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Sanctions Risks for Foreign Financial Institutions That Join Russian Financial Messaging System SPFS

Houston, Tex. (February 11, 2025) - On November 21, 2024 the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury published a new Russia-related alert (the "Alert"), "Sanctions Risk for Foreign Financial Institutions that Join Russian Financial Messaging System, System for Transfer of Financial Messages." The purpose of the Alert is to warn foreign jurisdictions and financial institutions about the sanctions risks of joining the Russian financial messaging system Sistema Peredachi Finansovykh Soobscheniy or “System for Transfer of Financial Messages” (SPFS). 

The Central Bank of Russia (CBR) created SPFS in 2014 with the express purpose of diminishing the effect of sanctions imposed by the United States and its partners and allies. Russia has used and promoted SPFS, designed as an alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, to maintain international financial connectivity, evade sanctions, and fund its war effort. Sanctioned Iranian banks have joined SPFS to retain financial connectivity given restrictions on using SWIFT, and Russia has also pushed its partners to join SPFS to enable sanctioned Russian banks to evade sanctions. Currently, approximately 160 banks across 20 countries, including China, Iran, Belarus, Armenia, Tajikistan and Kazakhstan are connected to SPFS. SPFS is part of the financial services sector of the Russian Federation economy because of its role promoting communication between financial institutions within Russia’s financial system. This means that any foreign financial institution that joins or has already joined SPFS may be designated for operating or having operated in this sector pursuant to Executive Order (E.O.) 14024, “Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation.”

As discussed further in the following Lewis Brisbois Client Alert, "OFAC Expands Reach Over Foreign Financial Institutions," E.O. 14114 amended E.O. 14024 and authorized OFAC to impose secondary sanctions on foreign financial institutions that, among other things, have conducted or facilitated any significant transaction or transactions or provided any service to entities sanctioned for having “operated in Russia’s military-industrial base.”  This includes (i) all persons blocked under E.O. 14024, and (ii) any person operating in the technology, defense and related materiel, construction, aerospace, or manufacturing sectors of the Russian Federation economy. It may also include persons that support the sale, supply, or transfer, directly or indirectly, to the Russian Federation of certain critical items. 

Key Considerations

OFAC views joining SPFS after publication of the Alert as a red flag and is prepared to more aggressively target foreign financial institutions that join or participate in SPFS.  Additionally, there is no grandfather clause to joining SPFS, which means that any financial institution that has already joined SPFS and used it prior to the Alert must discontinue its use of SPFS in order to avoid possible sanctions. While some foreign banks that use SPFS might not have been sanctioned by OFAC, U.S. banks that deal with them must use caution in doing so going forward. 

This is a great increase in OFACs jurisdiction in foreign financial institutions as it further expands its oversight over foreign institutions that merely use SPFS, even if they don’t provide banking to sanctioned products or services directly. This has implications both domestically and abroad as financial institutions must exercise extreme caution about their exposure to institutions that have joined SPFS, as such banks may be conduits for Russian sanctions evasion, and a pathway to OFAC sanctions.

Lewis Brisbois’s attorneys are actively engaged in the wide range of legal issues in this area and are advising clients on managing legal and business risk as events continue to develop at an accelerated pace. For more information, contact the author or editors of this alert. Visit our Ukraine Conflict, International Trade, Export, Import and Investment Controls & National Security Practice page for additional alerts in this area.

Author:

Joe Magro, Associate

Editors:

Andrew Pidgirsky, Partner and Chair of Ukraine Conflict, International Trade, Export, Import and Investment Controls & National Security Practice

Thomas A. Brooks, Partner

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