Sanctions

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Following the imposition of new U.S. sanctions on Russia in April 2018, Russian lawmakers have introduced two draft bills proposing Russian countersanctions against ‘unfriendly’ states, as well as criminalizing compliance with foreign sanctions in Russia.

The Countermeasures Bill

The first measure, the Draft Bill No. 441399-7 On Measures (Countermeasures) in Response to Unfriendly Actions of the USA and (or) other Foreign States (the Countermeasures Bill) passed both chambers of the Federal Assembly, and was signed into law by President Putin and officially published on June 4, 2018. It is effective from that date.

The Countermeasures Bill was significantly watered down during its passage through the State Duma. Specifically, the Duma removed the specified categories of banned products and services that were proposed in the initial draft. The revised Countermeasures Bill as enacted includes the following six measures which may target the U.S., other ‘unamicable’ foreign states (the Relevant States), entities that are subject to the jurisdiction of the Relevant States, entities that are directly or indirectly owned by entities under the jurisdiction of the Relevant States (the Relevant Entities), officials and citizens of the Relevant States, if they are involved in ‘unamicable’ acts with respect to the Russian Federation:

  • Article 2(1): Termination or suspension of international cooperation between Russia and Russian legal entities and the Relevant States, including entities that are subject to the jurisdiction of the Relevant States, or the Relevant Entities, relating to sectors to be determined by a separate decision of the Russian President.
  • Article 2(2): Prohibition or restriction on the import of products and/or raw materials into Russia originating from the Relevant States or manufactured by the Relevant Entities. The list of products and/or raw materials shall be determined by the Russian Government. Significantly, such measures would not apply to (a) products which do not have substitutes manufactured in Russia, or (b) products imported for personal use.
  • Article 2(3): Prohibition or restriction on the export from the Russian Federation of products and/or raw materials by (a) citizens of the Relevant States and/or (b) the Relevant Entities. The list of products and/or raw materials will be determined by the Russian Government.
  • Article 2(4): Prohibition or restriction on access, directly or indirectly, to public procurement for providers of works/services that are Relevant Entities. The list of particular works/services prohibited from public procurement will be determined by the Russian Government.
  • Article 2(5): Prohibition or restriction on participation in privatization of state or municipal property for (a) citizens of the Relevant States and/or (b) the Relevant Entities. Prohibition or restriction for such persons from (a) providing works/services for the organization of sale of federal property in the name of the Russian Federation and/or (b) fulfilling functions as a seller of federal property.
  • Article 2(6): All other measures determined by a separate decision of the Russian President.

Such measures must be implemented by all federal and municipal bodies, as well as the citizens of the Russian Federation and entities under Russian jurisdiction (Article 1(4)).

The Criminalization Bill

On May 14, 2018, Russian lawmakers filed another draft bill in connection with the proposed countermeasures, this time proposing criminal liability for Russian citizens complying with non-Russian sanctions. The Draft Bill No. 464757-7 On Amendments to the Criminal Code of the Russian Federation (the Criminalization Bill) passed its first hearing stage with only minor changes. The second hearing for the Criminalization Bill was scheduled for May 17, 2018 but was postponed, pending further consultations with the Russian government and the business community. A new date for the hearing has not yet been set.

The draft bill introduces a new Article 2842 of the Russian Criminal Code, which creates the following two new types of criminal offenses and related liability:

  • Article 2842(1): Actions (or omission to act) aimed at compliance with a decision of a foreign state, union of foreign states or international organization to impose restrictive measures, if this action (omission to act) restricts or prohibits Russian citizens, legal entities incorporated in Russia, Russian Federation, subjects of the Russian Federation, municipal entities or entities controlled by any of the above (Russian private or public entities of entities controlled by them) to fulfil “ordinary economic operations or transactions”. Liability for such criminal offense ranges from (a) a fine of up to RUB 600,000 or four annual salaries or income, to (b) up to four years of imprisonment and also potentially a fine of up to RUB 200,000 or one annual salary or income.
  • Article 2842(2): Willful actions by Russian citizens that contribute to the imposition of restrictive measures by a foreign state, union of foreign states, international organization on Russian individuals, public and private entities (including their controlled entities). Such actions may involve recommendations and provision of information that led to the imposition of anti-Russian sanctions. Liability for such offense ranges from (a) a fine of up to RUB 500,000 or three annual salaries or income, to (b) up to three years of imprisonment and potentially a fine of up to RUB 200,000 or one annual salary or income.

