Introduction

The European Union and Canada have broadened sanctions against Ukrainian and Russian individuals and legal entities, while United States publishes new regulation implementing the existing measures in relation to the crisis in Ukraine.

European Union

Current status

In view of recent developments in Ukraine, on May 12, 2014, the Council of the EU (the Council) broadened EU sanctions against actions undermining Ukraine’s territorial integrity, sovereignty and independence (Decision 2014/265/CFSP, Regulation (EU) 477/2014 and Regulation (EU) No 476/2014). At its meeting in Brussels, the Council decided to expand the criteria for EU restrictive measures to target natural and legal persons. Furthermore, the Council provided a legal basis for asset freezes on entities in Crimea and Sevastopol whose ownership has been transferred contrary to Ukrainian law or on entities which have benefited from such confiscation. As a result, the agreed list includes two Crimean energy companies (PJSC Chernomorneftegaz and Feodosia). The Council decided as well to add 13 natural persons to the list of those subject to a travel ban and an asset freeze bringing the total number of persons subject to sanctions in connection with the crisis in Ukraine to 61.

In addition, the Council declared the independence referenda held on 11 May, 2014, in two Southern regions of Ukraine to be illegitimate and illegal and stressed that it does not recognise their outcome.

On 28 May, 2014, Regulation (EU) 577/2014 was adopted in order to amend the identifying information (mainly introduction or amendment of the date of birth, correction of names or introduction of addresses) for seventeen persons and the two above mentioned entities included in the list of persons, entities and bodies subject to restrictive measures.

In summary, the EU has imposed the following restrictions:

  • Member States shall take the necessary measures to prevent the entry into, or transit through, their territories of the listed individuals responsible for, actively supporting or implementing, actions or policies which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine, or stability or security in Ukraine, or which obstruct the work of international organizations therein.
  • All funds and economic resources belonging to, owned, held or controlled by natural or legal persons, entities or bodies responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine, or stability or security in Ukraine, or which obstruct the work of international organizations therein, and natural or legal persons, entities or bodies associated with them shall be frozen.
  • No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of natural or legal persons, entities or bodies, involved in the above mentioned actions or to or for the benefit of natural or legal persons, or entities or bodies associated with them.

These measures are directly applicable in all the Member States.

Background

The first stage of sanctions against Russia had been initiated on March 6, 2014. The European Council held an extraordinary meeting and underlined that a solution to the crisis must be found through negotiations between the Governments of Ukraine and Russia. The decision was taken to suspend bilateral talks with Russia on visa matters and discussions on the New (EU-Russia) Agreement as well as preparations for participation in the G8 Summit in Sochi. The EU announced a second stage of further measures in the absence of de-escalatory steps and additional far-reaching consequences for EU-Russia relations in case of further destabilisation of the situation in Ukraine.

On March 17, 2014, following the referendum in Crimea, the Council proceeded to a second stage of restrictive measures by adopting Decision 2014/145/CFSP and Regulation (EU) No 269/2014. These are directed against persons responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine as well as persons and entities associated with them. In this regard, 21 persons were identified and targeted with a travel ban and a freeze of their assets within the EU. The EU also strongly condemned the holding of an illegal "referendum" in Crimea on joining Russia and stated that it does not recognise its outcome. On March 21, 2014 the Council expanded the list of targeted individuals by adding 12 persons (Decision 2014/151/CFSP and Regulation (EU) No 284/2014).

At its meeting of April 28, 2014, the Council added 15 individuals to the list of persons subject to sanctions against actions undermining Ukraine's territorial integrity (Regulation (EU) 433/2014 implementing Regulation (EU) 269/2014). Following this set of sanctions the total number of Ukrainian and Russian citizens subject to sanctions therefore amounted to 48.

