These new designations follow the Department of Treasury’s issuance of the CAATSA section 241 report (January 2018) and come just 11 days after the Trump Administration expelled 60 Russian diplomats for the nerve-agent poisoning of a former Russian spy in the UK. Treasury Secretary Steven Mnuchin directly linked the sanctions to Russia’s actions in Crimea and eastern Ukraine, support for the Syrian government in its civil war, and cyber actions against the United States and other democracies.
The sanctions include designations against key individuals operating in Russia’s energy sector, along with 12 prominent energy companies owned or controlled by them. The list of new designations is not exhaustive; rather, the new specially designated nationals (SDNs) also include entities that are owned 50% or more by a designated person under OFAC’s 50% Rule. To the extent the designated persons have 50% or greater ownership in a company, that company would also be “blocked,” and U.S. persons may not engage with the entity.
Importantly, these new sanctions also have implications for non-U.S. persons and entities. While non-U.S. persons generally are not subject to U.S. sanctions, they may now face secondary sanctions under CAATSA for engaging in “significant” transactions with designated Russian parties or entities blocked as a result of OFAC’s 50% Rule. Because OFAC’s designations now include a broader scope of Russian oligarchs, officials, and entities, non-U.S. companies and financial institutions will need to carefully consider the risk of secondary sanctions when dealing with Russian parties in the future. In addition, OFAC’s recent action means that entities operating in key sectors of the Russian economy, such as energy, finance, defense, or oil, face a heightened risk of becoming designated in the future.
Issuance of General Licenses Nos. 12 and 13
OFAC also issued two general licenses to allow for the winding down of dealings with the newly designated SDNs. General License No. 12 permits U.S. persons to wind down dealings with specified SDNs (and entities where SDNs have a 50% or greater interest) until June 5, 2018 where the contract was in effect prior to April 6, 2018. This license permits all transactions ordinarily incident and necessary to the maintenance or wind down of dealings with SDNs – provided that outstanding payments are deposited into a blocked account at a U.S. financial institution. General License No. 13 permits U.S. persons to divest or transfer debt, equity, or other holdings in specific SDNs until May 7, 2018. General License No. 13 does not specifically state that divestiture activities with entities owned 50% or more by the SDNs is permitted. U.S. persons must comply with the conditions of both general licenses, which require the filing of a comprehensive report with OFAC.
The announcement of the new designations was accompanied by one updated Frequently Asked Question (FAQ) related to Countering America’s Adversaries Through Sanctions Act and eight new Frequently Asked Questions related to the new designations.
In FAQ 574, OFAC addresses whether foreign persons will be subject to sanctions for doing business with SDNs or individuals/entities blocked pursuant to OFAC’s 50% rule. Section 228 of CAATSA imposes mandatory sanctions on foreign persons that the U.S. Department of Treasury determines to knowingly facilitate significant transactions, including deceptive or structured transactions, for or on behalf of any person subject to U.S. sanctions with respect to the Russian Federation, or their child, spouse, parent, or sibling. Under this provision, non-U.S. persons may face mandatory sanctions where they are found to facilitate “significant” transactions, particularly with the most recently designated Russian oligarchs, officials, and entities. OFAC has stated that it will consider a transaction to be “significant” based on a review of the totality of the facts and circumstances OFAC considers seven broad factors in making this assessment, including whether the transaction involved deceptive practices and management’s awareness of the conduct at issue. See OFAC FAQ #542. However, OFAC also makes clear that a transaction is not “significant” if U.S. persons would not require specific OFAC licenses to execute it. Therefore, activity permitted by General Licenses Nos. 12 and 13 that occurs within the allotted time period would not be considered “significant” for purposes of secondary sanctions.
How Reed Smith can help
Reed Smith’s Sanctions Group has experience representing companies before OFAC. A global firm, Reed Smith is particularly well positioned to provide guidance on U.S. sanctions and to represent your company before OFAC and other federal agencies implementing U.S. sanctions, such as the U.S. Department of Commerce and the U.S. Department of State.
Client Alert 2018-089