Tag: Sanctions

EU Adopts New Sanctions on North Korea

On 16 October, the Foreign Affairs Council adopted new EU autonomous measures reinforcing the sanctions on North Korea imposed by the UN Security Council, effective immediately. They include a total ban on EU investment in North Korea across all sectors, whereas previously the ban related to certain sectors, such as the arms industry and chemical industries. Also, there is a total ban on the sale of refined petroleum products and crude oil. The amount of personal remittances to North Korea has been lowered from €15,000 to €5,000 in light of suspicions that they are being used in support of nuclear and ballistic missile programmes. In addition, three persons and six entities were added to the list of those subject to an asset freeze and travel restrictions.

This post was written by International Trade Practice at Squire Patton Boggs of Squire Patton Boggs (US) LLP., © Copyright 2017
For more Antitrust Law legal analysis, go to The National Law Review

Sanctions Imposed for Failure to Preserve Call Recordings

Call RecordingsSec. Alarm Fin. Enters., L.P. v. Alarm Protection Tech., LLC, No. 3:13-cv-00102-SLG, 2016 WL 7115911 (D. Alaska Dec. 6, 2016)

In this case, Plaintiff was sanctioned pursuant to Rule 37(e), as amended on December 1, 2015, for its failure to preserve relevant customer call recordings.

Plaintiff alleged that Defendant had “illegally ‘poached’” its customers and defamed the plaintiff. Defendant, in turn, alleged tortious interference with its contractual relationships and defamation by the plaintiff.  In the course of discovery, Plaintiff produced approximately 150 customer call recordings (out of “thousands”) that were “generally favorable” to it but, when asked, was unable to produce any others and claimed that the recordings were lost, apparently as the result of the “normal operation of a data retention policy.”  Defendant sought sanctions pursuant to amended Rule 37(e).

Taking up the motion, the Court first addressed whether the “newly revised or the former version of Federal Rule of Civil Procedure 37” applied.  Concluding that the revised version was appropriate, the Court reasoned that it was “clearly not impracticable to apply the new rule” and that while it would be “unjust to apply a new rule retroactively when that rule governs a party’s conduct,” Rule 37(e) “does not govern conduct” but rather limits the Court’s discretion to impose particular sanctions, without changing the parties’ duty to preserve as it existed prior to the amendments.

Turning to whether Plaintiff had a duty to preserve, the Court noted that the recordings were destroyed after litigation was ongoing and reasoned that Plaintiff should have known and in fact knew of the calls’ potential relevance, citing its memorandum to employees asking them not to use certain words on calls with Alaskan customers (circulated around the time of the complaint and close in time to being accused by Defendant of defamation during contact with Alaskan customers) and—more importantly—the fact that Plaintiff “flagged the existence of the recordings” in its initial disclosures.

Regarding the threshold question of whether Plaintiff took reasonable steps to preserve, the Court rejected Plaintiff’s argument that its “general litigation hold” was sufficient, despite not encompassing the recordings.  Moreover, the Court noted that “reasonable steps [to preserve] were available,” citing Plaintiff’s admission that the calls could have been extracted to avoid being overwritten and the fact that some recordings were saved.  Recognizing that sanctions are precluded when the information can be restored or replaced through additional discovery, the Court indicated that there was no suggestion that the calls were available elsewhere and thus turned to the question of appropriate sanctions.

First, the Court took up the question of whether the recordings were destroyed with the intent to deprive the other party of the information’s use in the litigation and indicated that based on the “relatively murky record before the Court” regarding the nature of the parties’ discussions surrounding the recordings and their treatment in discovery, it could not conclude that Plaintiff overwrote the recordings with the requisite intent to deprive.  Turning next to the question of prejudice, the Court considered whether the information was available through other means, but reasoned that the call notes and depositions of Plaintiff’s employees were “likely to be far inferior” compared to the calls themselves.  Thus, the Court concluded that Defendant was entitled to a remedy “no greater than necessary to cure the prejudice” as allowed by Rule 37(e)(1).

To address the prejudice suffered by Defendant, the Court ordered that Plaintiff pay Defendant’s reasonable attorneys fees incurred in bringing the motion, that neither party would be allowed to introduce recordings made to or from Plaintiff’s call center absent stipulation or a subsequent order, and that the parties may present evidence related to the lost recordings at trial (although Defendant was barred from arguing that the jury may or should presume that evidence would have been favorable to it). The Court also indicted that it would instruct the jury that Plaintiff was under a duty to preserve the calls, but failed to do so.

ARTICLE BY e-Discovery Analysis and Technology Group of K&L Gates

Copyright 2017 K & L Gates

President Obama Authorizes Additional Sanctions on Russian Individuals and Entities: Executive Order 13964

russian sanctions, President ObamaPresident Obama authorized additional sanctions in response to the Russian Government’s harassment of U.S. officials and alleged cyber operations during the 2016 U.S. election. On December 29, 2016 the President amended Executive Order (EO) 13964, which, in April 2015, created a targeted authority for the Government to respond effectively to significant cyber threats. The President also authorized actions intended to respond to harassment of U.S. diplomatic personnel in Russia and the release of a Joint Analysis Report (JAR) prepared by the Department of Homeland Security (DHS) and the Federal Bureau of Investigation (FBI) that contains declassified information on Russian malicious cyber activity.

Originally, EO 13964 focused on cyber-enabled malicious activities that harmed or significantly compromised the provision of services by entities in a critical infrastructure sector. This included significant disruptions to the availability of a computer or network of computers, or causing a significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.

In light of Russia’s recent use of cyber means to undermine democratic processes, the president has amended the EO to cover additional activities, authorizing sanctions on individuals/entities who tamper with, alter, or cause misappropriation of information with the purpose or effect of interfering with or undermining election processes or institutions. Under this authority, the president has sanctioned nine entities and individuals, including two Russian intelligence services (the GRU and the FSB), four individual officers of the GRU and three companies that provided material support to GRU’s cyber operations.

These new sanctions highlight the importance of regular and diligent screening of transactions, as well as the need to periodically review existing screening practices to ensure that they are up to date. It is critical to remember that an individual who may have been an acceptable business partner one day may be on a sanctions list the next.

ARTICLE BY Joan Koenig & Mollie D. Sitkowski of Drinker Biddle & Reath LLP

©2016 Drinker Biddle & Reath LLP. All Rights Reserved

Increased Sanctions on North Korea Focus on China and Russia

Last week, President Obama significantly increased sanctions on North Korea through Executive Order 13722, which implements the North Korea Sanctions and Policy Enhancement Act of 2016 (H.R. 757). The Executive Order’s prohibitions and blocking provisions, and designation criteria are substantially more expansive than that Act. Concurrently with the issuance of the Executive Order, OFAC announced the designations of 17 North Korean government officials and organizations, 15 entities, two individuals, and identified 40 blocked vessels under various sanctions authorities.

While neither Congress nor the President imposed secondary sanctions per se, China and Russia should  interpret the Executive Order as a clear warning about their economic ties with North Korea. In the Iran sanctions program, secondary sanctions require that a foreign financial institution “knowingly facilitate or conduct a significant financial transaction” for a particular individual or entity. This evidentiary standard greatly limited the use of those sanctions authorities. The new sanctions against North Korea are clearly aimed at foreign business interests, but unlike secondary sanctions, this new authority does not have an evidentiary impediment to its implementation.