In connection with embezzlement of Ukrainian public funds, on April 14, 2014, four additional persons had been added to the asset freeze (Decision 2014/216/CFSP and Regulation (EU) 381/2014). Previously, the Council had adopted Decision 2014/119/CFSP, which provides for the freezing of funds and economic resources of former President Viktor Yanukovych and 17 other prominent former government ministers, senior officials and businessmen. This Decision shall apply until March 6, 2015. On March 5, 2014, the Council published Regulation (EU) No. 208/2014, which reiterates the framework set out in the Decision and provides further definition on the scope of restrictions.

Outlook

At its meeting of May 12, 2014, the Council stressed that the EU strongly supported the holding of free and fair Ukrainian Presidential elections on May, 25, 2014, in order to overcome the crisis. In this regard, the Council warned that future measures will be imposed against any persons trying to obstruct this vote.

United States

Sanctions

President Obama has issued three increasingly broad executive orders authorizing sanctions on Russian and Ukrainian individuals and entities that have been identified as being involved in Russia’s incursion into, and subsequent annexation of, Crimea. The U.S. sanctions initially targeted particular individuals and entities that were identified as engaging in, or otherwise responsible for, Russia’s activities in Ukraine. As Russia moved forward with efforts to formally annex Crimea, President Obama authorized sanctions on individuals and entities operating in key sectors of Russia’s economy and the U.S. Congress also enacted additional sanctions. On May 8, 2014, the Office of Foreign Assets Control issued the Ukraine-Related Sanctions Regulations to implement the three executive orders.

A. Executive Order 13660 (March 6, 2014)

On March 6, 2014, President Obama signed Executive Order 13660 authorizing the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”) to sanction any individual or entity determined to be involved in undermining Ukraine's democratic processes or territorial integrity.

More specifically, the Executive Order authorizes an asset freeze and visa ban on persons determined by the Secretary of Treasury, in consultation with the Secretary of State, to be responsible for or complicit in, or to have engaged in, directly or indirectly, activities that: (i) undermine democratic processes or institutions in Ukraine; (ii) threaten the peace, security, stability, sovereignty, or territorial integrity of Ukraine; or (iii) contribute to the misappropriation of state assets of Ukraine.

The Executive Order further authorizes sanctions against persons determined to: (i) have asserted governmental authority over any part of Ukraine without authorization from the Ukrainian government in Kiev; (ii) be a leader of an entity that has engaged in any activity described above or of an entity whose property and interests in property are blocked pursuant to the Executive Order; (iii) have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any activity described above; or (iv) be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property is blocked pursuant to the Executive Order.

B. Executive Order 13661 and Designations (March 17, 2014)

On March 17, 2014, President Obama signed Executive Order 13661 authorizing sanctions on additional individuals and entities that are identified as contributing to Russia’s involvement in Ukraine. The Executive Order expands upon sanctions authorized in Executive Order 13660 by broadening the categories of individuals and entities potentially subject to sanctions to include:

  • Russian Government Officials
  • Any individuals or entities that operate in the arms or related materiel sector in Russia
  • Any individual or entity that is owned or controlled by, or provides material support or other support to, any senior Russian Government official or other blocked persons

Contemporaneous with the Executive Order, OFAC identified eleven current and former Russian and Ukrainian officials as being designated under the two executive orders for their role in events in Ukraine.

Seven Russian officials were designated as being the "key ideologists" and "architects" of the Russian military incursion into Crimea and include Vladislav Surkov, Sergey Glazyev, Leonid Slutsky, Andrei Klishas, Valentina Matviyenko, Dmitry Rogozin, and Yelena Mizulina. Vladislav Surkov and Sergey Glazyev are presidential advisers to Russian President Vladimir Putin and the five other Russian officials hold various positions in the Russian parliament and Russian government.

Four current and former Ukrainian officials were designated as being supporters of the Russian incursion in Crimea and include former Ukrainian President Viktor Yanukovych, former Ukrainian presidential chief of staff Viktor Medvedchuk as well as Crimea-based separatist leaders Sergey Aksyonov and Vladimir Konstantinov.

