U.S Russian Sanctions – Frequently Asked Questions *Update*

On 6th April 2018, 7 Russian oligarchs, 12 companies which they own and 17 Russian government officials were added to the U.S. Specially Designated Nationals (“SDN” list). The companies targeted include United Company Rusal PLC.

These new U.S. sanctions add an additional level of complexity and the North sanctions advice team (sanctions.advice@nepia.com) has dealt with numerous enquiries in relation to them. The background and detail of the sanctions are set out in the attached Freehill Hogan & Mahar LLP client alert. 

Below are some of the most frequently asked questions, which have been updated to reflect the issuing of General Licence 14 and the replacement of General Licence 12 with General Licence 12A on 23rd April 2018:

(1) The latest designations relate to additions to the SDN list, but other Russian companies are shown on the U.S. list of sanctions targets as a “non-SDN”. What does this mean?

The U.S. list of sanctions targets can be searched here.   

A Russian company may appear on the list as an SDN, or it may be highlighted in the search results as a “non-SDN”. 

In relation to “non-SDNs”, the U.S. previously introduced “sectoral sanctions” under Executive Order 13662 which prohibit U.S. persons from engaging in certain activities with named companies under four directives.  Such a company may be listed solely under the Sectoral Sanctions Identification (SSI) list and be shown as a “non-SDN”.  There is no overall prohibition on “U.S. persons” conducting business with companies subject to these sectoral sanctions, and it needs to be considered which of the directives the particular company is subject to, which will be highlighted in the text of the search results.     The detail of the four directives is explained by OFAC in their FAQs. 

The latest designations are additions to the SDN list.  This means that for these companies all assets within the jurisdiction of the U.S. are now blocked and U.S. persons are generally prohibited from engaging in any transactions with these parties.  General Licences 12 and 13 provided a limited period for parties to disengage with these SDNs.  As Freehill’s explained in its alert, General Licence 12 provided:

“…that all transactions which are otherwise prohibited by the Ukraine Related Sanctions Regulations, 31 CFR part 589, but which are “ordinarily incident and necessary to the maintenance or wind down of operations, contracts or other agreements” are authorized to continue until 12:01 AM Eastern daylight time, June 5, 2018. However, any payment for the benefit of a blocked person must be made into a blocked, interest-bearing account located in the United States. The license also lists a number of activities which are specifically not authorized by the license. Finally, the license provides that any U.S. persons engaging in transactions authorized by the general license are required to file a comprehensive, detailed report of each such transaction with OFAC within 10 days after June 5, 2018”.

One of the companies added to the SDN list on 6^th April 2018 was United Company RUSAL PLC (“RUSAL”).  On 23^rd April 2018 OFAC issued General Licence 14 to allow RUSAL or any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest, to continue maintenance or wind down activities until 23^rd October, 2018.  OFAC FAQ 575 reads that:

“…Although all funds blocked prior to 12:01 a.m. eastern daylight time, April 23, 2018 remain blocked, the general license authorizes the use of these blocked funds for the maintenance and wind down activities described in General License 14. In addition, U.S. persons are not required to block transactions authorized by General License 14 that occur on or after April 23, 2018, except for transactions involving blocked persons other than RUSAL or any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest”.

Also on 23^rd April 2018 General Licence 12 was replaced with General Licence 12A which reflects the authorisation in General Licence 14 in relation to RUSAL.  As set out in OFAC FAQ 578:

“…U.S. persons are not required to place into a blocked account payments to or for RUSAL, or any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest, for activities authorized by General License 14. Activities necessary to the maintenance or wind down of operations or existing contracts of RUSAL and any other entity in which RUSAL owns, directly or indirectly, a 50 percent or greater interest, are authorized pursuant to General License 14 through October 23, 2018”.

 (2) What is the definition of a U.S. person?

The US sanctions generally apply to U.S. persons, which encompasses at least:

• US Entities organized under U.S. laws and their non-US branches. 
• Employees (regardless of nationality) of above entities.
• Individuals and entities within in the United State.
• U.S. citizens and permanent resident aliens wherever located or employed.

(3) Do these SDN designations impact non-U.S. persons?

Yes.  Firstly, where a party is added to the SDN list there is likely to be a practical impact, even if the underlying transaction remains lawful.  For example, other parties linked to the business may be U.S. persons or have compliance policies that require them to act as if they were a U.S. person.  Secondly, in transactions with SDNs, no payment can move through the U.S. financial system or involve a foreign branch of a U.S. bank, regardless of the currency. Further, and crucially, the amendment of Section 10 of the Sovereignty, Integrity, Democracy and Economic Stability of Ukraine Act of 2014 means, as Freehill’s explain, that:

“…it is now mandatory that sanctions be imposed on any foreign person who is determined to have knowingly facilitated a significant transaction for or on behalf of any person subject to U.S. sanctions against Russia, which would include all of those individuals and entities designated on April 6th. OFAC FAQs advise that, as used in Section 10, “persons subject to sanctions imposed by the United States with respect to the Russian Federation”, includes persons listed on either the SDN List or the Sectoral Sanctions Identification List.”

