United States Adds Russian Direct Investment Fund, Other Russian Financial Services Actors to Sectoral Sanctions List
Certain Financing, Debt, and Equity Transactions Remain Prohibited; Action Relevant to U.S. Persons and Non-U.S. Persons (particularly Middle East- and Asia-based)
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.
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]
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.