On May 8, 2014, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued regulations to implement three Executive Orders issued by President Obama in March regarding the situation in Ukraine. The Ukraine Related Sanctions Regulations, which are now found in 31 C.F.R. Part 589 (the “URSR”), may have important practical consequences for many U.S. businesses currently doing business with or considering doing business with Russian businesses and individuals. U.S. businesses should also begin considering how they may be impacted by potential forthcoming sanctions. Similarly, the European Union (EU) has implemented its own sanctions against individuals and entities involved in undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. Therefore, EU and multi-national companies with operations in the European Union must also consider the practical impacts of those sanctions.
Background on the U.S. Ukrainian-Related Economic Sanctions
OFAC issued the URSR just over two months after President Obama first announced sanctions on certain persons involved in contributing to the unrest in Ukraine. On March 6, 2014, President Obama issued Executive Order 13660 (“EO 13660”), which blocked property of certain persons contributing to the situation in Ukraine.1 EO 13660 also banned travel to/from the United States of certain individuals. When EO 13660 was released, no names of persons whose property would be blocked or who would be subject to travel bans were released. However, since then, four individuals were named as persons whose property would be blocked associated with EO 13660 and these individuals are also subject to the travel ban.
On March 17, President Obama issued Executive Order 13661 (“EO 13661”) to expand the scope of the national emergency declared in EO 13660 finding that the actions and policies of the Government of the Russian Federation with respect to Ukraine undermine democratic processes in Ukraine; threaten its peace, security, stability, sovereignty and territorial integrity; and contribute to the misappropriation of its assets. EO 13661 added seven individuals to the list of individuals whose property is blocked and, again, these individuals are also subject to the travel ban.
EOs 13660 and 13661 stopped short of issuing a total trade embargo on Russia. Nevertheless, EO 13661 stated that all property and interests in property that are in the United States, that hereafter come within the United States or that are or hereafter come within the possession or control of any United States person of the following persons are blocked:
(ii) persons determined by the Secretary of the Treasury, in consultation with the Secretary of State:
(A) to be an official of the Government of the Russian Federation;
(B) to operate in the arms or related materiel sector in the Russian Federation;
(C) to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly:
(1) a senior official of the Government of the Russian Federation; or
(2) a person whose property and interests in property are blocked pursuant to this order; or
(D) to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of:
(1) a senior official of the Government of the Russian Federation; or
(2) a person whose property and interests in property are blocked pursuant to this order.
EO 13661 left the Treasury and State Departments broad authority to determine individuals and entities that would qualify as persons in the above list.
On March 20, 2014, President Obama issued Executive Order 13662 (“EO 13662”) that extended the blocking restrictions on property of persons contributing to the situation in the Ukraine to additional persons in a broader spectrum of the Russian Federation’s economy, including sectors very relevant to Uranium One. As with the prior Executive Orders, EO 13662 also banned travel to and from the United States by certain individuals. EO 13662 blocks all property and interests in property that are in the United States, that hereafter come within the United States or that are or hereafter come within the possession or control of any United States person (including any foreign branch) of:
(a) Any person determined by the Secretary of Treasury, in consultation with the Secretary of State:
(i) to operate in the financial services, energy, metals and mining, engineering and defense and related materiel (sic) sectors in the Russian Federation;
(ii) to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of any person whose property and interests in property are blocked; or
(iii) to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked.
As with EOs 13660 and 13661, EO 13662 gives the Secretary of the Treasury, in consultation with the Secretary of State, broad authority to determine individuals and entities that would qualify as blocked persons in the above list. The Secretary of the Treasury delegates authority to identify such individuals and entities to OFAC.
As the situation in the Ukraine/Crimea region has continued to escalate, OFAC has continued to update its List of Specially Designated Nationals and Blocked Persons (the “SDN List”) to add additional Russian individuals and entities. Over 60 individuals and entities have been added to the SDN List under the various EOs. Included among the individuals listed have been Igor Sechin, Gennady Timchenko, Arkady Rotenberg, Boris Rotenberg, Vladimir Yakunin, and Viktor Fedorovych Yanukovych. Included among those entities listed have been Bank Rossiya, Volga Group, Transoil, Invest Capital Bank, Avia Group LLC, SMP Bank and Stroytransgaz Group. Because the list of individuals and entities sanctioned under the URSR is expected to continue to evolve, a complete listing of those sanctioned by OFAC can be found easily by using OFAC’s search tool at http://sdnsearch.ofac.treas.gov/ and searching under the Ukraine programs. The EU sanctioned individuals and entities overlaps somewhat with the OFAC sanctioned individuals and entities but there are a several key differences. The EU list can be found here.