An explanatory note to the new Article 2842 clarifies that “ordinary economic operations or transactions” means legal actions, aimed at performing contractual or other legal obligations, if such operation or transactions are carried on in the ordinary course of business, or other lawful activities, by individuals or entities (or foreign entities controlled by them) who are subject to restrictive measures (e.g., specially designated nationals or SDNs). Such transactions would include opening of bank accounts, making and accepting payments, trading securities, etc.

Based on the difference in terminology (insofar as the latter is limited to “actions by Russian citizens”), the proposed Article 2842(1) appears to apply both to Russian and to foreign citizens subject to Russian jurisdiction, in contrast to Article 2842(2), which appears to apply to Russian citizens only.

Russian business groups reportedly voiced opposition to the current draft of the Criminalization Bill. Russian President Putin has stated that the new law “should be balanced” and that it “must not do harm to our own economy and to those of our partners with good conscience do business in Russia.” We would therefore expect that the Criminalization Bill will be amended before being passed through its second hearing.

On May 23, 2018, the State Duma’s Law-making Committee held a meeting among policymakers and representatives of, among others, the Russian Union of Industrialists and Entrepreneurs, Retail Companies Association, European Businesses Association, and Russian banks and retailers. The majority view on the business side appears to be that the appropriate liability for compliance with foreign sanctions (i.e. the new criminal offense under Article 2842(1)) would be administrative (e.g. a fine), not criminal. However, the proposed criminal offense of contributing to the imposition of foreign sanctions, etc. (i.e. under Article 2842(2)) is likely to remain in the Criminal Code. The Law-making Committee will now consult on the results of these discussions with the Russian government and the responsible ministries. The next step would be for the Committee to prepare a revised draft of the bill. It is expected that the second draft would be ready for another round of discussions between the Committee and the business community representatives a week after the consultations with the government, and will then be submitted for the second hearing at the Duma.

If the Criminalization Bill is enacted in the current version (which does not appear likely given President Putin’s comments), companies operating in Russia and, in particular Russian citizen managers of the operation of Russian subsidiaries of U.S. or non-Russian companies, would face a substantial risk arising from the potential conflict generated by U.S. obligations that can apply to even non-U.S. entities (e.g., “secondary” sanctions or the designation authority in Section 228 of the Countering America’s Adversaries Through Sanctions Act (CAATSA) and the provisions in the Criminalization Bill.

 

On June 4, 2018, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Ukraine-/Russia-related General License 16 (GL16).

General License 16 authorizes U.S. persons to engage in specified transactions related to winding down or maintaining business involving EN+ Group PLC, JSC EuroSibEnergo, or any entity in which EN+ Group PLC or JSC EuroSibEnergo owns, directly or indirectly, a 50 percent or greater interest, until October 23, 2018.

GL16 is subject to a series of conditions that are familiar from OFAC’s previous wind-down licenses arising from the same action including, among other things: (a) that the transactions must be conducted pursuant to a contract or other agreement in place prior to April 6, 2018, (b) payments to these entities must be made to a blocked account, except to the extent authorized by General License 14 (related to United Company RUSAL PLC), (c) products cannot be exported from the United States to these persons, and (d) U.S. Persons utilizing the authority must file comprehensive reports with OFAC within 10 days from GL16’s expiration.

