Russia/Ukraine Sanctions

On December 31, 2019, the US District Court for the Northern District of Texas threw out a $2 million fine issued in 2017 by the Treasury Department’s Office of Foreign Assets Control (OFAC) under the Ukraine-Related Sanctions Regulations (URSR), 31 C.F.R. § 589.  The much-awaited opinion held that OFAC did not provide “fair notice” that the URSR prohibited dealing in contracts signed by a sanctioned individual on behalf of a non-sanctioned company, prior to the issuance of the penalty.

In reaching its decision, the Court concluded that the language of the URSR did not “’fairly address’ whether a US entity receives a service from [a Specially Designated National (SDN)] when that SDN performs a service enabling the US person to contract with a non-blocked entity.” Moreover, public statements made by relevant US government officials in 2014—some of which could be read to conflict—did not “create ascertainable certainty” of OFAC’s intention with respect to the URSR’s application. (The Court also held that contemporaneous reports by media outlets were not probative of OFAC’s regulatory intent.)


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On April 25, 2019, OFAC announced that Haverly Systems, Inc. (“Haverly”), a New Jersey software company, had agreed to pay $75,375 to settle apparent violations from 2014 related to Haverly’s collection of payments from JSC Rosneft (“Rosneft”), a Russian oil major on OFAC’s Sectoral Sanctions Identifications (“SSI”) list. The key issue was OFAC’s finding that Haverly accepted the payments from Rosneft outside of the then-applicable 90-day window and thereby dealt in the restricted “new debt” of Rosneft. This appears to be the first time OFAC has published a settlement involving violations of the SSI list Directives, and underscores the importance for companies subject to US jurisdiction of monitoring invoicing and payments with SSI list entities and their subsidiaries. Non-US companies may also face “secondary sanctions” risk under Section 228 of CAATSA, on which we have previously advised, for certain types of transactions with SSI list designees. See also our previous advisory on OFAC’s SSI list sanctions, along with our previous discussion of the CAATSA-mandated changes to those sanctions.

Pursuant to Directive 2 under Executive Order 13662 and § 589.201 of OFAC’s Ukraine-Related Sanctions Regulations, US persons are prohibited from transacting or otherwise dealing in “new debt” of longer than certain stated maturity periods of SSI list designees or any entities of which they own 50% or more. At the time of this apparent violation, the relevant maturity period was 90 days.[1] “Debt” is defined broadly to include any “extensions of credit.” OFAC has stated in FAQ guidance that open payment terms, such as the time permitted to pay commercial invoices, also fall within the scope of “new debt.”
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On February 13, 2019, the State Department provided a summary of Secretary of State Mike Pompeo’s recent phone call with Russian Foreign Minister Sergey Lavrov, which stated that “Secretary Pompeo reiterated the US determination to hold Russia accountable for its use of a chemical weapon in Salisbury, UK through sanctions as required by the CBW Act.”  The sanctions Secretary Pompeo referenced are the second round of sanctions slated to be imposed on Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act) for that country’s use of a nerve agent against a former Russian spy and his daughter in the United Kingdom.  The decision to impose the second round of CBW Act sanctions was announced in November of last year, but there has largely been radio silence from the administration over the past few months with respect to a timetable for imposition or the type of sanctions to be imposed.  While the summary of Secretary Pompeo’s call did not provide any additional detail on those questions, it is notable as it indicates that despite the months of delay the administration is still expressing an intent to move ahead with the sanctions.
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On September 20, 2018, the State Department announced sanctions on China’s Equipment Development Department (EDD) (formerly known as the General Armaments Department (GAD)) and its director, Li Shangfu, for engaging in significant transactions with Russia’s Rosoboronexport for the delivery to China of Su-35 combat aircraft in 2017 and equipment for S-400 surface-to-air missile systems in 2018. The EDD is part of the Chinese State Council’s Central Military Commission and plays a key role in the Chinese government’s international military cooperation efforts.

