U.S. sanctions against Russia for actions related to the crisis in Ukraine have escalated since March and continue to impact businesses on various levels. As the sanctions and the situation in Ukraine continue to develop, it is a good time to review the status of the existing sanctions and how they may impact U.S. businesses, as well as keeping in mind that the EU, Canada, Australia and others maintain similar, though not identical, sanctions against Russia.
U.S. sanctions currently fall into three basic types: restrictions on engaging in transactions with certain specified individuals; sector specific sanctions, currently in place against financial institutions; and enhanced licensing restrictions for military and high-tech goods and goods related to the energy sector.
The initial sanctions, implemented and enforced by the Office of Foreign Assets Control (OFAC) within the Department of the Treasury, identify individuals and entities on the Specially Designated Nationals (SDN) list focusing on persons determined to be contributing to the situation in Ukraine. U.S. persons are prohibited from engaging in transactions with named parties. In addition, as with other OFAC SDN lists, any entity that is more than 50 percent owned by an individual or entity on the SDN list is itself considered to be on the SDN list. OFAC has been designating individuals and entities periodically since the initial designations in March.
Shortly after the first SDN designations, the Directorate of Defense Trade Controls (DDTC) within the Department of State and the Bureau of Industry and Security (BIS) within the Department of Commerce announced they were suspending or restricting the issuance of licenses for certain types of controlled goods destined for Russia. Although BIS has stated that it will deny licenses for certain “high tech” products that contribute to Russia’s military capabilities, that term has not been defined. Also, although some licenses are being approved by BIS, licensing times are, not surprisingly, rather long.
In late July, certain sector specific sanctions were put in place. OFAC announced it had created a new list for certain Russian banks, known as the Sectoral Sanctions Identifications (SSI) list. If a bank or entity is placed on that list, U.S. persons are only prohibited from “transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity" in connection with those banks or any entity more than 50 percent owned by entities on the SSI list.
Shortly thereafter, BIS announced that it would be instituting a policy denying licenses for the export, reexport or foreign transfer of certain items used in Russia’s energy sector for exploration or production from water (deepwater or Artic offshore) or shale projects that have the potential to produce oil. BIS did not clarify when it would be instituting this policy nor did it specify the items that would be impacted by this policy.
Most recently, OFAC released new guidance on its “50 Percent Rule,” i.e., the rule that when an entity is 50 percent or more owned by an individual or entity that has been designated, it is also considered to be designated. OFAC has now clarified that if multiple designated parties own an interest in an entity, the parties’ interests will be aggregated and the entity will be considered to be designated if that aggregated interest is 50 percent or more. OFAC had previously given guidance that interests would not be aggregated, so this move will increase its reach. This move will also increase the amount of work companies have to put into screening their customers.
At this time, companies should continue to be vigilant with “know your customer” diligence and screening with respect to U.S., EU and other sanctions lists, as well as monitoring exports of products that could require export licensing. Even if a particular transaction might not be restricted by existing sanctions, banks are being cautious in processing Russian transactions, in addition to the fact that the sanctions may further expand without warning if the situation in the region escalates. As with all sanctions regimes, being in compliance does not mean that you will be able to collect payment.