Expanded Russia Sanctions Underscore Need for Due Diligence


On Sept. 1, 2016, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) expanded U.S. sanctions relating to Russia by “blocking” an additional 37 individuals and entities and identifying a number of subsidiaries of “sectorally” sanctioned Russian entities as likewise being sectorally sanctioned. OFAC announced that these actions are to address sanctions evasion, clarify application of sanctions to affiliates of sanctioned entities and advance diplomatic efforts with Russia relating to Ukraine. OFAC also published a general license to authorize withdrawal of investor interests in newly blocked Russian construction company PJSC Mostotrest.

OFAC’s sanctions actions reinforce that the U.S. government continues to treat economic sanctions as an important tool in addressing considerations relating to Russia and prioritizes effective administration and enforcement of Russia-related sanctions. OFAC’s extension of far-reaching blocking sanctions to 37 persons shows that the U.S. government remains focused on preventing sanctions evasion and generally stopping business relating to blocked persons as well as strengthening the effects of the Crimea embargo. And OFAC’s identification of subsidiaries of entities that are subject to more limited sectoral sanctions shows that OFAC is serious about en-forcing the so-called “50 percent rule” — application of sanctions to entities that are 50 percent-or-more owned, directly or indirectly, by sanctioned persons. These actions also confirm that non-U.S. persons can be exposed to being sanctioned if they engage in support for sanctioned persons or what the U.S. government considers to be sanctions evasion.

As a result, OFAC’s sanctions actions highlight that persons engaged in Russia-related commercial dealings should assiduously administer effective due diligence procedures and other related safeguards in connection with their dealings relating to Russia.

Background on OFAC’s Russia Sanctions

OFAC administers three types of economic sanctions relating to Russia: (1) broad blocking measures against designated individuals and entities and 50 percent-or-more owned affiliates; (2) sectoral sanctions targeting designated entities in Russia’s defense, energy and finance sectors and 50 percent-or-more owned affiliates; and (3) a broad embargo of Crimea.

• Blocking Measures: The U.S. government has designated as being blocked a large number of Russian and Ukrainian individuals and entities under three March 2014 executive orders. By virtue of their being blocked, OFAC has added these entities to its Specially Designated Nationals and Blocked Persons List (the SDN List). Blocking measures generally forbid U.S. persons to engage, directly or indirectly, in transactions and dealings involving persons on the SDN List and entities that are, directly or indirectly, 50 percent-or-more owned by one or more blocked persons. United States persons include U.S. citizens and permanent resident aliens, entities organized under the laws of the Unit-ed States or any jurisdiction within the United States (including non-U.S. branches) and persons in the United States.

• Sectoral Sanctions Measures: Sectoral sanctions target entities in Russia’s defense, energy and finance sectors, generally prohibiting U.S. persons to provide financing for or otherwise deal in certain debt or, with respect to the finance sector, equity issued on or after the sanctions effective date of persons designated for inclusion on OFAC’s Sectoral Sanctions Identifications List (the SSI List) or their, directly or indirectly, 50 percent-or-more owned affiliates. Sectoral sanctions also forbid U.S. persons, in some circumstances, to provide goods, services or technology in support of certain types of Russian crude oil production projects involving persons designated for inclusion on the SSI List or their, directly or indirectly, 50 percent-or-more owned affiliates. These prohibitions also en-compass any sanctions evasion attempts. For example, in 2014, OFAC added Gazprom, Gazprombank and Bank of Moscow, among others, to the SSI List.

In addition, the U.S. Commerce Department’s Bureau of Industry and Security has added designated companies to its “Entity List” under the Export Administration Regulations, essentially extending energy sector sanctions prohibitions to non-U.S. persons to the ex-tent that they would supply certain goods, software or technology that are of U.S. origin or that contain a specified level of U.S.-origin content.

• Crimea Embargo: The Crimea embargo generally prohibits most investment in Crimea and trade in goods, services and technology with or relatinxg to Crimea. Related blocking measures may extend to persons determined to operate in Crimea; to lead entities operating in Crimea; to be owned or controlled by or be acting on behalf of persons blocked in relation to Crimea; or to have materially supported persons blocked in relation to Crimea.

Sept. 1 OFAC Actions

• Evasion-Related and Other Blocking Actions: OFAC added to the SDN List 17 individuals and two entities, including Bank Rossiya’s asset management company, reportedly in response to sanctions evasion activity.

• Sectoral Sanctions Measures: OFAC identified a number of 50 percent-or-more owned subsidiaries of Gazprom, Gazprombank and Bank of Moscow as being subject to sectoral sanctions. United States persons have always been required to treat as being sanctioned all such 50 percent-or-more owned subsidiaries of these entities since OFAC sanctioned them in 2014. Their identification now is to reinforce and make certain application of sanctions that already applied. These identifications underscore OFAC’s commitment to treating as being sanctioned 50 percent-or-more owned affiliates of sectoral sanctions targets as it continues being concerned with the use of corporate structures and shell companies to circumvent enforcement of U.S. sanctions measures.

• Crimea Embargo Blocking Actions: OFAC added to the SDN List 18 construction, transportation and defense entities acting in and outside of Crimea, including seven entities involved in the construction of the Kerch Bridge between the Crimean peninsula and Russia, five defense firms operating in Crimea and six entities operating in the Crimean maritime sector and on routes connecting Crimea and Russia. The new designees include a major Russian construction company, Mostotrest, and a Russian shipping and logistics group, Sovfracht-Sovmortrans Group.

OFAC also issued a general license to establish a grace period to enable U.S. persons to disengage from Mostotrest. The license authorizes certain transactions ordinarily incident and necessary to divest or transfer to a non-U.S. person holdings in Mostotrest, whose minority owners have been reported to include, for example, a U.S. investment group.

This is the most significant action by the U.S. government thus far to block Russian entities in connection with their dealings related to Crimea. This creates uncertainty for inter-national actors with Russia-related commercial dealings as it highlights the risk that OFAC may block any other Russian entity with operations in Crimea and thereby cut it off from the U.S. market, whether international parties are reliant on business relation-ships with such Russian entities or not. This development also shows the importance of having adequate due diligence programs and other safeguards in place.

Optimizing Transaction Due Diligence and Other Safeguards

OFAC’s message is that Russia sanctions are not going away anytime soon, and the U.S. government takes them very seriously. Companies are well advised to reassess whether their approaches to transactional due diligence and other safeguards, contractual and otherwise, are adequate to manage sanctions risk associated with Russia-related business.

Non-U.S. as well as U.S. companies should hear this message. Although they might be outside the scope of U.S. sanctions prohibitions, non-U.S. companies are well served by arrangements to avoid activity that will place them at risk of being sanctioned.

As anyone who has administered these types of protections knows, due diligence can be particularly challenging in Russia due to uncertainties about entity ownership. And there are limits on the time and resources that companies can devote to transaction-specific due diligence. Companies should establish sensible, risk-appropriate procedures that, for example, are graduated depending on transaction value and other factors.

Harry Clark and Evgeniya Shakina are with the international trade and compliance practice of international law firm Orrick, Herrington & Sutcliffe.

Reprinted with permission from the September 7, 2016 edition of law.com © 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].