Therefore non U.S. persons will have sanctions imposed against them if they have knowinglyfacilitated a significant transaction for or on behalf of any person subject to U.S. sanctions against Russia.

A transaction will not be significant if a U.S. person would not require specific licences to participate in it.     In relation to RUSAL, OFAC FAQ 579 indicates that activity authorised by General Licence 14, and occurring within the time period authorized by the relevant licence, should not be considered “significant” for the purposes of such a sanctions determination.

OFAC has further indicated that non-U.S. persons may engage in activities that would be authorized by General License 14 if engaged in by a U.S. person, without making associated payments into a blocked account.

(4) What is a “significant transaction” under Section 10 of the Sovereignty, Integrity, Democracy and Economic Stability of Ukraine Act of 2014?

his will be determined on a case by case basis and in light of the totality of the circumstances.  There are seven broad factors that OFAC will consider:  (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis.

(5) If the Russian company is listed as a “non-SDN” subject to sectoral sanctions, does that impact non-U.S. persons?

As set out above under question (3), it is now mandatory under Section 10 of   Sovereignty, Integrity, Democracy and Economic Stability of Ukraine Act of 2014 that sanctions be imposed on any foreign person who is determined to have knowingly facilitated a significant transaction for or on behalf of any person subject to U.S. sanctions against Russia.    Any persons “subject to U.S. sanctions” includes not only the SDNs, but the “non-SDN’s” subject to sectoral sanctions. 

However, in relation to these “non-SDNs” listed under the Sectoral Sanctions Identification (SSI) list the trade should be permissible for non-U.S. persons, even if it falls within the prohibited activity in one of the relevant directives, unless it involves deceptive practices.   OFAC FAQ 545 reads for non-U.S. persons that a transaction:

 “in which the person(s) subject to sanctions is only identified on the Sectoral Sanctions Identifications (SSI) List must also involve deceptive practices (i.e., attempts to obscure or conceal the actual parties or true nature of the transaction(s), or to evade sanctions) to potentially be considered significant”.

(6) There have been no “hits” on the OFAC search engine for the entity I am contemplating transacting with, is that sufficient to demonstrate compliance with sanctions?

No.  Firstly, Members must consider the other various sanctions regimes that may apply, such as the EU sanctions against Russia.  Secondly, as Freehills highlight:

Entities which are not listed on the SDN List can nonetheless be considered as Specially Designated Nationals if they are 50% or more owned by an entity on the SDN List. This so-called “50% Rule,” as implemented by OFAC, provides that if an entity is 50% or more, individually or in the aggregate, directly or indirectly, owned by persons or entities on the SDN List, it is itself considered an SDN, even though not listed.

(7) Are there likely to be more sanctions in the near future?

It had been reported that there would be further U.S. sanctions and whilst this has not yet occurred, the position can of course change very quickly.  Further, the Russian Parliament has been presented with a draft bill providing for sanctions in response to the sanctions from the U.S.

(8) What is the potential impact of sanctions on P&I Club cover?

The Club is not usually able to confirm cover will remain in place for any particular voyage.  Members should note that if a vessel is employed in a carriage, trade or voyage which would expose the Club to the risk of sanctions (see P&I Rule 38(h)) then the entry of that vessel will cease by operation of the rule and without notice from the club. This could include a situation in which the trade in which the Member’s vessel is engaged is lawful but where the Club is unable to provide insurance because of sanctions legislation. 

(9) How can we be protected against the risk of a counterparty being added to a sanctions list?

North’s sanctions advice team can advise on suitable protective clauses such as the BIMCO sanctions clause for time charters (or inclusion of a similar clause for voyage charters), and the BIMCO designated entities clause.  BIMCO’s designated entities clause is designed to address the issue of persons or entities (or indeed the vessel) becoming sanctioned.    

North has a dedicated Sanctions Advice Team available to discuss these latest developments and sanctions generally.

Disclaimer
The purpose of this publication is to provide a source of information which is additional to that available to the maritime industry from regulatory, advisory, and consultative organisations. Whilst care is taken to ensure the accuracy of any information made available no warranty of accuracy is given and users of that information are to be responsible for satisfying themselves that the information is relevant and suitable for the purposes to which it is applied. In no circumstances whatsoever shall North be liable to any person whatsoever for any loss or damage whensoever or howsoever arising out of or in connection with the supply (including negligent supply) or use of information. Unless the contrary is indicated, all articles are written with reference to English Law. However it should be noted that the content of this publication does not constitute legal advice and should not be construed as such. Members should contact North for specific advice on particular matters.