Dr. Justine Walker, Head of Sanctions Policy, UK Finance (right)
and Peter Harrell, Adjunct Senior Fellow, Center for a New American Security, and Attorney/Strategist
Last month UK Finance blogged about the dynamic geopolitical environment which has resulted in the international sanctions compliance landscape changing faster than ever before. Our message was that given current world events it would be unlikely that Governments will cease their reliance on sanctions as the “go to” instrument. Over recent weeks, this has been evident in the response to the deteriorating diplomatic relationship between the West and Russia.
In retaliation to the recent nerve agent attack on Sergei and Yulia Skripal, we have seen a host of countries announcing the expulsion of Russian diplomats. In direct response to the poisoning incident, UK Prime Minister Theresa May set out her government’s movement to enact new legislative powers to “harden [the UK’s] defences against all forms of hostile state activity”. She indicated that Government would table an amendment to the UK Sanctions and Anti-Money Laundering Bill, to strengthen UK powers to impose sanctions in response to the violation of human rights. Russian-state assets were further called out with the warning that they would be frozen wherever there is evidence that “they may be used to threaten the life or property of UK nationals or residents”.
In parallel to the above, the US – Russia dynamic has been equally as dramatic. On April 6 2018, the US Treasury Department imposed new sanctions on seven Russian oligarchs, 12 oligarch-owned companies, 17 Russian officials, and a Russian state-owned weapons trading company in the toughest sanctions action that the Trump Administration has imposed to date on Russia. The sanctions, which set out a further split from the EU sanctions policy response, had an immediate impact on Russian markets and raise a host of compliance challenges for western banks and companies.
The US sanctions targets include several significant Russian oligarchs, including Oleg Deripaska and Viktor Vekselberg, and oligarch-owned companies including United Company RUSAL, Basic Element Limited, EN+, and GAZ Group. The sanctions also automatically apply to companies 50 per cent or more owned by the named oligarchs and their companies. The sanctions also target Gazprom Chairman Alexi Miller and Surgutneftegaz Director General Vladimir Bogdanov, though neither Gazprom nor Surgutneftegaz were themselves sanctioned (although obviously significant caution should be exercised in any dealings which involve the sanctioned individuals).
The sanctions generally freeze the US assets of sanctioned individuals and companies and prohibit US companies from engaging in business with the sanctioned individuals and companies. Furthermore, as a result of Sections 226 and 228 of the 2017 Countering America’s Adversaries Through Sanctions Act (CAATSA), non-US banks and companies, including UK banks, face potential secondary sanctions by the United States for engaging in “significant transactions” with the sanctioned individuals and companies, even if the transactions occur entirely outside the US What amounts to a “significant transactions” is a key matter that receives extensive scrutiny within the UK Finance sanctions panel.
Recognising the disruptive nature of the sanctions, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued two general licenses and associated FAQs that provide companies with a short period of time to wind down certain existing business with most of the sanctioned companies and to divest existing holdings in several of the sanctioned companies. OFAC FAQs state that non-US companies, including UK banks, will not face sanctions under CAATSA for engaging in “wind down” and divestment activities comparable to those that the licenses authorise US companies to engage in.
Specifically, OFAC Ukraine General License 12 generally authorises US persons to continue executing existing contracts and to wind down existing business with 12 of the sanctioned Russian companies until 12:01 am (US Eastern time) on June 5 2018, subject to certain conditions. The license also authorises transactions with subsidiaries that at 50 per cent or more owned by the companies named in the license.
General License 12 and related FAQS make clear that companies can continue to perform certain obligations under existing contracts until the deadline, and that companies can also engage in activities to ensure an orderly wind down (by the deadline) of business that would have continued after the deadline absent the sanctions. However, General License 12 does not authorise unblocking frozen assets in the US, and General License 12 requires that any payments to the sanctioned Russian companies be made into blocked accounts. General License 12 also does not authorise the export of US goods to the sanctioned companies.
The second license, OFAC Ukraine General License 13, authorises US persons who hold debt and equity in three of the sanctioned companies, EN+, GAZ Group, and RUSAL, to divest their holdings of such debt and equity until 12:01am (US Eastern time) on May 7 2019. Unlike General License 12, General License 13 does not clearly state that it applies to subsidiaries of named companies, leading to speculation in industry about the scope of General License 13 to subsidiaries. Companies need to carefully consider this issue and companies holding shares of subsidiaries may be able to apply for a specific license or seek specific guidance related to divesting those holdings.
For non-US companies dealing with the sanctioned Russian individuals and companies, OFAC has not defined a specific list of “specific transactions” that could trigger US secondary sanctions, instead publishing a broad seven-factor test, which raises significant compliance challenges. Generally speaking, non-US companies should expect OFAC to take an expansive view of “significant transactions”. With the absence of further guidance from OFAC, they should also expect that most large or ongoing, witting transactions with the sanctioned individuals and companies could trigger sanctions after the “wind-down” period is complete. Non-US companies with complex ongoing relationships with the sanctioned Russian companies and oligarchs may wish to consider seeking specific guidance from OFAC.
In addition to the immediate impacts, the April 6 sanctions suggest that Washington is pivoting to a significantly harder line towards Russia. There is a significant likelihood of additional OFAC sanctions actions during the course of 2018, as well as some likelihood of Congress enacting new sanctions legislation before the end of the year.
In parallel, the financial sector is now watching whether the UK and European governments will seek to step up their sanctions response to reflect the measures undertaken by OFAC. In considering this, it is worth noting that domestically the US political situation in respect to Russia has a very different set of drivers and dynamics. Therefore, whilst recent events in Salisbury may have had some impact it should be borne in mind that the implementation of the US Congress led “Countering America’s Adversaries through Sanctions Act” (“CAATSA”) had already set the US on a different path as compared to their EU counterparts.
What we can be certain of is that geopolitically the situation is rapidly evolving. Given this, UK Finance members, along with the wider financial and business sector, will be well advised to carefully assess their compliance posture and risk exposure towards Russia in light of the evolving legal, political, and diplomatic context. In support of this, our UK Finance Sanctions Panel will continue to map common areas of industry uncertainty whilst also endeavoring to seek consensus on how best to practically implement the new US obligations. For now, however, members are faced with a situation of legal complexity and enormous challenges in mapping how and where they are risked exposed.
Next month UK Finance sanctions blog will address the continuing life of the JCPOA and prospects for managing an increasing divide between US – EU sanctions policy towards Iran.