Expanding Ukraine and Russia sanctions program presents compliance challenges to U.S. and European Union businesses and organizations

In response to Russian intervention in the Crimea, the Obama Administration and the European Union (EU) have created separate sanctions programs targeting specific individuals and businesses within Ukraine and Russia.

The U.S. sanctions program presents three primary concerns for U.S. companies and individuals. First, U.S. persons should not transact business with sanctioned persons. Second, U.S. persons should monitor the sanctions program for rapid changes that come without notice. Third, U.S. persons doing business within Russia will need to watch for reciprocal economic sanctions Russia might impose.

From the EU perspective the message is similar; transactions with designated persons should not be carried out and if designated persons come to the attention of individuals or companies in the UK then they should be reported to the Treasury. Given the strong signals that the EU and UK Ministers have sent over the situation in Ukraine and the equally unyielding Russian response regarding Crimea, it appears inevitable that the ambit of the sanctions in this area will widen in the near future; those operating in the EU and UK should carefully monitor the developing situation.

Sanctions Imposed by the United States

President Obama has signed three Executive orders that block the property of Russian and Ukrainian individuals and organizations designated by the Secretary of the Treasury and prohibiting transactions with or benefiting those designated persons. The Executive orders create a regulatory framework allowing sanctions against individuals or organizations falling into the following categories:

• persons responsible for or complicit in undermining the Ukrainian government’s control in Crimea (EO 13 360, issued March 6, 2014);
• Russian officials or persons within the Russian arms sector (EO 13 361, issued March 16, 2014); and
• persons operating within the specific Russian economic sectors as determined by the Secretary of the Treasury (EO 13 362, issued March 20, 2014).¹

In addition to these specific categories, each Executive order includes two broader provisions allowing the Secretary of the Treasury to designate for sanction persons who (1) provide material assistance or support to, (2) are owned or controlled by, or (3) act on behalf of any person designated under the Executive orders.

So far, the Treasury Department’s Office of Foreign Assets Control (OFAC), on behalf of the Secretary of the Treasury, has designated 31 individuals and one organization, Bank Rossiya, for sanctions under the three Executives orders. According to the White House, the individuals are Russian and Ukrainian government officials and Russian businesspersons. OFAC has added all of these names to its Specially Designated Nationals and Blocked Persons list (SDN List). A searchable version of the SDN List may be accessed at http://sdnsearch.ofac.treas.gov/.

Given the large and uncertain scope of the Ukraine-related sanctions, U.S. companies and individuals should watch the SDN list, particularly if they are conducting business with individuals or organizations in Russia or Ukraine.

U.S. organizations and individuals should also be aware that organizations owned or controlled by a designated person are possible sanction targets, and in certain cases are blocked whether or not the organization itself appears on the SDN List. Under OFAC rules, an entity owned fifty percent or more by a listed person is itself “blocked” and subject to sanctions as a matter of law. An ownership of less than fifty percent or control by an individual such as a CEO or Board Chair could also trigger sanctions depending on the specific facts, and based on OFAC determinations of the scope of “control” in specific cases. OFAC expects entities to conduct due diligence on their own direct customers (including, for example, their ownership structure) to confirm that those customers are not persons whose property and interests in property are blocked.

Should U.S. persons discover a potential or existing partner is covered by the Ukraine-related sanctions, they should cease activities with the sanctions target immediately and determine whether it is feasible or advisable to seek a license for continued activity or wind-down activities. In general, the Executive orders prohibit giving or receiving any funds,

goods, or services to or from a blocked person. This includes transactions done for the benefit of that person, monetary transfers and donations of food, clothing, and medicine.

Sanctions program likely to evolve and expand without notice

U.S. persons should continually monitor the scope of the Ukraine-related sanctions as the sanctions program could rapidly evolve or expand to encompass previously unaffected business relationships with no prior notice. The regulatory framework created in the three Executive orders provides the Department of Treasury with great flexibility to designate additional persons subject to sanction and to target additional sectors of Russia’s economy. In particular, EO 13662 grants the Secretary of the Treasury the ability to designate companies operating within “…such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State…” The Executive Order does not appear to limit the sectors to those listed, instead allowing the Treasury to expand the program as needed.

Moreover, as the situation in Ukraine and Crimea develops, President Obama may issue another Executive order imposing additional sanctions. Each of the previous Executive orders expanded the Ukraine-related sanctions program to capture broader categories of persons. For example, the first Executive order tied the sanctions narrowly to the ensuing conflict within Ukraine, but the later orders expanded the scope to include any Russian official, and finally into broad sectors of Russia’s economy. As tensions continue, another Executive order cannot be ruled out and the expansion of the sanctions program can affect existing business.

Expanding the sanctions, either by increasing the scope or by designating additional persons, will likely occur with no prior notice. In section 7 of each Executive order, President Obama found that if blocked persons were given prior notice of a change in status under the sanctions program, they could instantly transfer assets prior to the sanctions affecting them. Thus, each Executive order notes that no notice will be given before including the person on the SDN list.

U.S. entities may find that an existing partner suddenly becomes listed as a designated person, affecting future and continuing relationships. Penalties for violation of the sanctions can be up to US$250,000 per occurrence for civil infractions, and up to US$1,000,000 and up to 20 years in prison for criminal activities. In addition, any financial transfer in violation of the sanctions must be blocked (seized) when it comes into possession of a person subject to U.S. jurisdiction. Effectively this means that payments to or from a sanctioned person may be blocked by operation of law and could be lost forever.

