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Mastering Russia Sanctions: A Comprehensive Compliance Guide

Gain insights into navigating the complex landscape of Russia sanctions including blocking and sectoral sanctions, with a step-by-step approach outlined. Learn about recent developments like CAATSA and its implications.

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Mastering Russia Sanctions: A Comprehensive Compliance Guide

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  1. 11th Annual A.C.E.S. Compliance Summit Anti-Corruption, Export Controls, and Sanctions April 18, 2018 Russia Sanctions Case Study: A Step by Step Guide for Navigating the Complex Sanctions Landscape Track Session 1 10:50 a.m. - 11:30 a.m. Track B: International Trade/Sanctions

  2. Speakers F. Amanda DeBusk (moderator) Chair, International Trade Department Hughes Hubbard & Reed LLP Tyler Hand Global Head of Sanctions, Interdiction & Anti-Corruption, Global Compliance Western Union Jeff Kruszewski VP & Senior Corporate Counsel U.S. Bank Robert Peri Director, Global Sanctions Compliance Citigroup

  3. Overview: Russia Sanctions Russia sanctions fall into the followingthree broad categories: • Blockingsanctions against specific individuals and entities identified on the Specially Designated Nationals and Blocked Persons List (“SDN” List) • Non-blocking “sectoral” sanctions against specific entities operating in the financial, energy, and defense sectors of the Russian economy and listed on the Sectoral Sanctions Identification List (“SSI” List) • A comprehensive embargo on Crimea, including a new investment ban and prohibition on the exportation or importation of goods, technology, or services to/from the region

  4. Blocking Sanctions • Transferring, paying, exporting, withdrawing, or otherwise dealing in the property or interests in property of an entity or individuals listed on the SDN List • Prohibitions extend to virtually all transactions with SDNs • E.g., Exxon enforcement case in 2017 • Entities that are 50% or more owned by one or more blocked persons are also blocked (the “50 Percent Rule”) • Ownership can be direct or indirect, and the percentage can be in the aggregate

  5. Sectoral Sanctions • Sanctions imposed on specified U.S. persons operating in the Russian economy identified on the SSI List • "50 Percent Rule": In addition to designated entities, the SSI List restrictions apply to entities owned, directly or indirectly, by 50% or more by those designated entities, either individually or in the aggregate • Implemented through OFAC Directives 1-4 • Applies to activities by U.S. persons or within the United States

  6. Sectoral Sanctions: Directives • Directive 1: Prohibits dealings in newequity and in new debt of longer than14 days maturity of entities in Russia’sfinancial services sectorthat are made subject to this Directive • Directive 2: Prohibits dealings in new debt of longer than 60 days maturity of entities in Russia's energy sector that are made subject to this Directive • Directive 3: Prohibits dealings in new debt of longer than 30 days maturity of entities in Russia’s defense and related material sector that are made subject to this Directive

  7. Sectoral Sanctions: Directives (cont.) • Directive 4: Prohibits the provision, exportation, or re-exportation of goods, services, or technology in support of exploration or production for deep-water, Arctic offshore, or shale projects that have the potential to produce oil and: • For projects in Russia (or its maritime area extending from its territory): that involve any entity subject to this Directive (no matter their level of involvement); • For projects outside Russia: that involve any entity subject to this Directive if such entity has (1) at least a 33% ownership interest OR (2) a majority of the voting interests in the project, if the project was initiated on/after January 29, 2018

  8. Sectoral Sanctions: Directives (cont.) • The prohibitions on the exportation of services include drilling services, logistical and management service, mapping tech • The prohibitions do not extend to financial services, including insurance

  9. Recent Developments: CAATSA • Enacted 8/2/2017, the Countering America's Adversaries Through Sanctions Act (CAATSA) codified existing U.S. sanctions and introduced additional sanctions authorities, including those targeting: • Section 225: Significant investments in frontier oil projects • Section 226: Foreign financial institutions facilitating certain transactions • Section 228: Persons facilitating significant transactions on behalf of sanctioned individuals • Section 231: Transactions with persons that are part of, or operate on behalf of, identified entities in Russia's defense and intelligence sectors • Section 232: Persons making certain investments in Russian energy export pipelines • The Administration has not yet made use of any of these new authorities, but has issued guidance regarding their implementation

