Overview
On April 6, 2018, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced new blocking sanctions against seven Russian oligarchs, 12 entities owned or controlled by those oligarchs, 17 senior Russian government officials, a Russian weapons trading company, and a banking subsidiary owned by the weapons trading company. According to Treasury Secretary Steven Mnuchin, the sanctions were issued in response to Russia’s “range of malign activity around the globe,” including actions in Crimea, Eastern Ukraine, and Syria, and “Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.”
These actions reflect OFAC’s first sanctions against Russian “oligarchs” per se, and follow Treasury’s submission to Congress in January of a report on Russian oligarchs and senior government officials required by Section 241 of the Countering America’s Adversaries Through Sanctions Act (CAATSA). As noted in the Treasury press release, OFAC’s actions target “a number of the individuals listed in the Section 241 report, including those who benefit from the Putin regime and play a key role in advancing Russia’s malign activities.” For more on the Section 241 report see previous Steptoe blog posts here and here.
The companies targeted for sanctions include a number of entities with substantial business dealings with US companies. Thus, in order to “minimize immediate disruption” caused by the sanctions, OFAC also issued two new general licenses (General License 12 and General License 13) designed to allow the unwinding of certain activities with or divestment of certain holdings in a number of the newly sanctioned companies. OFAC also issued eight new frequently asked questions (FAQs) and one updated FAQ on the new designations and general licenses.
New Designations
The newly sanctioned individuals and entities are designated as specially designated nationals (SDNs), meaning that they are “blocked” under US law. All US persons worldwide (including US banks) are required to freeze the SDNs’ property and assets in their possession or control, and are prohibited from engaging in any transactions or dealings with these SDNs, subject to certain narrow authorizations. These restrictions apply not only to the listed SDNs, but to any unlisted entities owned 50% or more by any combination of SDNs. Unlisted entities controlled by SDNs, but not owned 50% or more by them, are not automatically blocked, but could be designated as SDNs in the future.
Additionally, pursuant to Sections 226 and 228 of CAATSA, foreign persons and foreign financial institutions may face secondary sanctions if they knowingly facilitate “significant transactions” for, or on behalf of, the newly sanctioned persons, including specifically listed persons and entities owned 50% or greater by such persons. Whether a transaction is significant turns on a number of factors outlined by OFAC and discussed further below.
The sanctions designations were made under Executive Orders (EOs) 13661, 13662, and 13582. EOs 13661 and 13662 target persons in certain sectors of the Russian economy, persons who are officials of the Russian government, or persons who have supported blocked persons in response to US government concerns regarding Russian government activity to undermine democratic processes and other activities in Ukraine. Congress codified EOs 13661 and 13662 as part of CAATSA. EO 13582 targets the government of Syria and persons engaging in certain transactions with Syria.
OFAC designated the following persons as SDNs:
Individuals (oligarchs and senior Russian government officials)
- Andrey Akimov
- Vladimir Bogdanov
- Oleg Deripaska
- Alexey Dyumin
- Mikhail Fradkov
- Sergei Fursenko
- Oleg Govorun
- Suleiman Kerimov
- Vladimir Kolokoltsev
- Konstantin Kosachev
- Andrey Kostin
- Alexey Miller
- Nikolai Patrushev
- Vladislav Reznik
- Igor Rotenberg
- Kirill Shamalov
- Evgeniy Shkolov
- Andrei Skoch
- Alexander Torshin
- Vladimir Ustinov
- Timur Valiulin
- Viktor Vekselberg
- Alexander Zharov
- Viktor Zoloto
Entities
- AgroHolding Kuban
- Basic Element Ltd.
- B-Finance Ltd.
- EN+ Group plc
- GAZ Group
- Gazprom Burenie, OOO
- JSC Eurosibenergo
- Ladoga Menedzhment, OOO
- NPV Engineering OJSC
- Renova Group
- Rosoboroneksport OAO
- Russian Financial Corporation
- Russian Machines
- United Company RUSAL plc
The designated entities include significant companies in a number of business sectors, including metals (RUSAL is one of the world’s largest aluminum producers), automotive (GAZ Group, an automotive conglomerate, is Russia’s largest producer of commercial vehicles), weapons trading (Rosoboroneksport OAO), energy, banking and finance, and management and consulting
services. The government officials serve in a variety of capacities within the Russian government, including as directors and officers in large state-owned entities such as Gazprom.
General Licenses
In recognition of the significant ties between the US economy and some of the designated entities, OFAC issued two new general licenses to facilitate the winding down of business dealings between US persons and those entities.
General License 12 authorizes certain activities necessary for the maintenance or wind-down of operations or existing contracts with all of the above listed entities, except for Rosoboroneksport OAO and Russian Financial Corporation. Such activities must be “ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements, including the importation of goods, services, or technology into the United States.” Such operations, contracts, or agreements must have been in effect prior to April 6, 2018 (the date the license was issued) and are authorized through 12:01 a.m. Eastern Daylight Time (EDT), June 5, 2018. Any payment made pursuant to the license for the direct or indirect benefit of a blocked person must be placed in a blocked, interest-bearing account located in the United States. The general license does not clearly state whether US persons are permitted to collect outstanding debts, and if so, in which circumstances. US persons participating in transactions authorized by the license must, within 10 business days of the expiration of the license, file a “comprehensive, detailed report of each transaction, including the names and addresses of parties involved, the type and scope of activities conducted, and the dates on which the activities occurred.”
General License 12 does not authorize all wind-down related activity by US persons. For example, it does not authorize “divestiture or transfer” of debt, equity, or other holdings in the blocked entities – it is not stated whether or not receipt of debts owed (e.g., outstanding invoices) is permitted. In addition, the general license does not authorize “the export of goods from the United States.” Therefore, US persons may need to seek guidance from OFAC in order to conduct certain wind-down activities (e.g., certain activities related to export or supply commitments, certain activities involving accounts receivable, or activities involving SDNs that are not listed in General License 12), and OFAC may find itself reviewing many specific license requests for winding down supply arrangements and receiving payments.
