This briefing is intended to provide an update on two recent developments under the US sanctions regime.

• The first one is the introduction of US sanctions related to the Nord Stream 2 pipeline project, which threaten to widen a rift between the US and EU foreign policymakers.
• The second one is the judgment of a federal district court in Texas in favor of Exxon Mobil Corporation, vacating the USD 2 million penalty notice imposed by OFAC against the company. In addition to being a rare defeat for OFAC, the ruling obliges the agency to provide “ascertainable certainty” as to the scope and meaning of its regulatory prohibitions. 

Nord Stream 2

On  December 18, 2019, the US Senate approved the National Defense Authorization Act for Fiscal Year 2020 (herein Defense Budget 2020). President Trump signed the Defense Budget 2020 into law on December 20, 2019.

Section 7503 of the Defense Budget 2020 provides for implementation of blocking sanctions concerning the Nord Stream 2 pipelines for:

1. vessels that engage in pipe-laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline project, the TurkStream pipeline project, or any successor project (the Projects); and
2. foreign persons that have knowingly:
   1. sold, leased, or provided those vessels for the construction of the Projects; or
   2. facilitated deceptive or structured transactions to provide those vessels for the construction of the Projects.

The signing of the Defense Budget 2020 into law triggered a 60-day review window, under which the United States has until February 18, 2020 to identify the vessels and foreign persons carrying out the activities set out above. Additional reports are required for each succeeding 90-day period thereafter.

Foreign vessels and persons identified in the report once published will, with immediate effect, be ineligible to enter the United States. The President is also required to block and prohibit all transactions concerning property and interests in property of persons identified in the reports if such property is in the United States or in the possession of a US person (this will likely mean designation on the Specially Designated Nationals and Blocked Persons (SDN) list).

The sanctions provide for a 30-day wind-down period, whereby the President is prohibited from imposing sanctions with respect to a person identified in the report if the President certifies that the person has, by January 19, 2020, engaged in good-faith efforts to wind down operations targeted by section 7503 of the Defense Budget 2020.

As yet, the report listing relevant vessels or persons in connection with the Projects has not been published.  We will update this briefing with that information when the report is published.

Generally speaking, the term “facilitating transactions” is interpreted widely under US sanctions law. As such, persons offering ancillary services to persons involved in the Projects may find themselves targeted, e.g. marine and cargo insurers, vessel insurers, vessel bunkers, etc. Nonetheless, it seems that the transactions would need to be “deceptive or structured” to fall within the scope of sanctions at point a)(ii) above. Whilst there is no definition of “deceptive” or “structured” in the Defense Budget 2020, in respect of other legislation concerning Russia, Office of Foreign Assets Control (OFAC) has commented as follows:

“Structured transactions are a type of deceptive transaction. A ‘deceptive transaction’ is one that involves deceptive practices. As described in 31 C.F.R. § 561.404(f), ‘deceptive practices’ are attempts to obscure or conceal the actual parties or true nature of a transaction, or to evade sanctions.”

The threat of these sanctions has caused some construction companies of the Nord Stream 2 pipeline to withdraw from the project—most notably, Allseas of Switzerland, which is responsible for the pipe-laying and has been identified as a prime target for sanctions.

However, it is speculated that the sanctions provided for in the Defense Budget 2020 will not prevent the completion of the Nord Stream 2 project. At this time, the sanctions would not prevent offtake transactions such as lifting or purchasing products (directly or indirectly) from Nord Stream 2. Nonetheless, as the United States considers that the Projects may be used as a tool for coercion and political leverage by the Russian Government, the scope of the sanctions may be widened in the future.

The EU has strongly condemned the sanctions relating to the Projects as interference in the autonomous decision-making of the EU and an attack on sovereignty. While repercussions against the United States for these sanctions have been threatened by the EU and Moscow, the exact nature of any countermeasures, and whether any protections from US sanctions will be provided to EU businesses, are yet to be revealed.

Exxon judgment

Summary

On  December 31, 2019, a federal district court in Texas (the Court) issued a ruling which granted Exxon Mobil Corporation (Exxon) motion for summary judgment and vacated the USD 2 million penalty notice which had been levied on Exxon by OFAC for alleged violations of US sanctions against Russia. When fining Exxon, OFAC proclaimed that Exxon had received a prohibited service from an SDN when it had permitted Igor Sechin (a listed SDN and the CEO of Rosneft) to sign multiple contracts with Exxon in his official capacity as the CEO of Rosneft (a company which was not itself an SDN).

The Court’s decision focused on the narrow question of whether Exxon had received “fair notice” that it was prohibited to deal with non-SDN companies by engaging with individuals listed on the SDN List acting in their capacity as officials of such companies. While the Court concluded that Exxon had not received fair notice at the time it accepted Igor Sechin’s signature on contracts, OFAC clarified its position subsequently by issuing an FAQ confirming that entering into a contract signed by an SDN would be prohibited.  Ironically, the fact that OFAC issued this guidance when it did was taken as evidence that OFAC had not provided “fair notice” to Exxon before it signed the contract.