C. Executive Order 13662 and Further Designations (March 20, 2014)

On March 20, 2014, President Obama responded to Russia's formal annexation of Crimea by issuing Executive Order 13662 that further expands the categories of individuals and entities for which sanctions are authorized to include entire sectors of the Russian economy. OFAC also designated 20 Russian individuals as well as a Russian financial institution (Bank Rossiya), as Specially Designated Nationals (“SDN's”).

Executive Order 13662 authorizes, for the first time, sanctions to be imposed on any individual or entity operating in certain sectors of the Russian economy. The Executive Order left the specific sectors to be sanctioned to the discretion of U.S. Secretary of Treasury but specifically mentioned the following sectors as potential targets:

  • Financial Services
  • Energy
  • Metals and Mining
  • Engineering
  • Defense and related materiel

The Secretary of Treasury has not yet identified any sectors of the Russian economy as subject to sanctions but would be expected to do so quickly if Russia were to continue to escalate its involvement in Ukraine by, for example, sending its forces into portions of Ukraine outside of Crimea.

D. H.R. 4152 (April 3, 2014)

On April 3, 2014, President Obama signed into law a bill entitled “Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014” (H.R. 4152). The Act provides for $1 billion in loan guarantees to Ukraine and directs the President to impose sanctions on: (i) any person, including a current or former official of the government of Ukraine or a person acting on behalf of that government, who has perpetrated or is responsible for directing significant acts of violence or gross human rights abuses against persons associated with the anti-government protests in Ukraine that began on November 21, 2013; (ii) any person who has perpetrated or is responsible for directing significant acts intended to undermine Ukraine's peace, sovereignty, or territorial integrity, including acts of economic extortion; (iii) any official of the government of the Russian Federation, or a close associate or family member of such an official, who is responsible for or complicit in directing acts of significant corruption in Ukraine; and (iv) any individual who has materially assisted, sponsored, or provided financial, material, or technological support for such acts.

Additional legislation relating to Ukraine is currently being considered by both houses of Congress and future Congressionally mandated sanctions are likely if Russia continues to escalate the situation in Ukraine.

E. Further Designations (April 11, 2014)

On April 11, 2014, OFAC designated seven additional individuals as well as one Russian entity (Chernomorneftegaz) under the prior Executive Orders.

F. Further Designations (April 28, 2014)

On April 28, 2014, OFAC designated seven additional individuals considered to be government officials, including “two key members of the Russian leadership’s inner circle,” and 17 entities pursuant to Executive Order (E.O.) 13661.

G. Consequences of Designations and Violations

Any individuals or entities designated under the Executive Orders or H.R. 4152 are subject to a U.S. visa ban and the blocking of their assets in the United States or in the possession or control of U.S. persons. OFAC guidance states that property blocked pursuant to an Executive Order is broadly defined to include any property, tangible or intangible, or any interest therein, including present, future or contingent interest.

In addition, U.S. persons are prohibited from engaging in any transactions with the designated individuals or entities as well as any entity they own or control. The executive orders do not define “own” but OFAC guidance states that an entity is deemed “owned” by an SDN where the SDN owns, directly or indirectly, a 50% or greater interest in the entity. The property and interests in property of an entity owned by an SDN are themselves blocked regardless of whether the entity itself is specifically designated or included on the SDN list. Generally, OFAC does not aggregate the ownership percentages of multiple designated persons to determine if an entity is 50% or more owned or controlled by designated individuals or entities (e.g., SDN X owns 30% of entity Z and SDN Y owns 30% of entity Z, entity Z is not an SDN despite the fact the collective ownership by SDNs X and Y is over 50%).

The executive orders also do not define “control” but, in other contexts, OFAC has interpreted “control” to include circumstances where the designated individual or entity is able to control the actions, policies or personnel decisions of a company such as where they hold a majority of seats on the company’s board of directors. OFAC does not presume control where a designated person is, for example, the chief operating officer of an entity but does maintain that U.S. persons may not engage directly in transactions with the company that involve the participation of the designated individuals themselves.

