Expansion of U.S. Sanctions Regarding Russia: Five Crucial Points

International Trade & Compliance Alert

On April 6, 2018, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") expanded U.S. sanctions relating to Russia by "blocking" seven prominent Russian businessmen, 12 companies, 17 senior Russian government officials and a state-owned Russian weapons trading company and its subsidiary Russian bank.

  1. The April 6 sanctions represent a major intensification of U.S. sanctions against Russia. These blocking sanctions cut off most business interaction between sanctioned persons and the United States by forbidding U.S. persons to engage in transactions in which sanctioned persons have a direct or indirect interest. The prohibitions cover not just the designated individuals and legal entities but also entities in which one or more blocked persons hold a 50 percent-or-greater ownership interest. OFAC had previously imposed this far-reaching blocking sanction thousands of times but seldom, as here, against major companies participating in international business.
  2. Implicitly acknowledging the broad impact of the April 6 sanctions, OFAC established accommodations to "minimize disruptions to U.S. persons, partners, and allies." OFAC issued General License 12 and General License 13 to establish a limited grace period to allow U.S. persons to engage in transactions with certain blocked persons that would otherwise be prohibited. The general licenses do not apply with respect to all persons designated as sanctioned on April 6 – only entities identified in the licenses.
    1. Until June 5, 2018, subject to conditions and exceptions, General License 12 authorizes U.S. persons to wind down and maintain operations, contracts and other agreements that were in effect prior to April 6, 2018, involving any of the specified 12 blocked entities or their 50 percent-or-more owned affiliates. It is notable that OFAC has authorized maintenance activity during the grace period – not just wind-down activity.

      The temporarily authorized activities include importation of goods, services and technology into the United States from the 12 blocked entities and their 50 percent-or-more owned affiliates.

      At the same time, the license requires that any payment in connection with authorized activities be placed in a blocked, interest-bearing U.S. account if it is to or for the direct or indirect benefit of a blocked person. United States persons must also submit a report to OFAC describing each transaction undertaken under General License 12 within 10 business days of June 5, 2018.
    2. Until May 7, 2018, subject to conditions and exceptions, General License 13 authorizes U.S. persons to divest and transfer debt, equity and other holdings in three blocked entities to non-U.S. persons and to facilitate such divestiture and transfer between non-U.S. persons. Unlike General License 12, this license does not appear to apply with respect to entities owned 50 percent or more by blocked entities that are identified as being covered by the license.

      As with General License 12, U.S. persons must submit a report to OFAC describing each transaction undertaken under General License 13 within 10 business days of May 7, 2018.
  3. Exceptions to the general licenses include the following:
    1. Exportation of goods from the United States involving blocked persons remains prohibited.
    2. With respect to divestitures and transfers of holdings involving the identified blocked persons, General License 12 does not authorize any divestiture or transfer of holdings in, to or for the benefit of blocked persons. General License 13 authorizations do not cover U.S. persons selling holdings to or purchasing or investing in holdings in blocked persons (or facilitating such transfers).
  4. OFAC also provided guidance on authorized actions with respect to (i) severing of ties between blocked entities and their U.S. person employees and (ii) operations of the U.S. entities in which blocked persons hold an ownership interest of less than 50 percent.

    First, OFAC clarified that, under General License 12, U.S. employees of the blocked entities are generally authorized to receive salary and other payments and benefits and to provide services to any of the identified blocked entities or their 50 percent-or-more owned affiliates until the grace period expires. United States persons who are employed by blocked entities other than those 12 blocked entities and their 50 percent-or-more owned affiliates covered by General License 12 do not benefit from this authorization and are generally prohibited from continuing their employment.

    Second, OFAC explained that while U.S. companies in which one or more blocked persons hold a less-than-50 percent aggregated interest are not blocked themselves, such U.S. companies must block all property and interests in property in which the blocked person has an interest. As a result, depending on the nature of the blocked property, the blocking sanctions may not affect the U.S. company's ability to continue operating. At the same time, any payments, dividends or disbursements of profits to the blocked person are prohibited and, if required, must be made into a blocked account at a U.S. bank.
  5. Depending on the circumstances, non-U.S. persons may want to evaluate whether their dealings with Russian and Russia-related blocked persons place them at risk of being sanctioned by the U.S. government. In particular, secondary sanctions measures of the August 2017 Countering America's Adversaries Through Sanctions Act mandate imposition of sanctions on non-U.S. persons engaged in specified "significant" transactions involving blocked persons.