Transportation, Mining, Energy, and Financial Services

Subsection 2(a)(i) of the Executive Order authorizes the Secretary of the Treasury to identify industries in the North Korean economy, the participants of which may be designated solely based on their operating within that industry. The Secretary of the Treasury determined that entities within the transportation, mining, energy, and financial services industries are subject to designation. The Treasury Department’s Office of Foreign Assets Control (OFAC) then designated Ilsim International Bank and Korea United Development Bank for operating in the financial services industry.

OFAC’s authority to derivatively designate any bank that provides services to any identified North Korean bank creates de facto secondary sanctions. Executive Order 13722 authorizes OFAC to designate any individual or entity that provides services to any identified Korean bank. Therefore, any financial institution that provides an identified North Korean bank with an account, serves as an intermediary, confirms or advises a letter of credit, or provides any other service can be designated. The most likely targets of these derivative actions are Russian and Chinese financial institutions.

North Korean Slave Labor and Coal

The Executive Order authorizes OFAC to designate businesses that “have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea.” According to open source reporting, North Korea has between 50,000 and 100,000 “state-sponsored slaves” predominantly located in China and Russia. The North Korean regime earns between $1.2 and $2.3 billion annually in foreign currency through these slave laborers. Apart from the appalling human rights violations, this practice finances the North Korean nuclear and missile development programs.

In addition to companies that utilize North Korean slave labor, entities that deal in metal, graphite, coal, or software to or from North Korea are now subject to designation, “where any revenue or goods received may benefit the Government of North Korea.” United Nations Security Council Resolution 2270 of March 2, 2016 address the sale of coal and iron from North Korea, but in a very limited manner. Unlike the United States sanctions program, the prohibitions do not apply to transactions  “exclusively for livelihood purposes and unrelated to generating revenue for the DPRK’s nuclear or ballistic missile programs.” As a result of these substantial limitations, any application of the sanctions on coal and iron are likely to be enforced unilaterally by the United States.

Chinese companies are clearly the most susceptible to this designation criteria. According to the press release announcing the Executive Order and designations, “coal generates over $1 billion in revenue per year for North Korea.” Open source reporting also indicates that in 2015, North Korea supplied China with 19.63 metric tons of coal.

Return to a Comprehensive Sanctions Program

In addition to the designation criteria highlighted above, Executive Order 13722 also transitions U.S. sanctions against North Korea back into a comprehensive sanctions program. All property and interests in property of the North Korean government are now blocked, and the Department of Commerce licensing requirements are now supplemented with a prohibition on the exportation of goods and services.

OFAC released a series of 9 General Licenses to address issues that commonly arise from comprehensive programs. These include authorization of certain legal services, certain services in support of nongovernmental organizations,  transactions related to intellectual property, and noncommercial personal remittances.

Article By Jeremy P. Paner of Holland & Hart LLP.
Copyright Holland & Hart LLP 1995-2016.

The Day of North Korea Sanctions: the UN Imposes the Toughest North Korea Sanctions Yet While OFAC and State Designate More North Korean Entities

After weeks of negotiations and a Putin-backed delay, the UN Security Council unanimously adopted resolution 2270 on March 2, 2016, imposing new sanctions against North Korea. According to U.S. Secretary of State John Kerry, the resolution imposes the strongest set of UN sanctions in over two decades. This article provides a summary of the new UN North Korea sanctions followed by an overview of the most recent developments in North Korea sanctions under US law.

New UN North Korea Sanctions

The new sanctions require:

  • An asset freeze on all funds and other economic resources owned or controlled by the North Korean government or the Worker’s Party of Korea, if associated with its nuclear or ballistic missile program or other prohibited activities
  • A ban on the opening and operation of North Korean banks abroad
  • A ban on foreign financial institutions opening new offices in North Korea under all circumstances, unless first approved by the Sanctions Committee, and a requirement for UN Member States to order the closing of existing branches if there is credible information indicating the associated financial services are contributing to North Korea’s illicit activities
  • Designation of 16 new individuals and 12 entities (including North Korea’s Ministry of Atomic Energy and the Reconnaissance Energy Bureau)
  • A ban all public and private financial trade support to North Korea if there are reasonable grounds to believe there is a link to proliferation
  • Sectoral sanctions on North Korean trade in natural resources banning the export of all gold, titanium ore, vanadium ore and rare earth metals and banning the supply of all types of aviation fuel, including rocket fuel
  • A ban on the export of coal, iron, and iron ore used for North Korea’s nuclear or ballistic missile programs
  • Inspection of all cargo going to and from North Korea, not just those suspected of containing prohibited items
  • Expanding the arms embargo to include small arms and light weapons
  • A ban leasing or chartering vessels or airplanes, providing crew services to North Korea, and registering vessels
  • Expanding the list of luxury goods (prohibited for export to North Korea) to include luxury watches, aquatic recreational vehicles, snowmobiles worth more than $2,000, lead crystal items and recreational sports equipment
  • A sweeping ban on the transfer of any item if a UN Member State has reason to believe the item can contribute to the development and capabilities of the North Korean armed forces, except for food and medicine

China, a permanent member of the Security Council, joined the unanimous vote despite prior reluctance to strengthen UN sanctions against North Korea. It remains yet to be seen how China will enforce the sanctions.

U.S. North Korea Sanctions

Separately, the United States took action earlier against North Korea. We speculate that this action helped align the UNSC members toward the unanimous vote on UNSCR 2270. On February 18, 2016, President Barack Obama signed into law the North Korea Sanctions and Policy Enhancement Act of 2016. The bill had easily passed through both Houses of Congress on the heels of the most recent nuclear test and rocket launch by North Korea.

Then on March 2, the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) named two entities and 10 individuals to its list of Specially Designated Nationals and Blocked Persons. On the same day, the State Department designated three entities and two individuals for activities related to weapons of mass destruction (WMD).

Over the next few months, OFAC is expected to issue new North Korea regulations to implement other provisions of the new statute.

The Act

The new statute provides for both mandatory and discretionary designations. These sanctions are directed at activities by U.S. Persons, which includes any United States citizen, permanent resident alien, any entity organized under the laws of the United States or any jurisdiction within the United States (foreign branches of U.S. companies, that means you too), and any person in the United States.

In addition, any transaction by any non-U.S. persons supporting any of the designated entities or prohibited activities must be carefully scrutinized, especially if the transactions involve the U.S. financial system in any way.

Mandatory Designations

The Act requires the designation and freezing of all assets subject to U.S. jurisdiction of any person that engages in any of the following activities relating to North Korea:

  • Nuclear and ballistic missile proliferation
  • Dealings in North Korean metals and products tied to WMD activities, the Korean Workers’ Party, armed forces, intelligence, or the operation of political prison camps
  • “Significant financial transactions” related to weapons of mass destruction
  • Undermining cybersecurity
  • Internal repression
  • Forced labor
  • Censorship
  • Human rights violations

In addition, the Act requires the President to decide on the designation of North Korea as a Primary Money Laundering Concern in the coming months.

