On October 31, 2017, the Office of Foreign Assets Control (OFAC) took a number of actions to implement the Countering Russian Influence in Europe and Eurasia Act (CRIEEA) (also known as the Countering America’s Adversaries Through Sanctions Act (CAATSA), a larger sanctions statute of which CRIEEA was a part).  As part of this, OFAC amended Directive 4 under Executive Order 13662—related to prohibitions on supplying Russian oil projects—and issued updated Frequently Asked Question (FAQ) guidance on restrictions related to foreign financial institutions, facilitating transactions with sanctioned persons, sanctions evasion, and investments in Russian state-owned assets.  OFAC also provided guidance regarding CRIEEA’s authorization of sanctions targeting the railway and metal and mining sectors.

Expansion of Prohibitions on Supplying Russian Oil Projects

Directive 4 as amended prohibits U.S. persons from directly or indirectly providing, exporting, or re-exporting goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that meet all three of the following criteria: (1) the project was initiated on or after January 29, 2018; (2) the project has the potential to produce oil in any location; and (3) Russian individuals or entities designated under Directive 4—individually or in the aggregate—either have a 33 percent or greater ownership interest in the project or own a majority of the voting interests in the project.  Directive 4 does not apply to gas-only projects.   

In its FAQ guidance accompanying the amended Directive, OFAC provided definitions for “deepwater projects,” “shale projects,” “Arctic offshore projects,” and the term “production.”  It also provides examples of activities prohibited under Directive 4, which include drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies.

OFAC also clarified that a project is “initiated on or after January 29, 2018”—such that it could fall under the purview of Directive 4—“when a government or any of its political subdivisions, agencies, or instrumentalities (including any entity owned or controlled directly or indirectly by any of the foregoing) formally grants exploration, development, or production rights to any party.”  This implies that existing projects and new developments of existing exploration prospects likely will not be affected by the amended Directive.

OFAC also has provided guidance regarding indirect ownership interests in projects held by sanctioned persons, and when such indirect ownership will subject the project to the restrictions of Directive 4.  Specifically, OFAC provided the following three examples:

Example 1: An SSI entity listed under Directive 4 (“Entity A”) has a 33 percent ownership interest in a deepwater, Arctic offshore, or shale project initiated on or after January 29, 2018 that has the potential to produce oil (“Project X”).  The prohibition of subsection 2 of Directive 4 applies to Project X.  Consequently, U.S. persons are prohibited from providing goods, services (except for financial services), or technology in support of exploration or production for Project X.

Example 2: Instead of holding a direct interest in Project X, Entity A now owns 50 percent of Entity B, and Entity B holds a 33 percent interest in Project X.  As a result of OFAC’s 50 percent rule, Entity B is subject to Directive 4.  Because Entity B is subject to Directive 4 and owns a 33 percent or greater interest in Project X, the prohibition of subsection 2 of Directive 4 applies to Project X.  Consequently, U.S. persons are prohibited from providing goods, services (except for financial services), or technology in support of exploration or production for Project X.

Example 3: Entity A now owns only 33 percent of Entity B, and Entity A is the only SSI entity that owns any interest in Entity B.  Entity B holds a 100 percent ownership interest in Project X.  Entity A owns less than 50 percent of Entity B, and so, in accordance with the 50 percent rule, Entity B is not subject to Directive 4.  The prohibition of subsection 2 of Directive 4 would therefore not apply to Project X, even though Entity B owns an interest in the project that is 33 percent or greater.

Foreign Financial Institutions

Under Section 226 of CRIEEA, which amends Section 5 of the Ukraine Freedom Support Act of 2014, the Department of Treasury must impose restrictions on US correspondent and payable-through accounts (which could include terminating or suspending such accounts) for foreign financial institutions (FFIs) that:

  • (1) “knowingly” engage in “significant transactions” involving certain defense- and energy-related activities, or
  • (2) “knowingly facilitate significant financial transactions” on behalf of any Russian person designated on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List pursuant to any executive order addressing the crisis in Ukraine.

According to OFAC FAQ guidance, FFIs will not be subject to sanctions under this amended section solely on the basis of knowingly facilitating significant financial transactions on behalf of persons listed on OFAC’s Sectoral Sanctions Identification (SSI) List.

In its updated FAQ guidance, OFAC defines the terms “significant transaction,” “significant’ financial transaction,” and “facilitated”—all of which it interprets broadly.

In addition, the guidance clarifies that the Department of Treasury will notify a financial institution that it has imposed prohibitions on correspondent accounts or payable-through accounts for the foreign financial institution by adding its name to a yet-to-be created list similar to the Part 561 List in the Iran sanctions context.  The Department of Treasury will establish and publicize the list before adding any FFIs to it.

Facilitating Transactions with SDNs / Sanctions Evasion

Section 228 of CRIEEA (which adds a new Section 10 to the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (SSIDES)) requires the president to impose blocking sanctions (i.e., designation on OFAC’s SDN List) on a “foreign person”—a term that includes not only FFIs, but all non-U.S. persons, including dual U.S. nationals—that the president determines “knowingly” does either of the following:

  • “Materially violates, attempts to violate, conspires to violate, or causes a violation of” any Russia sanctions executive order or statute; or
  • “Facilitates a significant transaction or transactions, including deceptive or structured transactions, for or on behalf of” any person “subject to sanctions imposed by the United States with respect to the Russian Federation” or their immediate family members.

