• Penalty imposed against Exxon related to contracts with Russian oil company Rosneft
• Rosneft is not a prohibited party but its president is
• OFAC alleges that “senior-most” Exxon management were involved
• Exxon responds with suit against OFAC

On July 20, 2017, the U.S. Treasury Department Office of Foreign Assets Control (OFAC) announced that ExxonMobil (Exxon) must pay a $2 million penalty for violating U.S. sanctions on Russia.  On the same day, Exxon responded by suing OFAC.

There is a lot to this story, including a political angle given that current U.S. Secretary of State Rex Tillerson was the boss of Exxon at the time of the violations. We will get to that, but we first want to focus on the potential implications of this action for U.S. companies.

Background of U.S. Sanctions on Russia

Back in 2014, the U.S. government announced sanctions against Russia related to its annexation of Crimea.  Like most other U.S. sanctions, the Russia sanctions are administered by OFAC.

U.S. sanctions on Russia, however, are somewhat unique in that they are tailored to target particular industries, entities and individuals. The sanctions are also two-tiered: some Russian parties are designated as Specially Designated Nationals (SDNs) with which U.S. companies and individuals can conduct virtually no business.  Many other Russian parties are designated as restricted parties with which U.S. companies and individuals can conduct some, but not all, business.

In September 2014, OFAC designated Rosneft OAO, one of Russia’s largest oil and gas companies, as a restricted party under Directive 2 – related to issuance of debt of 90-days maturity or more – and Directive 4 – related to activities in support of deepwater, Arctic and shale development projects in Russia. (The U.S. Commerce Department has imposed similar restrictions on exports to Rosneft.)  Igor Sechin, the president of Rosneft and one of Russia’s richest men, was designated as an SDN in April 2014.

Through these 2014 actions, OFAC appeared to be drawing a distinction between Sechin, who was totally off limits for U.S. companies, and Rosneft, which could continue to be a business partner to U.S. companies in many cases.

To further illustrate this point, concurrent with Sechin’s designation, OFAC issued a press release that made clear that U.S. persons were prohibited from conducting business with Sechin, but did not mention Rosneft itself.

Exxon’s Violations of U.S. Sanctions in Russia

In May 2014, Exxon signed eight legal documents related to oil and gas projects in Russia. Sechin signed each of these documents – presumably on behalf of Rosneft, though the July 20, 2017,  penalty notice does not make that entirely clear.

Exxon has argued that there is a distinction between conducting business with Sechin in his professional versus personal capacity. Exxon apparently believed that the former (i.e., dealing with Sechin in his official capacity as president of Rosneft) was permitted.

OFAC has dismissed the personal versus professional distinction. The agency asserts that both the language of the sanctions regulations along with guidance (that was) on its website make clear that Exxon’s conduct was prohibited.  That guidance, issued in 2013 in relation to U.S. sanctions on Burma, stated that U.S. parties should “be cautious in dealings with [a non-designated] entity to ensure that [the U.S. party is] not providing funds, goods, or services to the SDN.”  (We would link to that guidance on OFAC’s website if it were still there.)

Key Takeaways from Exxon’s Penalties for Violating U.S. Sanctions on Russia

1. Probably most important for U.S. companies, is the fact that so many of Russia’s biggest companies are presided over by SDNs. We understand that it is common, and may sometimes even be required, for Russian company presidents to sign contracts before they enter into force.  As highlighted in the Exxon matter, even if a Russian company’s president’s signature is not required, any contract signed by an SDN is off-limits for a U.S. company.  Negotiation and other business discussions with an SDN, prior to actual contract signature, would be prohibited, too.

   We can only guess at the number of U.S. companies – banks? technology companies? service providers? – that maintain contracts with Russia’s biggest companies, many of which are headed by an SDN. If those contracts were signed by an SDN, violations occurred.

2. We wonder what this means for any actual work that Exxon, and likely other U.S. companies, will be performing under contracts signed by an SDN. Would it now be prohibited for Exxon to perform under any contract that Sechin signed?  That seems to follow naturally from the penalty imposed here.  Yet there is no indication in OFAC’s penalty announcement that the agency intends to penalize Exxon for performing under contracts signed by Sechin.  (As noted above, it is not entirely clear that the “legal documents” that Sechin signed were in fact contracts, but it seems like a safe assumption.)

   A $2 million penalty does not seem like an existential threat to Exxon. But it would be something entirely different if OFAC were to prohibit the company from performing under contracts that could be worth billions of dollars, or penalizing the company for work already performed under those contracts.  We would not be surprised to see OFAC issue guidance to clarify what appears to be a distinction between signing the contract – which is prohibited – and performing – which apparently is not.  It would be fantastic if that guidance also explained why that distinction exists.

3. When announcing the Exxon penalty, OFAC noted that “ExxonMobil’s senior-most executives knew of Sechin’s status as an SDN when they dealt in the blocked services of Sechin.” Exxon’s “senior-most executive” at the time was current U.S. Secretary of State Rex Tillerson.  To be clear, OFAC has not specifically accused Tillerson or any other executive of committing, facilitating or abetting these violations.  Nonetheless, OFAC’s language seems to leave open the possibility that its investigation could extend to individuals who were involved, possibly including Tillerson.

   Correspondingly, and as if there is not already enough news related to Russia, the fact that a company once managed by a current Trump Administration official violated U.S. sanctions against Russia is only likely to increase existing congressional pressure to codify existing Russian sanctions into law.  As congressional pressure intensifies, the scope and breath of sanctions against Russian entities may change.

4. We cannot ignore the importance of Exxon’s countersuit here. Challenges to OFAC penalty actions are rare.  It will be interesting to see how OFAC (an Executive agency) responds to Exxon’s suit, particularly in light of the role of Tillerson (an Executive official) at Exxon at the time of the alleged violations.

Regardless of how all of this shakes out, the Exxon matter serves as a yet another reminder that a thorough review of sanctions regulations and guidance must occur prior to engaging in transactions with countries or entities affected by sanctions regulations. This review is especially important when conducting business in or with Russia, which is subject to particularly nuanced sanctions, or in any case in which an SDN may be involved.  If nothing else, the Exxon matter demonstrates that an SDN is an SDN, whether acting as a private individual, corporate representative, government official, or in any other capacity.

Special thanks to Tim Pellegrino, a Bass, Berry & Sims summer associate based in our Washington, D.C. office, for his assistance in drafting this post.