THE UNITED STATES
1. INTRODUCTION OF THE LATEST DASKAA BILL
On 13 February 2019, a group of five American senators headed by Sen. Lindsey Graham (Republican, South Carolina), introduced S. 482, the “Defending American Security from Kremlin Aggression Act” (DASKAA), a Bill aimed at ramping up economic pressure on Russia with amendments to the existing sanctions regime. Earlier, on 1 August 2018, Senator Graham introduced a similar Bill, S. 3336. S. 3336 was referred to the Senate Committee on Foreign Relations but failed to make it through the committee and necessary voting before the 115th United States Congress ended its term on 3 January 2019. Bills that are introduced but not enacted by the end of a Congress usually expire and can be reintroduced in the next session with amendments.
With respect to the sanctions regime, S. 482 focuses on strengthening existing restrictions and introducing new ones in response to Russia’s alleged interference into the activity of foreign democratic institutions, and to Russia’s activity in Ukraine. Other provisions include other restrictions and boost the authority of U.S. government agencies, especially that of the U.S. Department of State, to coordinate enforcement.
S. 482 would impose: (1) restrictions against 24 Federal Security Service (FSB) agents, in response to the detention of 24 sailors by Russia during the Kerch Strait incident; (2) sanctions against banking industry; (3) certain restrictions against provisions of services and leases, as well as the provision of goods, technology, financing, or support for the Russian crude oil industry; (4) restrictions against investments in projects, including ones that boost Russia’s LNG exports; (5) sanctions against the Russian shipbuilding industry; (6) sanctions against the high-tech cyber sector; and (7) restrictions against Russia’s sovereign debt. The restrictions would cover political figures, oligarchs, and their family members, as well as other persons that contribute to what the U.S. government determines to be the illicit and corrupt activity of the regime.
Section 704 of the Bill (Sec. 704 Establishment of a national fusion center to respond threats from the Government of the Russian Federation) calls on establishment of a special center with the authority to coordinate sanctions regime with respect to Russia.
Paragraph (C) of subsection 1(b) of Section 704 of the Bill calls for relentless pursuit of operations aimed at circumventing the financial aspects of the sanctions regime.
In particular, this center will fight against the covert transfer of illicit money, through shell corporations and financial institutions, to facilitate corruption, crime, and other activities of malign influence, including through political parties and interest groups. This would function through a special financial monitoring facility and the SWIFT system.
SWIFT has already developed, on its own, a system of automatic sanctions compliance with sophisticated algorithms being its key component. The system has proven to be a success in commercial transactions worldwide. Considering SWIFT’s tight cooperation with, and its systematic disclosure to U.S. government agencies, the technical peculiarities of the day-to-day functioning of the proposed center is not an issue. Though the precedent was set by the program for the financial monitoring of terrorist activity, the call in Section 701 of the Bill to name Russia as a state-sponsor of terrorism would be a starting point for U.S.-SWIFT cooperation. The moment provision of the Bill would be enacted into law cooperation between the United States and SWIFT would be boosted. It also worth to note, that EU and U.S. financial regulators are in tight contact
The Bill would also increase the sanctions risks for oil and gas industry. In particular, restrictions would cover the provision of goods, technology, financing, or support for the Russian crude oil industry, the construction of new facilities, and the repair, maintenance, and other support of existing facilities. Investments contributing to the development of the export potential of Russia’s gas industry overseas also would also be restricted.
The Bill emphasizes exemptions for existing projects, as well as the importance of official guidance about the list of restricted services, technologies, finance, and support, which would be issued by the Department of State, the Department of the Treasury, and the Department of Energy within 90 days after enactment of the Bill into law.
Due to the events in Kerch Straight, under some specific circumstances, all entities operating in Russian shipbuilding industry would be sanctioned. The Bill clarifies that these sanctioned entities would be under the same restrictions as those listed in SDN List.
In 2017, the Sponsor of the previous version of DASKAA, Sen.Graham introduced 13 Bills on multiple topics, but only one was enacted.
According to govtrack.us, an American service that tracks legislative initiatives using metrics provided by Skopos Labs, S. 482 has only a 7% chance to be enacted into law.
Nonetheless, the following conclusions can be drawn if the latest DASKAA Bill, or some version of it:
1. It would increase the sanctions risks for entities in finance and insurance industries that have sanctioned or partially-sanctioned operations as part of their commercial activity.
2. It would increase the sanctions risks for the Russian oil and gas industry.
3. It would increase the sanctions risks for the Russian shipbuilding industry.
2. OFAC v. INSTAR LOGISTICS
On 26 January 2019, the U.S. Department of the Treasury announced the addition of the Russian company Instar Logistics onto its Specially Designated Nationals List (SDN List).