OFAC interprets the term “materially violates” to refer to egregious violations.

The latter restriction, targeted on facilitating significant transactions on behalf of Russian sanctioned persons, is quite broad, as noted in our previous advisory.  The restriction covers not only “deceptive” and “structured” transactions (with structured transactions being a type of deceptive transaction), but all “significant” transactions with persons “subject to sanctions imposed by the United States with respect to the Russian Federation.”  OFAC’s updated FAQ guidance clarifies that that OFAC will interpret this term to mean persons subject to sanctions under SSIDES, under the Ukraine Freedom Support Act (UFSA), or under the several Ukraine-related executive orders in place.  This includes persons listed on the SDN List, the SSI List, and persons subject to sanctions pursuant to OFAC’s 50 percent rule.

However, OFAC’s interpretation of the term “significant transaction” may blunt the impact of this provision somewhat.  Specifically, OFAC indicates that a transaction is not “significant” if U.S. persons “would not require specific licenses from OFAC to participate in it.”  Furthermore, transactions only involving persons on the SSI List will be considered potentially significant only where they involve “deceptive practices (i.e., attempts to obscure or conceal the actual parties or true nature of the transaction(s), or to evade sanctions).”

OFAC’s guidance also defines the following relevant terms: “foreign person,” “knowingly,” “materially violate,” “facilitates . . . for or on behalf of,” and “deceptive or structured transaction.” The interpretation of the term “facilitation . . . or on behalf of” is particularly notable.  OFAC interprets the term to mean providing assistance for a transaction from which a sanctioned person “derives a particular benefit of any kind[,]” including “the provision or transmission of currency, financial instruments, securities, or any other value; purchasing, selling, transporting, swapping, brokering, financing, approving, or guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.”  It distinguishes this from “a generalized benefit conferred upon undifferentiated persons in aggregate,” which is not covered by this language.

Investments in Russian State-Owned Assets:

Section 233 of CRIEEA requires the president to impose five or more menu-based sanctions on “a person,” who, “with actual knowledge…makes an investment of $10,000,000 or more (or any combination of investments of not less than $1,000,000 each, which in the aggregate equals or exceeds $10,000,000 in any 12-month period), or facilitates such an investment, if the investment directly and significantly contributes to [Russia’s ability to] privatize state-owned assets in a manner that unjustly benefits—(1) officials of the Government of the Russian Federation; or (2) close associates or family members of those officials.”

In its updated FAQ guidance, OFAC defined the terms “investment,” “facilitates,” “unjustly benefits,” and “close associates or family members,” which it has interpreted broadly.  Such broad interpretations include those for “investment,” defined as a “commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise,” and “unjustly benefits,” defined as “activities such as public corruption that result in any direct or indirect advantage, value, or gain, whether the benefit is tangible or intangible, by officials of the Government of the Russian Federation, or their close associates or family members.”

Railway/Metals and Mining Sectors

Section 223(a) of CRIEEA provides that the “Secretary of the Treasury may determine that a person meets one or more of the criteria in section 1(a) of Executive Order No. 13662 if that person is a state-owned entity operating in the railway or metals and mining sector of the economy of the Russian Federation.”

OFAC has provided the following guidance regarding this section:

Section 223(a) of CAATSA does not require the imposition of sanctions. While sanctions may be imposed on potential targets in any sector of the economy of the Russian Federation in the future, maintaining unity with partners on sanctions implemented with respect to the Russian Federation is important to the U.S. government. The point of the sectoral sanctions is to impose costs on the Russian Federation for its aggression in Ukraine. The United States will continue to work closely with our allies to address unintended consequences arising as a result of such sanctions.

(emphasis added)

The reference to “unintended consequences” may be a first for an OFAC FAQ.  While the reference is not clear, OFAC may be referring to an unintended chilling effect on business brought about by existing sectoral sanctions, or unintended confusion resulting from Section 223(a) of CRIEEA/CAATSA.

In any event, as OFAC notes, Section 223(a) does not impose new sanctions, but rather authorizes the imposition of “sectoral” sanctions targeting the railway and metals and mining sectors—an authorization already included within the scope of Executive Order 13662, issued in March 2014.  Specifically, that executive order provides that the Secretary of the Treasury may designate any person determined “to operate in such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, such as financial services, energy, metals and mining, engineering, and defense and related materiel.”  Section 223(a) of CRIEEA/CAATSA essentially reiterates that the Treasury Department may target any sector of the Russian economy it sees fit, including the railway and metals and mining sectors.  The reference to the railway sector, which is not mentioned in Executive Order 13662, is especially noteworthy.

Conclusion

Both U.S. and non-U.S. persons should take note of the newly implemented CRIEEA sanctions.  For U.S. persons engaged in exploration or production on frontier energy projects, newly amended Directive 4 may present significant compliance challenges when it becomes effective in January, and appropriate due diligence will be warranted.  For non-U.S. persons, the restrictions on facilitating transactions with Russian SDNs in particular will be of concern, and due diligence in this context is warranted as well.