As a result, companies must ensure that no company activity supports the activities of entities designated under the above act provisions. Compliance programs, including those related to anti-money laundering, should be reevaluated as the sanctions are not simple reiterations of previous measures. These mandatory designations will make it all the more necessary that companies maintain reasonable and proportionate due diligence and screening procedures to prevent facilitating the enumerated activities.

Discretionary Designations

Before we reach the current regulation regime, we will leave you with the remaining provisions of the Act that have not yet been implemented. While no one holds the OFAC crystal ball, these provisions may rear their head and are worth considering in advance of promulgation.

1. Blocking sanctions

The Act explicitly codified the blocking of assets of the Government of North Korea, the Workers’ Party of Korea, and North Korean Specially Designated Nationals (SDNs). While this sanction is essentially already in effect under the various executive orders, the explicit restrictions would prohibit the use of the U.S. financial system in connection with any transaction with the Government of North Korea, the Workers’ Party of Korea, or SDNs of North Korea.

2. UN Security Council resolutions

The Act also authorizes designation as an SDN of any person who supports a person designated pursuant to an applicable UN Security Council resolution. The potential implications of this Act provision deserve attention as the recent resolution imposed the toughest set of sanctions yet.

3. Bribery

If you thought the FCPA was the sole concern out of U.S. soil relating to bribery of foreign officials, think again. The Act also authorizes designation of any person who knowingly contributes to bribery of a North Korean official, or to misappropriation, theft, or embezzlement of public funds by, or for the benefit of, a North Korean official.

4. Sanctions grab bag

The Act also authorizes the President to prohibit any person already designated under the above three categories from transactions in foreign exchange or credit or payments subject to U.S. jurisdiction, procurement, and/or travel by the designated person’s officers and shareholders.

Refresher: Pre-Existing OFAC Regulations

The new Act builds upon the pre-existing U.S. sanctions against North Korea. For further background, see Trading Up: Newly Implemented North Korea and Libya Sanctions.

Blocking sanctions

The regulations provide for the continued the blocking of property and interests in property of certain persons with respect to North Korea that had been blocked pursuant to the Trading with the Enemy Act (TWEA) as of June 2000.Further, the regulations block property and interests in property of persons listed in the Annex to E.O. 13551 and of individuals and entities determined by Treasury in consultation with the State Department to have engaged in activities related to:

  • The import, export, or reexport of arms or related materiel from North Korea

  • The import, export, or reexport of luxury goods to North Korea

  • Money laundering, counterfeiting of goods or currency, bulk cash smuggling, narcotics trafficking, or other illicit economic activity supporting the Government of North Korea or its senior officials

  • Providing support for or goods or services of any of the above-listed activities or any person whose property and interests in property are blocked pursuant to E.O. 13551

  • Owning, controlling, or acting on behalf of any person whose property and interests in property are blocked pursuant to E.O. 13551

Vessels

The regulations prohibit U.S. persons from registering, owning, leasing, operating, insuring or otherwise providing support to North Korean vessels.

Imports to North Korea

Lastly in terms of prohibitions, the regulations prohibit imports of goods, services, and technology (including those used as components of finished products of, or substantially transformed in, a third country) from North Korea without an OFAC licenses or applicable exemption.

Authorizations

The preexisting regulations also provided authorization for the provision of certain legal services, emergency medical services, and entries in certain accounts for normal service charges by U.S. financial institutions.

The Takeaway

Interactions with North Korea are an increasingly dangerous minefield of sanctions. The new North Korea sanctions add to an already restrictive program. As a result, we recommend additional review and specialized controls as the new sanctions reach new heights (or depths, depending your level of preparation).

Article By Lisa C. Mays, J. Scott Maberry & Reid Whitten of Sheppard, Mullin, Richter & Hampton LLP

Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.

Cuba: Further Easing of the U.S. Sanctions

Following up on the historic changes in 2014 and 2015 to the five-decade U.S. trade embargo on Cuba, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) have announced new amendments to the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR), effective January 27, 2016.

What U.S. Companies Need to Know About the Easing of Restrictions

  1. Payment Terms for Authorized Exports to Cuba No Longer Restricted
    OFAC restrictions have been lifted on payment and financing terms for authorized exports and reexports to Cuba, except for agricultural commodities and items. U.S. banks will be authorized to provide financing by third-country or U.S. financial institutions (e.g., letters of credit, payment of cash in advance, sales on an open account). Payment for agricultural exports will still be limited to cash in advance or financing by third-country banks only. “Authorized exports and reexports” include those authorized under a BIS license exception (e.g., products and materials exported to private sector entrepreneurs under License Exception “SCP” – Support for the Cuban People), as well as export transactions permitted by BIS under a specific license.

  2. Most Cuban Embargo Restrictions Remain in Place
    Although the amendments to the CACR and EAR signify further relaxing of Cuba sanctions, the U.S. embargo on Cuba remains largely in place; most transactions between the U.S. and Cuba continue to be prohibited.

    In addition, a general policy of denial will still apply to exports and reexports of items for use by state-owned enterprises, agencies, or other organizations of the Cuban government that primarily generate revenue for the state. Additionally, applications to export or reexport items destined to the Cuban military, police, intelligence and security services remain subject to a general policy of denial.

  3. More Favorable Licensing Policies for Certain Exports and Reexports
    The following transactions still require a license application, but the chances of approval for such licenses have improved:

Exports to Cuban Government Agencies Meeting the Needs of the People: BIS is now considering, on a “case-by-case” basis, license applications for exports and reexports to Cuban state-owned enterprises and government agencies that provide services and goods to meet the needs of the Cuban people. Previously, such license applications were subject to a policy of denial. The new case-by-case policy applies to items for construction of facilities for public water treatment, electricity or other energy; sports and recreation; agricultural production; food processing; disaster preparedness, relief and response; public health and sanitation; residential construction and renovation; public transportation; wholesale and retail distribution for domestic consumption by the Cuban people; and artistic endeavors.

  • New Policy of Approval for Certain Exports and Reexports: License applications for the following exports and reexports are now subject to a “general policy of approval,” an upgrade from “case-by-case” consideration:

  • Environmental protection items: U.S. and international air quality, water, or coastline

  • Telecommunications items: To improve communications to, from, and among the Cuban people.

  • Civil aviation and commercial aircraft safety items: Those necessary to ensure the safety of civil aviation and safe operation of commercial aircraft engaged in international air transportation, including the export or reexport of civil aircraft leased to state-owned enterprises.

  • Agricultural items: Such as insecticides, pesticides, and herbicides, as well as other agricultural commodities (e.g., tractors and other farm equipment) not eligible for License Exception AGR

  • Commodities and software: To human rights organizations or to individuals and non-governmental organizations that promote independent activity intended to strengthen civil society in Cuba; also to U.S. news bureaus in Cuba whose primary purpose is the gathering and dissemination of news to the general public.

4. Travel Authorized for Additional Purposes Including Film Making 
U.S. persons are still prohibited from traveling to Cuba for tourism, but OFAC now permits travel to Cuba for additional purposes as highlighted below.

  • Travel related to information and informational materials now includes travel for the filming of movies and TV programs, music recordings, and artwork creation.

