Webinar Report | Navigating Russian Payment Issues Amid Global Financial Sanctions

Since the outbreak of the Russia-Ukraine conflict, the U.S. and other Western nations have imposed unprecedented economic and financial sanctions on Russia. These sanctions have significantly impacted not only Russia’s economy but also the compliance challenges faced by businesses in other countries engaged in commerce with Russia. For Chinese companies, addressing the complexities of maintaining lawful and compliant business dealings with Russia—particularly with respect to payment settlements—has become a critical issue.

In response to these challenges, SIPAC recently hosted an webinar titled “How to Overcome Payment Difficulties with Russian Transactions.” This webinar brought together several experts in the fields of international sanctions and compliance to discuss the risks, challenges, and possible solutions for Chinese companies dealing with cross-border payments involving Russia.

Webinar Overview

The webinar was moderated by Robert Lewis, Chairman of SIPAC, and focused on navigating Russian payment challenges in a sanctions-heavy environment. Speakers included Elizabeth Liu, Consultant at Chance Bridge Law Firm, Johnson Ma, China Director of Dow Jones Risk and Compliance, and Britt Mosman, Partner at Willkie Farr & Gallagher LLP, and a former counsel at the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC). Each expert shared their insights, drawing on their extensive experience in financial sanctions, corporate compliance, and cross-border payment settlements, offering practical advice tailored to the current situation.

Global Sanctions Environment and Secondary Sanctions Challenges

Johnson Ma provided an overview of the global sanctions framework, explaining how the 2023 U.S. Executive Order 14114 marked an escalation of sanctions against Russia, especially concerning secondary sanctions on third-party financial institutions. Secondary sanctions mean that even companies or banks not directly involved with sanctioned entities can face penalties if they indirectly engage in transactions linked to specific sectors or industries.

This creates significant risks for Chinese financial institutions and businesses, particularly within the U.S. dollar settlement system. In response, many Chinese banks have adopted a cautious approach, or outright refusal, to process Russian-related transactions. As such, Chinese businesses must find legal and compliant ways to manage cross-border payments with Russia.

Ma emphasized that with increasingly stringent long-arm jurisdiction measures by the U.S. and its allies, China’s companies need to be especially mindful of international sanctions. The G7 countries, for example, have targeted not only Russia’s defense industry but also dual-use goods, further complicating compliance.

Corporate Compliance Challenges

Elizabeth Liu highlighted the practical difficulties Chinese companies face in managing payments with Russia. The first issue is the disruption of banking services. Since late 2023, several major state-owned Chinese banks have gradually stopped offering payment services for many Russia-related transactions, impacting businesses from coastal megabanks to smaller regional branches. Even Russian bank branches in China have encountered instability in payment flows.

Furthermore, Liu noted the increasingly stringent compliance terms imposed by upstream suppliers and downstream partners, demanding detailed export control clauses—something many Chinese companies are unfamiliar with.

Adding to these challenges, banks’ internal audit processes have become significantly more complex, with central decision-making hubs now handling transaction reviews. This has extended review times and imposed stricter document requirements, further delaying payment cycles.

Some businesses have tried circumventing sanctions by using third-party or shell companies. However, U.S. authorities have taken notice, raising the risk of blacklisting for companies caught attempting to evade sanctions.

Despite these difficulties, certain exempted trades—such as agricultural products, pharmaceuticals, medical devices, and replacement parts—are not subject to sanctions and generally do not face payment obstacles.

The International Banking Approach

Robert Lewis shared insights from his discussion with Chloe Cina, a seasoned sanctions expert from international banks, on how global financial institutions handle Russia-related transactions. Large international banks, particularly those based in the U.S. or Europe, have adopted a “de-risking” approach. This practice, however, varies between large and small banks, as well as between high-value and low-value transactions.

Large banks typically have vast compliance resources, allowing them to thoroughly scrutinize transactions. For long-standing corporate clients, even those with significant Russian business interests, banks may still process payments after conducting rigorous due diligence.

Smaller banks, on the other hand, lack the manpower and technical expertise to navigate the complex sanctions landscape, often opting to reject Russian-related transactions altogether.

Transaction size also plays a role—large transactions between long-term partners might still be processed after due diligence, while smaller, one-off payments are often declined, with banks citing the disproportionate cost of compliance.

OFAC’s Strict Compliance Standards

Britt Mosman provided an in-depth analysis of OFAC’s enforcement mechanisms, emphasizing the “strict liability” principle applied to primary sanctions and the “knowledge qualifier” for secondary sanctions. Under the current sanctions framework against Russia, secondary sanctions no longer require the “knowledge qualifier”, meaning financial institutions may face penalties even if they are unaware that a transaction involves a sensitive sector like Russia’s military-industrial complex.

Mosman advised Chinese companies to ensure that their compliance systems are robust and to collaborate closely with banks, providing comprehensive transaction documentation to alleviate banks’ compliance concerns.

She further stressed that OFAC sanctions are dynamic and constantly evolving, urging businesses to stay abreast of policy changes, particularly in relation to secondary sanctions and export controls.

Building Effective Compliance Systems: Best Practices

The discussion highlighted the importance of developing and maintaining a comprehensive compliance management system as a cornerstone for navigating sanctions and maintaining stable business operations.

Key recommendations included:

1. Dynamic Risk Assessment: Companies should continuously assess risks related to their products, clients, supply chains, and transactions, especially those linked to high-risk sectors or regions.
2. Enhanced Due Diligence: Companies must thoroughly vet their customers and partners to ensure they are not engaging with sanctioned entities. Implementing a “Know Your Customer’s Customer” (KYCC) system can help ensure supply chain compliance.
3. Close Bank Collaboration: Given the critical role banks play in cross-border payments, companies should establish open communication with banks and proactively provide all necessary transaction documentation. For high-risk transactions, enlisting external legal counsel to perform due diligence can further reassure banks.
4. External Expertise: Leveraging external consultants can bolster a company’s internal compliance system. Experienced consultants can provide the latest guidance on international sanctions and assist in developing effective compliance strategies.

Third-Country Payment Routes: Risks and Considerations

Although some companies have sought to circumvent sanctions by routing payments through third countries or shell companies, both Liu and Mosman warned against this risky practice. U.S. authorities have tightened oversight of third-country transactions, and any attempt to evade sanctions could have severe legal consequences.

The U.S. Presidential Election: Potential Implications for Sanctions Policy

With the U.S. presidential election approaching, many are speculating on potential shifts in sanctions policy. Mosman suggested that if Trump were re-elected, there could be a shift toward a more pragmatic, less stringent sanctions regime. However, any policy changes would take time to implement, so businesses must continue prioritizing compliance in the short term.

Conclusion

In today’s complex sanctions environment, Chinese companies must establish strong compliance systems to ensure their business with Russia remains lawful and compliant. Through dynamic risk assessment, enhanced due diligence, and close collaboration with banks, businesses can mitigate risks and maintain operational stability.

SIPAC will continue to provide professional support for Chinese businesses in global legal and compliance matters, helping them navigate cross-border challenges and ensure sustainable international growth.

---