 

 

 

 

On May 18, the EU Commission announced plans to protect EU companies doing business in Iran. This announcement comes in response to President Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), known as the Iran nuclear deal, and re-impose U.S. sanctions on Iran. The EU Commission plans to mitigate the extraterritorial effect of U.S. sanctions on EU companies in four ways:

  1. Blocking Statute: revive and update a 1996 “blocking statute” to forbid EU companies from complying with U.S. sanctions against Iran and make foreign court judgements based on these sanctions ineffective in the EU. The blocking statute was originally proposed to counter the effects on EU companies of the U.S. embargo on Cuba. It will be necessary to update the list of U.S. sanctions on Iran that fall within its scope. The Commission hopes to have this measure in place by August 6, 2018, when the first set of U.S. sanctions takes effect.
  2. EIB Investment: remove obstacles to allow the European Investment Bank (EIB) to support EU investment in Iran.
  3. Sectoral Cooperation: strengthen sectoral cooperation with Iran, including “in the energy sector and with regard to small and medium-sized companies.” To facilitate this, Commissioner for Climate Action and Energy, Miguel Arias Cañete, plans to travel to Tehran this weekend. Additionally, the Development Cooperation or Partnership Instruments will provide financial assistance.
  4. Central Bank of Iran Transfers: encourage Member States to “explore the possibility of one-off bank transfers” to the Central Bank of Iran. The U.S. sanctions could target EU entities active in oil transactions with Iran, so this would help Iranian authorities receive their oil-related revenues.

After the first two measures are formally proposed, the European Parliament and the Council will have two months to object to them. If neither institution objects, however, this period can be shortened.

EU leaders gave unanimous backing to the above proposals when they were presented to them at an informal meeting in Sofia, Bulgaria, by European Commission President Jean-Claude Juncker on 16 May 2018.

 

On April 1, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended two of its pre-existing Ukraine-Russia-related General Licenses.

First, General License 12B (GL12B) replaces and supersedes General License 12A in its entirety. GL12B authorizes the listed entities to access blocked accounts for purposes of “maintenance or wind-down activities.” Previously, while GL12/GL12A had permitted maintenance or wind-down activities, it had required all payments to or for the benefit of the 12 designated entities to be made to a blocked account (this requirement was relaxed for RUSAL only in General License 14); in practice, therefore, the listed entities found it very difficult to engage in even licensed activity because most of their funds were blocked.

GL12B aims to remedy this by continuing to require U.S. Persons to make payments into blocked accounts, but authorizing the designated entities to now access those funds for “maintenance or wind down activities.” All of the other conditions on GL12/GL12A—including the 12:01 AM (East Coast) on June 5 expiration date—remain in place.

Second, OFAC issued General License 13A, which replaces and supersedes General License 13 in its entirety. General License 13A makes four general changes to General License 13:

(1) extends the authorization to three subsidiaries of the listed entities—Irkutskenergo, GAZ Auto Plant, and Rusal Capital Designated Activity Company—(previously, the divestment authorization applied only to (a) EN+ Group PLC, (b) GAZ Group, and (c) United Company RUSAL PLC and not to their subsidiaries);

(2) clarifies that U.S. persons can undertake certain “intermediate” purchases of debt/equity if those are necessary to divestment (i.e., purchases of securities to close out a short     position);

(3) clarifies the authorization extends to purchases of securities by designated persons made prior to April 6, but which have not settled due to sanctions; and

(4) extends the authorization through 12:01 AM (East Coast) on June 6, 2018 (previously it was the same time on May 6, 2018).

OFAC issued three new Frequently Asked Questions (FAQs) to explain the changes. The first two FAQs (#583-584) simply reiterate the changes summarized above. The only relevant new FAQ (No. 585) reiterates the bright line 50 percent rule, noting that U.S. Persons are “generally” not prohibited from engaging in a transaction with a non-U.S. company if one or more SDNs hold less than 50 percent aggregate interest.

This interpretation is consistent with existing guidance, but was likely re-issued to affirm the existing position as a result of the number of non-U.S. companies in which the new SDNs hold a minority interest (e.g., Renova Group’s 48 percent interest in Sulzer Group and its smaller interests in dozens of other entities).

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs

On April 23, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued General License (GL) 14 in its Ukraine/Russia sanctions program.

