Some U.S. banks are avoiding legal trouble by refraining from conducting possibly permissible business in Russia while they wait for guidance.

In an April 6 executive order, President Joe Biden prohibited American citizens, residents and companies from making new investments in the Russian Federation, and from supplying certain services and financings, "as may be determined by the Secretary of the Treasury," to anyone located there. The action, which also prohibited facilitating such transactions on behalf of foreign people, followed other sanctions related to oligarchs and companies, as the Biden administration seeks to punish Russia following the country's invasion of Ukraine.

Banks are "very careful and very uncomfortable" following the order, according to Andrew Shoyer, a partner at Sidley Austin LLP who co-leads the firm's global arbitration, trade and advocacy practice.

"It's frustrating for everyone in the market because we don't have guidance," Shoyer said in an interview. "It's hard to know when we will see that guidance, and it's also, I think, hard to predict how the White House will work this out within the executive branch.

"Will they want to give less guidance, in which case it will essentially push conservative banks to de-risk, or will they be willing to be prescriptive and directive? And we just don't know yet,” Shoyer said.

Some banks' compliance departments are closely reviewing the purposes of payments made to Russia to ensure they are permissible, while others are declining to process transactions to Russia, said Brian Frey, a partner at Alston & Bird LLP and former federal prosecutor with the U.S. Department of Justice.

"Companies wishing to process payments that are not prohibited by the 'new investment' ban will need to be prepared for the possibility that payments may be delayed and that they may need to be prepared to provide details about the underlying transactions in order to successfully complete such payments," Frey, who focused on cross-border business and financial transactions implicating U.S. sanctions laws and the Bank Secrecy Act in his time at the Justice Department, said in an email.

Treasury has not yet issued guidance, a department spokesperson confirmed. While banks wait, they are proceeding based on "the limited hint" that officials at the U.S. Department of the Treasury's Office of Foreign Assets Control, or OFAC, will interpret this ban similarly to a new investment ban related to energy, which likely did not apply to maintenance of activities, Shoyer said.

Difficulties of interpretation

It is unclear what constitutes new investment in the context of the order, though the term appears in other sanctions programs, Anthony Rapa, a partner who leads the national security team at Blank Rome LLP, said in an interview.

"One of the main fault lines, for example, is the interpretation of new investment in the context of an existing operation in Russia, and funding that, and whether that's new investment or not," Rapa said, adding that guidance from OFAC "would be helpful there."

Restrictions on regions

In response to the sanctions enacted in February, meanwhile, banks have faced challenges in targeting the appropriate parts of the Donetsk and the Luhansk regions of Ukraine, where new investments, financings and other types of business are prohibited.

Treasury provided some help on the issue through guidance. People may use postal codes, maps and other "vetted information from reliable third parties" to determine whether locations are within sanctioned regions, OFAC said in guidance updated May 5.

Shover said the OFAC guidance does not completely resolve the challenge, while Frey called it helpful in addressing a difficult compliance issue.

"They're really breakaway regions of another country, and so it's a challenge to figure out how you go about doing things like geofencing in your payment system to make sure that you're not accepting payment orders from people who are residents or located in those regions," Frey said in an interview.

Ban on banking services?

Some transactions with Russia are still allowed for now. However, since other types of services have been banned, it seems like "a logical step" for banking services to be eventually banned, Shoyer said.

The likelihood of such a move is hard to predict, Rapa said.

"Practically speaking, there already are significant constraints on this activity given the sanctions already in place (including, notably, as directed against the Russian financial sector), and many U.S. persons choose not to engage in this activity for prudential reasons, but there is still room for the Biden Administration to ramp up sanctions in this regard," Rapa said in an email. "This remains difficult to predict."

However, Frey said he does not think this type of ban is likely.

"The U.S. is experienced in tailoring sanctions on banks in a way that will achieve the desired outcome such as eliminating U.S. dollar payments or restricting support of lending activities," Frey said in an email. "I think that OFAC will continue to follow that traditional model with respect to banking services rather than follow the recent approach that it took to target accounting, trust, and consulting services."