In response to the Russian Federations’ (“Russia”) invasion of Ukraine, the U.S. Government has recently announced expansive economic sanctions against Russia and its economy. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) imposed sanctions against multiple parties in Russia to deplete Russian resources for purposes of ending the war. These actions were taken pursuant to Executive Order 14024 (EO 14024), which authorizes sanctions against Russia for its harmful foreign activities, including violating core principles of international law such as respect for the territorial integrity of sovereign states.
As background, OFAC administers and enforces economic sanctions programs primarily against countries and groups of individuals. The sanctions can be either selective or comprehensive, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals. U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all U.S. incorporated entities and their foreign branches. In the cases of certain programs, foreign subsidiaries owned or controlled by U.S. companies also must comply.
Here is a brief summary of the different sanctions imposed by OFAC against Russia since the start of the war (up to the date of this writing 04-06-22):
- On February 21, 2022, Executive Order 14065 was issued which provided the “first tranche” of sanctions in response to President Putin’s recognition of the independence of the “so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic in Ukraine (LNR)” and his request to deploy forces to those regions. The sanctions prohibit investments, imports and exports, and financial transactions to, from, or in these separatist regions. OFAC issued six General Licenses to authorize wind-down and divestment activities through March 23, 2022.
- On February 22, 2022, OFAC amended Directive 1 under EO 14024, originally issued on April 15, 2021, to prevent Russia from raising funds or trading on U.S markets and prohibit U.S. financial institutions from certain other transactions.
- Additionally, on February 22, 2022, OFAC added Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB) and Promsvyazbank Public Joint Stock Company (PSB) to the Specially Designated Nationals and Blocked Persons List (SDN List). Additionally, OFAC added elites close to Putin to the SDN List.
- On February 23, 2022, OFAC designated Nord Stream 2 AG, the Swiss company in charge of building Russia’s Nord Stream 2 gas pipeline, and its German Chief Executive Officer, Matthias Warnig, to OFAC’s List of SDNs. OFAC concurrently issued General License 4 authorizing certain wind-down transactions involving Nord Stream 2 AG.
- On February 24, 2022, OFAC took the following actions against Russia: (1) issued two new Directives, D2 and D3; (2) sanctioned certain parties; (3) added numerous Russian parties to the SDN List; (4) added several Belarussian parties to the SDN List; and (5) issued several corresponding general licenses.
- On February 28, 2022, OFAC issued Directive 4 under EO 14024. This directive prohibits any transaction involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities.
- On March 3, 2022, OFAC sanctioned numerous Russian elites and their family members, identifying certain property of these persons, as blocked, and sanctioning Russian intelligence-directed disinformation outlets.
- On March 11, 2022, OFAC issued a new round of sanctions targeting Russian and Kremlin elites, oligarchs, and Russia’s political and national security leaders who have supported Russian President Vladimir Putin’s brutal and illegal invasion of Ukraine. These included President Putin’s spokesperson, Dmitriy Sergeevich Peskov; Russian tycoon and Kremlin insider Viktor Vekselberg; and the Management Board of the sanctioned VTB Bank. Additionally, OFAC designated 12 members of the Russian State Duma, including Vyacheslav Victorovich Volodin, who is also a permanent member of Russia’s Security Council.
- Additionally, on March 11, 2022, President Joe Biden issued an Executive Order banning exports of luxury goods headed to Russia, including: (1) jewelry, (2) watches, (3) vehicles, and (4) alcohol. Further, President Biden and G7 Leaders from multiple countries began working to revoke Russia’s most-favored national status, as well as deny Russia borrowing privileges at multilateral financial institutions.
- On March 24, 2022, OFAC sanctioned dozens of Russian defense companies, 328 members of the Russian State Duma, and the head of Russia’s largest financial institution.
- On March 31, 2022, OFAC designated 21 entities and 13 individuals as part of its crackdown on the Kremlin’s sanctions evasion networks and technology companies, which are instrumental to the Russian Federation’s war machine.
- On April 5, 2022, OFAC sanctioned the world’s largest and most prominent darknet market, Hydra Market (Hydra), in a coordinated international effort to disrupt proliferation of malicious cybercrime services, dangerous drugs, and other illegal offerings available through the Russia-based site.
