US Clarifies Sanctions Provisions and US Senate Passes a Bill to Codify and Expand Sanctions

by Dechert LLP
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As noted in previous updates, the United States and European Union continue to impose sanctions against Ukrainian and Russian individuals and entities as a result of the turmoil in Ukraine. On 11 December 2014, the US Senate passed the Ukraine Freedom Support Act of 2014 (S. 2828) (hereinafter the “Act”), which would significantly expand the scope of US economic sanctions against Russia if it became law. In addition, the US Treasury Department’s Office of Foreign Assets Control recently released additional guidance regarding the scope of existing US sanctions involving Ukraine and Russia.

Potential Expansion of Sanctions Under Ukraine Freedom Support Act of 2014

If enacted into law, the Act would represent a significant expansion in the scope of US sanctions involving Russia as a result of the Ukrainian crisis. Most significantly, the version of the Act passed by the Senate would extend the applicability of US sanctions involving Russia and Ukraine to non-US persons.

Current US economic sanctions involving Russia/Ukraine only apply to “US persons,” which includes: (i) entities organized under US laws and their non-US branches; (ii) individuals or entities located in the United States; and (iii) US citizens or permanent residents, wherever located or employed. This is distinct from US sanctions against Iran, for example, which apply to non-US subsidiaries of US companies and also can result in penalties against non-US companies who engage in certain prohibited activities involving Iran (such as transactions involving Iran’s energy sector), even if such activities have no connection to the United States.

Under the Act, the US Government would be authorized to impose penalties on non-US persons who enter into a significant investment in a special Russian crude oil project. A “special Russian crude oil project” is defined as a “project intended to extract crude oil from (a) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep, (b) Russian Arctic offshore locations, or (c) shale formations located in the Russian Federation,” while covered non-US persons would include “any individual or entity that is not a United States citizen, a permanent resident alien, or an entity organized under the laws of the United States or any jurisdiction within the United States.” “Significant investment” is not defined, but based on similar language in other US sanctions, likely would be determined by the US Government on a case-by-case basis.

Penalties imposed against non-US persons who make prohibited investments in Russian oil projects could include federal procurement prohibitions, blocking of property, denial of access to the US banking system, prohibitions on investment in new debt or equity, travel restrictions/visa bans, and other sanctions on principal officers. Under the Act, some of these penalties also could be imposed against specific Russian defense and energy companies – including Rosoboronexport and Gazprom, among others – regardless of their involvement in covered oil projects. In addition, non-US financial institutions that facilitate transactions targeted under the Act could be penalized, including with respect to their US correspondent or payable-through accounts.

The Act received bipartisan support in the Senate, and its passage there can be seen as an indication that many Senators are frustrated with the Obama Administration’s gradual approach to sanctions against those viewed as responsible for undermining democratic processes in Ukraine. The Act is designed in part to level the playing field by strongly discouraging non-US persons from entering into transactions that US persons may not engage in themselves.

The Act faces significant hurdles to becoming law in Congress’ current “lame duck” session. In order to become law, it also must be passed by the House of Representatives and signed by President Obama. If the Act is not passed by the end of the current Congressional session, it will likely be re-introduced in the new term. President Obama has continued to express caution, however, regarding unilateral imposition of additional sanctions involving Russia – such as those contemplated under the Act – unless the European Union also implements similar measures (which has largely been the case to date). As recently as 11 December 2014, President Obama said that the United States has “been successful with sanctions because we’ve been systematic about making sure there is not a lot of daylight between us and the Europeans...[s]ometimes it’s tempting to say we can go even further, but that won't do us any good if suddenly the Europeans peel off.”

Guidance on the Scope of Existing US Sanctions Related to Ukraine and Russia

On 11 December 2014, OFAC updated its Frequently Asked Questions Related to Sectoral Sanctions to provide additional clarity on the scope of Ukraine-related sanctions imposed against Russian entities under the Sectoral Sanctions Identifications List (“SSI List”), including with respect to acceptable payment terms in agreements involving SSI entities and the scope of activities covered under Directive 4 sanctions involving certain Russian oil exploration and production projects.

Guidance Regarding Acceptable Payment Terms in Agreements with SSI Entities

OFAC provided additional information regarding commercial interactions with entities listed on Directives 1, 2 or 3 of the SSI List. Depending on the specific Directive at issue, US persons are prohibited from dealing in any “new equity” and/or “new debt” of greater than either 30 or 90 days maturity of specified Russian entities. OFAC previously has advised that US persons are prohibited from entering into agreements with SSI entities that extend payment terms of more than 30 or 90 days (as relevant), as this would be considered prohibited debt for the benefit of an SSI entity. In its recent guidance, OFAC confirmed that:

  • For agreements related to sales of goods, US persons may extend payment terms of up to 30 or 90 days from the time when title or ownership of the goods transfers to the SSI entity; and
  • For agreements related to the provision of services, subscription arrangements and progress payments for long-term projects involving SSI entities, payment terms can include up to 30 or 90 days from when a final invoice is issued (or, in the case of an agreement involving multiple final invoices, from when each invoice is issued).

OFAC also stated that if a US person has a payment dispute with an SSI entity that might result in the US person not being paid in full within the permitted 30 or 90 day period, the US person should contact OFAC to determine whether a license or other authorization is required to collect payment from the SSI entity.

Scope of Oil Projects Covered Under Directive 4 of the SSI List

OFAC also provided some additional clarity on the scope of activities covered under Directive 4 of the SSI List, which prohibits US persons from providing goods, services (except for financial services), or technology to certain specified Russian entities in support of exploration or production for deepwater, Arctic offshore, or shale projects in Russia or Russian waters that have the potential to produce oil. In particular, OFAC confirmed that for purposes of Directive 4:

  • “Production” refers to the lifting of oil to the surface and the gathering, treating, field processing, and field storage of such oil;
  • These prohibitions do not apply to transportation, refining, or other dealings involving oil that has already been extracted from a deepwater, Arctic offshore, or shale project and transported out of a field production storage tank or otherwise off of a field production site;
  • “Arctic offshore projects” include only projects that have the potential to produce oil in areas that (1) involve drilling operations originating offshore, and (2) are located above the Arctic Circle – therefore, prohibitions do not apply to horizontal drilling operations originating onshore where such drilling operations extend under the seabed to areas above the Arctic Circle; and
  • “Shale projects” include only projects related to the exploration or production of oil from or in a shale formation, and do not include projects involving exploration or production through shale to locate crude oil in reservoirs.

As a result of this additional guidance, persons considering activities that involve Russian oil exploration or production projects should have greater clarity on the scope of projects covered by US sanctions.

 

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