This case is precedent-setting and demonstrates a growing trend to designate persons involved in business transactions with the Russian defense industry, even if there is little or no U.S. nexus in their operations. Previously, Russian entities that had no U.S. nexus and were regulated by Russian foreign trade laws were not placed on the SDN List due to business activity with a previously designated entity.
As was described by the Treasury Department, Instar Logistics LLC interacted on the matters of shipping and forwarding operations with Vakhtang Karamyan (Designated on December 22, 2015), the business development director of Kalashnikov Concern, who was previously designated by U.S. Office of Foreign Assets Control (OFAC). OFAC noted that Instar Logistics has been designated for acting or purporting to act for or on behalf of, directly or indirectly, Kalashnikov Concern.
It might be the case that OFAC got the information on Instar Logistics transactions in a passive way, using information provided by financial institutions, customs brokers, and stevedores, as well as financial control entities and individuals as part of their compliance programs and policies. Some corporate sanctions compliance policies require employees, such as compliance managers, legal counsel, and some subject matter experts, to report possible sanctions violations or other doubtful operations to OFAC. Statutory penalties for a failure to report may reach hundreds of thousands of U.S. dollars.
The Instar Logistics case escalates the sanctions risks for all entities with close connections to the defense industry of Russia. Those business relations might draw more active and precise attention by the U.S. Treasury.
Currently, Instar Logistics is in close contract with the U.S. Treasury Department and intends to be delisted from the SDN List.
3. DELISTING OF OLEG DERIPASKA’S ASSETS
On 27 January 2019, the U.S. Department of the Treasury announced the delisting of Oleg Deripaska’s RUSAL, En+, and Eurosibenergo from SDN List, as well as General Licenses with respect to Deripaska’s assets, which had been under relatively mild sanctions with respect to business relations that existed before the introduction of sanctions. OFAC’s final decision on delisting has marked an end in this story. See OFAC FAQs 577, 581 and 625. For more information read RUSAL’s case summary (in Russian) in our bulletin.
4. RAMPED-UP ECONOMIC PRESSURE ON IRAN
International labor relations with Iran are considered a sanctions risk, as demonstrated by a recent case involving a subsidiary manager’s personal liability.
On 7 February 2019, the U.S. Department of the Treasury announced a settlement with the energy-service company Kollmorgen Corporation (incorporated in the U.S. state of Virginia). To settle six episodes of a violation of the Iran sanctions, which actually were conducted through a Turkish-based subsidiary (Elsim Elektroteknik), Kollmorgen shall pay a penalty of USD 13,381. For actions leading to the sanctions violations, the Treasury added the former manager of the Turkish subsidiary, Mr.Evren Kayakiran, to Foreign Sanctions Evader (FSE) list (OFAC publishes a list of foreign individuals and entities determined to have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions on Syria or Iran pursuant to Executive Order 13608. It also lists foreign persons who have facilitated deceptive transactions for or on behalf of persons subject to U.S. sanctions. Collectively, such individuals and companies are called “Foreign Sanctions Evaders” or “FSEs.” Transactions by U.S. persons or within the United States involving FSEs are prohibited. The FSE List is not part of the Specially Designated Nationals (SDN) List. However, individuals and companies on the FSE List may also appear on the SDN List).
According to the disclosed information, in 2013 Kollmorgen Corporation acquired a Turkish-based subsidiary, the Elsim Elektroteknik company. Before long, the company implemented a number of measures and conducted a number of events aimed at decreasing the sanctions risks and preventing sanctions incidents, including hiring of external consultants (a law firm, an audit company, and a management consultancy). They conducted thorough Due Diligence and took other actions to adapt the newly acquired Kollmorgen asset to international compliance standards.
Despite the efforts made by the U.S.-based head office to prevent business relations with Iran, the Turkish subsidiary provided maintenance and delivery of energy equipment, and sent out qualified personnel on business trips to Iran, where people had been working as embedded associates of Iran oil enterprises for two years after the acquisition by Kollmorgen. In 2015, one of the Turkish-based associates informed the ethics compliance hotline of the parent company about the possible violation of the sanctions against Iran and called for action. The management of the Turkish subsidiary found out that the head office had been informed, and the Turkish managers tried to hide those violations, thereby intentionally misleading the head office. The parent company then conducted a full-scale internal investigation, gathered all the facts with respect to its subsidiary’s Iran operations, and filed a comprehensive report to the Treasury Department.