- On April 6, 2022, the U.S. with the G7 and European Union, announced additional Russian sanctions which included: (1) full blocking sanctions on Russia’s largest financial institution, Sberbank, and Russia’s largest private bank, Alfa Bank, (2) full blocking sanctions on critical major Russian state-owned enterprises, (3) full blocking sanctions on Russian elites and their family members, (4) prohibiting new investment in Russia for U.S. persons or companies, and (5) prohibiting Russia from making debt payments with funds subject to U.S. jurisdiction.
As expected, several U.S. companies are directly impacted by these OFAC sanctions. If a U.S company has historically done business in Russia, it is imperative it review different compliance aspects of the transactions. For example, what does OFAC consider a violation? If a party to a transaction is not sanctioned, but the payment is through a sanctioned bank, are there any options to proceed with the transaction without violating the law? These are the types of questions that are being asked as companies try to understand and comply with the new sanctions. To this point, does a company have any responsibly if it becomes aware of a violation and cannot complete a transaction?
In general, 31 C.F.R. § 501.603 and § 501.604 governs the reporting requirements for blocked, unblocked, and rejected property. In this context, a blocked transaction means that the property is “frozen” until OFAC provides authorization to proceed, while a rejected transaction means that an offer or proposal is rejected, or the merchandise is returned to the sender without acceptance. Companies should be aware that these regulations might become implicated if a company is forced to block or reject a transaction based on sanctions. For example, if a company has been doing business directly with one of the recently sanctioned Russian banks, it might be forced to reject or block an offer or proposal if one was initiated by the bank, and then submit the necessary report to OFAC. This example raises the interesting question of who is subject to the OFAC reporting requirements?
In 2019, OFAC amended the regulations to provide updated instructions and incorporate new requirements for parties filing reports on blocked property, unblocked property, or rejected transactions. Based on the amendments, these regulations now apply to “[a]ny U.S. person (or person subject to U.S. jurisdiction), including a financial institution, holding property blocked pursuant to this chapter or releasing property from blocked status (i.e., unblocking property)” or “[a]ny U.S. person (or person subject to U.S. jurisdiction), including a financial institution that rejects a transaction that is not blocked under the provisions of this chapter, but where processing or engaging in the transaction would nonetheless violate a provision contained in this chapter.” This language regarding rejected property is different than pre-2019 as reporting requirements historically only applied to financial institutions rather than all U.S. persons.
If your business is forced to block/unblock or reject a shipment, when must it report? For blocked property, the initial report must be reported within 10 business days from the date the property becomes blocked. Unblocking reports are also required within 10 business days but only when specifically required by OFAC, such as when they are made a condition of a general/specific license. In addition to the initial blocking report, OFAC requires an annual blocking report on all blocked property held as of June 30th of the current year and it should be filed annually by September 30th. For rejected property, the initial (and only) report should be filed within 10 business days of the rejected transaction. A shorthand version of the information that is required to be included in each initial report can be found below:
- Information regarding the person holding the blocked or rejected property;
- A description of any transaction associated with the blocking;
- The associated sanctions target(s) whose property is blocked and the location(s) of the target(s);
- A description of the property that is the subject of the blocking and its location in the United States;
- The date the property was blocked;
- The actual, or if unknown, estimated value of the property in U.S. Dollars;
- The legal authority or authorities under which the property is blocked; and
- A copy of any other relevant documentation received in connection with any related transaction.
While it does not seem that enforcement of these regulations has been a priority, it is likely companies could see additional scrutiny from OFAC moving forward. Since late February, OFAC has continually been imposing more sanctions on Russia to deplete its resources and end the war. It would seem from OFAC’s perspective that the more reports it receives on blocked and rejected transactions, the better the agency can position itself to impose additional sanctions against Russia. Businesses should be aware and fully comply with these reporting requirements to avoid any potential OFAC violations for failure to report. Failing to report these violations could result in civil and criminal penalties depending on the applicable sanctions program.
Companies can attempt to avoid these regulations all together by ensuring that they have a process in place to safeguard against dealings with prohibited entities. One recommendation is to have updated written policies and procedures for screening all Russian parties that may be subject to a transaction. As well, it may be wise to obtain ownership information from the screened entity to confirm they are not owned or controlled by a sanctioned party. While OFAC continues to flex its muscles with Russia, domestic companies should be proactive and ensure they are aware of all the Russian sanctions and the necessary reporting requirements.