On April 6, 2018, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) added 38 new designees to its list of Specially Designated Nationals and Blocked Persons (“SDN List”) related to Russia pursuant to Presidential Executive Orders (EOs) 13661 and 13662. Specifically, in an effort to counter Russian “elites who profit from a corrupt system” and a government that engages “in a range of malign activity,” OFAC’s sanctions targeted 7 wealthy Russian individuals, 12 companies deemed to be owned or controlled by those individuals, 17 senior Russian government officials, and a Russian weapons trading company and its subsidiary Russian bank.
A critical aspect of the new sanctions is that foreign persons may be affected by the new designations by virtue of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which was signed by President Trump on August 2, 2017 and provides for mandatory sanctions against any person, including non-U.S. entities and individuals, that knowingly engages in “significant transactions” with SDNs designated under applicable laws.
Among industries most heavily affected by the new sanctions are metals traders (particularly aluminum traders), energy, banking, and finance. Given the extensive operations that many of the new SDNs have within western economies, it is anticipated that these sanctions will have a significant effect on the sanctioned entities and on companies that engage in significant transactions with these SDNs.
Provided below is a discussion of how the new Russia sanctions may affect both U.S. and non-U.S. persons.
REQUIREMENTS OF U.S. PERSONS AND FOREIGN PERSONS UNDER THE NEW DESIGNATIONS
U.S. persons (defined to cover U.S. companies, U.S. citizens, permanent resident aliens, and any persons within the United States) are prohibited from engaging in or facilitating transactions with SDNs, including entities that are 50% or more owned by one or more SDNs. NonU.S. persons can also be subject to sanctions for facilitating a “significant transaction” with respect to SDNs related to U.S. sanctions on Russia by virtue of CAATSA.
The full list of new designees can be found here: https://www.treasury.gov/resource-center/sanctions/ OFAC-Enforcement/Pages/20180406.aspx.
OFAC GENERAL LICENSES AND WIND-DOWN PERIOD
General License 12
In connection with the new SDN designations, OFAC issued General License 12, which authorizes activities “ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements … that were in effect prior to April 6, 2018” through 12:01 a.m. EST on June 5, 2018. It is important to note that the scope of General License 12’s wind-down activities is limited to the specific entities identified on General License 12. Thus, General License 12 does not cover transactions related to Rosoboronexport, the Russian weapons trading company designee, and Russian Financial Corporation, its subsidiary Russian bank designee.
Additionally, U.S. persons seeking to rely on General License 12 are subject to the following conditions:
• Any payments due to an SDN that are permissible under General License 12 must be deposited into a blocked bank account in the United States. U.S. persons can receive payments from the SDNs covered by the General License relating to arrangements with the SDNs covered under General License 12 entered into prior to April 6, 2018.
• U.S. persons must report to OFAC on actions taken under General License 12 within 10 business days of its expiration on June 5, 2018.
According to OFAC’s FAQs, U.S. person employees are permitted to provide services to, and receive salary payments, pension payments, or other benefits from, the blocked entities untilJune 5, 2018, “if such activities are ordinarily incident to the continuity of operations or to facilitate a wind-down.” Similarly, General License 12 may allow U.S. companies who had placed an order for goods with a designee (or its 50%-owned company) prior to April 6, 2018 to accept such goods until June 5, 2018.
General License 13
OFAC also issued General License 13, which authorizes U.S. persons to conduct activities “ordinarily incident and necessary” to divesting or transferring debt, equity, or other holdings of three of the designees (specifically, EN+ Group plc, GAZ Group, and United Company RUSAL plc) through May 7, 2018. Authorized activities include facilitating, clearing, and settling transactions to divest debt, equity, or other holdings in such blocked entities to non-U.S. persons. However, General License 13 does not permit U.S. persons holding accounts or other property for a new SDN to unblock such accounts or property. As with General License 12, U.S. persons undertaking transactions authorized by General License 13 must report such transactions to OFAC within 10 business days of its expiration on May 7, 2018.
