Navigating the Russian and Ukrainian Sanctions MazeComplying Effectively Amid Uncertainty

Presented byJim Slear

ACFCS Webinar May 29, 2014

Certification, Training, Networking, News, Guidance

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Jim SlearPartner, Thompson Coburn

Washington, DC

Authorize “blocking” of persons and their property and related interests:

1. Ukraine-related: Undermining democratic processes or institutions in Ukraine or threatening peace, security, stability, sovereignty, or territorial integrity of Ukraine (6 March)

2. Russian-centered: Operating in the Russian arms or related materiel sector or owned or controlled by, or providing material or other support to senior Russian officials or designated persons (17 March)

3. Sector sanctions: Participants in Russia’s financial services, energy, metals and mining, engineering, and defense sectors, and persons providing material support, goods or services to, or acting on behalf of, designated persons (20 March)

U.S. Sanctions: “Escalating” Executive Orders

Commercially Significant Designations

(20 March) Included Bank Rossiya and four wealthy oligarchs:• Yuri Kovalchuk; Arkady and Boris Rotenberg; & Gennady Timchenko

• Other entities “blocked” under 50% ownership rule

(11 April) Included Chernomorneftegaz (nationalized Crimean subsidiary of Ukrainian Naftogaz)

(28 April) Included 17 entities owned or controlled by designated oligarchs

45 individuals targeted since 17 March • Most largely political or symbolic but still require blocking

• Rossneft and Rostec CEO designations don’t target companies

U.S. Listed Entities BANK ROSSIYA

• JSB SOBINBANK• CJSC ZEST• LLC INVESTMENT COMPANY ABROS

CHERNOMORNEFTEGAZ SMP BANK

• INVESTCAPITALBANK VOLGA GROUP

• AQUANIKA• AVIA GROUP LLC• AVIA GROUP NORD LLC• SAKHATRANS LLC• STROYGAZMONTAZH (SGM)• STROYTRANSGAZ GROUP (STG)• STROYTRANSGAZ HOLDING• STROYTRANSGAZ LLC• STROYTRANSGAZ OJSC• STROYTRANSGAZ-M LLC• TRANSOIL

OFAC’s 50% Ownership Rule U.S. companies must “block” entities 50% owned by SDNs

• Must spot and block “low hanging fruit” (SGM businesses)• Must act on “reliable information” when reason to know • Transactional due diligence is essential• Review of customer databases?

Unlisted companies that 50% or more owned. For example, these are SGM companies:• Lengazspetsstroy• Gazregion• Volgogaz • Krasnodargazstroy• Neftegazkomplektmontazh• Volgogradneftemash

OFAC’s 50% Ownership Rule:Seemingly new policies emerging

Control is not enough (strictly 50%)

Non-aggregation of multiple SDNs

Reasonable reliance on ownership details

Non-attribution for Tier 3 companies:• Must be a blocked party at Tier 2 for attribution of listed SDN [Tier 1] interest • Sovag (German Insurer)

• 49.1% - Timchenko/Volga Group (blocked) • 50.9% - Sogaz (not blocked, but Timchenko owns 12.5% of Sogaz)

• Unwritten, informally confirmed OFAC policy: 12.5% not attributed • May be inconsistent with “indirect” ownership rule

Divestment after blocking: Interim blocked assets must remain blocked

Query/Caution: How much will apply in non-Russia contexts?

OFAC Regulations – May 8, 2014

31 C.F.R. Part 589• Standard “blocked accounts” for funds in U.S. • May hold on account overseas but must provide

commercially reasonable interest• No set offs

• 50% ownership rule (Sec. 406) retains “directly or indirectly” language which could be at odds with third tier interpretation

U.S Sanctions not applicable to non-US companies

Not applicable to foreign subsidiaries BUT• Facilitation/approval risks

Not applicable to non-U.S. entities BUT• USD transactions subject to blocking or

enforcement (if deceptive) Designation (“blocking”) possible:• Persons that have “materially assisted, sponsored,

or provided financial, material, or technological support”

U.S Sanctions not applicable to non-US companies

Not applicable to foreign subsidiaries BUT• Facilitation/approval risks

Not applicable to non-U.S. entities BUT• USD transactions subject to blocking or

enforcement (if deceptive) Designation (“blocking”) possible:• Persons that have “materially assisted, sponsored,

or provided financial, material, or technological support”

New U.S. Export Restrictions

EAR & ITAR Policies

• Policy of denial: applications to export or re-export any high technology item to Russia or Crimea that contribute to Russia’s military capabilities

• Revocations: BIS/DDTC taking action to revoke any existing export licenses which meet these conditions.

