Today, the United States announced new sanctions on over three dozen Russian government officials, wealthy individuals with close ties to the Kremlin, and businesses. Today’s actions have implications for both US and non-US Persons engaging in or facilitating Russia-related transactions. These sanctions come amid increasing tension between the United States and Russia as reflected in the Treasury Department’s press release, which criticizes Russia in relation to several areas of US national security and foreign policy concern (including in connection with Ukraine, Syria, and malicious cyber activity). The Treasury secretary had signaled that such sanctions were coming in January of this year when the Treasury Department issued a report on Russian oligarchs and senior political figures to Congress as required by the Countering America’s Adversaries Through Sanctions Act (CAATSA).1
The Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated 24 individuals as Specially Designated Nationals (SDNs) pursuant to the Russia/Ukraine sanctions program, including seven oligarchs and 17 senior Russian government officials. OFAC also designated 15 entities as SDNs, including 12 companies owned or controlled by these oligarchs, a state-owned weapons trading company, and a Russian bank. Under OFAC’s long-standing 50% Rule, the SDN designation extends to entities owned 50% or more in the aggregate by one or more SDNs (whether at an intermediate or ultimate level).
As a result of these designations, US citizens and permanent residents; entities organized under US law (and their foreign branches); and individuals and entities located in the United States, regardless of nationality (collectively, “US Persons”), are prohibited from engaging in or facilitating virtually all dealings in which these SDNs have an interest without authorization and are further obligated to block or “freeze” and report to OFAC any property or interests in property of the SDNs (including any entities subject to the 50% Rule).
In addition to the designations, OFAC issued two general licenses under the Russia/Ukraine sanctions program addressing short-term dealings with the new designees.
The first, General License 12, allows transactions and activities otherwise prohibited by the Russia/Ukraine sanctions regime to be conducted through 12:01 am on June 5, 2018, if such transactions and activities are “ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements” with certain of the entities that were designated as SDNs.2 General License 12 does not allow for the divestiture or transfer of debt, equity, or other holdings in or for the benefit for these entities, and any US Persons who conduct transactions pursuant to this general license must file a report of such transactions within 10 business days.
General License 13, the other general license issued today, allows for transactions and activities otherwise prohibited by the Russia/Ukraine sanctions regime to be conducted through 12:01 am on May 7, 2018, if those transactions are ordinarily incident and necessary to divest or transfer debt, equity, or other holdings of certain blocked entities to a non-US Person or to facilitate such transactions between non-US Persons. General License 13 only applies to transactions and activities related to the debt, equity, or other holdings of some of the entities designated today. The transactions authorized by the general license include facilitating, clearing, and settling transactions necessary to divest a non-US Person’s debt, but the general license does not allow US Persons to sell, purchase, or invest in debt, equity, or other holdings of these entities. Persons relying on either general license are subject to a requirement to file a detailed report to OFAC within 10 days of license expiration.
Today’s actions also have implications for non-US Persons, including foreign financial institutions, that knowingly facilitate significant transactions for or on behalf of the Russian SDNs designated today. Non-US Persons that engage in such activity risk imposition of mandatory sanctions that could restrict or cut off their access to US markets. These sanctions apply to transactions for or on behalf of the persons designated—and, in some instances, their families. Knowledge for these purposes does not require actual knowledge but also reason to know based on the facts and circumstances of the transaction. This highlights the importance of appropriate due diligence in transactions that could give rise to sanctions risk. Notably, in published FAQ guidance issued today, OFAC clarified that activities authorized by General Licenses 12 and 13, or that otherwise would not require a license for US Persons, would not be considered “significant” for the purposes of secondary sanctions. Non-US Persons may also have liability exposure in connection with actions to “cause,” “aid or abet,” “procure,” or “conspire” with a US Person to violate the sanctions laws.
Parties with potential exposure to Russian investors, clients, venture partners, and counterparties should carefully consider the impact of today’s actions on their investments, financial dealings, and operations. Management, boards and compliance personnel should evaluate the sanctions risk associated with these issues in the larger political environment in which the Treasury Department has announced these sanctions. In that regard, several factors are noteworthy.
First, today’s designations target persons and entities with a substantial and complex network of business holdings and investments that extend far beyond Russia and include dealings with business partners in a range of sectors. Moreover, in announcing today’s sanctions, the Treasury Department emphasized the importance of going beyond screening counterparty names against the SDN List. This highlights the importance of ensuring appropriate due diligence on the ownership of those parties in order to identify and address potential risk exposure.
Second, these measures are significant in the current political climate in Washington and may signal a turning point in the Trump administration’s willingness to impose and pursue sanctions against Russia that are directed at close allies and business interests of President Putin’s inner circle. Non-US financial institutions and investors will take particular note of the secondary sanctions implications of these measures, and parties may see enhanced due diligence in connection with significant transactions involving Russia or Russian investors more generally. Borrowers, fund managers, and financial institutions can also be expected to consider whether existing contractual representations and warranties and commitments (and related notice provisions) may be impacted in light of any possible investment ties to the sanctioned oligarchs and their holdings.
Finally, parties who maintain Russia-related investments and business ventures should consider forward-looking measures—including an evaluation of potential contractual protections (including minority and exit rights) and the commercial and legal structure for their holdings— in order to mitigate their potential exposure to Russia sanctions risk.