Tag: U.S.

Executive Immunity and Impeachment: Any Precedent for President Trump’s Strategy?

With the fourth presidential impeachment hearings in our country’s history underway; the National Law Review thought it timely to look at some of the issues related to impeachment; specifically involving executive privilege and how the Trump administration’s invocation of executive privilege and how presidential immunity fits in historically with other impeachments in recent memory.

Sol Wisenberg, a Deputy Independent Counsel from the Starr Investigation, is a white-collar attorney who was written and spoken about the procedures surrounding impeachment and the constitutional law issues in play. He was generous with his time and spoke with the Lead Writer of the National Law Review, Eilene Spear, on executive privilege, recent litigation related to executive privilege, and the ever-present intersection of public opinion, constitutional law, and politics.  Below are excerpts of the conversation, featuring Mr. Wisenberg’s analysis and opinion on the proceedings at hand. This is the second article in this series, the first focusing on comparing and contrasting the Clinton impeachment with the impeachment investigation into President Trump.

ES:  Is it appropriate for Democrats to imply that if a witness in the impeachment investigation refuses to testify that they are trying to undermine the impeachment proceedings?

I mean, look, it’s their show, they are the majority in the House. Adam Schiff came out and said “if you do not appear, then we’ll infer that your testimony would have been favorable to our impeachment inquiry.” Those weren’t his exact words, but that was the essence. Is it appropriate? I would say that it depends on the circumstances. Charles M. Kupperman, President Trump’s former deputy national security adviser, was subpoenaed by House Democrats to testify, but the White House, prior to Mr. Kupperman’s House testimony, said that the President had invoked Presidential Immunity, leaving Mr. Kupperman uncertain about how to proceed.  Kupperman went to the federal district court and basically said: ‘Hey, I’ve got Congress issuing a subpoena and telling me I’m going to be in contempt if I don’t answer. But I also went to the White House Counsel and he’s sent me this letter here saying I’m absolutely forbidden to appear. I want to follow the law. Tell me what to do court.’ I believe he did exactly what you’re supposed to do in that situation. Kupperman’s lawsuit also raised questions about John Bolton’s possible future testimony, as Kupperman’s lawyer, Charles Cooper, also represents Bolton, President Trump’s former national security advisor.  According to CNN, while it remains to be seen if Kupperman or Bolton will ultimately end up testifying, their actions are widely viewed as intertwined, with one source telling CNN that the two men are “simpatico.”

As a purely legal proposition, Adam Schiff’s assertion about inferences to be drawn from refusing to testify or show up is preposterous in Kupperman’s case. The only time a trier of fact is allowed to make a negative inference from the invocation of a privilege is the Fifth Amendment privilege against self-incrimination, and even that is only in a civil proceeding. The Fifth Amendment gives a criminal defendant the right not to testify, and the judge and jurors are not permitted to take this refusal to testify into consideration when deciding whether he or she is guilty See Ohio v. Reiner 532 US 17 (2001).   The people who aren’t testifying or showing up at the House are not, so far, taking the Fifth. These are people saying, “I’ve got a constitutional argument or the President does, and that’s why I shouldn’t appear.” But keep in mind that impeachment is a political remedy. If a majority of the House wants to construe a refusal to appear or testify, even on Constitutional grounds, against the President, they are going to do it.

A Bit of Background:

Executive privilege has been asserted frequently by past presidents, though it’s not explicitly written into the Constitution.  George Mason University professor Mark Rozell explained in a 1999 law review article that executive privilege is “the right of the president and high-level executive branch officers to withhold information from Congress, the courts, and ultimately the public.” This power can be used in two circumstances, he continues: “(1) certain national security needs and (2) protecting the privacy of White House deliberations when it is in the public interest to do so.” It’s the second part that is especially valuable, as it allows presidential advisors to freely speak their minds without the threat of a subpoena. The problem is it’s not precisely clear who this privilege covers.

In United States v. Nixon, 418 U.S. 683 (1974), the Supreme Court addressed a subpoena duces tecum during the Nixon impeachment process to produce documents, including full copies of the Watergate tapes which contained meetings between President Nixon and others indicted in Watergate situation or had ties to the Nixon administration.  President Nixon did turn over edited transcripts of some of the conversations included in the subpoena. Before the Supreme Court, Nixon claimed he had an absolute executive privilege to protect communications between “high government officials and those who advise and assist them in carrying out their duties.” The Supreme Court held presidential privilege as to materials subpoenaed for use in a criminal trial did not override the needs of the judicial process on the grounds of a generalized interest in confidentiality.  The large difference is that the Nixon case involved the subpoena of documents, the Trump impeachment subpoenas addressed above involve subpoenas for live testimony only.

