On December 11, 2014, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury published three new Frequently Asked Questions (FAQ) regarding Ukraine-related sanctions imposed pursuant to Executive Order 13662.
Clarification on Application of “New Debt” Restrictions to Certain Commercial Transaction Situations
US persons are restricted from engaging in “new debt” transactions with specified SSI entities under OFAC Directives 1, 2 and 3 issued pursuant to Executive Order 13662. The application of the new debt restriction in certain situations involving SSI entities has been unclear with regard to numerous commercial scenarios. OFAC has published FAQ Number 419 to clarify how the new debt restriction would apply in three such scenarios:
- The sale of goods to a Sectoral Sanctions Identification List entity (SSI entity)
- The provision of services to and subscription arrangements involving SSI entities
- Progress payments for long-term projects
According to FAQ Number 419, US persons “may engage in commercial transactions with SSI entities provided that any such transactions do not represent a direct or indirect dealing in prohibited debt or equity.” OFAC has previously advised that offering payment terms to an SSI entity which are longer than 30 days (for Directive 1 and 3 SSI entities) or 90 days (for Directive 2 entities) would constitute a prohibited extension of credit (or new debt) to the SSI entity. Furthermore, various existing FAQs explain when loans, letters of credit, and other financial instruments may trigger new debt restrictions. However, FAQ Number 419 is intended to make clear that US persons can engage in underlying commercial transactions with Directive 1, 2, and 3 entities as long as the financial terms and financing arrangements do not independently transgress the new debt (and new equity) restrictions of more than 30 or 90 days.
There also has been a lack of clarity regarding how US persons should interpret the 30+ and 90+ day restrictions as they apply to the open account payment terms (e.g., payment is due in 30 days). A key question is when the extension of credit begins in various situations involving the sale of goods or the supply of services. FAQ Number 419 states that in situations involving the sale of goods to an SSI entity under Directive 1, 2 or 3, US persons “may extend payment terms of up to 30 or 90 days from the point at which title or ownership of the goods transfers to the SSI entity.” Thus, it is important to note that the trigger for purposes of determining the length of the credit extension under an open account payment term is the date that title is transferred to the SSI entity, and not necessarily when the contract or purchase order is executed or when delivery is made.
With regards to both providing services to and subscription arrangements involving SSI entities, and progress payments for long-term projects, OFAC has clarified that US persons “may extend payment terms of up to 30 or 90 days from the point at which a final invoice (or each final invoice) is issued.” Consequently, the 30+ or 90+ day restriction is triggered by the date of invoicing for the service, and not the date that an agreement to provide services is concluded.
Furthermore, in situations where payment may not be forthcoming in a manner consistent with the payment terms, FAQ Number 419 advises that US persons should contact OFAC to determine whether a license or other authorization is required in the event of a “payment dispute” that causes the US person to believe that it may not receive payment in full by the end of the 30- or 90-day period. The term payment dispute is not defined by the FAQs, and therefore it is not clear whether this guidance would apply to a scenario where a SSI entity is late on paying a debt beyond the specified term and no formal dispute has arisen.
Definition of “Production” for Purposes of Directive 4 Restrictions
FAQ Number 420 addresses the meaning of the term “production” under Directive 4 of Executive Order 13662. In particular, US persons have questioned whether “production” was intended to include activities such as transportation, refining, or other dealings in oil extracted from deepwater, Arctic offshore, or shale projects.
In this FAQ, OFAC’s clarifies that production refers to “the lifting of oil to the surface and the gathering, treating, field processing, and field storage” of oil extracted from deepwater, Arctic offshore, or shale projects. OFAC also explains that the production stage ends at the point that the extracted oil is transported out of a field production storage tank or otherwise away from a field production site.
Therefore, Directive 4 does not prohibit the provision of goods, technology, or services to SSI entities by US persons, when “such transactions relate only to the transportation, refining, or other dealings involving oil that has already been extracted from a deepwater, Arctic offshore, or shale project and transported out of a field production storage tank or otherwise off of a field production site.”
Interpretation of “Arctic Offshore Projects”
FAQ Number 421 interprets the term “Arctic offshore projects” with respect to prohibitions found in Directive 4 of Executive Order 13662. OFAC notes that the prohibitions found in Directive 4 apply to “deepwater, Arctic offshore, or shale projects with the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory.” Furthermore, the term “Arctic offshore projects” encompasses projects that potentially produce oil in areas that:
- Involve drilling operations originating offshore and
- Are located above the Arctic Circle
However, the prohibitions do not apply to horizontal drilling operations originating onshore, where such drilling operations extend under the seabed to areas above the Arctic Circle. In terms of delineating the “Arctic” region from a geographical perspective, this clarification is consistent we believe with the guidance recently released by the EU in connection with its application of restrictions to oil E&P projects in the Arctic area.