Worldwide: Implications Of US Sanctions On Russian Oligarchs And Their Businesses

New sanctions against Russia were imposed by the Trump Administration on April 6, 2018, designating 7 Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, state-owned Russian weapons trading company Rosoboroneksport, and its subsidiary Russian Financial Corporation Bank, as Specially Designated Nationals (SDNs). 1 These sanctions reflect an escalation of Russia sanctions by the Trump Administration, and create serious compliance challenges for both US and non-US persons doing business with Russia. The designated Russian oligarchs and their companies have extensive business relationships around the world, and their counterparties will need to assess quickly the sanctions risks of continued transactions with these designated parties.

The US Department of the Treasury's Office of Foreign Assets Control (OFAC) designated these persons and entities pursuant to the Ukraine/Russia-related authorities under Executive Order (EO) 13661 and EO 13662, which were codified by the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA), and pursuant to the Syria-related authorities under EO 13582.

These sanctions follow the Treasury's issuance in late January 2018 of the Section 241 of CAATSA report—colloquially known as the "Oligarch List." The Treasury delivered to Congress both a classified and unclassified version of that report, in which it listed senior Russian political figures and oligarchs, as determined by their closeness to the Russian regime and their net worth. 2 OFAC's guidance states that the inclusion of individuals or entities in that report "does not and in no way should be interpreted to impose sanctions on those individuals or entities" or "indicate that the U.S. Government has information about the individual's involvement in malign activities." 3 The Trump Administration, however, received significant criticism for not sanctioning any persons named in the report. The April 6 action imposes sanctions on a number of individuals named in the Section 241 report, and CAATSA authorizes the Administration to continue sanctioning Russian oligarchs and government officials.

The Trump Administration also imposed sanctions last month for Russia's 2016 election interference and cyber-attacks. 4 In the press release, the Administration announced its intent to impose additional sanctions on Russia for its ongoing efforts to destabilize Ukraine, occupy Crimea, and meddle in elections, as well as for its corruption and human rights abuses. 5 The April 6 sanctions exemplify the Administration's stated intent to respond to destabilizing activities emanating from Russia. Treasury Secretary Steven T. Mnuchin described the Administration's rationale for sanctioning the Russian oligarchs and businesses under their control:

The Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies, and malicious cyber activities. Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government's destabilizing activities. 6


Implications of the April 6 Sanctions

The April 6 sanctions will impact both US and non-US persons that do business with the sanctioned persons or their businesses. OFAC's sanctions prohibit US persons from engaging in most interactions with SDNs and impose secondary sanctions on non-US persons who engage in certain specific transactions with sanctioned persons or in sanctioned activities, even when there is no US jurisdictional nexus (e.g., no involvement of US persons, US origin items, or US dollar payments).

Primary Sanctions

US persons, including US financial institutions, are prohibited generally from engaging in any transactions with SDNs and are required to block (i.e., freeze) any property or interests in property belonging to SDNs. Under OFAC's 50 percent ownership rule, entities that are owned 50 percent or more, directly or indirectly, by one or more SDNs in the aggregate are also subject to OFAC's sanctions, even if OFAC does not publicly list those entities as SDNs. US persons, therefore, need to conduct due diligence into their foreign counterparties to ensure that they are not owned 50 percent or more by sanctioned persons.

To minimize the immediate disruptions of these sanctions, OFAC issued two time-limited general licenses, authorizing certain activities to maintenance or wind down operations or existing contracts and certain transactions to divest or transfer debt, equity, or other holdings:

  • General License 12 authorizes all transactions and activities ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements, including the importation of goods, services, or technology into the United States, that were in effect prior to April 6, 2018, and that involve designated persons listed in General License 12, or entities owned 50 percent or more by those designated persons. This license expires on June 5, 2018. 7
  • General License 13 authorizes all transactions and activities ordinarily incident and necessary to divest or transfer debt, equity, or other holdings in designated persons listed in General License 13 to a non-US person, or to facilitate the transfer of debt, equity, or other holdings in those designated persons by a non-US person to another non-US person. This license expires on May 7, 2018. 8

OFAC also published eight FAQs that provide additional guidance about these sanctions and the general licenses, including that US persons may finish importing goods from the licensed entities, but exports of goods to those entities is not authorized. 9