This marks the first time the US government has imposed sanctions under Section 231 of the Countering America’s Adversaries Through Sanctions Act (CAATSA). It is also the most significant sanctions action taken by the US government to date under the CAATSA Russia sanctions authorities.  Notably, the Trump Administration chose the most severe measure available under the “menu” of sanctions available under Section 231 of CAATSA – the addition of the targeted persons to the Specially Designated Nationals (“SDN”) list – along with some other restrictions. 
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On August 8, 2018, the US State Department announced that it would be imposing new sanctions on Russia pursuant to the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act).  The new sanctions are in response to a determination by the US government that the Russian government was behind the recent use of a nerve agent in the United Kingdom against two UK citizens.  The CBW Act requires the imposition of sanctions following a determination by the President (delegated to the Secretary of State) of the use of chemical or biological weapons in violation of international law or in lethal form against one’s own nationals.  Sanctions under the CBW Act, which are expected to take effect on August 22nd, include the termination of foreign assistance, suspension of sales of defense articles or services, denial of credit or other financial assistance by the US government, and a prohibition of exports of national security-sensitive goods and technology.  In a background briefing the State Department announced that it is making “a number of carve-outs” to these sanctions to allow the continuation of certain foreign assistance; exports for space flight activities, safety of commercial passenger aviation, and “purely commercial end users for civilian end uses”; and perhaps other activities.  A Federal Register notice that is to be published by the State Department on August 22 should explain the sanctions and carve-outs in more detail.  According to the State Department, this is the third occasion on which sanctions have been imposed under the CBW Act.  Sanctions under the Act were imposed against Syria in 2013 and against North Korea earlier this year.
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As the world turns… There have been several key developments recently in the Russia sanctions context:

  • Issuance of General License 15.  This general license, issued May 22, authorizes maintenance and winding down of pre-April 6 business with GAZ Group and its subsidiaries through October 23.  The authorization is similar in scope to General License 14, issued on April 23 with respect to Rusal.
  • Issuance of General License 13B.  This general license, issued May 31, added EN+ Group PLC to the list of companies (previously consisting of GAZ Group and Rusal) for which divestment of holdings is permitted, and extended the deadline for divestment from June 6 to August 5.  The general license also permits divestment of holdings in the subsidiaries of the covered companies under certain circumstances.
  • Issuance of General License 16.  This general license, issued just yesterday, authorizes certain activities to maintain or wind down pre-April 6 business with EN+ Group PLC,  EuroSibEnergo, and their subsidiaries through October 23.
  • Lapse of General License 12C.  This general license previously had authorized certain activities to maintain or wind down pre-April 6 business with several Russian companies (see the list below).  That authorization lapsed yesterday, meaning that business with the companies covered by the general license no longer is permitted.
  • President Putin signs Russian “counter-sanctions” into law.  Yesterday, President Putin signed into law a bill that gives him the power to sever relations with “unfriendly” countries and prohibit trade with such countries.  Notably, the bill as initially proposed would have banned a range of US goods and services, including certain US food, alcohol, medicine, and consulting services, but it was watered down significantly before reaching the president’s desk.  Consideration of a related bill, which would criminalize compliance with US sanctions on Russian soil, has been postponed for the time being.

So where do things stand?  Here’s a short summary:
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On May 14, a cross-party group of Russian lawmakers at the Russian State Duma, the lower house of the Federal Assembly of Russia, introduced an amendment to the Criminal Code of the Russian Federation to create a new offense that would criminalize compliance with US and EU sanctions on Russian soil.  On May 15, the State Duma unanimously approved the proposed amendment in the first reading. If enacted into law, these restrictions would create significant complications for companies seeking to comply with US and EU sanctions.

