Trade Compliance Flash: OFAC Sanctions Individuals Named in CAATSA Section 241 Report and Related Entities; Issues Wind Down Licenses

International Alert
04.09.2018

On Friday, April 6, 2018, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) imposed another tranche of Russia-related sanctions by adding several Russian government officials and high-net-worth individuals, a state-owned arms dealer, and associated entities to its List of Specially Designated Nationals and Blocked Persons (SDN List). U.S. persons now are prohibited from dealing with the designated individuals and entities and any entities owned by them. In recognition of the potential impact of the new designations on U.S. business interests, OFAC also issued two "wind down" and divestment general licenses allowing U.S. persons a limited amount of time to extricate themselves from business relationships now prohibited as a result of the new sanctions.

Notably, most of the newly designated individuals had previously been listed in a report on Russian senior government officials and "oligarchs" (the Section 241 report) prepared by the Department of the Treasury in January 2018 pursuant to Section 241 of the Countering America's Adversaries Through Sanctions Act (CAATSA). Sometimes referred to as the "oligarch list" by the media, the report itself did not impose sanctions.

However, as signaled by OFAC's actions on March 15 related to Russian cyber-attacks, the April 6 designations make clear that while the Section 241 report may not be a sanctions list, as administration officials have stated repeatedly, those listed are not immune from sanctions imposed under other authorities if they engage, or have engaged, in sanctionable activity.

The new designations also mark the first use of Executive Order 13662 to add individuals and entities operating in the energy sector of the Russian Federation economy to the SDN List. Although this executive order, issued in 2014, had previously been the basis for additions to the Sectoral Sanctions Identifications List pursuant to various directives, the blocking (or "asset freezing") power granted by the executive order had not been exercised by OFAC in the past. The April 5 designations represent a ramping up of the sectoral sanctions and administration officials have indicated that the United States intends to continue to increase pressure on the Putin regime through additional sanctions and other measures until the Russian government ceases to engage in malign activities.

Another executive order issued in 2014 also served as the authority for many of the new SDN designations. Executive Order 13661 gave OFAC the power to block (or "freeze") the assets and property interests of officials of the Government of the Russian Federation.

In addition, Rosoboroneksport, a state-owned weapons trading company, and its subsidiary bank Russian Financial Corporation Bank were designated under Executive Order 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the Government of Syria.

The basis for each of the April 6 designations was explained in a press release issued simultaneously with the amendments to the SDN List. Consistent with the authorities granted by the executive orders cited in support of the designations, in designating individuals listed in the Section 241 report, OFAC focused its actions on individuals with executive positions in Russian oil and gas companies, many of whom have been accused of bribery, money laundering, or other criminal activity. In designating individuals previously described in the Section 241 report as members of the Russian Presidential Administration or Cabinet of Ministers, or Other Senior Political Leaders, OFAC appears to have focused generally on service within a government agency involved in national security or leadership at Russian state-owned energy companies or financial institutions.

It is worth noting that a handful of the April 6 designations did not appear in the Section 241 report. The largest group of such individuals consists of government officials who are not in the Russian Presidential Administration or Cabinet of Ministers, but nevertheless hold security-related positions.

In recognition of the disruption to U.S. business interests that will result from the new designations, OFAC issued two new general licenses authorizing certain transactions with designated entities that are now prohibited by the Ukraine Related Sanctions Regulations as a result of the new designations. As described in more detail below, General License No. 12 (GL 12) and General License No. 13 (GL 13) provide limited relief for U.S. and other persons seeking to unwind their business relationships with the newly designated entities.

GL 12 authorizes certain transactions ordinarily incident and necessary to maintain or wind down operations or contracts with certain entities, including several companies affiliated with separately designated "oligarch" Oleg Deripaska – EN+ Group, GAZ Group, United Company RUSAL PLC, EuroSibEnergo, and Russian Machines – as well as other Russian companies such as Gazprom Burenie, Lagoda Menedzhment, NPV Engineering OJSC, and Renova Group.

GL 13 authorizes certain transactions ordinarily incident and necessary to divest or transfer debt, equity, or the holdings in three of the Deripaska-associated companies – EN+ Group, GAZ Group, and United Company RUSAL PLC.

Although the general licenses permit some transactions that would otherwise be prohibited under today's designations, both licenses have strict terms and conditions and reporting requirements that must be followed carefully. For example, GL 12 does not authorize exports and requires all payments in furtherance of the wind down activities to be paid into blocked accounts. GL 12 does not permit sale of debt, equity, or other holdings back to the newly blocked entities. Furthermore, both licenses expire within a relatively short period – at 12:01 a.m. Eastern Daylight Time on June 5, 2018 and May 7, 2018, respectively – and it is unclear whether OFAC will renew them.

In conjunction with GL 12 and GL 13, OFAC also published FAQs 567 through 573, which provide guidance to U.S. and other persons seeking to end business relationships with newly designated entities and individuals in a lawful manner. The FAQs emphasize that the prohibitions resulting from the designations apply to U.S. persons who serve as employees or board members in now-designated entities, U.S. persons who own shares in now-designated companies, and U.S. persons who have ordered goods from now-designated companies. Accordingly, such U.S. persons must wind down or divest from such relationships within the limited period allocated by the applicable general license (or any specific license obtained) or face civil or criminal liability. The FAQs also emphasize that by virtue of OFAC's 50 percent rule, entities owned 50 percent or more, in the aggregate, by one or more SDNs (including those designated on April 6) must be treated as blocked (or subject to asset freezing) even if they are not themselves listed on the SDN List.

In addition, OFAC published FAQ 574, which provides that for the purposes of CAATSA Section 228, which requires OFAC to impose secondary sanctions on foreign persons who knowingly facilitate "significant transactions" on behalf of persons subject to U.S. sanctions, as well as for the purposes of the mandatory sanctions required by Section 226 of CAATSA, the term "significant transaction" does not include transactions that would not require a specific license from OFAC. This clarifies that wind down transactions carried out in full compliance with GL 12 and GL 13 do not constitute "significant transactions" and will not result in secondary sanctions.

The new designations clearly represent an attempt to punish the closest supporters of the Russian regime for their support for, and collaboration in, Russia's malign activities, perhaps in the hope that increased pressure will cause their support for President Putin's agenda to wane. However, the Russian foreign ministry has responded that Russian cannot "be spoken to in the language of sanctions." The resulting standoff does not bode well for diminution of sanctions in the near future. U.S. and non-U.S. businesses should monitor developments carefully and prepare for more sanctions – including, perhaps, exercise of the Executive Order 13662 blocking authority in additional sectors of the Russian economy, such as financial services, metals and mining, engineering, and defense, in addition to additional blocking actions affecting the energy sector. Under the current administration policy, the sanctions risks associated with doing business in Russia will almost certainly continue to increase in the foreseeable future.


For more information, please contact:

Brian J. Fleming, bfleming@milchev.com, 202-626-5871

Collmann Griffin, cgriffin@milchev.com, 202-626-5836

Barbara D. Linney*

*Former Miller & Chevalier attorney


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