On top of that, Kollmorgen implemented a number of measures aimed at prevention of further incidents. These measures included: (1) termination of the Elsim Elektroteknik managers responsible for, and involved in, the apparent violations; (2) implementation of new procedures to educate Elsim employees on compliance with U.S. economic and trade sanctions; (3) a request to Elsim to seek pre-approval from an officer based outside of Turkey for all foreign after-sales service trips; and (4) a request to Elsim to inform its major Turkish customers that Elsim cannot provide goods or services to Iran.
OFAC determined the following to be mitigating factors: (1) neither Kollmorgen nor Elsim Elektroteknik had received a penalty notice or finding of violation from OFAC in the five years preceding the earliest apparent violation; (2) Kollmorgen cooperated with OFAC by conducting an effective and extensive internal investigation and submitting a comprehensive voluntary self-disclosure to OFAC; and, as described in detail above, (3) Kollmorgen’s extensive preventative and remedial conduct. If OFAC had determined this case was egregious, the base civil monetary penalty amount for the apparent violations could have been $750,000.
OFAC determined the following to be aggravating factors: (1) Elsim willfully provided goods and services to Iran in violation of the Iranian Transactions and Sanctions Regulations; (2) Elsim management knew its employees were traveling to Iran to provide services and directed them to do so; (3) Elsim management concealed the apparent violations from Kollmorgen and others by deleting and falsifying records as well as directing their subordinates to do so; and (4) the apparent violations conferred economic benefit to Iran.
After considering both mitigating and aggravating factors, as well as actions of the parent company that led to self-disclosure, the Treasury Department determined the case to be non-egregious and imposed penalty in amount of USD 13,381 for six episodes of sanctions regime violations.
In the case materials, OFAC emphasized that if Kollmorgen had failed to conduct actions that led to self-disclosure, the statutory maximum penalty of USD 1,500,000 and USD 750,000 as an additional penalty could have been imposed.
For actions that led to violation of sanctions regime and attempts to hide the violations, pursuant to and enforcing E.O 13608, the Treasury Department added Evren Kayakiran, the manager of Turkish-based subsidiary, to the Foreign Sanctions Evader (FSE) List.
The U.S. Department of the Treasury calls on all parties involved to remain vigilant while doing business with Iran, specifically:
1. Conduct thorough Due Diligence with respect to affiliated persons, subsidiaries, and counterparties, known to be involved in: (1) operations with countries or persons falling under sanctions regulations; or (2) operations with heightened sanctions risk due to its geographical components.
2. Implement proactive controls when U.S. persons, directly or indirectly, acquire companies with preexisting relationships with sanctioned persons and jurisdictions.
The Kollmorgen case highlights the importance of the end user and the true origin of American goods and services and it emphasizes an increased sanctions risk with respect to labor relations with Iran. The companies with most heightened risks are ones that supply or contract with corporations with business in Iran, as well as any financial and banking institutions that make these operations possible. As was demonstrated by this case, the manager of the foreign subsidiary may suffer personal liability for the sanctions violation.
On 13 February 2019, the Treasury Department updated the sanctions list in response to the discovery of cyber-espionage activities for Iran and the associated activities of the Islamic Revolutionary Guard Corps. New Horizon Organization and the Net Peygard Samavat Company, along with a number of individuals affiliated with these companies, have now been added to the SDN List. According to Reuters, a former U.S. Air Force intelligence specialist and U.S. citizen, Monica Witt, is among them. Witt was sanctioned individual due to her cyber-espionage in favor of Iran and breach of the U.S. national security through the distribution of malicious software among former and current U.S. military personnel.
This cyber-espionage case demonstrates the systematic and heightened attention of the U.S. to Iran and the Iranian sanctions regime and it escalates the risks of everyone doing business in or with Iran. Because of this case, heightened vigilance is required from high-tech companies that use U.S. parts and components, as well as software, and persons that use U.S. currency for doing business with Iran. The financial and insurance institutions that support these transactions also bear high risks.
5. RAMPED-UP ECONOMIC PRESSURE ON VENEZUELA
On 8 January 2019, the Office of Foreign Assets Control of the U.S. Department of the Treasury, pursuant to and enforcing Executive Order (E.O.) 13850, designated seven individuals, 23 entities, and one aircraft. Among the designated individuals are two former officials of the Venezuelan Treasury, as well as individuals with significant contributions to Venezuela’s shadow economy, known for ownership and control of Globovision Tele (a major Venezuelan media network with assets on U.S. soil).
