On April 6, 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) designated several persons and entities as Specially Designated Nationals (“SDN”). These designations – which target certain Russian government officials, Russian oligarchs, and companies they own and control – were made pursuant to pre-existing Russia-related sanctions.
U.S. persons are prohibited from all dealings or transactions with SDNs and are required to block1 SDNs’ property or interest in property that U.S. persons come to possess. Under OFAC’s 50 percent rule, these prohibitions also apply to entities in which SDNs own at least a 50 percent interest (either individually or in the aggregate), even if such entities do not themselves appear on the SDN List. It is imperative, therefore, that proper due diligence is conducted in advance of any dealing to ensure that all relevant parties are not on the SDN List and are not otherwise majority-owned by SDNs.
The new designations also create potential exposure for non-U.S. persons under certain circumstances. The Countering America’s Adversaries Through Sanctions Act (CAATSA) requires that mandatory sanctions be imposed on a non-U.S. person that facilitates a “significant” transaction for or on behalf of any of the newly designated SDNs or a newly designated SDN’s immediate family member. In determining whether a transaction is “significant,” OFAC will consider: (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis.
General Licenses
Also on April 6, 2018, OFAC released two general licenses (General License 12 and General License 13) aimed at providing a wind-down period for certain operations involving the newly designated SDNs.
General License 12 permits U.S. persons to engage in transactions through 12:01am EDT on June 5, 2018, that are necessary to wind down pre-existing operations, contracts, or other agreements, including the importation of goods, services, or technology into the U.S. with 12 of the 15 newly designated entities, as well as entities in which one or more of the 12 listed entities own, directly or indirectly, a 50 percent or greater interest (“blocked entities”).2 Notably, General License 12 provides that any wind-down payment to or for the direct or indirect benefit of these blocked entity must be made into a blocked, interest-bearing account located in the United States. Hence, payments to a blocked entity in connection with wind-down activities are not permitted.
General License 13 permits U.S. persons to engage in transactions through 12:01 am EDT on May 7, 2018, that are necessary to divest or transfer debt, equity, or other holdings of three of the newly designated entities (EN+ Group PLC, GAZ Group, and United Company RUSAL PLC) to a non-U.S. person, or to facilitate the transfers of debt, equity, or other holdings in those three entities by a non-U.S. person to another non-U.S. person. General License 13 does not permit the sale of debt, equity, or other holdings to these blocked entities.
U.S. persons participating in transactions authorized under either General License 12 or 13 must file a detailed report of each transaction including certain required information with OFAC within 10 business days after the expiration of the general license (i.e. June 19, 2018 for General License 12 and May 21, 2018 for General License 13).
OFAC released Frequently Asked Questions to provide additional guidance with respect to the general licenses. OFAC advises that U.S. persons employed by or on the board of newly designated SDNs may not continue their employment or board membership and must take steps to sever ties with the blocked entities. In addition, U.S. persons who have ordered goods from the newly blocked entities before April 6, 2018, may still accept the goods in accordance with the requirements and time limitations of General License 12, though any payments for such goods must be deposited in a blocked, interest-bearing account located in the United States.
If you have any questions or concerns about U.S. sanctions against Russia, please contact one of the attorneys listed below.
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1 OFAC explains that when property is to be blocked, “(t)itle to the blocked property remains with the target, but the exercise of powers and privileges normally associated with ownership is prohibited without authorization from OFAC. Blocking immediately imposes an across-the-board prohibition against transfers or dealings of any kind with regard to the property.”
2 General License 12 does not apply to Gallistica Diamante, Rosoboroneksport OAO, and Russian Financial Corporation, as well as the newly designated individuals. As such, General License 12 does not permit wind-down activities with these entities, individuals, or entities owned 50 percent or more by them.
