On December 19, 2018, the US Department of the Treasury notified Congress of its intention to terminate sanctions imposed on En+ Group plc (En+), as well as its subsidiaries, United Company RUSAL (Rusal) and JSC EuroSibEnergo (ESE), on January 19, 2019. En+ and its subsidiaries were designated on the Office of Foreign Assets Control’s (OFAC) list of Specially Designated Nationals and Blocked Persons (SDN List) on April 6, 2018, on the basis that En+ was majority owned and controlled by Oleg Deripaska, a Russian billionaire and aluminum magnate believed to be close to President Vladimir Putin. As part of an agreement with OFAC, Deripaska agreed to reduce his ownership shares of En+ from 70% to 44.95% in exchange for En+, Rusal and ESE (En+ Group) each being removed from the SDN List. Deripaska himself, and entities in which he continues to hold an interest of 50% or more, will remain on the SDN List after January 19, 2019. 

OFAC Terms for the Delisting Require Deripaska to Relinquish Majority Ownership and Corporate Governance Rights in the EN+ Group

Since their designation, En+, Rusal and ESE have engaged in negotiations with OFAC for delisting. OFAC approached these negotiations with the objective of reducing Deripaska’s ownership and control of the En+ Group. Throughout the negotiations, OFAC pressed for terms that would untangle En+ Group from Deripaska’s controlling influence. Ultimately, per the Terms of Removal referenced in OFAC’s letter, OFAC compelled En+ to remove Deripaska from control over En+ by first reducing his ownership shares in En+ via a series of transactions, including: (i) VTB Bank taking a block of Deripaska’s shares, pledged as collateral for obligations of entities controlled by Deripaska previously issued by VTB Bank; (ii) engaging in a restructuring transaction whereby the Swiss company Glencore swaps shares of Rusal for a direct ownership interest in En+; and (iii) donating a block of shares to a charitable foundation. 

To further ensure that Deripaska does not influence En+ Group decisions, En+ Group also agreed to a series of significant corporate governance changes. Limitations on Deripaska’s governance rights imposed by the Terms of Removal include the following: 

• limiting Deripaska’s shares to a 35% voting interest, with any additional voting rights assigned to a voting trust obligated to vote with the majority;
• creating a new En+ board composed of 12 directors, all vetted by OFAC, with at least eight independent directors and at least six of whom are US or UK nationals. None of Deripaska’s four board nominees will be permitted to serve on either the Audit or the Nominations committees; 
• the stepping down of Rusal’s Chairman and commitment by En+ to create a 14-person board for Rusal, with eight independent, non-executive directors from whom a new Chairman will be selected; 
• providing OFAC a right to review En+ and Rusal board nominations; and 
• execution of a deed letter between Deripaska and En+ providing that Deripaska will not enter into any agreements which would allow him to exercise a controlling influence on the management or policies of the En+ Group.

With steps in place to remove Deripaska from ownership and control, En+ was able to show that “the circumstances resulting in the designation no longer apply” and that the SDN List designation should be rescinded.

Divestment Transactions Avoid Any Transfer of Funds or Dividends to Deripaska

Key to OFAC’s assessment and acceptance of the divestment transactions is that they do not involve any transfer of funds directly or indirectly to Deripaska. This is the rationale behind the complicated series of share pledges and swaps, and charitable contributions necessary to effect the divestment. In addition, future dividends paid on Deripaska’s remaining shares are to be kept in a blocked account. Ultimately Deripaska will retain 44.95% of En+; En+ will retain a controlling 56.88% stake in Rusal; and Deripaska will have a direct shareholding interest in Rusal of 0.01%, plus a slightly increased indirect shareholding in Rusal as a result of the Glencore share swap. 

Ongoing OFAC Monitoring and Enforcement

OFAC will require an “unprecedented” level of transparency from En+, Rusal and ESE to monitor compliance with the Terms of Removal. En+ Group will be required to regularly provide OFAC with information and certification, including: 

• audits of En+’s and Rusal’s engagements with and obligations to Deripaska or any of his entities; 
• monthly certifications of compliance with the Terms of Removal, particularly regarding independence from Deripaska and other designated persons;
• provision to OFAC of quarterly reports, board minutes and audit reports of En+ and Rusal;
• providing OFAC notice and opportunity to respond to anticipated changes in the composition of the board of En+ and Rusal as well as voting rights of third parties pursuant to the Terms of Removal;
• a commitment to respond fully and in a timely manner to any additional questions from OFAC; and
• a commitment to remedy any issues identified by OFAC related to compliance with the Terms of Removal.

OFAC Extends General Licenses Related to GAZ Group

In addition to committing to terminate sanctions imposed on En+ Group, OFAC also announced this week that it is extending the authorized period for maintenance and wind down of transactions involving another Deripaska-owned entity, GAZ Group, from January 21, 2019, to March 7, 2019. GAZ Group, in which Deripaska continues to hold a controlling interest, was added to the SDN List contemporaneously with En+ Group in April 2018. At this time, it is unclear whether OFAC will remove GAZ Group from the SDN List under a plan similar to the one it negotiated with En+ Group. 

Principal Impacts: January 2019 Termination of Rusal Sanctions and Roadmap for Future Delisting Petitions and SDN Divestment Transactions 

Customers, employees, shareholders and suppliers of Rusal and ESE will celebrate this news signaling a path to concluding the sanctions designation nightmare that the company has been experiencing since April. Note that, unless a general license is issued, the delisting will not take effect until January 19, 2019. Until then no new authorizations have been issued other than the authorization for maintenance and wind-down transactions under General License 14D issued December 7, 2018. 

Importantly, following this action, Deripaska will remain an SDN. As such, unless authorized by a general license, US persons are prohibited from dealing directly or indirectly with him and with any other entities in which he may have a 50% or more ownership interest and from facilitating any such dealings. Moreover, provision of “material” support to Deripaska by any non-US person is subject to secondary sanctions.

Another takeaway from this action is that OFAC is setting a high bar for future delisting petitions. Generally speaking, entities that are less than 50% owned by an SDN are not subject to sanctions restrictions unless the entity is specifically designated by OFAC. OFAC required far greater commitments from En+ Group in order to achieve the delisting. In addition to requiring his divestment of shares, robust and detailed ongoing transparency requirements have been put into place to make sure that Deripaska does not indirectly run En+ Group, including in some instances providing OFAC with an opportunity to object to certain En+ corporate decisions. 

Finally, banks should take note of the overarching requirement in the Terms of Removal that none of the equity divestment transactions approved by OFAC are to result in a transfer of funds, or even future payment of dividends, to Deripaska. These strict limitations will guide non-US banks and other third parties in assessing secondary sanctions risks arising from involvement in SDN-related transactions.

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