Latest Russia Sanctions Designations: Key Takeaways
On April 6, 2018, the Department of the Treasury, Office of Foreign Assets Control (OFAC) designated a number of Russian entities and persons as Specially Designated Nationals (SDNs), including 7 Russian oligarchs, 12 companies they own or control, 17 Russian government officials, and Rosoboroneksport, Russia’s state-owned weapons trading firm, along with its subsidiary bank. In this client update, we explain why OFAC’s April 6 action is important to understand for all companies that deal directly or indirectly with Russia and provide some key takeaways for both U.S. and non-U.S. companies to consider in assessing their compliance strategy.
These latest designations are among the most far-reaching in recent years in terms of their potential to impact day-to-day business with Russia. First, several industries are affected. In addition to the military sector (Rosoboroneksport and its bank), some notable targets are Gazprom’s Chairman (Alexey Miller) and Gazprom’s general drilling contractor (Gazprom Burenie); Russia’s leading commercial vehicle manufacturer (GAZ Group); an aluminum producer responsible for 7% of global aluminum production (United Company RUSAL PLC) as well as another major aluminum and power producer (EN+ Group); and a power company that produces 9% of Russia’s total electricity (EuroSibEnergo).
Second, the SDN designation means that all property and interests in property of the designated entity that come within U.S. jurisdiction are blocked. U.S. persons (i.e., all U.S. citizens and permanent residents, all entities organized under U.S. law and all persons and entities physically located in the U.S.) are prohibited from engaging in any dealings with them. This is a vastly broader prohibition than the restrictions on doing business with entities subject only to the sectoral sanctions (i.e., Directives 1-4 issued pursuant to Executive Order 13662), which target specific categories of debt/equity and energy sector transactions.
A third reason that these designations have significant potential to disrupt business is OFAC’s so-called “50% rule.” Under this rule, all entities in which one or more SDNs own, directly or indirectly, 50% or more interest in the aggregate are automatically considered blocked persons by operation of law and treated like SDNs, even if they are not designated. This means that even though only 38 Russian persons and entities were designated, a significantly larger number of entities—likely hundreds—inside and outside Russia have effectively become blocked persons with which U.S. persons may not do business. A prominent example of the challenge this rule presents is the designation of Renova Group, a Russian investment group with holdings worldwide. Its designation has resulted in entities outside of Russia becoming blocked, such as Swiss-based Sulzer Ltd., which has already made efforts to mitigate disruption to its numerous subsidiaries and operations worldwide, including in the U.S. The same impact almost certainly exists with respect to the other designations.
Some immediate considerations for U.S. companies assessing compliance in light of this development include:
For U.S. companies that have existing business with a designated person or entity, pay close attention to General License 12 and General License 13 and particularly their limitations. General License 12 authorizes transactions ordinarily incident and necessary to the maintenance or wind down of existing operations, contracts or other agreements involving 12 of the designated entities. Notably, the authorized transactions may include importation of goods, services and technology into the U.S. but may not include export of goods from the U.S., and payments to or for benefit of a blocked entity must be made into a special blocked account. General License 13 authorizes, with some restrictions, transactions ordinarily incident and necessary to divest or transfer debt, equity or other holdings in three of the designated entities. U.S. persons using either general license are also required to report the transactions in detail to OFAC within 10 business days. Notably, unlike General License 12, on its face General License 13 does not apply to entities owned 50% or more by the three identified SDNs.
U.S. companies that have routine or significant business involving Russia may wish to consider re-screening their counterparties to identify if they may be dealing with a blocked person, and also assess whether their screening practices with respect to Russia and other high-risk destinations adequately address OFAC’s 50% rule.
Non-U.S. companies should also take note of these designations:
While non-U.S. persons are not directly subject to the prohibition on dealing with SDNs, they may be subject to secondary sanctions for such dealings pursuant to the Countering America’s Adversaries Through Sanctions Act (CAATSA). Section 228 of that Act mandates the imposition of punitive measures on any person who knowingly causes a violation of the Russia sanctions or knowingly facilitates significant transactions for or on behalf of any person subject to U.S. sanction.
Non-U.S. persons also face exposure to other secondary sanctions under CAATSA if they engage in certain significant transactions with the defense/intelligence sectors of Russia or that involve special Russia crude oil projects, construction, modernization or repair of Russia’s energy export pipelines, or privatization of state-owned assets. Whether a transaction is “significant” depends on six factors outlined in general terms in OFAC guidance as well as other factors OFAC may consider relevant on a case-by-case basis.
As always, a non-U.S. person’s dealings with an SDN that involve a U.S. person or other U.S. nexus may implicate the non-U.S. person in a U.S. person’s violation, and OFAC takes a broad view of its jurisdiction over non-U.S. persons in such circumstances. Also, non-U.S. persons handling goods that are U.S.-origin or otherwise subject to U.S. export control (due to incorporation of U.S.-origin content or derivation from U.S.-origin technology) are bound to comply with the U.S. export controls over such goods.
Finally, all companies should remain vigilant in monitoring the sanctions and continuing their screening and other compliance efforts. The Russia sanctions continue to evolve and there is continuously risk that they could be escalated to designate additional persons and entities as SDNs. Implementing appropriate contractual and other protections to mitigate these risks is essential in ongoing and new business involving Russia.