The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) had a busy week last week. In addition to adding names of individuals to its list of Specially Designated Nationals (“SDNs”) and releasing its quarterly report on licenses for exporting agricultural commodities, medicine, and medical devices to Iran and Sudan, OFAC took two particularly notable actions during the week beginning February 17, 2020.
1. OFAC Designated Rosneft Trading S.A. as an SDN
On February 18, OFAC designated Rosneft Trading S.A. (“Rosneft Trading”) of Switzerland as well as its chairman and president, Didier Casimiro, as SDNs under Executive Order 13850 for operating in the oil sector of the Venezuelan economy. Rosneft Trading acts as the brokerage arm of Russia’s state-controlled energy company, Open Joint-Stock Company Rosneft Oil Company (“Rosneft”), and facilitates Rosneft’s foreign operations. In recent months, Rosneft Trading has handled transactions involving shipments of oil from Venezuela to destinations in Africa and Asia.
Executive Order 13850, issued on November 1, 2018, blocks the property of “persons” (including entities) operating in certain sectors of the Venezuelan economy. The Executive Order initially targeted the gold sector, and it has been expanded to cover the oil, financial, defense and security sectors of the economy.
OFAC also issued Venezuela General License 36, authorizing “all transactions and activities . . . ordinarily incident and necessary to the wind down of transactions involving Rosneft Trading S.A., or any entity in which Rosneft Trading S.A. owns, directly or indirectly, a 50 percent or greater interest,” through midnight on May 19, 2020. Entering into new business with Rosneft Trading is not considered wind-down activity.
Unless an activity is covered by the general license, all property and property interests of Rosneft Trading that are in the United States, or that come within the United States or within the possession or control of any U.S. person, are blocked. U.S. persons are prohibited from transferring or otherwise dealing in such property. U.S. persons cannot provide any funds, goods or services to Rosneft Trading and cannot receive any funds, goods or services from Rosneft Trading. These prohibitions also apply to any entity in which Rosneft Trading owns a 50 percent or greater interest.
OFAC made clear in new Venezuela-related frequently asked questions (“FAQs”) that the SDN designation and resulting blocking sanctions apply only to Rosneft Trading (and entities in which it owns a 50 percent or greater interest) and not also to its ultimate parent, Rosneft, other subsidiaries or affiliates (provided that those entities are not owned 50 percent or more by SDNs). However, to the extent that Casimiro holds other senior positions among Rosneft’s affiliates, U.S. persons dealing with these affiliates could face sanctions complications as a result of Casimiro’s designation as an SDN.
Rosneft is already a familiar name on U.S. sanctions lists. OFAC previously identified Rosneft as operating in the energy sector of the Russian Federation under the Ukraine and Russia-related sanctions. Rosneft and Rosneft Trading have been named on the Sectoral Sanctions Identification List (the “SSI List”) since 2014 and 2015, respectively. Fourteen Russian subsidiaries of Rosneft and two additional subsidiaries in Luxembourg and Cyprus were also added to the list in 2015. Many of these entities do not have “Rosneft” in their names. U.S. persons are prohibited from providing goods, services, or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation or elsewhere if they involve any of these Rosneft entities or entities in which these Rosneft entities have certain ownership or voting interests. U.S. persons are also prohibited from any dealing in new debt – defined broadly to include bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper – of greater than 60 days maturity of any of the Rosneft entities. These activities also are prohibited within the United States by persons of any nationality. In addition, any entity owned, directly or indirectly, 50 percent or more by one or more persons on the SSI List is also subject to the same restrictions, even if not identified by name on the SSI List.
Mirroring OFAC’s sectoral sanctions on the Russian energy sector, in 2014 and 2015, the Department of Commerce’s Bureau of Industry and Security (“BIS”) added Rosneft, Rosneft Trading, and the other Rosneft subsidiaries to the Entity List under the Export Administration Regulations (“EAR”). The Entity List imposes licensing requirements for all items subject to BIS’s export jurisdiction when they are to be used in the exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia. BIS reviews such export license applications under a presumption of denial for projects in Russia that have the potential to produce oil. The EAR’s various license exceptions cannot overcome the licensing requirement imposed by the Entity List. Notably, BIS’s licensing requirement for the Rosneft entities covers projects involving gas, whereas OFAC’s sectoral sanctions do not impose restrictions on projects that have the potential to produce gas only.
2. OFAC Publishes FAQs on Reporting Regulations
On February 20, OFAC released additional guidance on its Reporting, Procedures and Penalties Regulations (the “RPPR”) in the form of two FAQs. The breadth of the RPPR interim final rule, issued on June 21, 2019, has caused consternation and confusion among U.S. companies operating internationally. The interim final rule requires companies to file reports on blocked property, unblocked property, and “rejected transactions.” Traditionally, the requirement to report on rejected transactions was limited to “rejected funds transfers,” and applied only to financial institutions, but the June 2019 revisions broadened the reporting requirement to apply to all U.S. persons and persons subject to U.S. jurisdiction and to “any rejected transaction.” The interim final rule defines the term “transaction” as including but not limited to “wire transfers, trade finance, securities, checks, foreign exchange, and goods or services.”
In a FAQ published on February 20, OFAC stated that all U.S. persons – not only financial institutions – are required to comply with the RPPR, “including the expanded requirement in Section 501.604 of the RPPR to provide reports to OFAC regarding rejected transactions within 10 business days of the rejected transaction.” Though the rule is already in effect, OFAC says it continues to review the rule to determine whether any clarification or modification is appropriate. To this end, OFAC is seeking feedback on the business impact of the rule and the types of transactions that are challenging to report.
In a second FAQ issued on the same day, OFAC clarified that it expects filers of reports on rejected transactions to report information in their possession only and not also to seek further information from the counterparty. OFAC expects to receive information as required under Section 501.604(b) of the RPPR, including information on the submitter of the report, the date of the rejection, the legal authority under which the transaction was rejected, and any relevant documentation received in connection with the transaction.
OFAC prefers for reports about rejected transactions to be submitted electronically through its website.