OFAC Issues Revised Guidance Amid Confusion Over Ukraine-Related Sanctions

In the wake of many questions and some confusion highlighted by the recent and ongoing Ukraine-Related Sanctions, this week the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) issued Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked. OFAC states that the Revised Guidance has been issued in response to inquiries it has received.

The Revised Guidance reaffirms that property blocked pursuant to Executive Orders or OFAC regulations is subject to a sweeping definition and includes “any property or interest in property, tangible or intangible, including present, future or contingent interests. A property interest subject to blocking includes interests of any nature whatsoever, direct or indirect.”

OFAC goes on to explain that a blocked person (both individuals and entities) is “considered to have an interest in all property and interests in property of an entity in which such blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest.”

Therefore, OFAC considers an entity “owned in the aggregate,” whether directly or indirectly, 50% or more by one or more blocked persons to be a blocked person as well. In other words, an entity that is not identified on any of the U.S. Government’s “Lists” is a blocked (sanctioned) party if a blocked person (an individual or entity that appears on one of the Lists) owns 50% or more of the unlisted entity.

The practical difficulty in this coping with this broad definition is that it this rule covers aggregated and indirect ownership interests. It is not difficult to consider how even a rather simple ownership structure of a particular entity, say in Russia, might prohibit a U.S. company from accepting a recently received purchase order if that Russian entity is owned by 4 other entities in which a blocked person owns, through other entities or interests, a 50% stake of the Russian entity that submitted the purchase order.

Another unsettling statement in OFAC’s Revised Guidance is the warning to U.S. persons to proceed with “caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest.” So if the non-blocked/unlisted entity is managed by a President/CEO who is a blocked person who also owns a 30% interest in the company, OFAC seems to be strongly suggesting that U.S. companies avoid transactions with such entities.

The OFAC Revised Guidance does not represent a significant new development regarding economic sanctions administered and enforced by OFAC, but it does publicly illustrate the need for U.S. persons (including non-U.S. persons and companies that are subject to U.S. laws) to engage in enhanced due diligence and documenting those efforts before proceeding with a transaction, whether with a customer or other business partner in Russia and other countries where there is a targeted U.S. economic sanctions regime in place.

For assistance with understanding and complying with Ukraine-related and other economic sanctions regulations and Executive Orders, as well as representation before OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile).

U.S. Imposes New Export Controls on Russia’s Energy Sector and Adds Russian Shipbuilder to Entity List

On 1 August, Under Secretary of Commerce for Industry and Security, Eric L. Hirschhorn, signed a rule amending the Export Administration Regulations (EAR) to “impose additional sanctions implementing U.S. policy toward Russia,” and address the ongoing developments in Ukraine.  Under the rule, the Bureau of Industry and Security (BIS) imposes export controls on items used in Russia’s energy sector, including exploration and production from deepwater, Artic offshore, and shale projects.  The rule also adds state-owned shipbuilder, United Shipbuilding Corporation, to the Entity List.  On 31 July, the Office of Foreign Assets Control (OFAC) added United Shipbuilding Corporation, to the Specially Designated Nationals and Blocked Persons (SDN) List.

The new rule adds 15 CFR § 746.5 to the EAR, “Russian Industry Sector Sanctions,” and imposes export, reexport, and transfer controls on items classified under the following Export Control Commodity Numbers (ECCNs): 0A998 (Oil/gas exploration equipment, software, and data ), 1C992 (Commercial charges and devices containing energetic materials ), 3A229 (Firing sets and equivalent high-current generators), 3A231 (Neutron generator systems), 3A232 (Detonators and multipoint initiation systems), 6A991 (Marine or terrestrial acoustic equipment ), 8A992 (Vessels, marine systems or equipment, “specially designed” “parts” and “components” therefor), and 8D999 (“Software” “specially designed” for operation of unmanned submersible vehicles used in oil/gas industry).  These new controls apply “when the exporter, reexporter or transferor knows or is informed that the items will be used directly or indirectly in Russia’s energy sector” for exploration and production from deepwater (more than 500 feet depth), Artic offshore, and shale oil/gas projects.  The rule goes on to identify, without limitation, examples of items that are specifically covered by the new Russian Industry Sector Sanctions, as follows: drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Artic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing (“fracking”), high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers.  The rule makes clear that “[n]o license exceptions may overcome the licensing requirements under new § 746.5,” except for license exception GOV, and that the license review policy is a presumption of denial.

