Key Points:

  • Dozens more Russian and Ukrainian entities have been designated as prohibited / restricted parties
  • A limited General License authorizes transactions, for a brief period of time, to halt business with a specific Russian entity
  • The designations reflect OFAC’s continued use of the “50 percent rule,” and the challenges of diligence on Russian transaction partners

Designations. On September 1, 2016, the U.S. Office of Foreign Assets Control (OFAC) designated 37 individuals and entities pursuant to its Ukraine-related sanctions program.  OFAC last designated individuals and entities under the Ukraine program in December 2015.

The most recent round of designations occurred for various reasons, as follows:

  • One entity, CJSC ABR Management was designated for acting for or on behalf of Bank Rossiya. According to OFAC, Bank Rossiya managers specifically founded ABR Management as a means to evade sanctions.
  • Eighteen construction, transportation and defense entities were designated for operating in the Crimea region of Ukraine. Seven of these entities were involved in the construction of the Kerch Bridge, designed to connect the Crimean peninsula to Russia. Among them was PJSC Mosotrest, a major Russian construction company holding a multi-billion ruble contract for the development of the bridge. The remaining entities were designated for operating defense firms in Crimea and for operating in the Crimean maritime sector.
  • Six individuals were designated for asserting unauthorized governmental authority and acting for or on behalf of the Donetsk People’s Republic or Luhansk People’s Republic, each of which was designated previously.
  • Eleven individuals were designated for asserting unauthorized governmental authority in Ukraine as so-called officials of the Republic of Crimea.
  • The Salvation Committee of Ukraine was designated because of its affiliation with former Ukrainian Prime Minister Mykola Azarov, who was previously designated for misappropriating Ukrainian assets.

Separately, nearly 100 subsidiaries of previously designated entities (e.g., Bank of Moscow, Gazprombank and Gazprom) were added to the Sectoral Sanctions Identification List as well.  As a result, there are now significant restrictions on conducting certain transactions with or involving these entities

General License No. 10. To ease the pain at least a (very) little, simultaneous to announcing these designations, OFAC issued General License No. 10 to temporarily authorize certain transactions that are ordinarily incident and necessary to divest or transfer to a non-U.S. person holdings in PJSC Mostotrest.  Importantly, the General License does not authorize U.S. persons to actually sell or purchase such holdings or to facilitate non-U.S. person transactions with blocked parties.  In addition, the General License is effective only through October 1, 2016.

Analysis.  Through these actions, the United States is keeping the heat on Russia to comply with its commitments under the Minsk agreements.  In that regard, U.S. sanctions are likely to continue – and possibly expand – unless and until Russia implements a comprehensive cease fire, withdraws all weapons and military personnel, and restores Ukraine’s control over its side of the internationally recognized border.

These OFAC actions also highlight the continued importance of conducting robust due diligence on transaction partners in Russia and other countries subject to significant U.S. sanctions. Under OFAC’s somewhat notorious “50 percent rule,” any entity owned in the aggregate 50 percent or more by one or more blocked persons is itself considered to be a blocked person – even if the owned entity is not listed on any prohibited parties list.

These most recent round of designations reinforce, however, that even parties that are not owned by a blocked party may become designated if they are acting on behalf of, or otherwise controlled by, a blocked party.  Accordingly, due diligence on potential transaction partners should consist of more than a basic ownership assessment.  U.S. companies also need to inquire about who controls their non-U.S. business partners.  Otherwise, there is a heightened risk of entering into a transaction with a partner who later becomes designated, at which point the U.S. company could be prohibited from taking action even to unwind the transaction absent explicit OFAC authorization.  And as General License No. 10 illustrates, the scope of such authorizations can be exceedingly limited.

Unfortunately, due diligence on Russian counterparts presents unique challenges. The ownership and organizational structures of such entities can be convoluted and obscure.  Accordingly, if a company has any reason to think a Russian business partner is affiliated in any way with a sanctioned entity, it is essential to enlist expert assistance to fully tease out ownership and control before proceeding.