Sanctioned Status Made Explicit
On July 30, 2015, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) made explicit the sanctioned status of certain entities operating in Russia’s financial services sector by adding them to the Sectoral Sanctions Identifications List (SSIL).The SSIL identifies parties subject to U.S. Sanctions targeting specific sectors of the Russian economy (Sectoral Sanctions) within the framework of Ukraine/Russia-related sanctions adopted in response to events in Ukraine.[i] Currently Russia’s financial services, defense, and energy sectors are targeted.
Among those added to the SSIL on July 30 are the Russian Direct Investment Fund (RDIF) and other entities identified by OFAC as being owned 50% or more by Russian state development bank Vnesheconombank (VEB).
Russian Direct Investment Fund, Other Vnesheconombank-linked Entities Listed
Among those added to the SSIL on July 30 are the Russian Direct Investment Fund (RDIF) and other entities identified by OFAC as being owned 50% or more by Russian state development bank Vnesheconombank (VEB). VEB itself was added to the SSIL on July 16, 2014, the same day on which OFAC first issued Directive 1, the relevant financial services sanctions implementing measure discussed in detail below (as applicable to the VEB-owned entitles and generally).[ii]
Relevance to U.S. Persons and Non-U.S. Persons (Middle East and Asia-based)
U.S. Persons remain obligated to reject (and in the case of U.S. Financial Institutions, report to OFAC) transactions prohibited under Directive 1. As the U.S. Treasury Department’s July 30 statement indicates, the July 30 action is expected to bolster compliance with Sectoral Sanctions and related Ukraine/Russia-related sanctions.
In recent years, the RDIF and some other Russian entities have turned away from the West, and to investors in the Middle East and Asia. In light of this, parties based in those regions (or elsewhere) that have current or planned business involving the RDIF, other VEB-owned entities, or entities owned directly or indirectly by them should acquaint themselves with relevant sanctions and take steps to assess any potential legal, commercial, or reputational risk that may flow. Some steps that may be taken to identify indirect risk are outlined in the third part of this Update.
The VEB’s sanctioned status as of July 16, 2014 was imputed to its owned entities on the same day by operation of OFAC’s “50% Rule,” which attaches to entities owned 50% or more by one or more SSIL entities the sanctions status of their owner(s), even if such owned entities are not separately listed on the SSIL.
More Practical than Legal Significance; Entities Owned 50% or More by SSIL Entities are Similarly Sanctioned
The July 30 action is significant more for its likely practical impact, rather than its immediate legal meaning. This is so because the relevant VEB-owned entities, while not previously listed on the SSIL, have nevertheless been subject to Sectoral Sanctions since July 16, 2014.[iii] The VEB’s sanctioned status as of July 16, 2014 was imputed to its owned entities on the same day by operation of OFAC’s “50% Rule,” which attaches to entities owned 50% or more by one or more SSIL entities (individually or in the aggregate) the sanctions status of their owner(s), even if such owned entities are not separately listed on the SSIL.
The 50% Rule significantly expands the potential scope of Sectoral Sanctions and corresponding compliance obligations. Effectively, the 50% Rule requires parties to determine, at every link in the ownership chain (vertically and horizontally), whether one or more SSIL entities (alone or in the aggregate) directly or indirectly owns 50% or more of a relevant entity. This can be particularly burdensome where corporate structures are complex and/or opaque.
Not a Blocking Action
Importantly, Sectoral Sanctions measures are not “blocking” actions that would require U.S. Persons to block the property or interests in property of SSIL entities. OFAC has indicated that SSIL entities subject to Directive 1 will not be designated as Specially Designated Nationals.[iv] However, given the fluidity of Ukraine/Russia-related events and sanctions measures in response, parties should not assume that OFAC’s current position cannot change or that Sectoral Sanctions measures will not be intensified.
Continuing Prohibition of Certain Financing, Debt, and Equity Transactions and Financing and Services in Support of Same for VEB-owned Entities
The VEB-owned entities added to the SSIL on July 30 remain subject to Directive 1 (issued July 16, 2014 and tightened by amendment on September 12, 2014).
Both versions of Directive 1 prohibit the same long-term financing, long-term debt, and equity transactions, except that the allowable maturity period for “new” financing and debt is up to 30 days under amended Directive 1 and up to 90 days under original Directive 1. Because the relevant VEB-owned entities were subject to original Directive 1 as of July 16, 2014 and became subject to amended Directive 1 on September 12, 2014, the applicability of either Directive is based on a relevant transaction date.
With respect to the VEB-owned entities, the following transactions are prohibited within the United States and by U.S. Persons:
- “new” financing to, or for the benefit of, the VEB-owned entities, where such financing has a maturity period of longer than 90 days (if provided between July 16, 2014 and September 11, 2014) or 30 days (if provided on or after September 12, 2014).
- transactions or dealings in “new” debt issued by, on behalf of, or for the benefit of VEB entities, where such debt has a maturity period of longer than 90 days (if issued between July 16, 2014 and September 11, 2014) or 30 days (if issued on or after September 12, 2014).
- transactions or dealings in “new” equity issued by, on behalf of, or for the benefit of VEB entities, if such equity was issued on or after July 16, 2014.
In addition, Directive 1 prohibits:
- financing and services in support of covered financing, debt, and equity transactions. For example, as discussed below, U.S. banks may continue to maintain correspondent accounts for the VEB-owned entities, so long as such accounts do not support prohibited financing, debt, or equity transactions.
Importantly, Directive 1 provides that “[a]ll other activities” with SSIL entities “or involving their property or interests in property are permitted.”
[i] Sectoral Sanctions pursuant to Executive Order No. 13662 of March 24, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine (authorizing the targeting of certain sectors of the Russian economy “such as financial services, energy, metals and mining, engineering, and defense and related materiel.”) Id. at 1(a)(i).
[ii] Additional VEB-owned entities added to the SSIL on July 30 can be viewed at OFAC’s website. Interested parties should note that entities owned by Rosneft (OJSC Rosneft Oil Company) were also added to the SSIL on July 30, 2015. Rosneft is subject to Sectoral Sanctions measures (Directive 2(as amended) and Directive 4) that target the Russian energy sector.
[iii] See, e.g., July 30 Treasury Release (reiterating that the entities added to the SSIL on July 30 “were already subject as a matter of law to the same financing restrictions as their parent entities per OFAC’s 50 percent rule guidance.”); OFAC, Ukraine/Russia-related Sanctions (Sectoral Sanctions under Executive Order 13662) FAQs, No. 373, at http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#ukraine (Sectoral Sanctions FAQs”).
[iv] No. 370, Sectoral Sanctions FAQs.