• Other applications: All other pending applications and existing licenses will receive a case-by-case evaluation to determine their contribution to Russia’s military capabilities. DDTC license applications on hold since 27 March.

Certain Russian companies on SDN List added to BIS Entity List

• License required for the export, re-export or other foreign transfer of items subject to

the EAR to the designated companies• Presumption of denial.

EU Sanctions

Regulation 208/2014 (5 March 2014)• Misappropriation of Ukrainian state funds & human rights violations

Regulation 269/2014 (17 March 2014)• Actions that undermine or threaten territorial integrity, sovereignty and independence

of Ukraine and associated persons and entities

Listed 83 persons for asset freeze and visa ban• Former Ukraine officials (and associates) and Russian officials. • Limited commercial impact but may involve numerous entities

Two Crimean entities: Chernomorneftegaz & Feodosia (oil supplier)

No current authorization for sector sanctions

Canadian Sanctions

Special Economic Measures Act (SEMA)• Ukraine Regulations• Russia Regulations

Asset freeze for designated persons Disclosure obligation (continuing) • Individuals and entities in Canada and every Canadian

outside Canada must disclose to RCMP• Property in possession or control if reason to believe

owned/controlled, directly or indirectly, by target• Information about a transaction or proposed transaction in

respect of such property

Broader Commercial Impact of Canadian Sanctions

Gennady Timchenko, Yuri Kovalchuck, Arkady & Boris Rotenberg ExpoBank* RosEnergoBank* Bank Rossiya

• Sobinbank• CJSC Zest• LLC IC Abros

SMP Bank• InvestCapitalBank

Volga Group• Aquanika• Avia Group LLC• Avia Group Nord LLC• Sakhatrans LLC• Stroygazmontazh ("SGM")• Stroytransgaz Group ("STG Group")• Stroytransgaz Holding• Stroytransgaz LLC• Stroytransgaz OJSC• Stroytransgaz-M LLC

Missing: Transoil

What’s Next? De-escalation and unblocking

• Broad U.S. general license likely if this occurs Stalemate

• Minor adjustments and limited new designations? Russian invasion or interference

• Broad designations under EO 3?• Sanctions against Russian Government?• Broader EU and other sanctions and export restrictions?• Retaliatory sanctions/confiscation by Russia?

More?

Reading the Tea Leaves French President Hollande: "The possibility of de-escalation is here, finally . . . But we still

need this strict reminder."

Polish Prime Minister Tusk: "No one will opt to impose new sanctions right away but we should unanimously say that Europe is ready for further sanctions if Russia doesn’t give up its policy to support separatists."

Ukrainian President Poroshenko: “I don’t have the impression that [sanctions] are strong enough. I think more aggression is possible . . . and when aggression starts, no sanctions help.”

US State Department spokeswoman Jen Psaki: Washington will be "coordinating with the EU" whether to use additional punitive measures against Moscow. When asked whether she is asserting that Russia played a role in obstructing the voting in eastern Ukraine, she said "there is no question that armed militants played a role, as we've seen evidence of across the board. We've long believed and stated that there is a connection between Russia and these militants. We'll continue to evaluate what specific role they played. That's an ongoing discussion in the Administration now."

Russian President Vladimir Putin: Called on Tuesday for an “immediate halt to Ukraine's military operation against people in the east of the country.”

Planning Considerations

Other applicable country sanctions and differences in lists

Risk assessments:

• Anticipating new sanctions on current or future business partners

• Willingness to reject business without protective language

• EU and US problem if third tier sanctions effected

Anticipation of retaliatory actions/sanctions

• Russian litigation; refusal to accept termination or exclusions

• Possible loss of control or nationalization of businesses in Russian

• Possible Inability to process USD transactions in Russia

Your Questions

Jim Slear

+1.703.927.9993jslear@thompsoncoburn.com