President Obama issued yet another new Executive Order (E.O.) blocking property of additional Russian persons the U.S. Government holds responsible for the situation in Ukraine on 20 March 2014. For its part, on 21 March 2014, the EU added another 12 names to its list of designated persons. Russia responded by enacting countermeasures that prohibit nine U.S. officials from entering Russia. Below we discuss the specific sanctions imposed by the U.S., EU and Russia and highlight screening solutions that companies should implement as part of a broader compliance program.
Thursday’s E.O. marks the third such order issued by the President in the past two weeks. As discussed in our recent prior posts, the Executive Orders of 6 March and 16 March demonstrated the White House’s desire to impose costs on certain named individuals who wield influence in the Russian government and those purportedly responsible for the deteriorating situation in Ukraine. Thursday’s E.O. marks an important departure from the two previous orders by authorizing the Secretary of Treasury, in consultation with the Secretary of State, to impose sanctions on entire sections of the Russian economy.
The new E.O. authorizes the Secretary of Treasury to require U.S. persons, including foreign branches, to block the property and interests in property of persons involved in any sector of the Russian economy, and it calls out the following as examples: “financial services, energy, metals and mining, engineering, and defense and related materiel.” The order also authorizes blocking the property of individuals and entities deemed to materially assist, sponsor, or provide support for goods or services of any person or entity whose property is blocked pursuant to the order. The prohibitions are permitted to extend to providing material support for entities owned and controlled by entities blocked pursuant to the order.
In a Background Briefing on Ukraine on Thursday, senior U.S. government officials confirmed that the E.O. authorizes the Secretary of Treasury to issue such sanctions in the future but does not impose any additional restrictions at this time. The distinction is significant because it may be understood as a negotiating tactic designed to show Russian officials the “potential future consequences” of a failure to reach a diplomatic resolution. If the authority provided by the E.O. is utilized by the Secretary of Treasury, the Office of Foreign Assets Control (OFAC) is expected to promulgate specific regulations and guidance.
In the interim, in addition to the new E.O., OFAC designated approximately two dozen Russian individuals and a Russian bank on the List of Specially Designated Nationals and Blocked Persons (SDN List) pursuant to the previous Executive Orders. The designations include Bank Rossiya. While U.S. officials describe Bank Rossiya as the 17th largest bank in Russia, more notably it is considered a personal bank for many senior Russian officials. The designation of a Russian bank may be viewed as a warning for Russia of forthcoming sanctions in the absence of a diplomatic resolution.
In response to the latest round of U.S. sanctions, international payment service providers VISA and MasterCard halted payment operations for clients of Bank Rossiya, as well as for clients of SMP Bank, which is majority owned by Arkady and Boris Rotenberg, both of whom were designated on Thursday. Furthermore, VISA reportedly announced that in compliance with U.S. sanctions they would also halt operations for clients of SobinBank, which is a wholly owned subsidiary of Bank Rossiya, and InvestCapitalBank, which is majority owned by the Rotenberg brothers. Although clients of the aforementioned banks will not be able to use their cards to make purchases, they will still be able to receive cash from ATMs without any restrictions.
Any assets of any individual or entity on the SDN List that is subject to U.S. jurisdiction – or that comes under the control or possession of U.S. persons – must be blocked, and U.S. persons are prohibited in dealing in such assets. In order to comply with the orders, we recommend companies remain vigilant in screening all parties to contemplated transactions involving Russians or Ukrainians for connections to individuals or entities listed above as well as entities or individuals listed on the SDN List. In addition, companies should remain proactive in assessing their exposure to the sectors of the Russian economy listed in the order and described above.
Following the events of last week in Crimea, the European Council (EU Heads of State and Government) also agreed last night to step up the restrictive measures previously adopted on Monday 17 March 2014 (Regulation EU No 269/2014), including asset freezing measures and a visa ban, targeting Russian individuals linked with the political decisions that resulted in the Republic of Crimea joining the Russian Federation.
The European Council decided to extend the list with the inclusion of 12 new individuals (Regulation EU No 284/2014), including prominent Russian political and media figures such as Dmitry Rogozin, Deputy PM of Russian Federation; Sergey Glazyev, Advisor to President Putin; Valentina Matviyenko, Speaker of the Federation Council and Dimitry Kiselyov, Head of Federal State News Agency.
As is the case for U.S. sanctions, any funds or economic resources held by, for or on behalf of these individuals/entities must be blocked and reported to the competent authorities in the relevant Member States.
Unlike the U.S., the EU has not included in its list economic entities or prominent businessmen close to the Kremlin. This is partly due to the fact that the EU’s legal base for introducing restrictive measures (Article 215 of the Treaty of the Functioning of the European Union) requires that these acts “include the necessary provisions on legal safeguards,” including ensuring that those individuals can be directly linked with the political decisions triggering the EU’s decision.
Additionally, the European Council has instructed the European Commission to prepare an assessment of the potential impact of a broader package of economic and trade sanctions to be implemented in a third phase of retaliatory measures.
In response to the first round of sanctions of 16 March 2014, imposed by the U.S. on Russian officials, the Russian Ministry of Foreign Affairs yesterday released its own blacklist of U.S. administration officials and lawmakers who will be barred from entering the Russian Federation. Those named include White House advisors and several prominent lawmakers. In its statement announcing the sanctions, the Russian Ministry of Foreign Affairs noted that these sanctions were introduced on the “principle of reciprocity” in terms of the number of individuals named (the U.S. sanctions of 16 March also named nine individuals). The statement goes further to mention that “there must be no doubt that we will provide an adequate response to every hostile move made against us” – possibly referring to further action to be taken in light of the second round of sanctions, which were imposed on Russia this week.