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Highlights:
- OFAC’s latest wave of Russian sanctions, which require the blocking of several Russian companies and individuals, are having significant impacts across a number of economic sectors. OFAC anticipated some of these impacts and issued two General Licenses to soften the immediate blow on the global economy, but both of these measures will expire soon.
- Because of the turmoil in the aluminum market, OFAC has now issued an additional General License (14) to authorize U.S. persons to engage in a narrow set of transactions related to winding down or maintaining business with United Company RUSAL PLC (RUSAL) and its subsidiaries.
- General License 13, issued on April 6, 2018 and which allows U.S. persons to divest holdings in certain SDNs, expires in two weeks, on May 7, 2018.
- OFAC has also issued updated General License 12A, which allows U.S. persons to engage in winding-down activities with the newly designated SDNs, and reflects the authorizations in General License 14. General License 12A is still due to expire on June 5, 2018.
- OFAC’s move to relax the prohibitions on the winding down period for RUSAL demonstrates that when a proposed or new sanctions measure has an outsize collateral impact outside of the target company or country, OFAC will take measures to provide companies affected by the sanctions measures some limited respite.
Most Recent Round of Russia/Ukraine Sanctions
On April 6, 2018, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned 24 Russian individuals and 12 Russian companies under Executive Orders 13661 and 13662. These individuals and companies were added to OFAC’s Specially Designated Nationals (SDN) list, and accordingly, all of their property and property interests that come within the U.S. or under the control of a U.S. person are blocked. The sanctions apply in different ways to U.S. persons and non-U.S. persons, and have caused significant difficulties and disruptions in, for example, the aluminum markets. Please see our client alert of April 9, 2018 for further information on the scope of these OFAC measures.
General Licenses Permitting Wind-Down and Divestment Nearing Expiration
Both of the General Licenses initially issued by OFAC aim to provide U.S. persons with a short runway to be able to extricate themselves from ongoing business dealings with the SDNs and their business interests. U.S. persons may be able to additionally secure specific licenses to extend the time and scope of some aspects of wind-down or divestment activities, a view which is bolstered by OFAC’s subsequent actions to relax certain timelines applicable to one SDN, United Company RUSAL PLC (RUSAL), which we discuss in more detail below. Because a number of uncertainties have arisen around the scope of the new sanctions, we also expect that OFAC will continue to provide additional guidance on these measure and we will provide updates.
General License 12A (GL12A), permits a wind-down period whereby U.S. companies and their employees have until June 5, 2018 to close-out any dealings with the sanctioned entities identified in the license (GL12A was initially issued as GL12, but then modified to accommodate GL14, discussed in more detail below). Such activities are limited to those necessary to facilitate the wind-down of existing operations -- in other words, every transaction that can be undertaken under GL12A must at its core be intended to reduce the business activity. Guidance from OFAC indicates that during the wind-down period, the SDNs are able to continue providing salary payments, pension payments, or other benefits to U.S. employees and U.S. employees can continue providing services necessary to the wind-down.
Further, under GL12A, U.S. companies are able to receive shipments of goods ordered from the sanctioned entity as long as such orders were placed prior to the entity being designated (however, any outstanding payment for goods or services provided by the sanctioned entity to a U.S. person during the wind-down period must be deposited in a blocked account at a U.S. financial institution). OFAC guidance also indicates that even with long-term supply contracts, new orders under those contracts are not permissible under GL12A even if the orders and payments could be carried out within the period allowed. Following GL12A’s expiration date, any dealings with SDNs, even those dealings designed to close-out a relationship, will be prohibited without an additional specific license from OFAC.
General License 13 (GL13) authorizes U.S. persons to take the necessary steps to divest or transfer to a non-U.S. person any 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. It should be noted that GL13 is strictly limited to the three entities listed in the license and does not include other entities which are owned or controlled by one of the three identified SDNs. GL13 is set to expire at 12:01 a.m., May 7, 2018. Following this date, the transfer of debt, equity, or other holdings of the identified SDNs will be prohibited without a specific license from OFAC.
New General License Allows for Wind-Down Period in Dealings with Russian Aluminum Giant RUSAL
On April 23, 2018, OFAC issued an additional Ukraine-/Russia-related General License 14 (GL14), and the aforementioned updated General License 12A which replaced GL12.
GL14 authorizes activities and transactions necessary to the maintenance or wind-down of operations and contracts involving United Company RUSAL PLC (RUSAL). There are several notable aspects of GL14 which differ from the related GL12A.
- First, the covered maintenance and wind-down activities are authorized until October 23, 2018, a notably longer wind-down period compared to other sanctioned entities in GL12A (which as discussed above expires on June 5, 2018).
- Second, U.S. persons are not required to place payments to RUSAL into a blocked account for activities authorized by GL14, something which is also mirrored in GL12A applicable only to RUSAL for activities authorized by GL14.
- Third, GL14 authorizes the use of already-blocked funds for the maintenance and wind-down activities described in GL14.
OFAC’s issuance of GL14 is a rare demonstration that when sanctions cause significant disruptions in the U.S. economy (here, the aluminum market), OFAC may be willing to provide some additional scope for U.S. companies to identify alternative solutions.
