The Situation: The Trump Administration has imposed sanctions against a number of high-profile Russian individuals and entities by adding them to the Specially Designated Nationals and Blocked Persons ("SDN") List.
The Result: U.S. persons generally are prohibited from engaging in transactions with the designated individuals and entities, and non-U.S. persons could face sanctions for engaging in certain transactions with the designated individuals and entities. Even if an entity has not itself been added to the SDN List, its ownership or control by a blocked person could cause it to be subject to the same restrictions as an entity that has been added to the SDN List.
Looking Ahead: U.S. persons and non-U.S. persons should continue to undertake reasonable compliance due diligence when engaging in transactions involving Russia, including determining ownership and control of the entities with which they do business.
On April 6, 2018, the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC"), in consultation with the U.S. Department of State, designated as Specially Designated Nationals and Blocked Persons ("SDNs") seven high-profile Russian individuals, a dozen companies owned or controlled by those individuals, 17 senior Russian governmental officials, a Russian weapons trading company with ongoing ties to the Syrian government, and a Russian bank controlled by that company. In announcing the sanctions, Treasury Secretary Steven Mnuchin stated, "The Russian government operates for the disproportionate benefit of oligarchs and government elites. The Russian government engages in a range of malign activity around the globe.… Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government's destabilizing activities."
Additions to the SDN List
As a result of the designations, U.S. persons are generally prohibited from participating in transactions with the designated persons, and the property and interests in property of the designated persons that are in the United States, that come within the United States, or that are or come within the possession or control of any U.S. person (including any non-U.S. branch) are blocked. Moreover, under OFAC's 50 Percent Rule, any entity that is owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is also blocked, regardless of whether it is expressly named as a designated person. As a result, any entity owned 50 percent or more by the above designated persons also is considered blocked. In addition, pursuant to the Countering America's Adversaries Through Sanctions Act ("CAATSA"), non-U.S. persons who knowingly facilitate significant transactions for or on behalf of the designated persons risk additional sanctions.
Guidance Regarding the New Sanctions
OFAC issued a number of Frequently Asked Questions ("FAQs") in relation to the April 6, 2018, designations, including guidance regarding U.S. persons who are employed by or sit on the board of an entity that was designated, and guidance for U.S. companies in which one or more of the designated persons have a less than 50 percent ownership interest. Per FAQ 568, U.S. persons who are employed by or sit on the board of such an entity are, absent authorization from OFAC, now prohibited from continuing such employment or board service. FAQ 573 provides that the U.S. company is not itself considered blocked in that scenario, but that the U.S. company must block all property and interests in property in which the blocked person has an interest. For example, any payments, dividends, or disbursements of profits to the blocked person would be prohibited or, to the extent such payments are required, must be placed in a blocked account at a U.S. financial institution.
General Licenses Issued
Along with the designations, OFAC issued two general licenses. First, General License No. 12 authorizes certain actions relating to the maintenance or wind-down of operations, contracts, or other agreements involving a set of the newly designated entities that were in effect prior to the April 6, 2018, designations. This license establishes a grace period through June 5, 2018, for specified activities. It also authorizes payments to or for the direct or indirect benefit of a blocked person that is ordinarily incident and necessary to give effect to a transaction authorized under the general license, but these payments must be made into a blocked, interest-bearing account located in the United States. U.S. companies that have outstanding orders from those newly designated entities may import those goods in accordance with the requirements of General License No. 12. See FAQ 569.
General License No. 12 does not authorize the divestiture or transfer of debt, equity, or other holdings in, to, or for the benefit of the blocked persons specified in the general license. It also does not authorize any transaction or dealings prohibited by other sanctions laws or regulations or dealings with any blocked person other than those specified in the general license. Finally, it does not authorize the exportation of goods from the United States or the unblocking of any property blocked under the U.S. sanctions laws or regulations except as authorized in the general license. General License No. 12 includes a reporting requirement. U.S. persons who participate in transactions authorized under this general license must file a report with OFAC describing the transaction within 10 business days of June 5, 2018.
Second, General License No. 13 authorizes transactions and activities related to divesting or transferring debt, equity, or other holdings in certain entities included in the new designations through May 7, 2018. The general license only authorizes such divestments and transfers to non-U.S. persons. General License No. 13 does not authorize U.S. persons to: sell debt, equity, or other holdings to; purchase or invest in debt, equity, or other holdings in; or facilitate such transactions with, directly or indirectly, any person whose property is blocked pursuant to the Ukraine Related Sanctions Regulations. 31 C.F.R. Part 589. General License No. 13 also includes a reporting requirement (similar to General License No. 12), with reports due within 10 business days of May 7, 2018.
Transactions by Non-U.S. Persons
Certain of the programs under which parties are designated on the SDN List, including the executive orders under which the April 6, 2018, designations were made, authorize the U.S. government to add non-U.S. persons to the SDN List if they provide material assistance or support to SDNs or parties that are owned by SDNs. Accordingly, although non-U.S. persons are not directly subject to the Russia/Ukraine restrictions applicable to U.S. persons, the U.S. government could designate non-U.S. parties on the SDN List for providing material assistance or support to any of the designated persons.
In addition, under Section 228 of CAATSA, the U.S. president must impose sanctions on a non-U.S. person if the president determines that the person knowingly "facilitates a significant transaction or transactions, including deceptive or structured transactions, for or on behalf of (A) any person subject to sanctions imposed by the United States with respect to the Russian Federation; or (B) any child, spouse, parent, or sibling or an individual described in subparagraph (A)." The sanctions required under this provision of CAATSA are the same ones used in the recent designations. Non-U.S. persons sanctioned in this manner would be added to the SDN List.
In determining whether a transaction is "significant," OFAC will consider the facts and circumstances of the transaction, including "(1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis." OFAC FAQ 545.
As the persons designated on April 6, 2018, would be considered "person[s] subject to sanctions imposed by the United States with respect to the Russian Federation," this provision creates additional risk for non-U.S. persons who are involved in dealings with these newly designated individuals and entities.
We will continue to monitor and report on significant developments regarding sanctions relating to Russia and Ukraine.
Three Key Takeaways
- The United States continues to target Russian persons and entities.
- In connection with these most recent designations, OFAC has issued general licenses authorizing certain activities relating to the maintenance or wind-down of operations or agreements with specified designated persons.
- Non-U.S. persons are also subject to possible U.S. sanctions if they engage in certain transactions with designated persons.