  10. Recent Developments: CAATSA (cont.) • Section 241: Mandated report on the “significant senior political figures and oligarchs in the Russian Federation and Russian parastatal entities” • 1/29/2018: The Treasury Department delivered to Congress a classified report identifying such political figures and oligarchs. The public version of the report identified 114 political figures and 96 oligarchs, based on a Forbesmillionaires list • 4/6/2018: Treasury added a number of such political figures and oligarchs to the SDN List and entities owned or controlled by them • U.S. companies now face heightened primary sanctions risks when doing business in Russia or with Russian business partners • General licenses temporarily available for certain wind-downs and divestitures

  11. Hypothetical – Background • A U.S. oilfield services company (“U.S. Oil Co”) has a contract to manufacture and maintain a wellhead for a deep-water project in the Gulf of Mexico (Mexican waters). • The drilling concession was formally issued in February 2018. • The owner of the concession is a joint venture between U.S., Mexican, and E.U. oil and gas companies, each of which has a 33.3% stake. • The JV is organized in Mexico. • The project is being insured by a U.S. insurer.

  12. Hypothetical – Background (cont.) • The project is being financed by a U.S. bank • A U.S.-origin floating storage vessel will store the oil at the field and transport it to a refinery in Texas • Before delivery of the wellhead, Rosneft – an entity subject to Directives 2 and 4 – acquires a 50% interest in the Mexican company

  13. Hypothetical – Questions • Is the JV now subject to Directive 2 (prohibition on new debt of greater than 60 days maturity)? No: the JV is not 50% (or more) owned by an entity subject to Directive 2. • While the Mexican company is now itself subject to the Directives under OFAC’s 50 Percent Rule, it only owns 1/3 of the JV.

  14. Hypothetical – Questions (cont.) • Are JV projects now subject to Directive 4 (prohibition on providing goods/services/technology to frontier oil projects)? Yes: frontier oil projects in which the JV is involved (e.g., deepwater projects) are subject to Directive 4. • Directive 4 applies to deepwater projects involving any entity subject to the Directive that has (at least) a 33.3% interest in the project. • The Mexican company is subject to Directive 4 under the 50 Percent Rule, and has a 33.3% interest in JV projects.

  15. Hypothetical – Questions (cont.) • Can U.S. Oil Co. make delivery of the wellhead? Why/why not? No: an entity subject to Directive 4 (the Mexican company) owns a 33.3% interest in the project, and it was “initiated” after January 29, 2018. • Directive 4 prohibits provision of goods in support of production for deepwater projects.

  16. Hypothetical – Questions (cont.) • Can a U.S. bank process a payment to U.S. Oil Co. for consulting services performed prior to Rosneft’sacquisition of an interest, and that is more than 60 days past due? Yes: U.S. Oil Co. is not subject to Directive 2, and provision of financial services is not prohibited under Directive 4. • Can the U.S. bank continue to finance the project? Yes: the JV is not subject to Directive 2,and provision of financial services is not prohibited under Directive 4. • However, the U.S. bank would need to ensure that no credit is being extended directly to Rosneft (as opposed to the JV itself) – except within the permissible tenor.

  17. Hypothetical – Questions (cont.) • Suppose that, instead of the U.S. bank, VTB Bank is now providing U.S.-dollar financing to the project. VTB is a Russian bank whose CEO is an SDN. (VTB is not itself designated.) Can VTB provide the financing? Yes: no debt is being extended to an SSI (VTB). Rather, VTB is providing the financing. • While VTB’s CEO is an SDN, there is no primary sanctions risk (because the JV is not a U.S. person) and also very low secondary sanctions risk (because no services are being provided directly to the CEO himself).

  18. Hypothetical – Questions (cont.) • Can the U.S. insurer continue to provide coverage for the project? Yes: prohibitions imposed by Directive 4 do not include insurance. • If any insurance claim is made, can a U.S. bank process the payment? Yes: prohibitions imposed by Directive 4 do not include financial services.

  19. Hypothetical – Questions (cont.) • Can a U.S. supplier provide replacement parts to the floating storage vessel? Why/why not? No: the floating storage vessel likely would be considered a field production tank (which is part of the “production” stage of a project) and thus still subject to Directive 4.

  20. Questions?

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