According to its press-release, the Treasury Department discovered a corrupt scheme, which involved speculative operations with U.S. and Venezuelan currencies, participation in the scheme by designated persons, and legalization of proceeds on U.S. soil (New-York, Delaware, and Florida), in the Dominican Republic, and in St.Kitts and Nevis. In addition, the case involved a violation of the U.S. Foreign Corrupt Practices Act (FCPA).
Due to the changed circumstances, the Treasury Department issued a General License and FAQ on the matter of cooperation with Globovision Tele C.A and Globovision TeleCA, Corp.
From 28 January to 23 February 2019, the Treasury Department worked on an update of its regulations with respect to the Venezuela sanctions regime. The updates were due to the designation of Petroleos de Venezuela, S.A. (PdVSA) and included new press releases, FAQ, and certain amendments to General Licenses.
The updates were due to Executive Order 13857 (E.O 13857) and Executive Order 13850 (E.O 13850) that imply increased on Venezuela due to human rights violation and Maduro’s repression of Venezuela’s political opposition.
As part of the sanctions update, certain changes were introduced with respect to the implementation and interpretation of sanctions regulations. Those changes are in amended FAQ 595 and FAQ 648 as well as 11 new FAQs, all issued due to designation of Petroles de Venezuela S.A. (PdVSA) onto the SDN List.
FAQ 595 provides guidance for the conduct of operations with CITGO, a U.S.-based PdVSA subsidiary with substantial involvement of U.S. investors. As a response to concerns raised by U.S. investors about access to certain investments they have made, OFAC states that all sanctions imposed are aimed at Maduro regime and Maduro regime only; therefore, no sanctions program restricts access by U.S. investors to access their investments(Subsection 1(a)(iii) of E.O. 13835 could affect the ability to enforce bondholder rights to the CITGO shares serving as collateral for the Petróleos de Venezuela, S.A. (PdVSA) 2020 8.5 percent bond).
FAQ 648 provides guidance about the maintenance of existing operations that existed prior to introduction of the latest sanctions regulation with respect to PdVSA and were covered by General License 6 and General License 11.
Eleven new FAQs cover issues of transactions with respect to PdVSA. FAQs covered: (1) issues related to the transfer of certain obligations to U.S. and non-U.S. persons; (2) purchase of gasoline; (3) determination of the final date for the wind-down of any operations with respect to gasoline and gasoline products for U.S. persons (or those with a U.S. nexus (transactions allowed up to 29 March 2019); (4) determination of the final date for the wind-down of any operations with respect to swaps and non-cash transactions conducted with PdVSA (transactions allowed up to 28 April 2019); and (5) conditions for softening of the sanctions regime (with transfer of assets to U.S.-backed structures of Juan Guaidó).
OFAC recommends Due Diligence for all operations that may involve PdVSA, as well as other operations that might be subject to sanctions regulations. OFAC does not clarify whether it is required to conduct screening (Due Diligence L1 Public Records), or Enhanced Due Diligence, or to hire external consultants for human-sources Due Diligence (Bespoke Due Diligence).
The following conclusions can be drawn from the practices of the Regulator:
1. In cases of the direct or indirect participation of U.S. persons, or with elements that might become subject to U.S. jurisdiction, the U.S. regulator may provide special treatment, with de-facto authorization of operations or considerable benefits for the parties involved.
2. It is obvious that use of U.S. currency or the use of U.S.-based assets may be a trigger for U.S. jurisdiction over transaction, which in turn will increase the sanctions risks for all parties involved.
6. PRESIDENT TRUMP EXTENDS OBAMA-ERA SANCTIONS
On 4 March 2019, President Donald Trump prolonged sanctions stipulated in Executive Order 13660 and sent a Notice of Continuation to Congress.
The provisions of Executive Order 13660 cover a number of the Russian citizens, including Russia’s public officials and officials who served in the Ukrainian government of Viktor Yanukovych. Along with political figures, the sanctions covered some of the Russia’s shark-tank entrepreneurs and companies. Senior officials of self-proclaimed Donetsk and Lugansk Republics have also been sanctioned.
THE UNITED KINGDOM
NATIONAL SANCTIONS REGIME DEVELOPMENT AND BREXIT
On 21 January 2019, the Office for Financial Sanctions Implementation of H.M. Treasury imposed its first penalty for breach of sanctions regulations. Raphaels Bank was fined GBP 5 million.
Since 31 January 2019, H.M. Treasury has introduced a number of regulations on sanctions regime, including enforcement guidance. The Guidance covers the application of the Sanctions and Anti-Money Laundering Act of 2018 (SAMLA), the Policing and Crime Act of 2017, as well as number of actions of the Office for Financial Sanctions Implementation (OFSI), all due to come into force on 29 March 2019 if there should be a “no deal” exit by United Kingdom from the European Union.