OFAC further advises U.S. persons to act with caution when considering a transaction with a non-blocked entity in which a designated person has a significant ownership interest that is less than 50% or which a blocked person may control by means other than a majority ownership interest. Such entities may be the subject of future designations or enforcement action by OFAC.

Violations of the sanctions are subject to civil penalties of up to $250,000 or twice the transaction value, whichever is greater, per violation. If the violations are determined to be intentional or willful, criminal penalties of up to twenty years imprisonment for individuals, as well as fines of up to $1,000,000 or twice the gross gain, can be imposed. In egregious cases, OFAC can also impose collateral penalties including debarment, denial of export privileges, and loss of government contract privileges. Potential reputational damage can also occur from having violations published to the general public.

II. Holds on Exports to Russia

Both the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) and the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”) have also recently announced that they will place an indefinite hold on the issuance of any licenses for the export or re-export of any controlled U.S.-origin goods, services or technologies to Russia.

BIS announced that, effective March 1, 2014, it had placed a hold on the issuance of licenses that would authorize the export or re-export of items to Russia. BIS is responsible for regulating the export of most commercial items, often referred to as “dual-use” items, which are those having both commercial and military or proliferation applications. It appears that the hold applies only to new license applications, i.e., applications that were not granted by March 1, 2014, and not to exports and re-exports of items to Russia pursuant to existing licenses. BIS, however, has the authority to modify or revoke previously approved licenses and could contact individual exporters on a case-by-case basis. At present, this policy does not affect the use of license exceptions under Part 740 of the Export Administration Regulations (“EAR”) for exports or re-exports to Russia.

Following suit, on March 27, 2014, DDTC announced that it would place a hold on the issuance of licenses that would authorize the export of defense articles and defense services to Russia. DDTC is charged with controlling the export and temporary import of defense articles and defense services covered by the International Traffic in Arms Regulations (“ITAR”) U.S. Munitions List (“USML”). The agency has not, however, publicly indicated whether the hold applies only to new licenses, or whether it affects exceptions or exclusions that otherwise may have applied to exports to Russia.

Neither agency has publicly indicated whether these policies will extend to deemed export licenses that authorize the release to Russian nationals of certain technology, technical data, or software controlled under the EAR or ITAR. However, companies should assume that their ability to hire Russian nationals or grant Russian nationals access to certain controlled technologies may be blocked by these hold policies. Both agencies have stated they will continue these practices until further notice.

III. Denial of Exports to Russia

On April 28, 2014, BIS and DDTC announced that they are implementing additional restrictions on certain US exports to Russia in response to Russia’s continued actions in Ukraine. The new export policies expand upon the agencies’ existing export licensing policies toward Russia, which include a hold on the issuance of any licenses for the export or re-export of any controlled US-origin goods, services, or technologies to Russia. In addition to maintaining the export hold, the agencies will now deny pending applications for licenses to export or re-export any “high technology” items, defense articles, or defense services to Russia or occupied Crimea that “contribute to Russia’s military capabilities.” In addition, BIS and DDTC are taking actions to revoke any existing export licenses that meet these conditions. Both agencies stated they will continue to adjust their export licensing policies toward Russia, as warranted by Russia’s actions in Ukraine.

BIS also has designated 13 companies on the Entity List “based on a determination they are involved, or pose a significant risk of becoming involved, in activities contrary to the national security and foreign policy interests of the United States.” These 13 companies are Stroytransgaz Holding, located in Cyprus; Volga Group, located in Luxembourg and Russia; and Aquanika, Avia Group LLC, Avia Group Nord LLC, CJSC Zest, Sakhatrans LLC, Stroygazmontazh, Stroytransgaz Group, Stroytransgaz LLC, Stroytransgaz-M LLC, Stroytransgaz OJSC, and Transoil, all located in Russia. Designation on the Entity List imposes a license requirement for the export, re-export or other foreign transfer of US-origin items to these designated companies, with the presumption of denial.

