2014 proved to be robust on the international economic sanctions front, with new sanction programs, scores of new designations (and some delistings) of targeted individuals and entities, and very sizable enforcement actions. Of particular note were major developments concerning Russia, Cuba and Iran – many of which occurred in the closing days of the year, signaling that 2015 will likely be equally eventful. These changes create significant challenges and business uncertainties for companies operating internationally. New sanctions typically go into effect immediately and carry significant civil and criminal penalties for violations, thus requiring quick response from compliance personnel in order to minimize business disruptions and mitigate the risk of potential liability.
Here’s a brief wrap up:
Russia: Targeted but Expanding Sanctions Create Compliance Challenges and Business Uncertainty
Beginning in March 2014, the Obama Administration implemented several rounds of escalating sanctions in response to Russian and insurrectionist actions in Ukraine’s Crimea region and eastern Ukraine. Avowing to use a “scalpel” instead of a hammer, the Administration targeted select end-users and end-uses in Russia, including individuals and companies supporting Russian actions in Ukraine, Russian defense industry firms, certain entities within Russia’s financial services and energy sectors, and trade and investment in Crimea. In parallel, the European Union implemented similar measures that apply to EU companies and EU products.
Most recently, on December 19, 2014 President Obama issued an executive order that substantially broadened the sanctions targeting activities in Crimea. Executive Order 13685, “Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to the Crimea Region of Ukraine,” December 19, 2014. Specifically, EO 13685 prohibits:
- U.S. persons from making any new investment in Crimea; and
- Virtually any trade between the United States and Crimea, including importing or exporting goods, services, or technology, directly or indirectly, to Crimea; and
- U.S. persons from approving, financing, facilitating, or guaranteeing transactions by foreign persons that would be prohibited if performed by a U.S. person by virtue of the new Crimea-related restrictions.
These prohibitions became effective as of 3:30 p.m. on December 19, 2014. While Executive Order 13685 does not provide a grandfather exception or transition period for existing contracts involving trade with or investments in Crimea that are now prohibited, on December 29, the Office of Foreign Assets Control issued General License No. 5, which permits a transitional period through January 31, 2015, during which covered activities may be wound down.
In addition, the Executive Order authorizes the blocking of property of designated people and entities operating in Crimea, as well as the providing of assistance to the leadership of such entities. Simultaneously, the Department of the Treasury designated 24 individuals and entities involved in the pro-Russia uprising in eastern Ukraine to OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN List”).
Executive Order 13685 came one day after President Obama signed the Ukraine Freedom Support Act of 2014 (UFSA). Passed with broad bipartisan support, the UFSA authorizes additional sanctions against Russia, as well as $350 million in military aid to Ukraine. The legislation authorizes the President to impose sanctions on Russian producers, transferors, or brokers of defense articles, as well as sanctions on foreign persons making significant investment in Russian crude oil projects in deep water, the Russian Arctic, or in Russian shale formations. The legislation also authorizes the President to impose sanctions on foreign financial institutions engaging in significant transactions with sanctioned entities within the Russian defense and energy sectors. With the exception of the provisions related to the Russian defense sector (which the President may waive in the interest of national security), the imposition of sanctions authorized by the USFA is not mandatory, and the President stated upon signing the bill that the Administration did not intend to impose sanctions under the new law at this time. Notwithstanding the President’s statement, this new legislation signals that Congress is also watching events unfold in Ukraine and is not reluctant to further expand the already substantial body of sanctions measures targeting Russia.
Both the UFSA and Executive Order 13685 build on three earlier rounds of sanctions (targeting the Russian energy, financial services, and arms sectors) that the Administration imposed earlier this year in response to the Ukraine crisis. O’Melveny News Alert, U.S. Treasury Department Imposes Additional Sanctions on Russian Banks, Energy, and Arms Firms(July 14, 2014); O’Melveny News Alert, New Sanctions Arising from Ukrainian Crisis Are Limited to Certain Individuals (March 18, 2014). These include:
- Energy Sector Sanctions: Sanctions against the Russian energy sector seek to deny key entities access to U.S. goods, services, and technology for use in certain Russian oil developments. Specifically, the Treasury Department placed five Russian energy firms, including Gazprom, Rosneft, and Lukoil, on the Sectoral Sanctions Identifications List (“SSI List”). U.S. persons are prohibited from providing, exporting, or re-exporting, directly or indirectly, to designated entities added to the SSI List, “goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil” in Russia or maritime areas claimed by Russia. “Office of Foreign Assets Control, Directive 4 Under Executive Order 13662,” September 12, 2014; “Office of Foreign Assets Control, General License No. 2,” September 12, 2014. In parallel, the Department of Commerce’s Bureau of Industry and Security (“BIS”) added the five Russian energy firms sanctioned by the Treasury Department to the Export Administration Regulations’ (EAR) Entity List, which imposes a license requirement for the export, re-export, or transfer of any U.S.-origin items subject to the EAR (including goods, software, and technology) to these entities when the exporter, re-exporter, or transferor knows those items will be used directly or indirectly in exploration for or production from deep water, Arctic offshore, or shale projects in Russia. “Russian Sanctions: Addition of Persons to the Entity List and Restrictions on Certain Military End Uses and Military End Users” (September 17, 2014).