Also, in U.S. v. Nixon’s majority opinion, Chief Justice Burger stated, “[n]either the doctrine of separation of powers, nor the need for confidentiality of high-level communications, without more, can sustain an absolute, unqualified presidential privilege of immunity from judicial process under all circumstances.” The immunity claimed by both President Trump and other presidents comes from the position of the executive branch as a co-equal branch alongside the judiciary and legislative branches.

ES:  What do Executive Privilege and Absolute Presidential Immunity cover and do they  apply to people other than the president?

Executive privilege is invoked in the name of the president, but it can cover any executive officer. It is a privilege recognized by the Supreme Court. Presidential immunity purports to cover anyone who works in the White House, or the Executive Office of the president. The theory is that Congress can no more summon a White House employee to appear than it could summon the president.  One reason officials like Kupperman are seeking clarification is that executive privilege and presidential immunity in impeachment proceedings are not open and shut issues. Every president at least since Nixon has claimed immunity–for himself and his key White House aides–from even having to show up in the House or Senate to answer questions, claiming that White House employees are in the same position as the president and are immune from having to appear. This doctrine makes me shake my head a little, and, as noted, is far from settled law in the courts.

No court has ever accepted the absolute immunity argument, to my knowledge. Only one court has ruled directly on it, and that was in the George W. Bush administration. Committee on Judiciary v. Miers 575 F. Supp. 2d 201 (D.D.C. 2008) addressed a House Judiciary Committee’s subpoena to Harriet Miers, former Counsel to President Bush, seeking to compel her to produce documents and to appear and testify about the forced resignation of  U.S Attorneys, and that court ruled against the White House. In the Harriet Miers case, federal district judge John Bates stated “there is no judicial support whatsoever” that a president’s advisers have absolute immunity from testimony, and that such a view “would eviscerate Congress’ historical oversight function.” But the case was settled and has no precedential value, except in Bates’ court. I think the opinion is of some significance, however, because Bates was a Bush appointee and in general a strong supporter of executive privilege.

ES:  Is there any type of immunity from testimony that may apply if executive privilege isn’t applicable? 

There are other forms of privilege that might come up.  I suppose somebody could take the Fifth, you can take the Fifth right in front of the House committee. So that’s always available. There’s attorney-client privilege. To be precise; this idea that if you work at the White House–and are therefore in the same shoes as the president–you don’t even have to show up, that’s technically not executive privilege. That is a presidential immunity argument based upon the separation of powers.  For example, you could put that to a judge and the judge could throw it out, say there is no such thing, and the court rejects that doctrine. Then the individual could go over to Congress and get asked a question, and he could claim executive privilege and he would be completely within his rights.

The Obama administration took the identical position with David Simas, an employee in the Obama White House, that President Trump did in the case of Kupperman and former White House Counsel Don McGahn.  Simas was head of the Office of Political Strategy and Outreach and was subpoenaed in relation to Congressional oversight of Hatch Act compliance. White House Counsel W. Neil Eggleston asserted executive immunity, defying a subpoena from House Oversight and Government Reform Chairman Darrell Issa.  His letter referenced the Office of Legal Counsel’s opinion, saying: “The Executive Branch’s longstanding position, reaffirmed by numerous Administrations of both political parties, is that the President’s immediate advisers are absolutely immune from the congressional testimonial process.” There are examples in every administration, and each party wants to find examples where the other party did the same or a more extreme version of what they are trying to do because people forget and people are partisan.

ES:  That said, how do politics impact the perception of a President’s claim of executive privilege?

Once again, it depends on the circumstances. In the context of an impeachment inquiry with an unpopular President and an opposing party in charge of one or both branches, politics can affect absolutist doctrines fairly quickly. Look at Nixon again.  In April 1973, before the Senate Watergate Committee hearings began, he vowed that his aides would not testify. Nixon’s Attorney General, Dick Kleindienst, told Senator Ed Muskie,  “You do not have the power to compel me to come up here if the President directs me not to, and even if you would attempt to compel me, I would not come here.” If the Senate didn’t like it, Kleindienst smirked to Senator Sam Ervin, “you have a remedy, all kinds of remedies: cut off appropriations, impeach the President.” That was in April. By May 22, with public opinion starting to move against him, Nixon completely capitulated. Ervin called Nixon’s bluff, referring to his broad claims of Executive privilege as“executive poppycock.” Nixon didn’t have Trump’s political power. He had short coattails and both houses of Congress were in Democratic hands. Trump is stronger with his House and Senatorial base, and his party in control of the Senate, so he can pull off that attitude for now. But again, attitudes and public opinion can change quickly, and we’ve already seen the needle move a little bit in terms of public opinion in the last week alone.