Most of the new sanctions regulations mirror those that existed before and were governed by E.U. law. However, sanctions regulations with respect to Russia are yet to come. It is anticipated that any such U.K. sanctions regime might as well be tougher than those of European Union but softer than U.S. sanctions.
One of the features of the U.K. national sanctions regime is a freeze of the assets of a designated person. In particular, under the U.K. regulations, an asset freeze is an issue for entities owned or controlled by the designated person. The E.U. regime, however, uses an indirect benefit presumption approach, allowing entities under some circumstances and corporate structures to get access to funds and other resources owned or controlled by the designated person (Paras. 66-68 of E.U. guidance on sanctions). Should the U.K. sanctions regime be implemented, commercial organizations would have to update existing compliance procedures and policies and amend existing tax and corporate solutions.
At this moment, there is no information about U.K. targeted restrictions in the capital markets and economic sectors of Russia. Nevertheless, due to tight connections of the banking and insurance sectors with the U.K. and the substantial amount of transactions with a U.K nexus the sanctions risks for commercial organizations could significantly increase.
THE EUROPEAN UNION
1. DISTRICT COURT OF HELSINKI REJECTED BORIS ROTENBERG LAWSUIT AGAINST SCANDINAVIAN BANKS
In October 2018, Boris Rotenberg filed a lawsuit challenging the inclusion of E.U. citizens in sanctions lists, even if the President of the United States designated them. The amount in controversy was EUR 70,000.
It is worth noting that Mr. Rotenberg is designated by the U.S. authorities, but not designated by the European Union. (Rotenberg is a Finnish passport holder). At the same time, some Scandinavian banks (Nordea, Danske Bank, OP Corporate Bank, and Svenska Handelsbanken) denied Rotenberg their services to keep productive relations with the U.S. banks.
As was emphasized by Nordea, the heightened risk of money laundering was the reason for the denial of service, a view that was shared by Handelsbanken.
The District Court of Helsinki upheld the bank’s position and emphasized, “As the applicant claims to be a billionaire, this Court has no reasons to believe that this will hinder his net worth or somehow diminish and enhance it.”
2. E.U. SANCTIONS REGIME WELCOMES ITS NEW MEMBERS
In December 2018, the E.U. Council adopted the following decisions: 2018/2054 designating seven individuals as part of Myanmar/Burma enforcement; and 2018/2078 prolonging sectorial sanctions against Russia for the next six months through 31July 2019. The Russian sanctions cover the financial, defense, and energy sectors of the Russian economy. A lack of substantial progress in the implementation of Minsk agreements was the stated reason for the extension.
On 6 February 2019, the European Union welcomed new countries that undertook to enforce E.U. sanctions on Myanmar (Burma) via their own sanctions regulations: Turkey, Northern Macedonia, Albania, Bosnia and Herzegovina, Iceland, Lichtenstein, Norway, Moldova, and Armenia.
At the same time, E.U. Council decision on Russian sanctions had Montenegro, Albania, Norway, and Ukraine joining its sanctions regime. The trend to widening sanctions is still ongoing.
3. CREATION OF INSTEX – A COMPLEX SOLUTION TO COVER COOPERATION BETWEEN THE U.S. AND E.U. IRAN SANCTIONS REGIMES
On 31 January 2019, France, Germany, and the United Kingdom (collectively referred as “E3”) announced the creation of INSTEX, a mechanism for trade exchange created to facilitate trade between E.U. businesses and Iran.
An E3 joint statement emphasized INSTEX would be focused “on the areas essential for the Iranian population, such as pharmacy, medical aid, and agriculture,” with economic operators being free to trade in Iran and Iranian markets long term.
The E.U. member states are satisfied that Iran meets its obligations under the nuclear deal of 2015 and actively cooperates with the International Atomic Energy Agency.
4. E.U. CHEMICAL WEAPONS SANCTIONS REGIME UPDATE
In October 2018, the E.U. Council introduced amendments to sanctions regulations against organizations involved in the development, production, stockpiling. and distribution of chemical weapons.
For the first time in history, on 21 January 2019, the E.U. added to its chemical weapons sanctions list several individuals (Chepyga, Mishkin, Kostuykov, and Alexeyev) alleged to have been involved in the poisoning of the Skripals in Salisbury, using the prohibited Novichock nerve gas. More details on the list are at the E.U. legal portal.