By Farhad Alavi
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today announced scores of designations onto its List of Specially Designated Nationals and Blocked Persons (the “SDN List”). These 25 individuals and 29 entities collectively had a nexus to 20 jurisdictions. This move was mamde in conjunction with the U.S. Department of State, which has sanctioned certain parties today, as well as the U.S. Department of Commerce’s Bureau of Industry & Security (BIS) which added 28 entities to its Entity List. While such widescale designations in one instance, wherein an agency such as OFAC or the BIS may target an entire group of related parties (companies and individuals), are increasingly common, the types of entities targeted today are particularly noteworthy, as is the interagency (and multilateral) effort the action represents.
OFAC Designations
The SDN List is effectively a financial ban of the designated party vis-a-vis the U.S. economy, prohibiting most dealings with between it and “U.S. persons” – generally defined as U.S. legal (e.g., companies and organizations) or natural persons (citizens and permanent residents, as well as non-citizens and non-permanent residents physically in the United States). Due in part to the prominence of the SDN list and more broadly the preeminence of the U.S. economy, companies outside the United States, from banks to logistics providers and manufacturers, often abstain from dealing with such sanctioned parties, even if they are not prohibited from doing so under their own country’s laws.
The majority of parties designated by OFAC today are connected with Alisher Burhanovich Usmanov, a major Russian-Uzbek businessman whom OFAC sanctioned on March 3, 2022, soon after Russia’s invasion of Ukraine. Usmanov has holdings around the globe and has also been sanctioned in numerous other jurisdictions as well, including Canada, Japan, and the United Kingdom – importantly, today’s move was also coordinated with the United Kingdom – and the UK Office of Foreign Sanctions Implementation (OFSI) also issued a notice. The sanctioned entities are spread globally in jurisdictions as diverse as Cyprus, Switzerland, the UAE, and Russia.
Beyond the Usmanov designations, OFAC also targeted Seqouia Treuhand Trust Reg, a Liechtenstein-based trust services company for assisting sanctioned Russian businessman Gennady Timchenko (owner of the Volga Group) and his family. It also sanctioned individuals connected with the trust, including a Liechtenstein and Swiss dual national who serves as managing director of the trust who allegedly personally managed some of the properties of Usmanov, as well as other European nationals.
Lastly, certain parties in Russia, China, Turkiye, and the UAE have been designated for helping Russia procure technologies in areas such as semiconductors, defense, and robotics. Also sanctioned were the International Investment Bank (IIB), a Hungary-based investment bank and JSC IIB Capital of Russia, as well as three executives tied to the bank.
One significant aspect of today’s move is that it underscores that OFAC is not just designating major, well-known entities and their board members in its efforts to target key aspects of the Russian economy, but even related entities and parties who are assisting such primary actors, such as board members of foreign, non-Russian trusts. These authorities are afforded under Executive Order (EO) 14024 (April 15, 2021), which has served as a basis of sanctions against scores of Russian and Russian-tied entities, particularly in the aftermath of the Russian invasion of Ukraine which commenced on February 24, 2022. This Executive Order is implemented in the Russian Harmful Foreign Activities Sanctions, 31 CFR Part 587 (the “RuHSR”).
Notably, OFAC also issued several general licenses authorizing, inter alia, certain wind-down activities and certain debt/equity/derivative activities related to some of the entities sanctioned today, and revoked General License 15 to the RuHSR (March 3, 2022), which authorized wind-down with all entities owned directly or indirectly 50% or more by Usmanov.
BIS Entity List
The BIS separately today added 28 parties to the Entity List, Supplement 4 to Part 744 of the Export Administration Regulations, 15 CFR Parts 730-774 (the “EAR”). These additions span 10 countries and were based on alleged ties to export diversion and procurement related to Russia. Unlike the SDN List, the Entity List is not an outright financial ban on the named party. However, depending on the nature of the designation, it can prohibit the flow of any items or technologies subject to the EAR, which can include non-U.S. items physically in the United States, or items made outside the United States with certain U.S. origin content. The parties named today are in Armenia, China, Malta, Russia, Singapore, Spain, Syria, Turkiye, UAE, and Uzbekistan. The the standard of review for license requests to export EAR-controlled items to the named parties for these entities varies across the board, reflecting the variations of severity. To illustrate, for some parties there is a “presumption of denial” and for others the standard is less strict, with carveouts for food and medicine, for example.
State Department
The U.S. Department of State has similarly sanctioned a host of entities, including some related to Rusatom, part of Rosatom, the Russian state atomic energy corporation.
Significance of Today’s Actions
Today’s coordinated inter-agency (and arguably multilateral) effort in the United States reflects a trend we will likely see more of – increased coordination across agencies as well as with allied countries in trying to stem Russia’s military, energy, and financial sectors and other key economic players from access to global markets and finance. These actions suggest several conclusions.
- First, by targeting one individual’s financial empire, there will likely be a domino effect where this particular group would effectively be paralyzed internationally (if it hasn’t been already). As seen today, even executives and directors of such companies, including European nationals, have been sanctioned.
- As a result, the actions may cause remaining non-U.S. service providers assisting Russia such as banks, trust companies, entity maintenance companies, etc. outside the United States to reconsider some of their activities, further impairing the ability of the upstream sanctioned entity to conduct business outside Russia (U.S. persons are barred from many such services pursuant to a determination made under E.O. 14071 (April 6, 2022).
- The diversity of the designations and naming of the parties and their respective activities reflect an ongoing trend – a multifaceted approach towards targeting Russia, part of the efforts of the U.S. Task Force KleptoCapture, an interagency task force in response to Russia’s aggression towards Ukraine.
- Diversion risks will continue to evolve and companies should remain vigilant to ensure compliance programs and approaches are able to detect such shifting patterns and trends from both a sanctions and export controls perspective.
- Due diligence and “know your customer” (KYC) and “know your customer’s customer” will be increasingly critical as we see here with entities outside Russia being sanctioned for allegedly violative Russian activities.
Challenging SDN Designations and Entity List Naming
Inevitably, many of the sanctioned entities will likely want to consider delisting. This is certainly not impossible, but is an uphill battle that has to be handled correctly. Although OFAC blocking does not constitute forfeiture, and while parties can seek (and secure) removal from U.S. sanctions lists, it is often a challenging endeavor. Entity List removals can also be protracted and challenging. However, removal from these lists is certainly not without precedent. OFAC has been unequivocal on the emphasis on mitigation, with the Department of the Treasury restating even in today’s press release that “[T]he ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior.” While not guaranteed, a well-defined approach may help prevent a listing or could cause a removal.
This post is intended solely for informational purposes and should in no way be construed as legal advice. If you have any questions or are unclear on any of the subject matters addressed or discussed in this Client Alert, please consult a licensed legal professional.