OFAC’S 50% RULE
Under OFAC’s “50% Rule,” an entity that is 50% or more owned by one or more SDNs is also deemed an SDN, even if the entity is not specifically listed on OFAC’s SDN List. As a result, companies transacting with entities that may be commercially connected to the newly sanctioned SDNs should conduct diligence beyond screening against OFAC’s SDN List to ensure that the counterparty to a transaction does not have a corporate ownership structure suggesting that an SDN is its beneficial owner.
The 50% Rule also applies to the entities listed on General Licenses 12 and 13. Thus, transactions that are authorized under the General Licenses are also authorized for entities 50% or more owned by the entities identified in the applicable General License.
APPLICABILITY OF NEW SANCTIONS TO U.S. PERSONS
U.S. persons are prohibited from engaging in or facilitating any transaction in which an SDN has an interest. Thus, except as expressly authorized by General License 12 or 13, or pursuant to an OFAC specific license, OFAC can impose sanctions on U.S. persons for engaging in any transaction with an SDN, regardless of dollar value
EXTRATERRITORIAL APPLICATION OF NEW SANCTIONS
As a general matter, non-U.S. persons are not prohibited from engaging in transactions with SDNs. However, under CAATSA, U.S. sanctions related to the new Russian SDN designations apply extraterritorially.
Section 228 of CAATSA amended the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (SSIDESA) by adding a new Section 10 that requires the President to impose sanctions on:
“a foreign person if the President determines that the foreign person knowingly, on or after the date of the enactment of [CAATSA] — (1) materially violates, attempts to violate, conspires to violate, or causes a violation of any license, order, regulation, or prohibition contained in or issued pursuant to any covered Executive order, [SSIDESA], or the Ukraine Freedom Support Act of 2014 (22 U.S.C. 8921 et seq.); or (2) facilitates a significant transaction or transactions, including deceptive or structured transactions, for or on behalf of—(A) any person subject to sanctions imposed by the United States with respect to the Russian Federation; or (B) any child, spouse, parent, or sibling of an individual described in subparagraph (A).”
As part of the FAQs released on April 6, OFAC noted that in determining whether a transaction by a foreign entity is a “significant transaction,” the agency will examine the transaction under a subjective “totality of the facts and circumstances” test. We note that notwithstanding the listed factors considered under this test (such as the size of the transaction, the nature of the transaction, and management’s awareness of a “pattern of conduct”), OFAC has considerable discretion in determining when a transaction becomes significant enough to subject a foreign person to sanctions.
The Russian SDN designations also implicate other provisions of CAATSA with extraterritorial applicability. For example, Section 5 of the Ukraine Freedom Support Act of 2014 (UFSA) gave the President discretion to impose sanctions on Russian and other foreign financial institutions that “facilitated a significant financial transaction on behalf of any Russian person included on” the SDN List pursuant to UFSA or any applicable Executive Order, unless waived by the President as being “in the national security interest of the United States.” However, Section 226 of CAATSA amended this section to make such sanctions mandatory (though the President maintains the ability to waive such sanctions). OFAC guidance on the implementation of Section 5 of UFSA notes that OFAC will generally interpret the term “facilitated” broadly.
Companies that are engaged in transactions in which a Russian SDN may have an interest will need to be cautious and undertake appropriate diligence to confirm that the transaction does not violate the new OFAC sanctions. For example, a U.S. company cannot use a broker to indirectly acquire products from a Russian SDN, as it would be prohibited from doing so directly. Similarly, a non-U.S. company that engages in transactions with the Russian SDNs can be subject to sanctions if OFAC determines that such transactions are significant.
Thus, persons and entities potentially covered by the scope of the applicable sanctions’ regimes should have appropriate procedures in place to comply with existing sanctions and monitor developments to ensure ongoing compliance.