Part 1 of the amendment prohibits a person from taking any action (or omitting to take any action) for the purposes of implementing sanctions against Russia if such action or omission restricts or denies Russian citizens, corporate entities, or government institutions the performance of ordinary business operations and transactions.  The proposed amendment defines “ordinary business operations and transactions” in broad terms.  This includes performance of statutory and contractual obligations and pre-existing obligations, as well as entry into a “public contract”, and any other operations, which are not ordinarily refused due to the individual characteristics of the counterparty, including the opening of a bank account, making and accepting payments, performing transactions with securities, and accounting for such transactions.  A person guilty of the offense may be punished with, among others, imprisonment for up to four years in prison or a corrective labor colony, or a fine of up to 600,000 rubles (approximately $9,700 USD).  
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Yesterday, OFAC issued General License No. 15 under the Ukraine-Related Sanctions Regulations (31 C.F.R. Part 589), authorizing the maintenance or wind-down of pre-April 6 contracts with GAZ Group and its subsidiaries through October 23, 2018.  Previously, such activity with GAZ Group was permitted only through June 5, 2018 as per General License No. 12B (which has since been superseded, as described below).  OFAC also issued six new Frequently Asked Questions (FAQs).

Similar to the recent easing of restrictions against Rusal as set out in General License No. 14, the new general license extends the period of authorized maintenance/wind-down-related dealings with GAZ Group through October 23, permits exports from the United States to GAZ Group in support of such activity, and removes the requirement that payments to GAZ Group for maintenance/wind-down purposes be made into a blocked account in the United States.  The general license does not authorize divestiture of debt or equity (which is covered by General License No. 13A), dealings with other sanctioned entities (unless permitted by General License No. 12C, described below), or the unblocking of property except for use in maintenance/wind-down-related activity.

As with the general license for Rusal, while the authorization is directly applicable for US persons, it is also of significance to non-US persons. 
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On May 1, OFAC issued two amended general licenses under the Ukraine-Related Sanctions Regulations (URSR). General License No. 12B, superseding General License No. 12A, authorizes additional activities necessary to the maintenance and winding down of operations or existing contracts. General License No. 13A, superseding General License No. 13, authorizes certain additional transactions necessary to divest from certain blocked persons. OFAC also issued three new FAQs (583-585) and revised four others (570, 571, 578, and 582).

Under General License No. 12B, funds of identified blocked persons may be used for maintenance or wind-down activities, and US financial institutions are now permitted to process funds related to these maintenance/wind-down activities.

Under General License No. 13A, US persons now have until June 6, 2018 to divest from holdings covered by the license. This is one month longer than the previous May 7, 2018 deadline. US persons may also take actions to divest from entities meeting the following criteria: (a) they are owned (50 percent or more) by EN+ Group plc, GAZ Group, and United Company Rusal and (b) their holdings were issued by Irkutskenergo, GAZ Auto Plant, or Rusal Capital Designated Activity Company.
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On Monday, OFAC issued General License No. 14 under the Ukraine-Related Sanctions Regulations (URSR), authorizing the maintenance or winding down of business with United Company Rusal plc (Rusal) through October 23, 2018.  The imposition of sanctions on Rusal, which OFAC listed as a Specially Designated National (SDN) on April 6, had roiled the global aluminum market and sparked fears of a worldwide supply shock.  The Trump Administration appears to have taken these concerns on board in issuing the new general license, with Treasury Secretary Steven Mnuchin noting in a press release that the “the US government is not targeting the hardworking people who depend on RUSAL and its subsidiaries”.  OFAC also issued new Frequently Asked Questions (FAQs) providing interpretative guidance regarding the new general license.

As previously noted, OFAC designated Rusal as an SDN on April 6, cutting it off from all dealings with US persons and subjecting non-US persons to secondary sanctions to the extent they engage in “significant” transactions with the aluminum producer.  These restrictions also apply to all entities owned 50 percent or greater by Rusal.  To soften the blow of the designation, OFAC issued General License No. 12, authorizing the maintenance or winding down of business with Rusal through June 5.  However, the general license did not authorize US persons to export items to Rusal from the United States, and required any payments to Rusal to be made into a blocked account, restrictions that also carried significant implications for non-US persons.

General License No. 14 provides significantly more extensive relief, authorizing the maintenance or winding down of business with Rusal and its subsidiaries through October 23, and removing the restrictions on exports and payments. 
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