The European Council Regulations

The two European Council Regulations came in to existence for different purposes: Regulation No. 208/2014 due to the misappropriation of economic resources and human rights violations against the Ukrainian people; and RegulationNo.269/2014 in order to take action against people responsible for undermining or threatening the territorial integrity and independence of Ukraine. However, both sets of Regulations go about achieving their goals in broadly similar ways.

The EU Regulations require the freezing of assets belonging to, owned, held or controlled by persons designated in the annexes. Prohibitions are imposed on making funds or economic resources available (directly or indirectly) to designated persons.

Although EU Council Regulations are binding on Member States, individual States must set domestic rules for the penalties applicable to those who infringe them and nominate a competent responsible authority. The UK Treasury, the responsible government department concerned with economic sanctions, effected this by making Regulations contained in two Statutory Instruments coming into force on 6 and 18 March 2014, respectively.2 These have implications for individuals and corporations acting in the UK as well as for UK nationals and companies incorporated under the laws of the UK acting elsewhere.

Prohibited activities

In each Statutory Instrument, Regulations 3-7 contain strict- liability prohibitions against: dealing with funds or economic resources belonging to, owned or controlled by a designated person; making funds or economic resources available to a designated person; and making funds or economic resources available for the benefit of a designated person.

The Schedules to the UK Regulations set out obligations imposed on relevant institutions. These institutions are:

1. those who have permission to carry on regulated activities under Part 4A of the Financial Services and Markets Act 2000 (this would include those responsible for dealing in, managing or advising on investments; dealing in shares, securities, bonds or futures; and accepting deposits);
2. EEA firms mentioned in para 5(b) Schedule 3 of the FSMA 2000 which have permission to accept deposits (for example European financial institutions, investment firms and insurance firms which do not have their relevant office in the UK); or
3. an undertaking which operates a currency exchange office, transmits money or cashes cheques for customers.

A relevant institution must inform the Treasury as soon as practicable if it knows or has reason to suspect that a person is a designated person or that a person has committed an offence under Regulation 9 or 10. The information on which the suspicion is based must be communicated to the Treasury, so too must information about the value of the funds or economic resources held in relation to the suspected person. The Treasury may also request further information as to the nature of transactions or resources held and may require the production of documents.

Failure to comply with the prohibitions leaves individuals and corporations exposed to prosecution. These offences may be committed: by individuals or corporate bodies acting in the UK; anywhere in the world by UK nationals or bodies incorporated under the laws of the United Kingdom; and in British Overseas Territories by any person (in respect of individuals designated in EU Regulation 208/2014).

An offence is committed by a person who

• contravenes any of the prohibitions;
• participates in activities knowing that their object is the circumvention of the prohibitions or in order to enable the contravention of those prohibitions;
• in support of an application to the Treasury for a licence, knowingly or recklessly provides false information or provides a false document; or
• acts in excess of the conditions of a properly obtained licence.

A relevant institution commits an offence if it fails to comply with any request the Treasury may make of it or any other requirement imposed under the Schedules.

Corporate liability is dealt with in Regulation 11. Where a body corporate commits any offence under the Regulations and it is done so with the consent or connivance or through the negligence of an officer of the body corporate, the officer concerned as well as the body corporate is liable to be prosecuted.

Commission of offences under Regulations 3 to 7 of the UK Regulations is punishable by up to two years’ imprisonment or an unlimited fine, or both. Offences contrary to the reporting requirements in the Schedules are punishable with up to three months’ imprisonment or a fine of up to £5,000.

There are a number of statutory defences contained in the Regulations. Because the Treasury can grant licences to cover certain transactions, no offence would be committed if a licence had been issued for a transaction with a designated person. A licence would likely be required, for example, to release frozen funds in order to pay for legal advice.

No offence would be committed if a payment was made into a frozen account: under a contract concluded before the account was frozen; as payment of interest; or in satisfaction of a judgment or arbitration concluded in an EU Member State.

Sensible precautions

To avoid exposure to the risk of prosecution for breach of the prohibitions, any individuals or corporations that have dealings with designated persons or that suspect they may have dealings with them should check their client’s details against those available online (https://www.gov.uk/ government/publications/financial-sanctions-consolidated- list-of-targets).

Particularly, careful regard should also be had to situations where designated persons own majority shareholdings or rights in companies, the effect of which could be that the resources held by that company could, in effect, be held or controlled by the designated person.

Reciprocal sanctions may affect U.S. and EU entities doing business in Russia or Ukraine

In addition to the requirements imposed by the sanctions program, U.S. and EU entities conducting activities within Russia should keep watch for possible reciprocal sanctions from Russia in retaliation for the U.S. and EU sanctions programs. Currently, Russia has imposed only a reciprocal ban on certain U.S. government officials entering Russia, but not any reciprocal economic sanctions against U.S. companies or businesspersons. U.S. and EU entities with branches within Russia may wish to stay abreast of developments in possible reciprocal economic sanctions, and may wish to contact local counsel for advice on complying with Russian law.

Авторы: John P. Barker, John B. Bellinger III, Kathleen Harris, Baruch Weiss, Michael J. Atkinson

Источник: http://www.lexology.com/library/detail.aspx?g=ab1f368e-8f34-4bb7-a589-ee44cebe4129&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Other+top+stories&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2014-04-04&utm_