC decides to investigate European companies.

A recent case involving Austrian lender Raiffeisen Bank International (RBI) sheds light on the importance OFAC is giving to Russian sanctions. OFAC is currently investigating RBI’s Russian business, asking for clarification on payments business and related processes maintained by RBI in light of recent developments related to Russia and Ukraine.

Specifically, OFAC sought details of RBI’s exposure in Russia, the partially occupied Donbass region of Ukraine, and Syria, as well as the transactions and activity of specific clients.

While RBI claims to have procedures in place to guarantee adherence to sanctions, European financial regulators overseeing the bank are concerned about the information request from the US, which could result in RBI facing sanctions. RBI is one of the few European banks that continue to operate in Russia following the invasion of Ukraine almost a year ago, and its Russian business contributed over €2bn to its net profit of €3.8bn in 2020.

The new EU “Super Competitor to OFAC” proposal can be seen as a response to the ongoing global crackdown on sanctions evasion by OFAC. The US has long been a leader in this area with OFAC enforcing economic and trade sanctions on countries and entities associated with terrorism, narcotics trafficking, and other crimes.

OFAC is one of the most powerful financial regulators in the world and has the ability to freeze assets, block transactions, and impose heavy fines on individuals and companies that violate its sanctions. The EU’s proposed sanctions regulator rules would give the bloc a similar toolset to combat financial crime.

The recent case of Raiffeisen Bank International (RBI) being probed by OFAC over its Russian business is a reminder of the reach and power of US sanctions. The EU’s new proposal could give it similar powers to investigate and prosecute financial crimes, including money laundering, terrorist financing, and other illicit activities.

Although both the proposed EU sanctions enforcement headquarters and OFAC aim to enforce sanctions, there are some differences. OFAC is a department within the US Treasury, while the proposed EU sanctions enforcement headquarters would be a centralized watchdog based in Brussels. The proposed EU sanctions enforcement headquarters would establish a watch list of sectors and trade flows with a high circumvention risk, while OFAC maintains a list of sanctioned individuals and entities.

“Companies will be obliged to include end-use clauses in their contracts so that their products don’t end up in the Russian war machine,” Hoekstra said.

It remains to be seen how the EU’s proposed sanctions rules will be implemented and enforced, but if adopted, they could have a significant impact on companies and financial institutions operating in the EU and beyond.

As the world becomes increasingly interconnected, the fight against financial crime will require cooperation and coordination among regulators and law enforcement agencies around the world.

While the Netherlands’ proposal is still in its early stages and needs the backing of member states, it’s a step in the right direction towards strengthening the EU’s enforcement of its sanctions against Russia. Only time will tell if this proposal will be successful, but for now, we can hope that it will make a positive impact on the ongoing conflict in Ukraine.
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