U.S. banks face a challenge identifying assets related to over 300 sanctioned oligarchs and companies, as the Biden administration seeks to punish Russia following the country's invasion of Ukraine.

Identifying oligarchs' assets can be difficult due to chains of shell companies in jurisdictions with little transparency, according to Zachary Brez, partner at Kirkland & Ellis LLP and former staff attorney at the U.S. Securities and Exchange Commission. The lengthening list of sanctioned people and entities, as well as regions, adds further complications.

Working out who owns what "is incredibly complicated," Brez said on a Kirkland & Ellis webinar. “And it is not made any simpler by Russia's attempts to obfuscate some of those ownership chains.”

Banks' failure to freeze Russian assets targeted in U.S. sanctions could undermine global efforts to force President Vladimir Putin into retreat from Ukraine via economic measures. It could also leave U.S. lenders facing punishments, potentially mirroring the $140 million fine and $8.8 billion-plus of asset seizures imposed on BNP Paribas SA in 2015 for conspiring from 2004 to 2012 to violate the International Emergency Economic Powers Act and the Trading with the Enemy Act.

Some U.S. banks will probably want to close doors in Russia faster than required to avoid risks, said Brian Frey, a partner at Alston & Bird LLP and former federal prosecutor with the U.S. Justice Department who focused on cross-border business and financial transactions implicating U.S. sanctions laws and the Bank Secrecy Act.

VTB Bank PJSC and Sberbank of Russia, both based in Moscow, are two large banks sanctioned by the U.S., as over 80% of Russian banking assets have been targeted, according to Treasury. Russian billionaire and Putin ally Alisher Usmanov is one of several individuals sanctioned. In addition, President Joe Biden prohibited oil, coal and liquified natural gas imports from Russia, new investment in the country's energy sector and financing of prohibited transactions by foreigners, under an executive order issued March 8.

Under U.S. sanctions policy, if a blocked person owns at least 50% of an entity's property or an interest in a property, that property or interest is considered blocked, according to the Treasury Department's Office of Foreign Assets Control. Identifying assets that meet this threshold is complicated by the use of opaque ownership structures.

Sanctioned Russians and Belarusians may attempt to evade restrictions through various means, including the use of non-sanctioned financial institutions in their home countries or through entities in third countries, according to the Financial Crimes Enforcement Network, a bureau of the Treasury Department that seeks to safeguard the financial system from illicit use.

The notice also reminded bank officials of the possibility of civil and criminal penalties, including monetary fines and imprisonment, for sanction violations. TD Bank NA paid about $115,000 in December 2021 to settle potential civil liabilities for apparent violations of North Korea Sanctions Regulations and Foreign Narcotics Kingpin Sanctions Regulations. The apparent violations were caused by multiple compliance breakdowns, including screening deficiencies and human error, Treasury said.

Unprecedented sanction implementation

The risk of gaps in the implementation of Russian sanctions is growing because of the lengthening list of people and entities on the blacklist. This also heightens the chance of people or businesses with similar names being blocked by mistake, said Andrew Shoyer, a partner at Sidley Austin LLP who co-leads the firm's global arbitration, trade and advocacy practice.

"[T]he more names that the U.S. government throws on a list, the more likely it's going to generate lots of false positives," Shoyer said in an interview. "That requires a lot more resources — people — to adjudicate those false hits, escalate them and determine whether they're accurate or not."

Another challenge involves focusing on specific regions — in this case, Donetsk and Luhansk, which Russia has identified as breakaway territories — rather than a whole country, he added. Making sure payments do not go in or out of a specific region is more difficult, and banks previously had difficulties with sanctions against Crimea. Still, the limited flows in these regions should make it less of a challenge than similar sanctions against Crimea, he said.

US compliance assistance

The U.S. government has sought to ease enforcement of sanctions by proactively listing some Russian subsidiaries. That's a change from some previous economic embargos, said Angelena Bradfield, who covers sanctions as a senior vice president at the Bank Policy Institute trade group.

Banks are also likely to get some leeway on compliance failures, if they can demonstrate that they made good faith efforts, Frey said, adding that the unprecedented speed and scope of these sanctions likely adds to the case for leniency.

Looking ahead, banks know the test that awaits.

"The banks have had practice, but it certainly will be a strain on their compliance resources," Shoyer said.