  • Organization of professional meetings, public performances, clinics, workshops, and athletic and other competitions and exhibitions in Cuba, in addition to the previously authorized attendance at such events.

5. Air Carrier Services Expanded to Permit Code-Sharing and Leasing
U.S. companies can now enter into blocked space, code-sharing, and leasing arrangements to facilitate the provision of carrier services by air, in connection with travel or transportation between the U.S. and Cuba, including such arrangements with a Cuban national.

Article By Global Services of Barnes & Thornburg LLP

© 2016 BARNES & THORNBURG LLP

Switzerland Is the First Country to Lift Some Sanctions on Iran

Certain US sanctions on Iran may be lifted mid to late 2016 or even later.badge_button_switzerland_flag_800_2222

On August 13, Switzerland became the first country to formally lift certain sanctions on Iran, following the announcement of the Iran nuclear deal this past July. Switzerland is not a party to the Iran nuclear deal.

The Swiss Federal Council made the decision, which is a seven-member executive council that constitutes the federal government of Switzerland and serves as the Swiss collective head of government and state. This action nullifies a ban on precious metals transactions with Iranian governmental bodies and the requirement to report trade in Iranian petrochemical products to the Swiss government. It also eliminates an obligation to report to the Swiss government the transport of Iranian crude oil and petroleum products and certain rules on insurance and reinsurance policies linked to such transactions. In the financial sector, threshold values for reporting and licensing obligations in relation to money transfers from and to Iranian nationals were increased tenfold.

These Swiss measures had already been suspended since January 2014, but by lifting them on an apparently more formal or permanent basis, the Swiss government patently appears to be sending a far larger political message to sanctions compliance personnel. The Swiss government’s announcement stated, in part, the following:

Today’s decision by the Federal Council underlines its support for the ongoing process to implement the nuclear agreement, and its confidence in the constructive intentions of the negotiating parties. The Federal Council also wishes to signal that Switzerland’s positioning with respect to Iran, which was developed and maintained over a number of years, should be used to promote a broad political and economic exchange with Iran. In recent decades, Switzerland has pursued a consistent, neutral and balanced policy with regard to Iran . . . . Should implementation of the agreement fail, the Federal Council reserves the right to reintroduce the lifted measures.

It seems clear that the Swiss Federal Council is signaling that Switzerland is eager to resume normal business with Iran. Meanwhile, however, US Department of State spokesman Mark Toner said US sanctions continue to remain in place and penalties would still apply to any country or company that violates them. He told reporters that the United States wasn’t informed in advance of the Swiss move to drop its sanctions before Iran has taken the promised steps to curb its nuclear program and before the United States, European Union, and United Nations have removed their penalties.

It is also important to remember that for now, US secondary Iran sanctions will continue to remain in effect against foreign companies for probably the next 12 months or until the implementation day, no matter the consequence of this Swiss Federal Council action.

Moreover, “US Persons” are prohibited from entering into executory contracts for Iran-related transactions until US sanctions are lifted after implementation day. The US Department of State has recently suggested that that day may fall in summer or autumn of 2016, depending if and whether the International Atomic Energy Agency can certify that Iran has taken the required steps under the Iran nuclear deal.

“US persons” means US nationals, US permanent resident aliens (“Green Card holders”), entities incorporated in the United States, individuals or entities in the United States, or entities established or maintained outside the United States that are owned or controlled by a US person. For a US person to sign such an executory contract before implementation day would be a dealing in property or an interest in property involving Iran or a Specially Designated National, which is prohibited by current US regulations as applicable to US persons. The current Iran sanctions regulations expressly state that such executory contracts are property or an interest in property because they involve “contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent.”

On the other hand, it appears that non–US persons (as defined above) that have no US nexus (e.g., not incorporated in the United States or owned or controlled by a US person), that do not act in or through the United States or a US person and that otherwise are not generally subject to US jurisdiction may enter into executory contracts with Iran without risk of exposure of an Office of Foreign Assets Control (OFAC) enforcement case for so doing. Even in these cases, potential non–US person investors in Iran are well advised to seek clearance from the relevant regulators that these contracts do not violate United Nations, European Union, or other non–US sanctions.

At this time, it is unclear to what extent entities established or maintained outside the United States that are owned or controlled by a “US person” will be able to engage in trade with Iran after implementation day occurs. OFAC has indicated that it will resolve this question in due course, and at that time, it will issue appropriate guidance.

ARTICLE BY Louis Rothberg & Margaret M. Gatti of Morgan, Lewis & Bockius LLP
Copyright © 2015 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

Negotiators Have Reached Deal with Iran – U.S. Persons Should Not Expect Quick Relief From Sanctions

On July 14, 2015, the five permanent members of the UN Security Council (China, France, Russia, the United Kingdom, and the United States) plus Germany (the “P5 + 1”) announced a Joint Comprehensive Plan of Action (JCPOA) with Iran intended to ensure that Iran’s nuclear program will be exclusively peaceful. The agreement builds on the JCPOA framework announced on April 2, 2015, and is intended to provide Iran with phased sanctions relief based on verification that Iran has implemented key nuclear commitments.

Under the JCPOA, Iran agrees to cap its uranium enrichment capability for 10 years and to accept international monitoring of its nuclear program. In exchange, the United States, European Union, and United Nations will relax sanctions on Iran in stages. Once international nuclear inspectors verify that Iran has implemented the agreed to nuclear-related restrictions, the United Nations will pass a new resolution that will terminate various resolutions currently in place. If, at any time, Iran is determined to be out of compliance with its obligations, those resolutions will “snapback” or be re-imposed against Iran. The EU further agreed to terminate its regulations implementing all nuclear-related economic and financial sanctions at the time the inspectors verify Iran is in compliance.

U.S. sanctions relief will initially be limited to the suspension of secondary sanctions that target the commercial activities of non-U.S. companies in key sectors of the Iranian economy, such as oil, gas and petrochemical industries, as well as companies in the shipping and shipbuilding and automotive sectors. In other words, the sanctions relief that was provided to non-U.S. persons earlier in the negotiations will continue. Eventually, these secondary sanctions may be eliminated (rather than suspended) but only if the International Atomic Energy Agency (IAEA) verifies that Iran has implemented key nuclear-related measures described in the JCPOA.

It is anticipated that the United Nations Security Council will endorse the Agreement over the new few days. The JCPOA and its commitments will come into effect 90 days after the Security Council’s endorsement, which will be known as “Adoption Day.” Beginning on Adoption Day, the P5+1 and Iran will prepare for implementation of the agreement, but no sanctions relief will be granted until inspectors have verified Iran is in compliance with its commitments.

What changes, if any, will be made in primary U.S. sanctions, such as the Iranian Transactions and Sanctions Regulations (ITSR), is less certain. Under the Iran Nuclear Review Act, passed into law in May 2015, the president must transmit the agreement to Congress, which then has 60 days to review it. During Congress’ review period, the president may not waive, suspend, reduce, or provide relief from statutory sanctions or refrain from applying existing sanctions. In other words, there will be no sanctions relief for U.S. persons in the immediate future. If, as some members of Congress have threatened, Congress issues a joint resolution of disapproval, which the president in turn has threatened to veto, there is another waiting period during which the president may take no action to reduce sanctions.