You also have the issue of aides, former aides, and Executive Branch officials who simply ignore Presidential directives not to appear or testify. This happened to Nixon, as people like John Dean and Jeb Magruder finally started telling the truth to DOJ Prosecutor Earl Silbert, and ultimately to Ervin’s Watergate Committee. It is happening to Trump now with some State Department and DOD officials–and at least one mid-level OMB employee–talking to the House. I believe this is how Madison and some of the other Framers expected things to play out. It is checks and balances at work. It is one thing to have a nice little formalistic theory of executive privilege or presidential immunity. It is quite another to try to enforce it in the real rough-and-tumble world of politics.

Many thanks again to Mr. Wisenberg for his time, insights and perspective.

Copyright ©2019 National Law Forum, LLC

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

Starving the Bear: The United States Restricts Exports to Russia

Sheppard Mullin 2012

The pressure on Russia continues to build.  As we previously reported here and here, throughout March, the United States and other Western powers implemented a series of sanctions against individuals and entities deemed to be involved in the political destabilization of Ukraine.  Those sanctions were restricted to specific parties, including high ranking Russian and Ukrainian officials and – notably – one Russian bank.

The United States has now gone further, implementing restrictions that restrict trade with the entire country of Russia.  These sanctions are bound to have more bite.

Specifically, on March 26, the U.S. Department of Commerce announced that, since March 1, 2014 and until further notice, it had not and will not issue licenses for exports or re-exports to Russia.  Commerce governs exports and re-exports of U.S.-origin commercial and “dual use” items.  While not all such items require a license for Russia, many sensitive items do.

On March 27, the State Department followed suit: it announced that, until further notice, it will not issue any authorizations for exports of defense articles or services to Russia.  This is essentially an absolute embargo on defense exports to Russia and Russian nationals: an export authorization is required for virtually any export of a defense article, technical data, or defense service to Russia (or any other country).

These two actions constitute a significant expansion of U.S. trade restrictions on Russia, particularly because the license restrictions apply to exports of both goods and technology.  Moreover, the restrictions apply to all Russian individuals and entities, as opposed to the very targeted economic sanctions previously imposed by the Treasury Department.

While the United States has acted quickly, it is not alone, as the European Union has also taken action, introducing targeted sanctions, including an asset freeze and visa ban, against designated parties responsible for human rights violations, violence, and use of excessive force with respect to Ukraine.  In addition, EU Member States have agreed to (i) suspend export licenses on equipment that might be used for internal repression and (ii) reconsider export licenses to Ukraine and Russia related to military technology and equipment.

Collectively, the sanctions imposed to date bring with them a host of practical challenges for companies conducting business in or with Russia.  Western banks may scrutinize transactions with Russian banks and other parties especially carefully in light of the new restrictions.  In some cases, a Western bank might hold up a legitimate transaction for further review if a Russian counterparty is involved.

Companies with current business ties in Russia must, therefore, consider the commercial and related risks of continuing that business.  The United States in particular is implementing sanctions rapidly, piecemeal, and often without much warning.  As the landscape of trade restrictions continues to change, companies must perform ongoing diligence with respect to their Russian business.  For example, companies should perform periodic rescreening of Russian business partners to ensure they do not appear on any U.S. prohibited parties lists.

Article By:

Thaddeus Rogers McBride
Cheryl Palmeri
Of:
Sheppard, Mullin, Richter & Hampton LLP

The Complicated Landscape of US Estate Tax

Altro Levy Logo

Canadians who own assets in the U.S. may be subject to U.S. estate tax.

This tax is based on the fair market value of all U.S. assets owned at the time of death. It can reach 40%, depending on the value of U.S. assets and the world-wide estate.

But not all Canadians who own U.S. assets will be subject to U.S. estate tax. A close look at the new U.S. estate tax rules will help you determine whether your Canadian clients are exposed to U.S. estate tax.

New U.S. estate tax rules

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2013 (the Act) into law. The Act resolves many of the issues raised by the fiscal cliff.

