A referendum in Crimea was held on Sunday, March 16. Within the limited options presented, an overwhelming majority of those who participated voted in favor of making application to formally become part of the Russian Federation. Shortly thereafter, a series of legislative and executive actions were taken by local authorities in Crimea and in Russia by the legislature and President to annex Crimea to become part of the Russian Federation. The US, EU, the government of Ukraine in Kyiv and a large preponderance of the international community have stated that they will not recognize the results of what are deemed to be illegal and unconstitutional procedures.

The consequences of restrictions imposed by the US and the EU for investors with economic interests in Russia and Ukraine or who are engaging in transactions involving entities with such interests implicate a range of complex legal, economic and political issues. There are questions arising directly from sanctions and export license controls imposed to date by the US, the EU and other countries. In addition, there will be questions relating to the sovereignty of Crimea and the extent to which Russian, Ukrainian or international law will apply to transactions preceding or subsequent to the annexation. There have been, and likely will be further, Russian countermeasures affecting Ukraine.

Chadbourne has offices on the ground in Russia and Ukraine with support from our offices in the US and EU. Chadbourne stands ready to help you understand and cope with the consequences of these sanctions for your business in a rapidly changing environment.

Sanctions Imposed by the US and EU

US Executive Orders and Export Controls

Three Executive Orders issued on March 6, 17 and 21, 2014 authorize the United States to impose sanctions for conduct relating to the recent actions in Ukraine. Such sanctions may be directed against individuals or entities responsible for the turmoil in Ukraine who operate in certain sectors of the Russian economy, (e.g., financial services, energy, metals and mining, engineering, and defense) or who have provided support to persons designated by the Executive Order, or who acted directly or indirectly on their behalf, among others.

The Executive Orders that comprise the US sanctions essentially purport to delegate the President’s statutory authority to various US government agencies so that the latter may try to reach almost anyone in or connected with Russia. Thus far, under the US sanctions, the US has sanctioned at least 30 individuals and one entity. The sanctioned entity is Bank Rossiya. In addition to freezing the assets of sanctioned persons that come within the US or the control of a US person, the US sanctions prohibit giving a sanctioned person or receiving from a sanctioned person any funds, food or services. The US sanctions also prohibit any transaction that evades or avoids the prohibitions imposed by the sanctions, as well as conspiracies formed to evade the sanctions. The US sanctions apply to contracts and transactions that were entered into prior to the effective date of the Executive Orders. It is, however, possible to obtain certain licenses from the US government to allow an exception to such prohibitions.

To the extent that any of the sanctioned persons have an interest that is 50% or greater in an entity, that entity is also considered a sanctioned person. In addition, the guidance on the US sanctions indicates that caution should be exercised by a US person when engaging in transactions with an entity in which a sanctioned person owns an interest that is significant but that is less than a 50% interest.

The US sanctions operate to constrain the actions of any “United States person”. A US person is defined as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States”. It should be noted that the US sanctions apply to constrain the activities of US citizens and entities incorporated in the US no matter where they are located. Even if an entity does not qualify as a US person, and therefore is not obligated to comply with the sanctions, employees of the entity that are US citizens must comply with the sanctions.

In addition to the sanctions set forth in the Executive Orders, on March 27, the US Department of State and US Department of Commerce announced that they have placed holds on the issuance of new licenses for the export or re-export to Russia of certain controlled items. The suspension applies to defense articles and services and were effective as of March 1, 2014. http://www.bis.doc.gov/ ; http://www.state.gov/

The EU Regulations

On March 6, 2014, the EU Council adopted Council Regulation (EU) No. 208/2014, which imposed an asset freeze on former President Yanukovych and 17 other former Ministers and senior officials identified as being “responsible for the misappropriation of Ukrainian state funds.” On March 17, 2014, the EU adopted Council Regulation (EU) No. 269/2014, which imposed travel restrictions and an asset freeze on 21 Russian and other officials and military personnel who are deemed to be directly associated with the recent events in Ukraine. A few days later, on March 21, 2014, the EU adopted Council Regulation (EU) 284/2014, which expanded the list of sanctioned persons to 33.

These EU Regulations apply to all EU Member States. Each Member State may, however, enact specific domestic measures in relation to matters such as offenses and penalties for breach. Member States may also issue their own guidance on the interpretation of these sanctions and the measures that businesses and others in their territories are expected to take in order to comply with them. For example, the UK enacted regulations – The Ukraine (European Union Financial Sanctions) Regulations (SI 2014/507) – to make provision for the enforcement of the EU sanctions.

The EU Regulations require the freezing of all funds and economic resources belonging to or owned, held or controlled by a sanctioned person and prohibit making funds or economic resources available, directly or indirectly, to or for the benefit of a sanctioned person. Essentially, the EU sanctions prohibit transactions that touch upon the funds or economic resources of sanctioned persons or which permit them to be used in any way.

One of the difficulties facing individuals and companies trying to comply with the EU sanctions is identifying whether a sanctioned person owns or controls an entity. EU guidance suggests that a sanctioned person is presumed to own a business if the person has a 50% or greater interest in it. Whether a sanctioned person has a controlling interest in a business is less definitive, and each EU Member State can adopt different interpretative rules. The UK, for example, has issued guidance stating that the question of “ownership” and “control” by a designated person will be assessed on a case-by-case basis. Factors taken into account to make this determination include considering the management structure of the business, and whether the sanctioned person can exercise dominant influence. It should be noted that the EU Regulations state that institutions that wrongly freeze assets of a sanctioned person will not face civil claims for their mistake as long as they have acted in good faith and have not been negligent.

The EU regulations include various exemptions, including provisions that, in certain circumstances and under the terms of applicable licenses, allow EU businesses to make payments for contractual obligations that they entered into before the sanctions came into force.

The EU sanctions apply both within the EU and to EU persons anywhere in the world, including EU nationals, and companies incorporated in the EU. Even if an entity does not qualify as an EU person, and therefore is not obligated to comply with the sanctions, employees of the entity who are EU nationals must comply with the sanctions.