Background

Igor Sechin was designated on the SDN list on  April 28, 2014. He signed eight contracts with Exxon on behalf of Rosneft in May 2014.

On August 13, 2014, OFAC issued FAQ 400 explaining that: “OFAC sanctions generally prohibit transactions involving, directly or indirectly, a blocked person, absent authorization from OFAC, even if the blocked person is acting on behalf of a non-blocked entity. Therefore, U.S. persons should be careful when conducting business with non-blocked entities in which blocked individuals are involved; U.S. persons may not, for example, enter into contracts that are signed by a blocked individual.” (emphasis added) FAQ 398 also confirmed that companies should ensure they are not “dealing with a blocked person representing the non-blocked entity, such as entering into a contract that is signed by a blocked person”.

On July 20, 2017, OFAC imposed a USD 2 million civil penalty on Exxon for accepting the contracts signed by Igor Sechin. Exxon challenged this penalty decision on the grounds that, among other things, it was not given fair notice of OFAC’s interpretation of the law in accordance with the Due Process Clause of the Fifth Amendment to the US Constitution.

Decision

OFAC argued that FAQ 285 (which relates to Burma sanctions) warned against entering into contracts that were signed by SDNs and, therefore, should have put Exxon on notice that its conduct would be prohibited under the Russia sanctions program.

The Court disagreed with OFAC’s arguments and concluded that FAQ 285 did not provide fair notice of OFAC’s interpretation of the sanctions against Russia. The Court said that OFAC guidance issued in the context of one sanctions program does not constitute guidance for the purpose of another sanctions program. OFAC, as early as 2006, issued an FAQ warning that each sanctions program is based on different foreign policy and national security goals and, as such, prohibitions may vary between programs. In addition, OFAC issued a further warning concerning the Russia-related sanctions stating that “differing foreign policy and national security circumstances may result in differing interpretations of similar language among the parts of this chapter”. The Court ruled that these specific disclaimers negated any notice that FAQ 285 may have otherwise provided.

The Court noted that it did consider Exxon’s failure to inquire as to the meaning of prohibitions in the Russia sanctions program as a factor in its determination. However, it concluded that the burden of creating fair notice rests on the regulators, not the regulated.

Comments

This case presents a rare litigation defeat for OFAC, which is noteworthy since OFAC generally enjoys wide discretion to impose and administer sanctions on the basis of the President’s broad national security authorities.  OFAC is exempt from certain requirements of the Administrative Procedures Act.¹ for notice of proposed rulemaking, opportunity for public comment, and delay in effective date because its rulemaking involves foreign affairs functions of the United States.²

While the significance of the decision for the particular interpretive question at issue appears limited, the case has broad implications for the requirements for regulatory clarity that the Court imposes on OFAC under the Due Process clause.  To preserve its flexibility to interpret and enforce US sanctions authorities as circumstances dictate, many key terms used in OFAC sanctions regulations are not defined or are defined in broad, ambiguous terms.

For instance, by the power of an Executive Order, OFAC has the power to designate non-US persons for “having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” the Government of Venezuela, but does not provide a definition for “material assistance” or “material support”.  Furthermore, in Iran sanctions, when determining whether a transaction is “significant”, OFAC provides factors to consider, but does not provide a definition.  In addition, on June 21, 2019, OFAC issued an interim final rule amending the reporting requirements for rejected transactions, requiring all US persons to report all rejected transactions where processing or engaging in the transaction would nonetheless violate US sanctions within 10 business days without defining what constitutes a “rejected transaction”.

The Exxon ruling obliges the agency to provide “fair notice” and “ascertainable certainty” of the scope of its prohibitions when it seeks to enforce them. As a result, the agency will be expected to issue more definitions, make FAQs and Interpretive Guidance to explain its interpretation of the relevant prohibitions. Retrospectively, the agency may look for dated guidance that might be read to contradict its current interpretation and may seek to amend or withdraw such guidance.

Note, however, that the ruling does not otherwise limit OFAC’s authorities to impose and administer sanctions. Firstly, the Court did not determine whether Igor Sechin’s act of signing the contracts constituted a “prohibited service” for the purpose of the sanctions against Russia. Secondly, the Court did not determine that OFAC could not interpret the law in a way that prohibits the acceptance of contracts signed by SDNs on behalf of non-SDN companies, only that it had not made such a prohibition clear at the time that Exxon accepted the contracts with Rosneft. This implies that, provided that OFAC gives sufficient notice of/guidance on the relevant sanctions program, it is able to broadly interpret the scope of the legislation.

Nonetheless, it would clearly not be advisable for companies to rely on ambiguities in sanctions legislation, or inadequacies in OFAC’s FAQs, as a shield from enforcement action, given the broad scope of OFAC’s interpretative discretion and extraterritorial enforcement powers.

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¹5 USC § 553.
²31 CFR § 501.804.

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