Secondary sanctions: do not pass go if you violate the sanctions regimes

You are a business in the United States, and you are about to do business with a Russian company. Caution! Let’s say you find out that your erstwhile business partner is on the Specially Designated Nationals List (SDN List). Or you find out that your foreign business partner is owned by an individual or company on the SDN List. You need to consult with a sanctions attorney.

This article reviews some of the options you have available to you and discusses possible consequences if you are caught violating the sanctions regime.

Marina Keremkhanova © 123RF.com

Related articles:

Overview Russia Sanctions: Individuals and Companies on SDN List

Sanctions Against Russia: Sectoral Sanctions

Violating sanctions rules and regulations

If a company has knowingly facilitated significant transactions for or on behalf of persons subject to U.S. sanctions on Russia, it will be subject to secondary sanctions.

This includes knowingly deceptive or structured transactions, transactions for or on behalf of entities or persons designated as SDNs or SSILs (and their spouse, children, parents or siblings) and entities 50% or more owned by them. That is the most common category in which companies get into trouble, but there are more.

Foreign banks are also considerably interested in the sanctions regime. Non-U.S. financial institutions who knowingly facilitate significant financial transactions for or on behalf of Russians on the SDN List may be subject to secondary sanctions. OFAC will determine the significance based on the totality of facts and circumstances in each case (for example, the size, number, frequency, nature of the transaction).

Not surprisingly, if you are a company that is engaged in “significant” transactions with parties that are part of or operate for or on behalf of Russia’s defense or intelligence sectors, you may be subject to secondary sanctions. The list of these parties is compiled by the Department of State but the appearance of the party’s name on the list does not mean that the decision as to the imposition of sanctions has been made.

For information on civil penalties and enforcement information.

Secondary sanctions

What are the consequences to companies or individuals who have violated the sanctions? That is where secondary sanctions come in. These secondary sanctions apply to both U.S. and non-U.S. companies and individuals. So, don’t think that you can have your subsidiary based in Poland do what you are not allowed to do. These secondary sanctions are expansive and include having the party who violates the sanctions regime included on the sanctions list themselves.

Some of the other secondary sanctions include:

• Denial of U.S. Eximbank assistance;

• Denial of U.S. export licenses for entities listed on the Entity List compiled by the Department of Commerce’s Bureau of Industry and Security (Supplement No. 4 to Part 744 of the Export Administration Regulations);

• Denial of credit from U.S. financial institutions ($10M or more in a year);

• U.S. opposition to granting of credit from an international financial institution;

• Denial of U.S. government procurement opportunities;

• Prohibition on U.S. Persons dealing in property of a sanctioned entity in the U.S;

• Prohibition on U.S. Persons investing in a sanctioned entity or purchasing significant amounts of sanctioned entity’s equity or debt;

• Excluding sanctioned entity’s officers/principals/controlling shareholders from U.S.

As an example of secondary sanctions, in late 2018, US sanctioned China’s Equipment Development Department for the purchases of military equipment from Russia. The organization was blocked from applying for export licenses and access to the U.S. financial system, the department was also added on the SDN list. In total 33 related individuals and entities were blacklisted for their cooperation with Russian military and intelligence.

How to conduct business with Russian entities without violating sanctions regime

SDN petition to be removed from the OFAC’s lists

Your first option is to cancel the transaction and find a business partner is a less challenging environment, say Great Britain. No, forget the UK, they have Brexit problems. Let’s say France.

Or you could tell the other party that you won’t be able to deal with them until they are off the list. They can petition OFAC to be removed from the list. To be considered for removal from any OFAC Sanctions List, including SDN List, SDN can petition to OFAC for removal.

Petition should include:

• A listed person’s name and contact information;

• Date of the relevant listing; and

• The rationale for why the listed person should be removed.

Even though OFAC accepts petitions directly from listed persons, it is better to consult with the attorney before filing a petition.

For more information on Removal from OFAC Sanction Lists.

Obtain a license

The Department of Treasury’s Office of Foreign Assets Control (OFAC) has the authority by means of a specific license to release blocked funds and to permit a person or entity to engage in a transaction which otherwise would be prohibited. There are two types of licenses: general licenses and specific licenses.

• A general license authorizes a particular type of transaction for a class of persons without the need to apply for a license. General licenses are General licenses can be found on the OFAC’s website; For example, OFAC has issued General License 2 that allows companies to engage in activities “ordinarily incident and necessary to the wind-down of operations, contracts, or other agreements…”

• A specific license is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application. In instances where a general license does not exist, a written request for a specific license must be filed with OFAC. The request must conform to the procedures set out in the regulations pertaining to the particular sanctions program. The most common specific license is a request to OFAC to unblock funds. If your funds have been blocked or “frozen” by a financial institution or other parties due to a possible link to OFAC-administered sanctions, you may apply for a specific license.

You are a business in the United States, and you are about to do business with a Russian company. Caution! Let’s say you find out that your erstwhile business partner is on the Specially Designated Nationals List (SDN List). Or you find out that your foreign business partner is owned by an individual or company on the SDN List. Oy. You need to consult with a sanctions attorney.
This article reviews some of the options you have available to you and discusses possible consequences if you are caught violating the sanctions regime.