Thus, the status quo will likely continue for quite some time, and from the perspective of U.S. primary sanctions – those that apply to U.S. individuals and entities, as well as entities owned or controlled by U.S. persons – no changes are imminent.

ARTICLE BY Joan Koenig & Mollie D. Sitkowski of Drinker Biddle & Reath LLP

©2015 Drinker Biddle & Reath LLP. All Rights Reserved

New U.S. Restrictions on Russia: OFAC (Office of Foreign Assets Control) Guidance and Industry-Specific Sanctions

Sheppard Mullin Law Firm

OFAC Expands the 50 Percent Rule

Last month, the Department of Treasury’s Office of Foreign Assets Control (OFAC) released new guidance related to entities owned or controlled by persons designated as a Specially Designated National (SDN) on OFAC’s SDN list.  Although the guidance leaves intact the current meaning “50 percent rule,” the rule will now allow OFAC to take a far broader approach in determining when the 50 percent rule applies.

Under the 50 percent rule, as it stood before the August 13 release of the updated guidance, all entities owned or controlled, directly or indirectly, by an SDN (i.e., any entity of which an SDN owns 50 percent or more) are considered designated by operation of law and must be treated as SDNs.  Thus, companies owned or controlled by SDNs are blocked, even if they are not themselves specifically listed on the SDN list.  It is unlawful for U.S. persons to conduct virtually any business with any SDN.

In a major expansion of the 50 percent rule, OFAC will now aggregate the ownership interests of SDNs when it determines whether the rule applies.  Specifically, the new guidance provides that “any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or moreblocked persons is itself considered to be a blocked person” (emphasis added).  According to OFAC’S updated Frequently Asked Questions on the issue, “if Blocked Person X owns 25 percent of Entity A, and Blocked Person Y owns another 25 percent of Entity A, Entity A is considered to be blocked.”  Taken to the logical conclusion, the new approach means that an entity owned or controlled by a large number of SDNs, each with a small interest in the entity itself, may nonetheless be designated, and afforded the same regulatory treatment, as an SDN.

Notably, OFAC did not provide for a transition period as the new rule takes effect, nor is there any mention of a general authorization for companies to end involvement in now-potentially prohibited transactions.

More than ever, companies must focus on conducting appropriate due diligence when operating in the universe of potentially covered persons, entities, or transactions.  Due to the expansion of potentially blocked entities, American companies must determine what policies and procedures need to be in place for vetting would-be business partners before engaging in any transaction, so they do not inadvertently conduct unlawful business with SDNs.

Russian Industry Sector Sanctions

Separately, On August 6, 2014, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) issued a final rule amending the U.S. Export Administration Regulations (EAR) to implement the most aggressive set of export controls against Russia in recent memory.  In short, the new rules will deny export, reexport, and transfer (in-country) licenses for certain dual-use items for use in Russia’s energy sector.

Specifically, under the new EAR section 746.5 and amendments to other sections, a license is now required to export, reexport, or transfer (in-country) certain items when the exporter “knows or is informed that the item will be used directly or indirectly in Russia’s energy sector for exploration or production from deepwater …, Arctic offshore, or shale projects in Russia that have the potential to produce oil or gas or is unable to determine whether the item will be used in such projects in Russia.”

The “certain items” referred to in the regulation include two classes of products: (1) any item subject to the EAR listed in Supplement No. 2 to Part 746, including fifty-two specific products listed by Schedule B number; and (2) any item specified in the following Export Control Classification Numbers: 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, or 8D999.  BIS includes the following list of illustrative examples of restricted products: “drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Arctic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing, high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers.”

With the exception of License Exception GOV, which authorizes certain exports and reexports to U.S. and foreign governmental agencies and intergovernmental organizations, no license exceptions are available to fulfill the new licensing requirement.  Thus, all exports of the restricted products will require a BIS license for export or reexport to Russia, regardless of whether those products were formerly exportable to Russia with no license required.  Further, the new BIS rule imposes a presumption of denial for license applications “when there is potential for use directly or indirectly for exploration or production” from deepwater, Arctic offshore, or shale projects in Russia with the potential to produce oil.

The final rule does not contain a savings clause. That means any restricted products exported to Russia without a license on or after August 6 may be considered violations, even if the products were formerly exported under a license exception.

Those companies exporting items used in the exploration or production of oil or gas should immediately determine whether any of the products they export, reexport, or transfer to Russian end-users (or intermediaries with constructive or direct knowledge that the ultimate end-user is in Russia) are restricted products as defined in the new rule.  If so, companies should understand the implications of the new licensing requirements and the presumption of denial for license applications.  Further, if your company is unable to determine whether your products are used in the end-uses defined in the rule, the rule requires that such products be considered subject to the licensing requirements.  Thus, unless you can affirmatively determine that your products are not to be used for the energy-related activities defined in the rule, then your company should assume that its products are subject to the licensing requirements.

ARTICLE BY

J. Scott Maberry
Matthew L. Riemer
OF
Sheppard, Mullin, Richter & Hampton LLP
Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

U.S. And EU Significantly Expand Sanctions and Export Control Restrictions Targeting Russia

In response to Russia’s continuing actions to destabilize Ukraine, the United States and EU took coordinated and significant steps on September 12, 2014, to expand and intensify sanctions targeting the Russian energy, defense, and financial services sectors. In tandem, the United States and EU also imposed additional restrictions on energy-related exports to certain entities in Russia, and the EU introduced new trade controls relating to certain dual-use exports.

In the United States, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) and the Commerce Department’s Bureau of Industry and Security (“BIS”) took three steps that target the Russian energy sector:

  • First, OFAC imposed a prohibition on the following activities by U.S. persons or within the United States: the provision, export, or reexport of goods, services (other than financial services), or technology in support of deepwater, Arctic offshore, or shale exploration or production projects that: (1) have the potential to produce oil in or offshore of Russia; and (2) involve any of five major Russian energy companies: Gazprom, Gazprom Neft, Lukoil, Rosneft, or Surgutneftegas. U.S. parties impacted by these new sanctions have two weeks to wind down their activities with these Russian firms, under the terms of a new general license.

  • Second, BIS imposed a license requirement for the export, reexport, or foreign transfer to these same five Russian companies of any item subject to the U.S. Export Administration Regulations (“EAR”) if the exporter, reexporter, or transferor knows that the item will be used directly or indirectly in exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia. This action – achieved by naming these companies to the BIS Entity List – represents an expansion of the previous BIS restrictions relating to Russian deepwater, Arctic offshore, and shale oil and gas projects, which we reviewed in our e-alert of July 30, 2014.

  • Third, OFAC added two Russian energy companies–Gazprom Neft and Transneft–tothegroup of companies whose ability to issue new debt with a maturity of longer than 90 days is restricted. Those restrictions on new debt, which apply to U.S. persons and persons in the United States who transact in, provide financing for, or otherwise deal in such debt, were detailed in our e-alert of July 17, 2014.

    U.S. actions targeting the Russian defense and financial services sectors include new or expanded “sectoral sanctions” and the designation of Russian defense companies to BIS’s Entity List and OFAC’s List of Specially Designated Nationals and Blocked Persons. BIS also noted that it will “require licenses for an additional group of items destined to military end-uses or end-users in Russia,” but did not provide further elaborate on what this may entail.

