On April 6, 2018, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced new sanctions measures designating as Specially Designated Nationals (“SDNs“) seven Russian oligarchs and 17 Russian government officials previously identified in a report issued pursuant to Section 241 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA“; see our previous blog post on this report here) under the authority of Executive Orders 13661 and 13662, pertaining to destabilizing activities by Russia in Ukraine. OFAC also designated 12 entities owned or controlled by those newly designated oligarchs and, under the separate authority of Executive Order 13582, pertaining to support for the Government of Syria, a Russian weapons-trading company and related bank. A complete list of the designated individuals and entities is available here.
OFAC has stated that these designations are “to impose costs on Russia for its malign behavior” around the world, and are meant to put pressure on the oligarchs and government officials that OFAC says benefit disproportionately from the Russian government.
Effect on US and Non-US Persons and Foreign Financial Institutions
As a result of the OFAC designations, all of the property and interests in property within US jurisdiction of the designated individuals and entities are blocked. Accordingly, “US Persons” are generally prohibited from engaging in transactions involving these SDNs and any entities 50% or more owned by these SDNs. “US Persons” include (i) entities organized under US laws and their non-US branches, (ii) individuals or entities in the United States, or (iii) US citizens or permanent resident aliens (“Green Card” holders) wherever located or employed. Activities involving non-US persons, including separately incorporated non-US subsidiaries of US companies, may trigger US jurisdiction if they cause US Persons to engage in a prohibited SDN-related transaction..
Additionally, CAATSA Section 228 provides for mandatory sanctions against non-US persons that OFAC determines, inter alia, knowingly facilitate “significant” transactions, including deceptive or structured transactions, for or on behalf of any person subject to US sanctions with respect to the Russian Federation, such as the new SDNs. Further, CAATSA Section 226 makes foreign financial institutions susceptible to restrictions on the opening or maintenance of correspondent or payable through accounts in the United States if the Secretary of the Treasury determines, inter alia, that they knowingly facilitate “significant” financial transactions on behalf of any Russian person sanctioned under the Ukraine-related Russia sanctions, including the new SDNs.
New General Licenses and FAQs
In order to permit certain limited activities to minimize disruption to US Persons, partners, and allies caused by these new designations, OFAC also announced two new general licenses:
- General License No. 12 authorizes certain activities “ordinarily incident and necessary” to maintenance or wind down of operations, contracts, or other agreements in existence as of April 6, 2018 with 12 of the new SDN entities (and other entities 50% or more owned by these entities) before June 5, 2018.
- General License No. 13 authorizes certain transactions “ordinarily incident and necessary” to divest or transfer debt, equity, or other holdings in three of the new SDN entities before May 7, 2018. Note that General License No. 13 is limited to only three entities (EN+ Group PLC, GAZ Group, and United Company RUSAL PLC) and does not cover other entities 50% or more owned by these entities (as opposed to General License No. 12).
Reliance on these general licenses is subject to compliance with certain conditions. Further, each general license requires US Persons that use either license to make a detailed report to OFAC, within 10 business days after the expiration date of the relevant general license, regarding their activities under these licenses.
OFAC also published eight additional FAQs and one updated FAQ to address the designations and related general licenses. Of note, FAQ 574 makes clear that transactions by non-US persons and foreign financial institutions that would be permitted by these general licenses if performed by a US Person will not be deemed “significant” for purposes of CAATSA Sections 228 or 226 as described above.
Potential Addition of SDN Entities to the Entity List
Following other recent designations by OFAC of SDNs under the Executive Orders relating to Russia and Ukraine, the US Commerce Department’s Bureau of Industry and Security (“BIS“), which administers and enforces US export controls under the Export Administration Regulations (“EAR“), has also added those SDNs to the BIS Entity List. Accordingly, those Russian SDN entities are subject to license requirements for exports, reexports and in-country transfers of items (i.e., goods/commodities, software, technology) that are “subject to the EAR” (including all items in or originating in the United States and foreign goods/commodities, software, and technology that incorporate greater than a de minimis level of US-origin controlled content). Although it has not published a notice in the Federal Register to add the new SDN entities to the Entity List, BIS is likely to do so, consistent with its past practice.
Adding the 12 SDN entities listed in OFAC’s General License No. 12 to the Entity List would not affect the export of most items to those entities because General License No. 12 already explicitly prohibits exports of “goods” from the United States to these entities. However, General License No. 12 does not explicitly prohibit exports of technology or software. Were these 12 SDN entities to be added to the Entity List and subjected to the same restrictions as previously applied to Russian SDN entities, companies could be surprised to find that some activities presumably authorized by General License No. 12 (e.g., certain exports of technology or software) are prohibited unless BIS creates carve-outs that mirror the OFAC general licenses as it has done in the past with FAU Glavgosekspertiza Rossii and the Russian Federal Security Service (“FSB”).
Ms. Lis has extensive experience advising companies on US laws relating to exports and reexports of commercial goods and technology, defense trade controls and trade sanctions — including licensing, regulatory interpretations, compliance programs and enforcement matters. She also has advised clients on national security reviews of foreign investment administered by the Committee on Foreign Investment in the United States (CFIUS), including CFIUS-related due diligence, risk assessment, and representation before the CFIUS agencies.