US Treasury designates Russian oligarchs, officials, and entities

Authors: Kimberly Hope Caine, Stephen M. McNabb Publication | April 13, 2018
US Treasury designates Russian oligarchs, officials, and entities

On April 6, 2018, the US Department of the Treasury, Office of Foreign Assets Control (OFAC) added certain Russian oligarchs, officials, and entities to its Specially Designated Nationals and Blocked Persons (SDN) List. OFAC’s latest designations, which involve the novel use of existing authorities, elevate the sanctions compliance risks for both US and non-US companies doing business in Russia or with Russian partners. As a result of OFAC’s actions, US companies are prohibited from engaging in any dealings with the designated persons, including entities owned 50 percent or more by one or more designated persons, whose US assets are now blocked. Furthermore, funds may not be processed through the US financial system in connection with transactions involving such persons. Non-US companies, moreover, could face sanctions for engaging in significant transactions with these designated persons, as well as entities owned 50 percent or more by one or more designated persons. OFAC has issued a press release and FAQs related to these actions.

Designations and authorizations

OFAC’s designations on April 6 are pursuant to authority provided under Executive Order (E.O.) 13661 and E.O. 13662, authorities codified by the Countering America’s Adversaries Through Sanctions Act (CAATSA), as well as Syria-related E.O. 13582. The designations target a number of the individuals listed in a report that the Treasury Department issued on January 29, 2018, pursuant to section 241 of CAATSA, identifying 210 senior Russian government officials and oligarchs (Section 241 Report). The persons designated on April 6 include seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its subsidiary, a Russian bank.

As a result of OFAC’s actions, all assets subject to US jurisdiction of the designated persons, and of any other entities blocked by operation of law as a result of their ownership by a sanctioned party, are frozen. US persons generally cannot engage in, directly or indirectly, or facilitate any dealings with the designated persons, including any entities owned 50 percent or more by one or more designated persons. “US person” is defined to include entities organized under US law, US citizens and permanent residents worldwide, and any person physically located in the United States regardless of nationality. Furthermore, funds may not be processed through the US financial system in connection with transactions involving designated persons, including any entities owned 50 percent or more by one or more designated persons. Moreover, non-US persons could face sanctions for knowingly facilitating significant transactions for or on behalf of the individuals or entities blocked on April 6, 2018.

OFAC concurrently issued two general licenses: (1) General License 12, authorizing certain activities ordinarily incident to and necessary for the maintenance or wind down of operations or existing contracts; and (2) General License 13, authorizing certain transactions ordinarily incident to and necessary for the divestment or transfer of debt, equity, or other holdings in certain blocked persons. More specifically, General License 12 allows for the maintenance or wind down of operations, contracts, or other agreements that were in effect prior to April 6, 2018, and in which the blocked entities listed in General License 12 have an interest, provided that certain conditions are met. Importantly, any payment made directly or indirectly to the blocked entities listed in General License 12 must be deposited in a blocked account at a US financial institution. In addition, General License 12 does not authorize several activities, including the exportation of goods from the United States to any of the listed entities, and entering into any new contracts or agreements for the provision of goods or services with those entities. The authorization provided in General License 12 expires on June 5, 2018. US persons engaging in transactions pursuant to General License 12 must file a report with OFAC by June 19, 2018.

General License 13 authorizes certain divestment and transfer activities related to debt, equity, or other holdings in the blocked entities listed in General License 13, subject to certain conditions and exceptions. Specifically, General License 13 authorizes US persons to divest or transfer to a non-US person, or to facilitate the transfer by a non-US person to another non-US person, of debt, equity, or other holdings in the blocked entities listed in General License 13, provided that such divestment, transfer, or facilitation does not result in US persons: selling debt, equity, or other holdings to; purchasing or investing in debt, equity, or other holdings in; or facilitating such transactions with, directly or indirectly, any blocked person, including the entities listed in General License 13. The authorization provided in General License 13 expires on May 7, 2018. US persons engaging in transactions pursuant to General License 13 must file a report with OFAC by May 21, 2018.

