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Highlights:
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OFAC’s latest actions to block Russian companies and individuals poses risks for U.S. persons and requires additional know-your-customer measures.
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OFAC imposed 24 Ukraine-related designations of individuals and 12 additional designations of companies.
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For the first time, OFAC has designated individuals and entities as blocked, and added them to the SDN list, under Executive Order 13662.
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One Russian defense company, Rosoboronexport, has been designated pursuant to the Syria sanctions authorities.
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Since some of the designated companies may be doing business with U.S. persons, a new general license allows U.S. persons to wind down activities until June 5, 2018. Activities outside of winding down are prohibited.
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Three of the entities are also the subject of an additional general license to allow U.S. persons to divest debt/equity/or other holdings. But all such divestment must be completed by May 7, 2018 under the general license.
Renewed Pressure on Putin and Russian Companies
On April 6, 2018, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned a number of Russian individuals, including some with close connections to President Putin and previously identified as part of the Treasury Department’s so-called Oligarch’s Report. OFAC also sanctioned several Russian companies. These individuals and companies were added to OFAC’s Specially Designated Nationals (SDN) list under the Ukraine/Russia sanctions program and were undertaken as part of a broader U.S. Government initiative to put more pressure on Russia and the Putin government. According to Treasury Secretary Mnuchin “Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.” Along with these designations, OFAC issued two new Ukraine/Russia-related general licenses, eight new FAQs, and one updated FAQ relating to the Countering America’s Adversaries Through Sanctions Act (CAATSA).
Acting for the first time under Executive Order 13662, OFAC has designated several individuals and entities, placing them on the SDN list and blocking them. Previously, E.O. 13662 had only applied to OFAC’s Ukraine-/Russia-related sectoral sanctions and identifications under the Sectoral Sanctions Identification List.
A full list of individuals and entities added to the SDN list can be found here.
Implications for U.S. Persons
All property and property interests of the Russian individuals and companies now placed on the OFAC SDN list that come within the U.S. or the control of a U.S. person are blocked. U.S. persons and companies should therefore review the individuals and companies placed on the SDN list to ensure they take necessary steps to comply with these new measures. This should include not only screening new business that may be related to these individuals or companies, but also ongoing business activities, i.e. existing customer relationships.
Because some of the newly designated Russian companies may have U.S. operations or holdings, OFAC has provided more specific guidance on certain aspects of dealing with these entities by U.S. persons, including U.S. persons currently employed by entities owned or controlled by the blocked entities. If a person designated under E.O. 13661 or E.O. 13662 holds an ownership interest of less than 50% in a U.S. company, the U.S. company is not itself blocked, but the U.S. company must block all property and interests in property in which the blocked person has an interest. The U.S. company may be able to continue operating, but any payments, dividends, or disbursement of profits to the blocked person would be prohibited and, to the extent such payments are required, must be placed in a blocked account at a U.S. financial institution.
General Licenses to Permit Winding Down and Divestment
Anticipating a number of complex business wind-down issues under the new measures, OFAC has also issued General Licenses 12 and 13 which authorize, respectively, certain wind-down and divestment activities related to the newly designated persons and entities.
General License (GL) 12 authorizes certain activities through June 5, 2018 necessary to wind-down operations or existing contracts with the SDNs listed in GL12, provided that any payments made to such blocked entities are deposited in a blocked account at a U.S. financial institution. GL12 also authorizes any U.S. person employed at an office of a company that is listed in GL12 to continue providing services to the blocked entity to facilitate a wind down and for such blocked entity to make salary payments, pension payments, or other benefits until June 5, 2018. In other contexts, OFAC has granted specific licenses to U.S. persons who need more time to complete wind-down activities, however, requests for extensions take time and should be undertaken well in advance of the expiration of the GL.
GL 12 also allows a U.S. company that has ordered goods from a newly designated entity to accept the goods, provided that the importation is in accordance with the requirements and limitations specified in GL12 (i.e. that any outstanding payment for the goods be deposited in a blocked account at a U.S. financial institution).
General License 13 authorizes, through May 7, 2018, U.S. persons to divest or transfer to a non-U.S. person, or to facilitate the transfer by a non-U.S. person to another non-U.S. person, of debt, equity, or other holdings in the blocked entities listed in GL13, provided that such divestment, transfer, or facilitation does not result in U.S. persons selling, purchasing, or otherwise facilitating transactions involving debt, equity, or other holdings with any blocked person.
Facilitation Risks for U.S. and Non-U.S. Persons
Non-U.S. persons and entities may also face enforcement under U.S. sanctions if they knowingly facilitate significant transactions on behalf of any person subject to U.S. sanctions. OFAC has provided additional guidance on the terms “facilitated” and “significant transaction” or “significant financial transaction” – all of these require in-depth reviews of contemplated business transactions to ensure that non-U.S. persons do not violate these or other OFAC measures.
Under the amended Section 5 of the Ukraine Freedom Support Act (UFSA) and Section 10 of Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act, foreign persons and financial institutions may face sanctions if the Treasury Secretary determines that they knowingly facilitate significant transactions or financial transactions on behalf of any Russian person added to OFAC’s SDN List. OFAC will consider the totality of facts and circumstances when determining whether transactions or financial transactions are “significant” and ultimately will consider seven broad factors in its determination. As is the case with much of its regulatory toolkit, OFAC interprets the terms “financial transaction” and “facilitated” broadly. Specifically, “facilitated” refers to the provision of assistance for certain efforts, activities, or transactions, including the provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.
OFAC guidance does note that a transaction is not “significant” if U.S. persons would not require specific licenses (as opposed to a general license) from OFAC to participate in the activity.