    The new EU sanctions are set forth in two measures. First, Council Regulation No. 960/2014, which amends Council Regulation No. 833/2014 (described in our e-alert of August 4, 2014), introduces new restrictions on the access of certain Russian companies, including major Russian energy companies such as Rosneft and Gazprom Neft, to EU financing and financial markets. It also introduces new trade controls relating to certain dual-use and energy-related exports. Separately, Council Regulation No. 961/2014 designates 24 additional individuals for EU asset-freezing measures.

Collectively, the new U.S. and EU sanctions introduce a significant new range of trade controls, which will be of particular importance to companies in the energy, financial services, and defense sectors. The principal elements of the new sanctions are described below.

NEW U.S. SANCTIONS

A. New U.S. Sanctions Targeting the Russian Energy Sector

Perhaps the most significant of the new U.S. sanctions are those targeting the Russian energy sector. The new U.S. measures have implications for both U.S. and non-U.S. companies that do business with the Russian energy industry, though they will impact U.S. and non-U.S. companies in different ways. As noted above, OFAC and BIS have taken three new steps to target the Russian energy sector.

OFAC Directive 4 and General License No. 2

The first key action targeting the Russian energy sector is OFAC’s issuance of a new directive – Directive 4 – pursuant to Executive Order 13662. Directive 4 prohibits the following activities by U.S. persons or within the United States: providing, exporting, or reexporting, directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production from deepwater (i.e., more than 500 feet), Arctic offshore, or shale projects that: (1) have the potential to produce oil in Russia or in maritime area claimed by Russia and extending from its territory; and (2) involve parties subject to Directive 4, their property, or their interests in property. These restrictions also extend to entities owned 50% or more by one or more sanctioned parties. Currently, five Russian energy companies are identified on the U.S. Sectoral Sanctions Identifications List (“SSI List”) as being subject to Directive 4 – Gazprom, Gazprom Neft, Lukoil, Rosneft, and Surgutneftegas. Directive 4 also makes clear that any conspiracy to violate any of its prohibitions is prohibited, and that any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of Directive 4’s prohibitions is also prohibited.

At the same time that it issued Directive 4, OFAC expanded the guidance it offers on the sectoral sanctions through its Frequently Asked Questions. One of these “FAQs” (#412) explains that the prohibition on the exportation of services includes, but may not be limited to, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. In contrast, Directive 4 does not prohibit the exportation or provision of financial services, such as clearing transactions or providing insurance related to the targeted activities. However, companies providing such financial services should ensure that those services do not constitute a prohibited dealing in new debt or new equity under Directives 1 or 2, which are addressed further below and apply independently of Directive 4.

Simultaneously, OFAC also issued General License No. 2 to authorize, for a limited time, certain wind down activities involving the Russian energy companies subject to Directive 4. Specifically, activities otherwise prohibited by Directive 4 are authorized until September 26, 2014, if they are “ordinarily incident and necessary to the wind down of operations, contracts, or other agreements involving persons determined to be subject to Directive 4 . . . that were in effect prior to September 12, 2014.” OFAC has made clear that General License No. 2 does not authorize the provision, export, or reexport of goods, services (other than financial services), or technology except as needed to cease operations involving the projects covered by Directive 4.

Any U.S. persons participating in transactions authorized by General License No. 2 are required, within 10 business days after the wind down activities conclude, to file a detailed report with OFAC covering the parties involved in the wind down activities and the date, type, and scope of such activities.

Finally, even if General License No. 2 appears to allow an export or reexport of goods, services, or technology related to wind down activities, companies should also confirm that there are no BIS restrictions applicable to the export or reexport before proceeding.

Expansion of BIS License Requirements for Certain Russian Deepwater, Arctic Offshore, and Shale Projects

The second key action targeting the Russian energy sector is BIS’s addition to its Entity List of the same five Russian energy companies currently subject to OFAC’s Directive 4 – Gazprom, Gazprom Neft, Lukoil, Rosneft, and Surgutneftegas. As a result of this action, BIS now requires all U.S. and non-U.S. persons to obtain a BIS license for the export, reexport, or foreign transfer to these five Russian companies of any item subject to the EAR if the exporter, reexporter, or transferor knows that the item will be used directly or indirectly in exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia. Moreover, applications for such licenses will be subject to a presumption of denial if the item will be used directly or indirectly in exploration for, or production from, a deepwater, Arctic offshore, or shale project in Russia that has the potential to produce oil. BIS previously issued guidance addressing the scope of the Entity List, including circumstances where an entity is owned or controlled by an entity on the Entity List. That guidance is available here.

This BIS action – which targets the export, reexport, or transfer of any item subject to the EAR – represents a significant expansion of the BIS export restrictions that were announced in early August, which targeted only certain enumerated items, not any item, subject to the EAR.

Addition of Two Russian Energy Companies to the SSI List as Subject to OFAC Directive 2

The third key action targeting the Russian energy sector is OFAC’s addition of two Russian energy companies – Gazprom Neft and Transneft – to the SSI List as subject to OFAC’s Directive 2. Directive 2 was originally issued on July 16, 2014, pursuant to Executive Order 13662, and prohibited the following activities by U.S. persons or within the United States: transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity of entities identified on the SSI List as subject to Directive 2, their property, or interests in property.

Because Gazprom Neft and Transneft are now subject to Directive 2, transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity of Gazprom Neft and Transneft, Rosneft and OAO Novatek (which were added to the SSI List as subject to Directive 2 in July), and any entities owned 50% or more by one or more sanctioned parties is prohibited as to U.S. persons and within the United States.

Notably, OFAC also issued General License No. 1A, which supersedes General License No. 1 of July 16, 2014, and which authorizes all transactions by U.S. persons and within the United States involving derivative products whose value is linked to an underlying asset that constitutes new debt with a maturity of longer than 90 days issued by a person subject to Directive 2.

It is important to highlight that Rosneft and Gazprom Neft are subject to both Directive 2 and Directive 4 (described above). OFAC has made clear that persons dealing with either Rosneft or Gazprom Neft must ensure that such dealings comply with Directive 2 and Directive 4 independently. For example, even if the provision of services to Rosneft is permissible under Directive 4 because the services qualify as “financial services,” the entity providing those services must separately ensure that the services do not run afoul of the prohibitions of Directive 2.

B. New U.S. Sanctions Targeting the Russian Defense Sector

OFAC Directive 3

OFAC expanded the sectoral sanctions targeting Russia to also cover the defense and related materiel sector. U.S. sectoral sanctions targeting Russia had previously focused only on the Russian financial services and energy sectors.

In particular, OFAC issued a new directive – Directive 3 – prohibiting the following activities by U.S. persons or within the United States: transacting in, providing financing for, or otherwise dealing in new debt of longer than 30 days maturity of entities added to the SSI List as subject to Directive 3, or their property or interests in property. Simultaneously, OFAC added Rostec, a Russia-based state- owned holding company for the Russian defense industry, to the SSI List as subject to Directive 3.

Like Directive 4, Directive 3 prohibits any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate Directive 3’s prohibitions. Likewise, Directive 3 prohibits any conspiracy to violate any of its prohibitions.

