by Jeremy Paner
Last Friday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced the designations of a number of prominent Russian oligarchs. The initial reaction of many companies with investment or business ties with these blocked parties was either panic or nonchalance. In most cases, those extreme reactions arose from confusion about the scope of the Russia sanctions program, OFAC’s broad discretionary powers, and the enforcement process.
Uniqueness of the Russia Sanctions Program
OFAC currently administers and enforces 28 separate sanctions programs. Each program is governed by its own regulations, with corresponding definitions, prohibitions, exceptions, and exemptions. These regulations generally prohibit U.S. companies from dealing with designated parties on the Specially Designated Nationals And Blocked Persons List (SDN List), absent a general or specific license. U.S. law similarly prohibits non-U.S. companies from involving U.S. companies in their dealings with SDNs, irrespective of the sanctions program. The extraterritorial effect on non-U.S. companies, however, varies greatly depending on the program and specific designation authority. Non-U.S. companies should be mindful of two Russia sanctions authorities that substantially expand OFAC’s reach.
Section 226 of the Countering America’s Adversaries Through Sanctions Act (CAATSA) authorizes OFAC to place secondary sanctions on non-U.S. financial institutions that knowingly facilitate significant financial transactions on behalf of designated Russian oligarchs, among other designees. Non-U.S. banks should be familiar with these correspondent or payable-through account sanctions, which mirror various Iran sanctions authorities.
Section 228 of CAATSA, however, represents an unprecedented expansion of OFAC’s designation authority. Under OFAC’s interpretation of this section, the agency may sanction non-U.S. individuals or entities that knowingly provide significant services, technology, or goods to a party sanctioned pursuant to the 50 Percent Rule, but not explicitly listed on the SDN or Sectoral Sanctions Identification (SSI) Lists. This is extraordinary for two reasons.
First, OFAC may derivatively designate non-U.S. persons for dealing with companies owned 50 percent or greater by designated Russians, even if those listed Russians do not actually benefit from the transaction. OFAC has a long history of designating non-U.S. parties based on their provision of indirect services to SDNs, but the agency has not previously relied on the 50 Percent Rule for its derivative designations.
Second, this statutory authority introduces property blocking into Russian sectoral sanctions, which were previously limited to the rejection of certain debt, credit, equity, and certain transactions involving oil projects. Neither SSI listed entities, nor the companies they own 50 percent or greater are blocked under U.S. law. Pursuant to section 228, however, OFAC may designate and block non-U.S. companies that transact with unlisted SSI-owned parties.
Congress codified existing Obama-era sanctions authorities in CAATSA to prevent the current administration from lifting Russia sanctions through an Executive Order. In addition to this codification, several CAATSA sections, including 226 and 228, seem to indicate that Russian sanctions are mandatory through some variation of language stating “the President shall impose the sanctions.” In each case, however, sanctions are only imposed following a lengthy administrative process. This includes a determination by either OFAC or the State Department that the relevant criteria for designation has been met and requires broad interagency legal and policy approval.
The statute of limitations for civil enforcement of U.S. sanctions violations is five years, while the Justice Department may effectively extend that period through conspiracy charges. Although OFAC prefers to rely on recent transactions in support of its designations, there is no equivalent statute of limitations on its designations. This means that the current occupant of the White House should not influence compliance decisions with respect to the U.S. sanctions on Russia. Both U.S. and non-U.S. companies may face civil and criminal penalties or be designated years after their dealings with sanctioned Russian parties.
We will continue to closely follow developments in the Russia sanctions program and publish updates as significant development arise.
 See, section 104(c)(2)(E)(ii)(I) Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010; section 1245(d) of the National Defense Authorization Act of 2012; and section 1247(a) of the Iran Freedom and Counter-Proliferation Act of 2012.
 OFAC FAQs establish the relevant inquiry as to whether the entity owned 50 percent or more by designated Russians “derives a particular benefit of any kind (as opposed to a generalized benefit conferred upon undifferentiated persons in the aggregate).” Id.
Categories: Trade Sanctions