General License 13 authorizes certain transactions necessary to divest or transfer debt, equity, or other holdings for three entities listed in the general license (EN+ Group PLC, GAZ Group, and United Company RUSAL PLC). Authorized transactions must be “ordinarily incident and necessary to divest or transfer debt, equity, or other holdings” in the listed persons to a non-US person or to facilitate the transfer of such holdings by a non-US person to another non-US person. Such transactions are authorized through 12:01 a.m. EDT, May 7, 2018. The general license clarifies that authorized transactions include “facilitating, clearing, and settling transactions to divest to a non-US person debt, equity, or other holdings.”
General License 13 does not authorize divestment from any SDNs not specifically listed; the unblocking of blocked property; the selling of holdings in the covered entities to any SDNs including the entities listed in the general license (sales to non-SDNs otherwise conforming with the requirements of the license are permitted); the purchase of any holdings in such entities; or any dealings with SDNs, including the SDNs identified in the general license. Persons seeking to divest their holdings should carefully examine the mechanisms through which such divestment would occur to ensure compliance with the parameters of the general license. As with General License 12, persons participating in transactions authorized under General License 13 must submit a report to OFAC within 10 business days of the expiration of the license.
Frequently Asked Questions
OFAC has published a number of FAQs related to the newly announced designations, and has also updated one existing FAQ. The FAQs address various scenarios involving individuals and entities designated under EOs 13661 or 13662, or blocked pursuant to OFAC’s 50% rule on April 6, 2018 as a result of such a designation (hereinafter “newly sanctioned persons”).
FAQ 567 explains that General License 12 authorizes US person employees to provide services to, and receive salary payments, pension payments, or other benefits from, the blocked entities listed in the license until the expiration of the license, if such activities are ordinarily incident to the continuity of operations or to facilitate a wind-down. US person employees of SDNs not listed in General License 12 are prohibited from engaging in transactions or dealings with such blocked persons without specific authorization from OFAC.
FAQ 568 clarifies that, absent OFAC authorization, continued employment by or board membership in a newly sanctioned person is prohibited. OFAC adds that such employees or board members “should review the actions you view as necessary to sever your ties with the blocked entity against applicable OFAC regulations, authorizations, and public guidance.”
FAQ 569 states that US companies that have ordered goods from a newly sanctioned person may still accept such goods provided the importation is authorized under General License 12 and that payment is deposited in a blocked account at a US financial institution, as required under the license.
FAQ 570 provides information for shareholders or holders of global depositary receipts in newly sanctioned persons. The FAQ reiterates that General License 13 authorizes certain divestment and transfer activities for debt, equity, or other holdings in blocked entities listed in the license.
FAQ 571 clarifies that General License 13 does not permit US persons holding accounts for or other property of a newly sanctioned person to unblock such property, but instead is limited to certain authorized divestment and transfer activities.
FAQ 572 explains that while EO 13662 had previously only been used by OFAC to impose sectoral sanctions (to add persons to the Sectoral Sanctions Identifications List) the EO also authorizes OFAC to designate persons as blocked.
FAQ 573 addresses situations in which one or more newly sanctioned persons hold less than 50% ownership in a US company. The FAQ explains that the US company itself is not blocked, but the US company must block all property and interests in property in which the blocked person has an interest. OFAC further adds that a US company may be able to continue operating, but that “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 US financial institution.”
FAQ 574 addresses whether foreign persons may be subject to secondary sanctions for doing business with newly sanctioned persons. The FAQ explains that, pursuant to Sections 226 and 228 of CAATSA, foreign persons and foreign financial institutions may be subject to sanctions for knowingly facilitating a “significant” transaction with one of the newly sanctioned persons. As outlined in newly updated FAQ 542 and FAQ 545, whether a transaction is significant under these provisions of CAATSA turns on a number of considerations, including:
- The size, number, and frequency of the transaction(s)
- The nature of the transaction(s)
- The level of awareness of management and whether the transaction(s) are part of a pattern of conduct
- The nexus between the transaction(s) and a blocked person
- The impact of the transaction(s) on statutory objectives
- Whether the transaction(s) involve deceptive practices
- Such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis
The FAQs clarify that a transaction is not “significant” and thus would not subject a non-US person to secondary sanctions risk if US persons could participate in the same transaction without seeking a specific license from OFAC. Thus, activity authorized under General Licenses 12 and 13, and occurring within the time period authorized by these general licenses, would not be considered “significant” under Sections 226 and 228 of CAATSA. Accordingly, FAQ 574 appears to indicate that non-US persons are not at risk of secondary sanctions if they operate consistent with the wind-down and divestment authorizations available to US persons under General Licenses 12 and 13 during the time periods covered by the licenses so long as their activity falls within the parameters of those authorizations. As noted above, however, there is some lack of clarity as to the exact scope of these general licenses, and additional questions arise when considering the implications of the general licenses for the activities of non-US persons that take place outside of US jurisdiction.
Conclusion
These OFAC actions mark a significant intensification of US sanctions against Russia – many of the individuals and entities targeted by these sanctions have extensive holdings and business connections in the United States and elsewhere outside of Russia. The use of SDN designations is particularly severe, as compared with the less restrictive “sectoral” sanctions previously used to target major Russian companies. Not only are US persons affected, but the ripple effect risks of secondary sanctions on non-US persons of these new designations could be significant.
Further commentary is available on the Steptoe International Compliance Blog. You can also follow us on Twitter (@SteptoeIntlReg).