Notably, OFAC also issued General License No. 1A, as discussed above, which authorizes all transactions by U.S. persons and within the United States involving derivative products whose value is linked to an underlying asset that constitutes new debt with a maturity of longer than 30 days issued by a person subject to Directive 3.

Addition of Five Russian Defense Companies to the SDN List and Entity List

Separately, OFAC added the following five entities that operate in the Russian defense sector to its SDN List pursuant to Executive Order 13661:

  • Almaz-Antey GSKB (aka Almaz-Antey Air Defense Concern Main System Design Bureau, JSC): a subsidiary of the Almaz-Antey Concern (which was itself added to the SDN List pursuant to Executive Order 13661 on July 16, 2014) that designs and manufactures air defense systems for the Russian Ministry of Defense.

  • Dolgoprudny Research Production Enterprise: primarily engaged in the production of weapons and ammunition, including the Buk (SA-11 or SA-17) missile system.

  • JSC NIIP (aka Tikhomirov Scientific Research Institute of Instrument Design): a subsidiary of the Almaz-Antey Concern that develops anti-aircraft defense systems, including on-board radar systems for MiG and Sukhoi fighters, and anti-aircraft missile systems for land forces, including the Kub and Buk systems.

  • Kalinin Machine Plant JSC: a state-run company involved in the production of special purpose products, including launchers, anti-air missiles, and artillery guns for infantry and anti-air defense.

  • Mytishchinski Mashinostroitelny Zavod OAO: has produced weaponry and equipment, primarily anti-aircraft missile systems and chassis for tracked military vehicles.

U.S. persons are prohibited from engaging in any dealings with these designated entities or any entities that are owned 50% or more by one or more of the designated entities. Additionally, any property or interests in property of these designated entities that comes within the United States or the possession or control of a U.S. person must be blocked.

Simultaneous with the OFAC designations, BIS added these same five entities to its Entity List, which means that any person – including non-U.S. persons – must obtain a BIS license for the export, reexport, or foreign transfer of any item subject to the EAR to the five designated entities. Applications for such licenses will be subject to a presumption of denial.

BIS noted in making these designations that it “will also require licenses for an additional group of items destined to military end-uses or end-users in Russia.” BIS did not further elaborate on what this may entail. We note – as explained in our e-alert of August 4, 2014 – that the EU previously imposed a prohibition on the sale, supply, transfer, or export of dual-use goods and technology to Russia if those items may be intended for “military use” or a “military end-user.”

C. New U.S. Sanctions Targeting the Russian Financial Services Sector

OFAC also has taken two key steps to expand and intensify the restrictions under Directive 1, which was originally issued on July 16, 2014, pursuant to Executive Order 13662 and which targets the access of certain entities in Russia’s financial services sector to U.S. capital markets.

First, OFAC amended Directive 1 to decrease the length of maturity of prohibited new debt from 90 days to 30 days. In its original form, Directive 1 prohibited the following activities by U.S. persons or within the United States: transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity for persons identified on the SSI List as subject to Directive 1 (i.e., certain Russian banks), their property, or their interests in property. In its new, amended form, Directive 1 prohibits the following activities by U.S. persons or within the United States: transacting in, providing financing for, or otherwise dealing in new debt of longer than 30 days maturity or new equity of persons identified on the SSI List as subject to Directive 1, their property, or their interests in property.

Second, OFAC added Sberbank to the list of Russian banks subject to Directive 1. Thus, the prohibitions under Directive 1 are now applicable to new debt of longer than 30 days maturity and new equity of the Bank of Moscow, Gazprombank, the Russian Agricultural Bank, Sberbank, VEB, and VTB.

As noted above, OFAC also issued General License No. 1A, which authorizes all transactions by U.S. persons and within the United States involving derivative products whose value is linked to an underlying asset that constitutes new debt with a maturity of longer than 30 days or new equity issued by a person subject to Directive 1.

NEW EU SANCTIONS

The EU Council first agreed to the core framework of the sanctions on September 8, 2014. However, the cease-fire between the Ukrainian government and the pro-Russian armed militia — signed on September 5, 2014 — caused the EU Council to delay the entry into force of the new sanctions as the Council evaluated the cease-fire and the implementation of broader peace initiatives proposed earlier this month by the President of Ukraine.

The EU Council has signaled that it is prepared to take swift action to remove or reduce the new sanctions if the Russian Government demonstrates cooperation in resolving the conflict in Ukraine − or to further enhance the sanctions regime if Russia continues to contribute to the conflict.

The restrictions implemented on September 12, 2014 introduce a number of new measures, including features that do not have precedent in prior EU sanctions regulations. As in the case of the original version of Regulation 833/2014, the new provisions include a number of ambiguities that have already generated important questions from potentially affected companies, and the EU Member States will likely be called upon in the coming weeks to issue interpretive guidance relating to the new sanctions measures.

A. Additional Restrictions on Dual-Use Goods and Technologies

Regulation 960/2014 imposes a new prohibition − codified in Article 2a of the Amended Regulation 833/2014 − on the sale, supply, transfer, or export, directly or indirectly, of dual-use goods and technologies to any natural or legal person, entity, or body in Russia that is listed in Annex IV to the Regulation. Annex IV currently includes JSC Sirius, OJSC Stankoinstrument, OAO JSC Chemcomposite, JSC Kalashnikov, JSC Tula Arms Plant, NPK Technologii Maschinostrojenija, OAO Wysokototschnye Kompleksi, OAO Almaz Antey, and OAO NPO Bazalt. This new restriction on dual- use items supplements the existing prohibition, reflected in the original Regulation 833/2014, against the export of dual-use items to military end-users or for any military end-use in Russia.

Regulation 960/2014 also prohibits the provision to Annex IV parties of technical assistance, brokering services, or any “other services” related to dual-use items and to the provision, manufacture, maintenance, and use of those items. The provision to the Annex IV parties of financing or financial assistance for the sale, supply, transfer, or export of dual-use items, or for the provision of related technical assistance, brokering services, or other services is also prohibited.

The foregoing restrictions are expressed in the Regulation as prohibitions, rather than licensing requirements, thus implying that licenses will not be available to authorize transactions covered under the new restrictions. The new prohibitions are, however, subject to a number of important exemptions. Firstly, they do not apply to (i) the sale, supply, transfer, or export of dual-use items intended for the aeronautics and space industry, or the related provision of technical or financial assistance for non-military use and for a non-military end-user, or to (ii) the sale, supply, transfer, or export of dual-use items for maintenance and safety of existing civil nuclear capabilities within the EU, for non-military use, and for non-military end-users.

The foregoing provisions are also without prejudice to the execution of contracts or agreements concluded before September 12, 2014, and to the provision of assistance necessary to the maintenance and safety of “existing capabilities within the EU.” Regulation 960/2014 does not define the term “existing capabilities.”

