He finally did it. 

After months of speculation, delay and threatening statements, President Trump finally imposed additional sanctions on Russia for invading Ukraine. The EU and UK have also imposed matching sanctions, further reinforcing US actions. 

There has been much debate as to the effectiveness of these sanctions, but their impact is much wider than most observers might imagine. In this article we will analyse, examine and illustrate the practical aspects of these new sanctions, and their implications for sanctions risk management within organisations and institutions. 

The sanctions are authorised under Executive Order (EO) 14024, first executed under the Biden Administration under the title “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation”. 

As a consequence of this amended Executive Order, Russian oil majors Gazprom Neft, Surgutneftegas, Rosneft and Lukoil are all now SDNs (Specially Designated Nationals) which means their assets are frozen and blocked, and US persons cannot legally transact or execute any business with them. 

The most critical aspect of these sanctions is what defines a US person. The definition not only includes US citizens and corporates both domestic and overseas, but it also includes any person, i.e., corporate, individual or group, which uses the US dollar. Any entity that uses the US dollar (or has access to US markets) and violates US sanctions, may be subject to severe fines and penalties, with the ultimate sanction being a loss of access to the dollar market and any business with a US nexus. 

As such, refineries that take Russian crude either in India for onward sale to Europeans, or in China for consumption in their domestic market, risk losing access to the dollar market, if they continue to accept deliveries from Russia. Further, any bank or institution which provides finances or payment in dollars to those refineries would also be at risk for facilitating transactions with sanctioned persons—even if they merely functioned as a broker. 

It is accepted wisdom that no bank or financial institution of significance can afford to lose access to the US dollar market. The US Treasury designated ABLV Bank in Latvia an institution of primary money laundering concern under the USA Patriot Act, thus denying it access to that market. The ECB closed the bank after two weeks after a run on its deposits. 

The very structure of sanctions regimes has always been intriguing, in that they may effectively impose sanctions on entities, even though the sanctioning authorities have not designated them as such. 

For example, in this particular case, neither the EU, UK nor the US has sanctioned all Russian crude exporters. However, since the sanctioned entities represent a sizeable portion of Russian oil exports, how can anyone be sure that available Russian crude on the market, only originated from the entities that the relevant authorities did not sanction? 

In such cases, prudence will dictate that unless there is proof or certification that Russian crude traded on the market only originated from non-SDN entities (exceedingly difficult), no oil trader, refinery, bank or institution of standing will be willing to trade Russian crude. 

As such, the sanctions have a wider effective impact than the explicit language contained in the Executive Order would suggest, and effectively the sanctions imposed by the US, UK and EU extend to all Russian crude. 

The press release announcing the new sanctions also referred to the possible imposition of secondary sanctions. The implication here is that even if an entity is not a US person, the US authorities may still choose to impose sanctions. How would such sanctions be effective if an entity neither uses the US dollar nor does business in US markets? It is true that secondary sanctions would not be effective in all cases, but this is far from being a universal truth. 

A prime example of this would be the small “teapot refineries” in China, whose business model is the purchase and sale in renminbi, of crude oil from sanctioned countries such as Russia and Iran. Having no US dollar or US market exposure, would appear to effectively insulate these entities from sanctions given they are non-US persons. However, as no entity exists in perfect isolation, US secondary sanctions could severely disrupt the activities of these teapot refineries, by indirectly impacting their business relationships. 

All refineries require technology inputs, maintenance and spare parts. If a firm providing any of these also operates in international markets and uses US dollars, that firm will know that doing business with an SDN would negatively impact the rest of their franchise and therefore would refuse to offer their products and services to teapot refineries. 

The rationale applied above would also be true of any entity to which teapot refineries sold petroleum products. As such, given these circumstances, US secondary sanctions could effectively make Chinese teapot refineries market pariahs. Moreover, even the threat of such secondary sanctions could be effective in deterring organisations from doing business with the teapot refineries. Who wants to do business or offer financing to an entity that could at sometime in the future be the subject of major sanctions? 

We should note that the US, EU and the UK have already sanctioned several of these Chinese teapot entities. 

Both the structure of and the threat posed by sanctions regimes highlight the critical importance of effective sanctions risk management in any organisation. The assessment of sanctions risk exposure has to look beyond the immediate text of any sanctions regime and understand how and where sanctions risk exposures might actually arise. 

For effective sanctions risk management, organisations should focus on ensuring that the impact of new sanctions regulations is assessed, documented, disseminated, and that the policies and procedures that are in place, effectively operate within the stated boundaries of the relevant sanctions regime. Where relevant, said policies and procedures should anticipate where sanctioning authorities might next draw those boundaries. 

As a consequence, assessing sanctions risk exposures means properly understanding the structure of an industry, the products and their utility, the players, geopolitics, geography and proximity, e.g., Russia uses former Soviet republics as a conduit for semiconductors and other western technology. The list of sanctions risk factors invoked here is certainly not exhaustive. 

By definition, this implies that the assessment and documentation of risk exposures, is the single most crucial step in sanctions risk management and embedded within that is how we understand customers. It is an old adage; to truly perform CDD to the best of our ability, we must place ourselves in the seat of the CEO of every single customer so that we might comprehend the totality of their business. 

The challenges presented by the current sanctions landscape makes such an approach an imperative. Is your organisation asking all the right questions? 

About the Author 
Jonathan Ledwidge is an international financial crime and risk management specialist with over two decades of experience across banking, audit, and risk training in more than 40 countries. 

His article above highlights a central truth: sanctions risk is never isolated, it’s embedded across customers, products, and jurisdictions. These same dynamics are unpacked in IRM’s Financial Crime Risk Management course, where Jonathan guides participants through real-world case studies, practical risk models, and the latest global frameworks (FATF, OFAC, UK ECCTA 2023, EU AMLA). 

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