Irish companies may see a knock-on effect from the new range of sanctions announced by the US government against Russia.
The US government introduced sanctions against Russia as a response to what it describes as ‘malign activity’ by Russia in Syria, eastern Ukraine, and the West. These sanctions are aimed at having a punitive effect on targeted entities and limiting Russia’s economic growth.
On 6 April 2018, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) added a number of high-profile Russian businessmen and the companies they own or control to the Specially Designated Nationals and Blocked Persons List (the SDN List). Under these sanctions, US persons are generally prohibited from dealing with an SDN, or an entity controlled by an SDN (i.e. an entity in which 50% or more of its shares are owned by an SDN).
Persons or entities engaged in dealings with certain specified SDNs (GAZ Group, United Company RUSAL PLC, EN+ Group PLC and JSC EuroSibEnergo) can avail of a general licence giving them an extended period of time, currently up to 23 October 2018, to wind down their dealings with the SDN that were in effect prior to 6 April. This licence does not authorise the provision of new services or exports. (This deadline has been extended on a number of occasions – see OFAC’s website for updates).
SECONDARY SANCTIONS FOR NON-US PERSONS/ENTITIES
Non-US persons and entities may be subject to secondary sanctions and penalties if they knowingly engage in significant transactions with an SDN, including potentially being added to the SDN List. The potential consequences of these sanctions may be far-reaching.
POTENTIAL CONSEQUENCES FOR IRISH COMPANIES
A difficult choice for companies?
Take for example an Irish company doing business with an SDN, or with a subsidiary controlled by an SDN. The Irish company has a choice: terminate its contract with the SDN or potentially face secondary sanctions.
If the Irish company opts to terminate the contract, this may lead to claims for breach of contract and could have significant effects on the Irish company’s business, for example in cases where the SDN is a key supplier to the Irish company and there are no alternative suppliers available.
If the Irish company continues to trade with the SDN, it risks being subject to secondary sanctions, including having its assets in the US frozen. US persons and entities will also be prohibited from transacting with the Irish company, potentially eliminating significant revenue streams.
US banks will not be able to process transactions involving the Irish company.
Non-US banks may also be reluctant to transact with the Irish company. Over the past ten years, US government agencies have imposed multi-billion dollar penalties on non-US banks (including Commerzbank, BNP Paribas and HSBC) for “causing” US banks to violate sanctions by clearing SDNrelated transactions through the US financial system. Non-US banks may also be subject to secondary sanctions for facilitating transactions involving entities subject to sanctions.
What about the group?
A parent company, subsidiary, or company within the same group that continues to transact with an SDN may also be subject to secondary sanctions.
Even if the related company is not itself subject to secondary sanctions, heightened due diligence requirements mean that a US entity might refuse to transact with it, despite being legally permitted to do so.
Other companies within the group may also suffer reputational damage by being associated with a sanctioned entity.
MANAGING THE RISK
It is important to carefully manage the approach to a counterparty that has been designated an SDN in order to navigate contractual risks.
» Ascertain whether there is a legitimate “way out” of contractual terms, for example under the terms of a force majeure clause or a sanctions clause. When entering into new contracts, companies should ensure that the contractual terms deal with the risk of sanctions, a risk which is not necessarily as remote as it might first seem.
» Liaise with other companies that find themselves in the same situation and avail of the assistance of trade associations and industry representative bodies. OFAC is more likely to engage in discussions with representative groups from a particular industry than individual companies.
» Apply to OFAC for a specific licence to engage in a transaction that would otherwise be prohibited. OFAC is unlikely to grant a specific licence to continue transacting with the sanctioned entity in perpetuity. However, it may be willing to grant a specific licence to extend the time period within which the Irish company must wind down transacting with the sanctioned entity so that alternative arrangements can be made.
» If a company has availed of the general licence, to continue to trade with certain specified SDNs for the limited time period, the company must take action to start to wind down its business with the SDN and avoid any actions that might be seen as an attempt to bypass the sanctions e.g. increasing supply between now and the wind down date, as this might be seen as an attempt to sidestep the sanctions by stockpiling supplies in advance.