B. New Oil and Gas “Services” Controls

Regulation 960/2014 also introduces a new Article 3a to Regulation 833/2014, prohibiting the direct or indirect provision of certain “services necessary for deepwater oil exploration and production, arctic oil exploration and production, or shale oil projects in Russia,” including (i) “drilling,” (ii) “well testing,” (iii) “logging and completion services,” and (iv) “supply of specialised floating vessels[.]” The new measures supplement existing restrictions, set forth in Articles 3 and 4 of Regulation 833/2014, concerning transactions associated with oil and gas equipment listed in Annex II to Regulation 833/2014. The new Article 3a restrictions are not, however, limited to Annex II items or to any other defined products, and the Regulation provides no definition or guidance concerning the scope of the restricted “services.” Moreover, in contrast to Regulation 833/2014 and to trade controls restrictions in other EU sanctions regulations, which distinguish restrictions on exports of goods and technology from restrictions on the provision of related support (e.g., technical assistance, brokering, financing, or financial assistance), the general reference to “services” in Article 3a has invited questions − which are not easily resolved from the text of the Regulation − concerning whether the new measures are intended to capture the supply of goods, the mere provision of technical or other support, or both.

The Article 3a prohibitions are without prejudice to the execution of an obligation arising from a contract or a “framework agreement” concluded before September 12, 2014, or ancillary contracts necessary for the execution of such contracts. The term “framework agreement” is not defined in Regulation 960/2014. However, it presumably carries a broader scope than the term “agreement” used in similar grandparenting provisions in Regulation 833/2014.

Finally, Article 3a exempts services that are necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment.

On a separate but related note, a recently published corrigendum to Regulation 833/2014 has clarified the scope of the restrictions on the provision of technical assistance, brokering services, financing, or financial assistance relating to the items listed on Annex II to that regulation. The corrigendum amends Article 4(4), correcting an error to the version of Regulation 833/2014 published on August 1, 2014, to make clear that competent Member State authorities may not authorize such assistance if the Annex II items are for Arctic or deepwater oil exploration or production or for a shale oil project unless the assistance concerns the execution of an obligation arising from a contract or an agreement concluded before August 1, 2014.

C. Additional Controls on Military Items

Regulation 960/2014 also amends Article 4 of Regulation 833/2014 to prohibit the provision of insurance and reinsurance relating to military items to Russian parties or for use in Russia; this prohibition applies in addition to the pre-existing prohibition against the provision of financing and financial assistance relating to military items.

D. Additional Financial Sector Restrictions

Regulation 960/2014 also amends Article 5 to Regulation 833/2014 to introduce a number of important new financial restrictions against designated Russian parties. The key amendments to Article 5 are as follows:

  • Regulation 960/2014 extends existing restrictions targeting “transferablesecurities” and “money market instruments” issued by Russian financial institutions listed on Annex III to Regulation 833/2014. Specifically, the new provisions introduce a restriction on the provision of “investment services” relating to those instruments, and lower the maturity period for covered instruments from 90 to 30 days (for instruments issued after September 12, 2014). Thus, Article 5 now renders it prohibited to “directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments with a maturity exceeding 90 days, issued after 1 August 2014 to 12 September 2014, or with a maturity exceeding 30 days, issued after 12 September 2014[.]”

  • The newly-introduced term “investmentservices” is defined as“ (i) reception and transmission of orders in relation to one or more financial instruments, (ii) execution of orders on behalf of clients, (iii) dealing on own account, (iv) portfolio management, (v) investment advice, (vi) underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis, (vii) placing of financial instruments without a firm commitment basis, and (viii) any service in relation to the admission to trading on a regulated market or trading on a multilateral trading facility.”

  • The definition of “transferablesecurities” has been amended to exclude negotiable securities giving rise to a cash settlement.

  • The amended Article 5 also introduces similar prohibitions on dealings in “transferable securities” and “money-market instruments” with a maturity exceeding 30 days, issued after September 12, 2014, by (1) certain designated Russian military entities, as listed in the new Annex V to Regulation 833/2014, and (2) certain Russian entities active in the oil industry, as listed in the new Annex VI to Regulation 833/2014. Notably, the latter list includes major Russian oil and gas enterprises Rosneft, Transneft, and Gazprom Neft (the oil branch of Gazprom). Those new restrictions also extend to any entity established outside of the EU that is majority-owned by any entity designated in Annex V or Annex VI.

  • Similar to the restrictions imposed by Regulation 833/2014 against AnnexIIIbanks,the foregoing measures contain an important carve-out, as they do not apply to affiliates of the listed entities that are established within the EU. However, as with the Annex III bank restrictions, they extend to any entity “acting on behalf or at the direction of” the Annex V or Annex VI designated parties or their non-EU subsidiaries.

  • Finally, Regulation 960/2014 prohibits making or being part of any arrangement to make new loans or credit with a maturity exceeding 30 days available to any party listed on Annexes III, V, or VI after September 12, 2014. The Regulation exempts from that prohibition (i) loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the EU and Russia, and (ii) loans that have a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for legal persons established in the EU that are majority owned by Annex III banks.

    As with the original Article 5, the foregoing restrictions are not asset-blocking measures — EU parties are not generally prohibited from conducting business with the Annex III, V, and VI parties if their activities do not trigger the specific restrictions outlined above.

    E. Additional Parties Subject to the Asset-Freezing Restrictions

    Regulation 961/2014 imposes travel bans and asset freezes on a further 24 individuals, including pro-Russian rebels, Russian lawmakers and state officials, and the chairman of the Russian Rostec conglomerate, Sergey Viktorovich Chemzov. This brings the total number of individuals subject to sanctions under this specific regime to 119, whilst the number of designated entities remains 23.

    In the same manner as prior EU sanctions measures, all funds and “economic resources” belonging to, owned, held, or controlled by the newly designated parties must be frozen. “Economic resources” include “assets of every kind, whether tangible or intangible, movable or immovable, which are not funds, but which may be used to obtain funds, goods or services.” In addition, Regulation 961 prohibits making available funds or “economic resources,” directly or indirectly, to or for the benefit of the designated parties.

    F. Jurisdictional Reach of the New Sanctions

    Consistent with the pre-existing sanctions measures, the jurisdictional scope of the new sanctions extends (1) to conduct by EU-incorporated entities and EU nationals anywhere in the world; (2) to conduct by any party, irrespective of nationality, in connection with activities occurring in the territory of the EU or (with regard to legal persons) in respect of business “done in whole or in part within the Union”; or (3) conduct on board any aircraft or vessel under the jurisdiction of a Member State.

***

The new sanctions represent the latest, although perhaps not the last, restrictions relating to the crisis in Ukraine. The EU has signaled that it will closely monitor the implementation of the new restrictions and their impact, and it will consider supplemental measures if circumstances in Eastern Ukraine warrant and consensus among the 28 Member States can be reached. Likewise, the U.S. government has stated that additional sanctions targeting Russia could be forthcoming if Russia does not work toward a diplomatic resolution to the crisis in Ukraine.

We are following the above-mentioned sanctions and export control developments closely and will provide further updates as they evolve. We are particularly well-positioned to advise companies and individuals on compliance with the U.S. and EU sanctions related to the Ukraine crisis, as well as on the broader impact of the crisis on foreign investment in both Ukraine and Russia and other legal and commercial interests in the region.

ARTICLE BY

Peter Flanagan
Corrine Goldstein
Peter Lichtenbaum
Kimberly Strosnider
David Addis
David Lorello
OF
Covington & Burling LLP