Canada

The Canadian government has taken action against certain designated persons in Russia where the Canadian government considers there are reasonable grounds to believe that the designated person has been involved, either directly or indirectly, with the violation or attempted violation of the sovereignty of Ukraine.

In response, the Canadian government enacted the Special Economic Measures (Russia) Regulations, SOR/2014-58, which entered into force on March 17, 2014, and which were amended on March 19, on March 21April 28, May 4 and again on May 12, 2014 (SEMA Russia Regulations). The SEMA Russia Regulations freeze the assets of 47 designated individuals and 19 designated entities, and prohibit the following actions by any person in Canada, or by any Canadian outside of Canada:

  • dealing in any property, wherever situated, of a designated person;
  • entering into or facilitating, directly or indirectly, any financial transaction related to a dealing with any property of a designated person;
  • providing financial or other services related to a dealing with any property of a designated person;
  • making any goods, wherever situated, available to a designated person; or
  • providing financial or other related services to or for the benefit of a designated person.

The SEMA Russia Regulations include an obligation to disclose to the Commissioner of the Royal Canadian Mounted Police any property, or information about a transaction in relation to property, that is believed to be the property of a designated person.

There are certain exceptions to the prohibited actions, where the transaction involves a payment due under a contract that was entered into before the person became a designated person, a loan repayment made to a person in Canada or a Canadian outside Canada of a loan entered into before March 17, 2014, a transaction to an international organization with diplomatic status, etc. Further, the Minister of Foreign Affairs may issue a permit to carry out an activity or transaction that would otherwise be prohibited under the SEMA Russia Regulations.

There are two sets of sanctions against individuals in Ukraine that have been enacted as part of the Canadian government’s response to the gravity of the situation in Ukraine, and against members of the former Ukrainian government. The Special Economic Measures (Ukraine) Regulations, SOR/2014-60 came into force on March 17, 2014, and were amended on March 19, 2014April 12, 2014 and again on May 12, 2014 (SEMA Ukraine Regulations). The SEMA Ukraine Regulations list 17 designated individuals and 1 designated entity that the Canadian government considers there are reasonable grounds to believe have directly or indirectly been involved with the violation or attempted violation of the sovereignty of Ukraine. The SEMA Ukraine Regulations act to freeze the assets of the listed persons by prohibiting the following actions by any person in Canada, or by any Canadian outside of Canada:

  • dealing in any property, wherever situated, of a designated person;
  • entering into or facilitating, directly or indirectly, any financial transaction related to a dealing with any property of a designated person;
  • providing financial or other services related to a dealing with any property of a designated person;
  • making any goods, wherever situated, available to a designated person; or
  • providing financial or other related services to or for the benefit of a designated person.

The Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations, SOR/2014-44 came into effect on March 5, 2014. These regulations provide for the freezing of funds and economic resources of former President Viktor Yanukovych and 17 other prominent former government ministers, senior officials and businessmen. The regulations act to freeze the assets of the 18 individuals by prohibiting the following actions by any person in Canada, or by any Canadian outside of Canada:

  • dealing, directly or indirectly, in any property, wherever situated, of a politically exposed foreign person;
  • entering into or facilitating, directly or indirectly, any financial transaction related to a dealing with any property of a politically exposed foreign person; or
  • providing financial or other related services in respect of any property of a politically exposed foreign person.

The SEMA Ukraine Regulations and the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations include an obligation to disclose to the Commissioner of the Royal Canadian Mounted Police any property, or information about a transaction in relation to property, that is believed to be the property of a politically exposed foreign person.

The Minister of Foreign Affairs may issue a permit to carry out an activity or transaction that would otherwise be prohibited under the SEMA Ukraine Regulations or the Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations.

The Canadian regulations will continue to apply until they are amended or repealed, and additional individuals can be added to the list of politically exposed foreign persons.