Implications and takeaways

OFAC’s actions could have significant practical implications for both US and non-US companies. All companies that do business in Russia should carefully screen all parties involved to ensure that they are not sanctioned, keeping in mind that OFAC has cautioned that its list of 12 companies owned or controlled by the sanctioned oligarchs should not be viewed as exhaustive. Under OFAC’s “50 percent rule,” any entities owned 50 percent or more by one or more designated persons are themselves considered to be blocked persons, even if they are not specifically identified on OFAC’s sanctions lists. Therefore, companies should conduct sufficient due diligence to ascertain the ownership of Russian entities with whom they do business and confirm that such entities are not sanctioned by virtue of OFAC’s 50 percent rule.

As these designations demonstrate, the Ukraine-/Russia-related sanctions are continuously evolving and expanding. For example, it is conceivable that OFAC could target additional entities owned or controlled by the blocked persons, or continue to focus on other persons named in the Section 241 Report, or their owned or controlled companies (though OFAC has made clear that inclusion in the report does not indicate that the person is subject to, or likely to be subject to, sanctions, or signify involvement in malign activities). Furthermore, prior to the April 6, 2018 designations, E.O. 13662 only applied to OFAC’s Ukraine-/Russia-related sectoral sanctions and identifications under the Sectoral Sanctions Identification (SSI) List. OFAC pointed out in its FAQs that E.O. 13662 also authorizes it to designate persons as blocked, signaling that it could continue to wield this authority more broadly than it has done in the past.

If a US company has contracts, joint venture agreements, or investments in or from blocked persons, it should carefully evaluate whether a license or other authorization might be necessary for any activities or payments involving such blocked persons. For example, if a US company is owned less than 50 percent by one or more blocked persons, although it is not itself sanctioned, any payments, dividends, or disbursements of profits by the US company to the blocked person would be prohibited. Furthermore, where wind-down or divestiture procedures are appropriate, US companies need to ensure that they are complying with all the conditions and requirements of the applicable general license. For example, a US company that ordered goods from a blocked entity prior to April 6, 2018, can accept the goods until June 5, 2018, pursuant to General License 12, provided that any outstanding payment for the goods is deposited in a blocked account at a US financial institution.

In addition, US person employees, officers, or directors of blocked persons should consider whether their continued activities with those blocked persons might require a license or other authorization, and comply with wind-down or divestiture procedures as appropriate. For example, a US person employee can continue to receive salary payments, pension payments, or other benefits from blocked persons listed in General License 12, and provide services to such blocked persons, until June 5, 2018. If, however, the blocked person is not identified in General License 12, the US person employee cannot provide or receive any goods or services to or from such blocked person, or otherwise transact or deal in any property in which the blocked person has an interest.

Moreover, while most of the Ukraine-/Russia-related sanctions are not applicable to non-US persons, OFAC underscored in its press release and FAQs that non-US persons can be subject to sanctions under sections 226 and 228 of CAATSA if they knowingly facilitate significant transactions for or on behalf of the persons designated on April 6, 2018, including entities owned 50 percent or more by one or more designated persons. OFAC has advised that a transaction is not “significant” if US persons would not require specific licenses from OFAC to participate in it. Therefore, activity authorized by General Licenses 12 and 13, and occurring within the time period authorized in these general licenses, would not be considered “significant.” However, other transactions that would require a specific license for US persons could be deemed to be significant and would need to be carefully evaluated. In determining whether transactions are significant, OFAC considers the totality of the circumstances, 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.

Furthermore, companies that trade in US-origin goods or technology should monitor whether the US Department of Commerce’s Bureau of Industry and Security (BIS) takes any actions consistent with OFAC’s designations. For example, BIS often has added designated Russian entities to its Entity List, which imposes additional licensing requirements and policies in connection with certain exports or reexports to such entities.

Accordingly, given this latest escalation of the sanctions, both US and non-US companies that do business in Russia should: ensure that they carefully evaluate their existing Russia-related contracts, operations, and relationships; promptly comply with wind-down or divestiture procedures as appropriate; and consider whether a license or other authorization for any continued activities is needed. The importance of conducting reasonable due diligence before engaging in any Russia-related dealings, including ascertaining the identities of all transaction parties and their owners, cannot be overstated. We will continue to monitor the developments and provide additional briefings as warranted.


Contacts

Kimberly Hope Caine

Kimberly Hope Caine

Washington, DC
Stephen M. McNabb

Stephen M. McNabb

Washington, DC