On July 30, 2015, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an advisory relating to persons evading or circumventing the U.S. trade embargo on Crimea (“Crimea Advisory”). Over the past several months, OFAC has identified instances of activities by third parties intended to circumvent U.S. companies’ sanctions compliance policies and procedures. The Crimea Advisory was issued in order to highlight these practices and assist U.S. companies to comply with their sanctions obligations under the Russia sanctions program. The Crimea Advisory also includes specific recommendations for U.S. companies, and other persons subject to OFAC’s jurisdiction, to mitigate risks relating to these deceptive practices.
In addition, OFAC designated over two dozen additional Russian and Ukrainian parties under its Russia sanctions program in order to counter attempts to evade and circumvent U.S. sanctions, to align U.S. sanctions measures with existing European Union (“EU”) measures, and to provide additional clarity to U.S. companies. The additional designations follow an EU action last month to extend EU sanctions on Russia and Crimea, and Canada’s recent announcement that it is expanding its own sanctions in this region.
We have summarized below the most salient portions of the Crimea Advisory and the new Russia- and Ukraine-related designations.
As we previously reported, in December 2014, President Obama issued Executive Order 13685 (“EO 13685”), which established a trade embargo with respect to the Crimea region of Ukraine, essentially prohibiting U.S. persons from engaging, directly or indirectly, in transactions involving the Crimea region absent authorization from OFAC. EO 13685 prohibits U.S. persons from exporting or reexporting goods, technology, and services (including financial services) to Crimea.
After becoming aware of certain practices being used to evade or circumvent U.S. sanctions on Crimea, OFAC issued the Crimea Advisory to put U.S. companies on notice and to encourage them to implement appropriate, risk-based controls to address these newly-identified practices. The practices described in the Crimea Advisory include the intentional or unintentional omission or obfuscation of references to Crimea, or towns, cities or ports within Crimea, in wire transfer messages and in international trade agreements.
In the financial institution context, the practices identified by OFAC include persons omitting originator or beneficiary address information from Society for Worldwide Interbank Financial Telecommunications (SWIFT) messages involving individuals and entities resident in or otherwise located in Crimea. While certain SWIFT messages have omitted all address information, others have only included partial information, such as including a street address but not a city or country, making it difficult for financial institutions to determine where the originator and/or beneficiary are located. Of note, certain foreign financial institutions have engaged in similar practices to evade and circumvent other U.S. sanctions programs. OFAC and the U.S. Department of Justice have actively enforced these violations against foreign financial institutions, on the basis that their actions caused U.S. banks to violate OFAC sanctions by processing payments related to sanctioned country transactions.
In addition, in the broader international trade context, the Crimea Advisory warns that counterparties located outside the United States may deem Crimea to be within the territory of Russia, despite the fact that the U.S. and EU do not recognize Russia’s attempted annexation of Crimea. As a result, a U.S. company could execute a distribution agreement for its products in Russia, and the counterparty, who may be unaware that the U.S. does not recognize Crimea as a part of Russia or who may wish to intentionally evade or avoid U.S. sanctions on Crimea, could sell the U.S. company’s products to persons within Crimea in violation of U.S. sanctions.
The practices described in the Crimea Alert put U.S. financial institutions and other companies on alert that OFAC is aware of these deceptive practices. Accordingly, enhanced due diligence and extra precautions, in line with the risk profile of each U.S. company, are warranted when conducting dealings involving Russia and Ukraine to ensure compliance with U.S. law.
As a practical matter, these deceptive practices present significant challenges for U.S. companies. The Crimea Advisory identifies three key compliance recommendations that may mitigate risks arising from practices to evade or circumvent Crimea-related sanctions:
- U.S. companies, and in particular U.S. financial institutions, should ensure that transaction monitoring systems and interdiction filters include expansive lists of search terms beyond simply searching for references to “Crimea.” For example, search terms should also include major cities, towns and ports within Crimea in order to identify transactions relating to Crimea where only partial address information has been provided.
- Where a U.S. financial institution has identified a party that has previously violated or attempted to violate U.S. sanctions on Crimea (for example, by omitting partial or complete address information for a party resident in or located in Crimea), it should request additional information from such parties and should exercise caution when processing payment instructions that lack complete address information.
- U.S. companies should clearly communicate U.S. sanctions requirements to international partners (in both the financial and international trade sectors) and discuss U.S. sanctions compliance expectations with correspondent banks and trade counterparties.
In addition, we recommend that U.S. companies engaged in commercial transactions involving Russia or Ukraine include specific contractual provisions prohibiting the export or reexport of goods, technology or services to any embargoed country or region, including Crimea, or to any other destination or end-user in violation of U.S. sanctions or export control requirements.
The principles and advice included in the Crimea Advisory are additionally relevant to EU-based exporters because the EU sanctions on Crimea also include prohibitions on evading or circumventing sanctions.
OFAC also designated additional individuals and entities under its Russia sanctions program. In particular, OFAC identified 26 individuals and entities to be added to the List of Specially Designated Nationals and Blocked Persons (“SDN List”), and 35 entities to be added to the Sectoral Sanctions Identifications List (“SSI List”).
The SDN designations target:
- thirteen persons that have “supported serious and sustained evasion of existing sanctions” on Gennady Timchenko, Boris Rotenberg, and Kalashnikov Concern;
- two entities operating in Russia’s arms and related materiel sector;
- four former Ukrainian government officials or their close associates, and one entity that is owned or controlled by one of the designated officials; and
- five Crimean port operators and one Crimean ferry operator.
Certain of the persons added to the SDN List had already been designated by the EU as restricted parties.
In a press release regarding the new designations, OFAC stated that designations are designed to “ensure the efficacy of existing sanctions” and “to counter attempts to circumvent [OFAC] sanctions, to further align U.S. measures with those of [its] international partners, and to provide additional information to assist the private sector with sanctions compliance.” Acting OFAC Director John E. Smith underscored the Administration’s resolve to maintain pressure on Russia for violating the territorial integrity of Ukraine and fueling conflict in the region, and stated that the U.S.’s Russia- and Ukraine-related sanctions “will not be rolled back until the Minsk Agreements are fully implemented.”
OFAC also identified a number of subsidiaries of Vnesheconombank (VEB) and Rosneft for inclusion on the less restrictive SSI List. Both VEB and Rosneft were already included on the SSI List. Under OFAC’s “50 percent rule,” any entity that is 50 percent or greater owned by one or more SSI entities is deemed to be subject to the same financing and other restrictions as its parents. As a result, the subsidiaries being added to the SSI List were already deemed to be subject to sanctions. However, in its press release, OFAC indicated that the new identifications will assist U.S. companies to comply more effectively with existing U.S. sanctions on VEB and Rosneft.