The URSR prohibit all transactions prohibited under EOs 13660, 13661 and 13662. The URSR also serve as the regulatory framework for OFAC to continue to add individuals and entities to its SDN List. The URSR do not serve as a total trade embargo on Russia. However, U.S. persons should be aware that the U.S. Government has indicated that it is prepared to continue to escalate the impact of its sanctions program.
URSR Section 589.406 adopts OFAC’s Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked (the “Guidance on Entities”). Under URSR Section 589.406, “[a] person whose property and interests in property are blocked pursuant to § 589.201 has an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50 percent or greater interest.” Additionally, “[t]he property and interests in property of such an entity, therefore, are blocked, and such an entity is a person whose property and interests in property are blocked pursuant to § 589.201, regardless of whether the name of the entity is incorporated into OFAC’s” SDN List. Accordingly, a U.S. person generally may not engage in any transactions with such a majority-owned entity of an SDN unless authorized by OFAC. Further, a U.S. person may not procure goods, services, or technology from, or engage in transactions with, a blocked person directly or indirectly, including through a third-party intermediary.
Practical Considerations Regarding the Impact of the URSR
There is a presidential election in Ukraine scheduled for May 25, 2014. The Obama Administration indicated that should Russia disrupt those elections further, more-severe U.S. sanctions may be implemented. The Obama Administration further indicated that sanctions would be ordered against separate parts of the Russian economy or military but stopped short of specifying precisely what was being considered. In addition, certain members of the U.S. Congress have called for sanctions that target all Russian-state owned entities.
At this point, however, one cannot predict future events and so it is impossible to predict whether a near total embargo on Russia, akin to the current U.S. sanctions on Cuba or Iran, might be implemented or whether such new sanctions would further target specified individuals and entities. Nevertheless, U.S. persons with business dealings with Russian individuals and entities and Russian individuals and entities should begin to consider how they are impacted by the existing sanctions and how they may be impacted by forthcoming sanctions. Specifically, consideration should be given to the following:
Due Diligence. As pointed out above, under URSR Section 589.406, any entity in which a person or entity who is named as an SDN under the EOs or URSR is similarly treated as a blocked party. Therefore, U.S. persons effectively may not trade or exchange money with any such person unless an OFAC license or exemption allows otherwise. Many of the individuals targeted thus far under the EOs and URSR are extremely wealthy and have many business holdings worldwide and particularly throughout the European Union. Accordingly, if a U.S. person knows or has reason to know that an entity with which it has historically done business with is potentially owned or controlled by a targeted individual or entity, then that U.S. person should proceed cautiously in continuing business relations with the entity. Accordingly, the U.S. person should do an appropriate level of due diligence to determine whether the entity itself could fairly be treated as a blocked person under URSR Section 589.406.
Joint Ventures. Similar to the point above, U.S. persons that are involved in joint ventures with sanctioned parties (or with parties that may become sanctioned) should consider whether continuation of the joint venture is allowable under the EOs and the URSR.
Legal Services. Russian businesses (or U.S. businesses that are ultimately Russian owned) that operate within one of the targeted industry sectors should understand that URSR Section 589.506 contains a general license for the provision of certain legal services by U.S. persons to or on behalf of persons whose property or interests in property are blocked under URSR Section 589.201. In practical effect, this might mean that some legal services that those Russian businesses are currently receiving from U.S. counsel may not be authorized under URSR Section 589.506. Accordingly, U.S. counsel might need to apply for a specific license to OFAC in order to continue providing those legal services.
Provision of Travel Services. Most all of the OFAC regulations include a general license that authorizes the provision of travel and certain related ancillary services to individuals and entities targeted under the applicable regulations. However, the URSR do not, as of yet, contain such a provision. It is possible that OFAC will soon add such a general license to the URSR and it is possible that IEEPA’s travel services exemption might be read into the URSR. Nevertheless, international travel service providers must proceed cautiously and should understand that they may not be able to provide travel services to those individuals and entities currently sanctioned under the URSR or that may become sanctioned under the URSR.
Funds Transfers. OFAC has named several banks to the SDN List under the EOs. Although the targeted banks are not widely used by U.S. businesses with interests in Russia, U.S. businesses that are involved in transactions with Russian individuals and entities should understand that it is possible that U.S. and European Union based banks may block funds transfers if they involve a targeted bank.