The April 6 sanctions also create compliance risks for US persons who transact with non-sanctioned companies that have sanctioned officers or personnel. OFAC's policy is that US persons may not deal with any sanctioned persons, or receive, deal in, or benefit from any service a sanctioned person might provide, including when acting on behalf of a non-sanctioned company. 10 Thus, transactions that involve the signature or approval by an SDN could be considered a service sufficient to create a blockable property interest in a specific transaction. US persons should consider establishing additional safeguards for interactions with non-sanctioned companies that have sanctioned officers or personnel, such as limiting official business with the sanctioned persons, requiring representations and covenants designed to prevent prohibited transactions with sanctioned officers or personnel, and screening the names of the company, its officers and directors, and the persons signing the documents against OFAC's sanctions lists.

Secondary Sanctions

The April 6 sanctions also create compliance challenges for non-US persons and foreign financial institutions that transact with the sanctioned Russian persons or businesses they own or control. CAATSA requires the President to impose secondary sanctions on foreign persons and financial institutions that engage in certain transactions with sanctioned Russian parties or in sanctioned Russian activities.

Section 228 of CAATSA requires the imposition of sanctions on a non-US person who knowingly (i) facilitates a significant transaction on behalf of any person subject to OFAC's Russia sanctions or on behalf of their children, spouses, parents, or siblings. Persons subject to OFAC's Russia sanctions include SDNs and persons designated under the Russia sectoral sanctions, as well as entities owned 50 percent or more by those sanctioned persons; or (ii) materially violates—or attempts, conspires, or causes a violation of—any provision contained in the Russia/Ukraine sanctions. OFAC's guidance on Section 228 defines "facilitation" extremely broadly to mean "providing assistance for a transaction from which the person in question derives a particular benefit of any kind," and states that OFAC will consider the totality of the facts and circumstances when determining whether transactions are "significant." 11 Non-US persons who violate Section 228 risk being placed on OFAC's SDN List and becoming subject to blocking sanctions and asset freezes.

A foreign financial institution also faces severe sanctions under Section 226 of CAATSA if it knowingly engages in a "significant transaction" involving certain Russian defense-related activities or special Russian crude oil projects, or if it knowingly facilitates a "significant financial transaction" on behalf of any Russian person on OFAC's SDN List. Sanctions include loss of, or strict conditions on the maintaining of, a US correspondent account or payable-through account access. According to OFAC's updated FAQ published on April 6, OFAC will interpret the term "financial transaction" broadly to encompass any transfer of value involving a financial institution, and will consider the transaction "significant" based on the totality of the circumstances.12 OFAC also will interpret "facilitated" broadly to include providing assistance through the provision of currency, financial instruments, securities, or any other transmission of value; the provision of services of any kind; or the provision of software, technology, or goods of any kind. 13

OFAC's guidance provides that non-US persons and foreign financial institutions that are currently facilitating significant transactions with the newly sanctioned Russian persons may rely on the authorizations provided in General Licenses 12 and 13 to unwind those transactions and avoid sanctions. 14

OFAC's sweeping interpretations of "significant transactions" and "facilitation" have the potential to extend CAATSA's Section 228 and 226 liability to a wide range of activity. 15 Non-US persons and foreign financial institution who transact with Russian entities and persons should evaluate those activities to ensure that they are outside the penumbra of sanctionable activities.

Footnotes

1 Full list of designated entities.

2 The unclassified Section 241 report.

3 OFAC FAQ 552.

4 For additional information on those sanctions, please see our previous Advisory. For an overview of CAATSA, please see this Advisory.

5 Treasury Sanctions Russian Cyber Actors for Interference with the 2016 U.S. Elections and Malicious Cyber-Attacks, U.S. Dept. of the Treasury Press Release, Mar. 15, 2018.

6 Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity, U.S. Dept. of the Treasury Press Release, Apr. 6, 2018.

7 General License 12.

8 General License 13.

9 OFAC April 6 Sanctions FAQs.

10 See Enforcement Information, OFAC, July 20, 2017.

11 OFAC FAQ 545.

12 OFAC FAQ 542.

13 Id.

14 OFAC FAQ 574.

15 In addition to Sections 226 and 228 of CAATSA, the Act includes other secondary sanctions regarding certain Russia-related activities. For more information on CAATSA, please see our previous Advisory.

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