Reed Smith Client Alerts

The overturning by a federal court of an OFAC penalty imposed after a large oil and gas company entered into contracts signed by a blocked person addresses important questions about U.S. sanctions regulations.

Authors: Leigh T. Hansson Brett Hillis Noah T. Jaffe Eli Rymland-Kelly Ray-Shio Ho

Introduction

One of the world’s largest publicly-traded oil and gas companies (OilCo) achieved a New Year’s Eve victory in a sanctions-related dispute to close out a decade marked by increased attention by the energy industry to regulatory concerns. 

On December 31, 2019, a federal court (the Court) in Texas vacated the $2 million penalty imposed by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) for violating the Ukraine-related Sanctions Regulations (the Regulations) after finding that the penalty violated the Fifth Amendment’s due process clause. Below we discuss OFAC’s enforcement action and the Court’s opinion on OilCo’s lawsuit.

Alleged violation 

At issue are eight contracts between OilCo and Rosneft, Russia’s largest oil company, to explore for oil in the Arctic region.1 The contracts were executed on May 23, 2014 by Igor Sechin on behalf of Rosneft in his role as the company’s CEO despite OFAC’s imposition of blocking sanctions on Sechin less than one month prior to the execution of the contracts. 

OFAC placed Sechin on its list of Specially Designated Nationals and Blocked Persons (a person on the list is referred to as an ‘SDN’) on April 28, 2014 pursuant to Executive Order 13661 (Blocking Property of Additional Persons Contributing to the Situation in Ukraine) (EO 13661), which President Obama issued on March 16, 2014 in response to continued aggression by the Russian Federation in Ukraine. On May 14, 2014, OFAC issued the Regulations pursuant to EO 13661 and another Ukraine-related order, Executive Order 13660.