Evasion. The URSR prohibit all transactions that are prohibited under EOs 13660, 13661 and 13662. EOs 13660, 13661 and 13662 specifically prohibits “[a]ny transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions” of the EOs. Accordingly, a multi-national company with a U.S. person subsidiary or affiliate that has been doing business with a sanctioned person must be careful not to cause a violation of the URSR by the U.S. person subsidiary or affiliate by, for example, shifting that business to a foreign subsidiary or affiliate in a way that could be viewed as evasion.
Other Export Control Impacts. In addition to these sanctions administered and enforced by OFAC, the other two U.S. Government agencies primarily responsible for administering and enforcing export control regulations – the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) and the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”) – earlier made statements that processing of export licenses under the jurisdiction of those agencies was indefinitely put “on hold.” Since then, the BIS has indicated that it will deny any pending applications for licenses for exports or reexports of any high technology items subject to the EAR to Russia or the occupied Crimean region that contribute to Russia’s military capabilities. The BIS is also in the process of revoking existing licenses for such items and will assess other applications on a case-by-case basis. The BIS has also named numerous companies to its Entity List. The DDTC has taken similar actions as the BIS.
European Union Sanctions
On March 17, 2014, the European Council adopted Council Decision 2014/145/CFSP and Regulation No. 269/2014 imposing restrictive measures with respect to actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine. Under the Decision and the Regulation, the EU imposed asset freezing sanctions initially against 21 individuals in Russia, Ukraine and Crimea. By subsequent implementing legislative measures (Council Implementing Regulation (EU) No. 284/2014 of 21 March 2014 and Council Implementing Regulation (EU) No. 477/2014 of 12 May 2014) the list of individuals subject to asset freezing measures was extended six times adding additional individuals in Ukraine and Russia and the same asset freezing measures were extended to two Ukrainian enterprises that were confiscated by the Parliament of Crimea.
The EU sanctions adopted to date have two effects. First, the individuals on the sanction list may not enter into or transit through any of the EU countries except under very limited circumstances. Second, all funds and economic resources belonging to, owned, held or controlled by any of the individuals or entities on the sanctions list or persons or entities or bodies associated with them are frozen and cannot be made available to them, directly or indirectly. This means that funds in bank accounts in the EU are frozen and cannot be accessed and that EU persons (i.e., any entity established in an EU country and any person or entity operating within the EU) must not assist or enable the dealing with funds or making available of economic resources belonging to or owned by, held or controlled by a sanctioned individuals or entities.
The asset freezing measures and travel restrictions should have a significant practical impact on the ability of the individuals and entities in question to conduct any business at the international level or to transfer funds internationally (particularly funds held in euro, sterling or other currencies of EU member states). However, so far, the EU has been reluctant to extend those sanctions to impact wider economic interests in Russia such as the general banking sector or any industry sectors or the Russian state. The EU is likely to proceed more cautiously than the United States in imposing sanctions against Russia due to the close economic ties of many EU countries with Russia and the dependency of much of the EU on gas supplies from Russia (much of it, as it happens, flowing through supply lines across the Ukraine). Concerns over counter-sanctions that may be imposed by Russia (for example in relation to gas supplies) are a key factor. However, if the situation in Ukraine continues to deteriorate and if Russia intensifies its interference with the territorial integrity and independence of the Ukraine state, the EU is likely to extend the reach of those asset freezing measures to capture a wider range of individuals and entities in Russia and may impose military embargoes or other restrictions on exports from the EU into Russia.
Dorsey’s team of National Security Law experts led by Nelson Dong and Larry Ward stand ready to assist with potential concerns under OFAC’s URSR and Dorsey’s EU attorneys led by Ron Moscona stand ready to assist with potential concerns under the EU sanctions.
1 The vast majority of U.S. economic sanctions programs derive from Executive Orders. In general, the President’s authority to issue these Executive Orders stems from a statutory authority or from some Congressional mandate. The Trading with the Enemy Act (“TWEA”), the International Emergency Economic Powers Act (“IEEPA”), the National Emergencies Act (“NEA”) and the United Nations Participation Act (“UNPA”) are the statutory authorities for most of the U.S. economic sanctions programs. Executive Orders generally declare new, or build on existing, national emergencies; specify the threat that is posed; define the characteristics for designation of targets of the economic sanctions; and delegate authority for their implementation. Generally, implementation authority is granted to the Secretary of the Treasury, acting in consultation with the Secretary of State.