According to a Treasury press release, GL 14 “authorizes U.S. persons to engage in specified transactions related to winding down or maintaining business with United Company RUSAL PLC (RUSAL) and its subsidiaries until October 23, 2018. In accordance with preexisting OFAC guidance, OFAC will not impose secondary sanctions on non-U.S. persons for engaging in the same activity involving RUSAL or its subsidiaries that General License 14 authorizes U.S. persons to engage in.”

Treasury Secretary Steven T. Mnuchin said, “RUSAL has felt the impact of U.S. sanctions because of its entanglement with Oleg Deripaska, but the U.S. government is not targeting the hardworking people who depend on RUSAL and its subsidiaries.  He added, “RUSAL has approached us to petition for delisting. Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider RUSAL’s petition.”

In addition to extending the time period until October 23, 2018, GL 14 also expands the existing authorization in GL 12 by authorizing (a) the disbursement of previously blocked funds for specific maintenance and winddown activities, (b) new payments to RUSAL not to be made into blocked accounts, and (c) exports from the United States to RUSAL. GL14 is still, however, subject to many of the same conditions as apply to GL 12, including (a) the transactions must relate to “operations, contracts, or other agreements” in place prior to April 6, 2018 and (b) U.S. persons utilizing the authority must file a report with OFAC within 10 days of GL 14’s conclusion.

In addition to General License 14, today OFAC also published several FAQs regarding the general license’s authorizations and limitations, and issued an amended General License 12A (Authorizing Certain Activities Necessary to Maintenance or Wind Down of Operations) that reflects the expanded RUSAL-related authority in GL 14.

Per a press release, on April 6, “the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), in consultation with the Department of State, [ ] designated seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its subsidiary, a Russian bank.”

In addition to new Ukraine/Russia-related designations, two persons were also designated pursuant to the Government of Syria authorities.

OFAC also issued the following two Ukraine-/Russia-related general licenses in connection with these designations:  General License 12 “Authorizing Certain Activities Necessary to Maintenance or Wind down of Operations or Existing Contracts”; and General License 13 “Authorizing Certain Transactions Necessary to Divest or Transfer Debt, Equity, or other Holdings in Certain Blocked Persons”.

Finally, OFAC published eight new FAQs related to its April 6 action and published one updated FAQ related to the Countering America’s Adversaries Through Sanctions Act (CAATSA).

 

On March 19, President Trump issued an Executive Order (E.O.) “Taking Additional Steps to Address the Situation in Venezuela.” This E.O. aims to take further action against the Venezuelan Government’s newly issued cryptocurrency—Petro.

Previously, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) had issued a Frequently Asked Question (FAQ) to clarify that its existing prohibitions against extensions of debt/credit to the Government of Venezuela would likely prohibit U.S. persons to transact in the petro given its structure.

In the new E.O., the United States has gone further to simply prohibit all such transactions. Specifically, the new E.O. prohibits U.S. persons (defined to include U.S. citizens and permanent residents, U.S. companies including foreign branches, and persons in the United States) from engaging in:

  1. Any transaction associated with any digital currency, digital coin, or digital token, issued by, for, or on behalf of the Government of Venezuela, on or after January 9, 2018; and
  2. Any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set in this E.O.

The E.O. defines the term “Government of Venezuela” (GoV) as any political subdivision, agency, or instrumentality thereof, including the Central Bank of Venezuela, and Petróleos de Venezuela (PDVSA), as well as any person owned or controlled by, or acting for or on behalf of, the GoV.

In addition, OFAC released new Frequently Asked Questions (FAQs) related to this E.O., and separate new Digital Currency-related FAQs.