- Capital Markets Sanctions: Sanctions targeting the Russian energy, financial services, and arms sectors seek to deny key Russian entities within those three sectors access to U.S. capital markets. OFAC issued various directives that prohibit certain transactions in debt and equity with designated persons in each of these sectors, all of which are included on the SSI List. Directive 1 prohibits U.S. persons from engaging in any transactions involving new debt or new equity with a maturity of longer than 30 days that has been issued on behalf of certain entities in the financial sector. “Office of Foreign Assets Control, Directive 1 as Amended Under Executive Order 13662,” September 12, 2014. Directive 2 similarly prohibits transactions in new debt (but with no prohibition related to equity) on behalf of certain entities in the energy sector with a maturity date of longer than 90 days. “Office of Foreign Assets Control, Directive 2 as Amended Under Executive Order 13662,” September 12, 2014. Directive 3 prohibits transactions in new debt (but also with no prohibition related to equity) with a maturity date of longer than 30 days for certain defense sector entities. “Office of Foreign Assets Control, Directive 3 as Amended Under Executive Order 13662,” September 12, 2014.
- Defense Sector Sanctions: The Department of the Treasury blocked the assets of more than 30 Russian defense sector entities designated on the SDN List. In parallel, the BIS added these entities to the EAR Entity List, imposing a license requirement for exports, re-exports, or in-country transfers for all items subject to the EAR. “Russian Sanctions: Addition of Persons to the Entity List and Restrictions on Certain Military End Uses and Military End Users,” (September 17, 2014).
The current sanctions against Russia and Russia-backed persons and entities operating in Ukraine impose significant limitations on current and future business in Russia and Crimea, as well as with Russian partners in the financial services, defense, and energy sectors. The continuing political tensions have already led to the termination of certain business deals between European and United States companies and designated Russian energy companies, such as the cancellation of BASF and Gazprom’s multi-billion Euro asset swap. The new Crimea sanctions may cause increased business conflicts in Russia for U.S. and European companies that are pressured to engage in business in Crimea, which Russia now considers fully part of the Russian state. Screening counter-parties and product end use are two effective risk mitigation measures for companies continuing to operate in Russia and Ukraine.
Cuba: The United States Restores Diplomatic Relations and Eases Some Rules, but Broad Restrictions Remain
The United States has maintained a comprehensive economic sanctions regime on Cuba dating back to the early 1960s. On December 17, 2014, President Obama announced the restoration of full diplomatic relations with Cuba and an easing of some travel and trade restrictions. In addition to the re-opening of an embassy in Havana, President Obama expanded the list of general licenses available for travel to Cuba and eased restrictions on remittances to Cuba by U.S. persons. The President also instructed Secretary of State Kerry to review Cuba’s designation as a state sponsor of terrorism.
With regard to trade and financial transactions, the President authorized commercial exports to Cuba of certain goods and services, including building materials for private residential construction, goods for use by private sector Cuban entrepreneurs, and agricultural equipment for small farmers. The export of certain consumer communications devices, related hardware, software, applications, and services will also be permitted, and telecommunications providers will be allowed to establish the necessary mechanisms, including infrastructure, in Cuba to provide commercial telecommunications and internet services.
In addition, U.S. financial institutions will be permitted to open correspondent accounts at Cuban financial institutions, and travelers to Cuba will be permitted to use U.S. credit and debit cards. U.S.-owned or -controlled entities in third countries will also be generally licensed to provide services to, and engage in financial transactions with, Cuban individuals in third countries.
None of the announced changes will take effect until new regulations and/or general licenses are issued. OFAC and BIS will be responsible for working in parallel to implement the new policy. OFAC has said it expects to issue its regulatory amendments in the “coming weeks.” Therefore, until such time when the new measures are issued:
- U.S. companies must continue to comply with the existing sanctions regulations.
- U.S. companies should continue to seek specific licenses for Cuba-related activity.