Pursuant to the Act, U.S. estate tax liability of non-U.S. residents depends on the answers to the following two questions:

  1. Is the value of the U.S. estate more than $60,000?
  2. Is the value of the worldwide estate greater than $5,250,000?

If the fair market value (FMV) of U.S. assets is less than $60,000 on the date of death, then there is no U.S. estate tax. If the value of U.S. assets on death exceeds $60,000, a Canadian’s estate may still be exempt from U.S. estate tax if the value of his or her worldwide estate upon death is less than what is known as the “exemption.”

Worldwide exemption for 2013 and beyond

The Act provides an exemption from U.S. estate tax if a non-resident dies with a worldwide estate with a FMV of less than $5,250,000. This exemption amount is inflation-adjusted. Everything counts when calculating a Canadian client’s worldwide estate—including RRSPs and life insurance.

Additionally, when advising a married couple about U.S. estate tax exposure, it’s important to calculate the value of both spouses’ estates combined.

Clients often ask whether the U.S. estate tax is on the worldwide estate. The answer is no; the IRS does not tax a Canadian resident (who is not a U.S. citizen) on his or her worldwide estate.

The only assets that are subject to U.S. estate tax for Canadians are U.S. assets.

What are U.S. assets?

Common U.S. assets include real estate in the U.S. and personally held stocks of U.S. corporations, both public and private.

Here’s a complete list of U.S. assets subject to U.S. tax:

  • real estate property located in the U.S;
  • certain tangible personal property located in the U.S., such as furniture, vehicles, boats and airplanes;
  • golf club equity memberships;
  • shares of U.S. corporations, regardless of the location of the share certificates (even inside RRSPs or RRIFs);
  • interests in partnerships owning U.S. real estate or carrying on business in the U.S.;
  • U.S. pension plans and annuity amounts (IRAs and 401K plans);
  • stock options of a U.S. company;
  • U.S. mutual funds;
  • money owed to Canadians by American persons; and
  • money market accounts with U.S. brokerage firms.

The following is a list of U.S. assets not subject to U.S. estate tax:

  • U.S. bank deposits;
  • certain debt obligations, such as U.S. government bonds;
  • American depository receipts;
  • term deposits/guaranteed investment certificates;
  • real estate situated outside the U.S.;
  • Canadian mutual funds denominated in U.S. dollars that invest in U.S. stocks;
  • life insurance proceeds payable on the death of a Canadian citizen and resident who is not an American citizen; and
  • non-U.S. stocks, bonds and mutual funds.

Many Canadians own assets subject to U.S. estate tax with vacation homes and shares of U.S. corporations topping the list. How can you help clients who own these assets?

The following scenario provides some answers.

Strategies for Canadians who own U.S. assets

Richard is a Canadian citizen and resident, single, with a worldwide estate of $10 million. He owns an $800,000 property in Ft. Lauderdale, Fla.

Richard’s inherited 25% of the shares of four Florida corporations from his deceased father, which he estimates have a value of $200,000. Each corporation owns an apartment building in South Florida.

The chart “Example estimates” (this page) approximates Richard’s 2013 exposure to U.S. estate tax.

Tax planning for U.S. real estate

The goal of any tax-planning for a Canadian owner of U.S. real estate is to ensure the estate of the Canadian decedent is not subject to U.S. estate tax. Consequently, title should not be in his or her name. Alternative ownership structures include:

  • corporation;
  • cross-border trust (irrevocable or revocable); and
  • limited partnership.

These ownership structures avoid probate and guardianship proceedings in the case of incapacity and can defer or avoid U.S. estate tax.

Tax planning for stocks

Although Richard’s shares of U.S. stock are considered U.S. assets, there are tax-planning techniques for avoiding U.S. estate tax.

01 Sell

This may trigger capital gains tax in Canada, though Richard may have some capital losses to apply against it.

02 Create a Canadian holding corporation

Transfer the shares of U.S. stocks on a tax-free basis into a Canadian corporation, of which Richard is the shareholder.

Should Richard pass away with U.S. stock in his Canadian holding company, there will be no U.S. estate tax because Richard no longer owns shares of a U.S. company; he only owns shares of a Canadian holding corporation that owns shares of the Florida companies that Richard’s father passed on to him.

The U.S. Foreign Investment in Real Property Tax Act (FIRPTA) may apply to Richard’s transfer of U.S. stocks into a Canadian company. FIRPTA requires that 10% of the sale price or transfer value of U.S. real estate by a non-resident of the U.S. be withheld and remitted to the IRS. Richard can avoid this with proper structuring and reporting, which we’ll explain next time. No withholding will be required and no disposition will have occurred.

Example estimates of U.S. Estate Tax Payable for 2013

Article by:

David A. Altro

Of:

Altro Levy LLP