On March 22, President Maduro announced a redenomination of Venezuela’s fiat currency, “Bolívar Fuerte,” into a new currency called “Bolívar Soberano.” The “new” bolívar is expected to remove three zeros from the current bills once released. Notably, one of OFAC’s new FAQs clarified that the Bolívar Fuerte is not considered a digital currency for purposes of the new E.O. and therefore U.S. persons are not prohibited to transact with the Bolivar Fuerte. OFAC has not, however, specifically addressed transactions in the Bolivar Soberano. However, given that very similar—if not identical—measures were instated by the GoV in 2008 when late-president Chávez announced the redenomination of the “Bolívar” into the Bolívar Fuerte, it is likely that OFAC would take the position that the Bolívar Soberano and Bolivar Fuerte would be considered equivalent “traditional fiat currencies” pursuant to its regulations and would not be covered by the new E.O. Nevertheless, in view of the escalated sanctions on Venezuela, companies should continue to monitor closely any future measures by OFAC.

OFAC Designates Four Venezuelan Officials

OFAC also added four individuals associated with Venezuela’s Treasury and other government agencies to its Specially Designated Nationals (SDN) List pursuant to pre-existing authorities, as follows:

  • William Antonio Contreras—Vice Minister of Internal Commerce and Superintendent for the Defense of Socioeconomic Rights (SUNDDE)
  • Nelson Reinaldo Lepaje Salazar—Acting in the Capacity of the Head of the Office of the National Treasury
  • Américo Alex Mata Garcia—Alternate Director of the National Bank of Housing and Habitat
  • Carlos Alberto Rotondaro Cova—Former President of the Board of Directors of the Venezuelan Institute of Social Security (IVSS)

For the latest news, please subscribe to Venezuela Sanctions on Crowell’s International Trade Law Blog.

On March 15, the Office of Foreign Assets Control (OFAC) designated as Specially Designated Nationals (“SDNs”) 2 new persons under an existing Obama-era cyber Executive Order, and 13 new persons under new authority granted by the Countering America’s Adversaries Through Sanctions Act (CAATSA). This was the first time OFAC has utilized any of the multitude of CAATSA authorities to designate new SDNs.

The agency also updated nine previously sanctioned persons, adding the Cyber and/or CAATSA designations.

As background, CAATSA Section 224 requires the imposition of asset blocking sanctions on a person the President determines “knowingly engages in significant activities undermining cybersecurity” on behalf of the Government of Russia.

These actions are closely linked to the recent Mueller indictment of Russian persons for allegedly interfering with U.S. elections. All 15 defendants in that indictment have now been designated as SDNs: three of them were previously designated (but have now been re-designated under a second authority) and the 12 others were newly designated as part of this action. Specifically, the Internet Research Agency LLC is named in the indictment, as are 11 individuals linked to the company.

OFAC amended Cyber General License No. 1, “Authorizing Certain Transactions with the Federal Security Service” (GL 1), and reissued it as Cyber General License No. 1A (GL 1A). GL1A has the same net effect as GL1 insofar as it authorizes transactions, subject to certain conditions, with the Federal Security Service (a.k.a. Federalnaya Sluzhba Bezopasnosti) (a.k.a. FSB) related to certain licensing and authorization functions that the FSB performs. The only change under GL1A was to clarify that the authorization continues to apply despite the FSB’s new designation under CAATSA Section 224 (i.e., GL1A authorizes transactions otherwise prohibited by both the Cyber sanctions and Section 224).

OFAC also published four updated FAQs relating to GL 1A and one updated CAATSA-related FAQ related to this action.

Venezuela has frequently been in the news lately, not only because of domestic politics, but also because of sanctions and bribery enforcement actions brought by U.S. authorities. In this podcast, Crowell & Moring’s Cari Stinebower, Dalal Hasan, Eduardo Mathison, and Mariana Pendás provide an overview of recent political and enforcement developments in Venezuela and explain what U.S. companies need to know about how these developments could impact business and trade ties with Venezuela.

Discussed in this 23-minute podcast:

  • An overview of the political situation in Venezuela.
  • Implications of U.S. and EU current sanctions targeting Venezuela and the potential for new sanctions.
  • FinCEN guidance on identifying corruption and money laundering red flags from Venezuela transactions.
  • Legal protections and International Dispute Resolution options for companies provided in Bilateral Investment Treaties (BITs) signed by Venezuela.
  • Takeaways for companies with business ties to Venezuela.

Click below to listen via the embedded player or access from the link:
SoundCloud