The rule also adds Supplement No. 2 to Part 746, Russian Industry Sector Sanctions List.  This new supplement includes the ECCNs referenced above, but also includes more than 50 “Schedule B” numbers.  Schedule B numbers are a commodity classification number used for exports, administered by the U.S. Census Bureau and used for reporting foreign trade data.  The following main Schedule B numbers and items are listed: 7304, 7305, and 7306 (line pipe, drill pipe, casing), 8207 (rock drilling or earth boring tools and bits), 8413 (oil well pumps and elevators), 8421 (industrial gas cleaning and separation equipment), 8430 (offshore drilling and production platforms and boring/sinking machinery), 8431 (oil/gas field machinery parts), 8479 (oil/gas field wire line and downhole equipment), 8705 (mobile drilling derricks), and 8905 (floating or submersible drilling or production platforms and floating docks).

For U.S. companies and foreign companies that are subject to U.S. export controls and the jurisdiction of BIS, these new Russian energy sector sanctions pose new compliance challenges and risks.  As with any economic sanctions and export controls, but particularly with the progressing multilateral Ukraine-related sanctions, companies are urged to exercise enhanced due diligence in their compliance efforts.  U.S. and foreign companies that currently export, reexport, or transfer commodities, technology, and software covered by the ECCNs and Schedule B, should be alerted to this new rule and its compliance requirements.  U.S. companies and foreign companies that are subject to U.S. export controls that might only sell or transfer such items domestically should also undertake additional due diligence and not “self-blind” on determining whether Russia is the ultimate destination of the items.

The new rule can be found at this link, http://1.usa.gov/1okGBSH.

For assistance with understanding and complying with this new BIS rule, Ukraine-related and other economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile).

Navigating Economic Sanctions Successfully: Yormick will Present Upcoming FCIB Webinar

On April 23, international trade and business attorney, Jon Yormick, will present a webinar on Navigating Economic Sanctions Successfully for The Finance, Credit & International Business Association (FCIB). The 1-hour webinar begins at 11:00 am EST and is open to FCIB members and non-members.

In his presentation, Yormick will provide an update on the recent economic sanctions relating to events in Ukraine, discuss key U.S. economic sanctions regimes, discuss recent OFAC General Licenses and TSRA licenses that give companies certain business opportunities within the U.S. sanctions regimes for Iran and other countries subject to U.S. sanctions, and emphasize economic sanctions compliance, including lessons learned from recent OFAC and BIS civil penalty cases.

Yormick is an experienced international business and trade attorney practicing in the areas Export Controls & Economic Sanctions, Customs & International Trade, and FCPA/Anticorruption. He represents U.S. and foreign clients before the U.S. Department of Commerce, Bureau of Industry and Security (BIS), the U.S. Customs and Border Protection (CBP), the U.S. Department of Homeland Security, Immigration and Customs Enforcement (ICE), the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC), and the U.S. International Trade Commission (ITC) on import and export laws and regulations, including the Export Administration Regulations (EAR), and the International Traffic in Arms Regulations (ITAR).  His clients include those in the advanced manufacturing, advanced materials, aerospace and defense, distribution, electronics, energy, medical device, oil/gas, pharmaceuticals, professional services, steel, textiles and apparel, and transportation/logistics sectors.

For more information about FCIB visit, www.fcibglobal.com, or use this link to register for the webinar, http://bit.ly/1kWK9Q4

Copyright/Disclaimer
New York State Statement of Client's Rights
Attorney Advertising