Most importantly, even after OFAC and BIS promulgate measures to implement the President’s directives, the broad trade embargo against Cuba will continue to remain in effect, other than in regard to the limited areas that are subject to easing under the new policy or as authorized under current law (e.g., licensed exports of medicine and medical devices, food, and agricultural commodities). The trade and investment embargo is largely enshrined in law by the Cuban Democracy Act of 1992 (22 U.S.C. §§ 6001-6010) and the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (22 U.S.C. §§ 6021-6091). Action by Congress is therefore required in order to more fully restore normal economic relations between the United States and Cuba. President Obama stated: “As these changes unfold, I look forward to engaging Congress in an honest and serious debate about lifting the embargo.” Debate is assured, but swift legislative change—either to block the President’s actions or to lift current requirements of law—appears far less likely.
Iran: Broad Sanctions remain while Multilateral Negotiations on Iran’s Nuclear Program Continue, and Congress Considers further Sanctions
U.S. companies have been significantly restricted in any dealings with Iran since 1995, when the United States imposed a broad trade and investment embargo on the country. As concerns about Iran’s nuclear program, sponsorship of terrorism, and human rights violations continue to increase, that sanctions program has expanded in recent years to target the activities of non-U.S. companies in Iran’s energy and financial sectors. The United Nations, European Union, and other U.S. trading partners maintain more narrowly drawn sanctions.
The nuclear-related sanctions have been the subject of multilateral negotiations, which resulted in limited and temporary sanctions relief in November 2013. On November 24, 2014, U.S. Secretary of State John Kerry announced a seven-month extension for the P5+1 (United States, Russia, China, France, and the United Kingdom) talks on Iran’s nuclear program. The extension contemplates that the parties will reach a framework agreement by March 1, 2015, and then complete a final comprehensive agreement by June 30, 2015. The extension leaves in place the parameters set under the November 2013 Joint Plan of Action (“JPOA”). Under the JPOA, Iran accepted limits on uranium enrichment above certain levels and construction of additional enrichment and processing facilities, as well as consented to IAEA monitoring and inspection of certain nuclear facilities. In exchange, the E3/EU+3 (United States, Russia, China, EU, United Kingdom, Germany, France) provided limited relief from economic sanctions, including pausing efforts to further reduce Iran’s crude oil sales, refraining from imposing new nuclear-related sanctions, and facilitating humanitarian trade for Iran’s domestic needs.
In response to the agreement to extend the negotiations on a permanent agreement, OFAC announced that the limited sanctions relief period would be extended through June 30, 2015. Nevertheless, key oil, banking, and financial sanctions applicable to U.S. persons and financial institutions remain in full effect. (For a full description of the JPOA and key U.S. sanctions targeting Iran, please see the following O’Melveny & Myers Client Alerts: The Interim Agreement on Iran’s Nuclear Program: Implications for Iran Sanctions; New Executive Order Extends Extraterritorial Reach of U.S. Iran Sanctions; Broad New Legislation Further Expands Economic Sanctions Against Iran and Syria; New Iran and Syria Sanctions Pose Compliance Challenges for both U.S. and non-U.S. Businesses)
With the P5+1 talks at a standstill, various members of Congress have expressed renewed interest in two proposed Senate bills designed to increase sanctions targeting Iran. The first bill (S. 1881), co-authored by outgoing Senate Foreign Relations Committee Chairman Robert Menendez (D-N.J.) and Sen. Mark S. Kirk (R-Ill.), would expand existing sanctions and impose additional sanctions with respect to Iran’s petroleum sector, among other areas, if no deal is reached on Iran’s nuclear program. Several Republican senators have called for a vote on this bill, assuming that it is reintroduced in the new Congress.
The second bill, S. 2650, was introduced by Sen. Bob Corker (R-TN), who will replace Senator Menendez as the Chairman of the Senate Foreign Relations Committee. This bill provides for Congressional review of international agreements relating to Iran’s nuclear program. In addition, the bill provides for the reinstatement of sanctions if the U.S. intelligence community determines that Iran has failed to comply with the JPOA or any other agreement related to Iran’s nuclear program. Speaking at the 2014 Foreign Policy Forum on December 3, 2014, Senator Corker stated that Congress would “play a more robust role in the first quarter” with respect to Iran.
Implications for the Business Sector
U.S. companies seeking to do business in Iran must continue to wait. The essential embargo impacting U.S. firms remains in place, and cannot be lifted without Congressional action. In addition, even if the P5+1 nations reach agreement with Iran on Iran’s nuclear program, the President is only authorized to waive some, but not all, sanctions. Based on hostile reaction in Congress to the extension of the P5+1 talks, and renewed interest in enacting additional sanctions on Iran, there appears to be no immediate prospect that Congress will ease the broad sanctions against Iran, even with a full resolution of the P5+1 talks.