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US State and OFAC guidance relating to CAATSA

  • United Kingdom
  • Fraud and financial crime
  • Litigation and dispute management

05-02-2018

The US Department of State and OFAC have issued new guidance in respect of the sanctions imposed against Russia pursuant to the Countering America’s Adversaries Through Sanctions Act (“CAATSA”). CAATSA was signed into law by President Trump on 2 August 2017. The Russia-related provisions can be found in Title II of CAATSA “Countering Russian Intelligence in Europe and Eurasia Act 2017”. CAATA also contains measures related to North Korea and Iran. For further information on CAATSA and the sanctions measures it brings into force view our briefing of 8 August 2017.

This briefing sets out a brief overview of the salient points in the Guidance.

The guidance

Directives 1 and 2

Directives 1 and 2 of Executive Order (“E.O.”) 13662 apply to Russian financial institutions and energy companies, respectively. They restrict transactions by US Persons (defined in E.O. 13662), wherever they are located, and within the US, which relate to new debt of specified tenors (Directive 1 and 2 entities) and new equity (Directive 1 entities only). On 28 November 2017, the applicable tenor of the prohibited debt was reduced from 30 days to 14 days for Directive 1 entities and 60 days (from 90 days) for Directive 2 entities. OFAC confirmed that US Persons are not required to block the property or interests in property of the entities. Instead, US Persons should reject the transactions and, where required by 31 C.F.R part 601.604, report to OFAC the rejected transactions within 10 business days (see OFAC FAQ 370).

OFAC simultaneously issued General Licensee No. 1B, which authorised certain transactions involving derivative products that would otherwise be prohibited under Directives 1, 2 and 3.

Directive 4

On 31 October 2017, OFAC amended Directive 4 in accordance with section 223(d) of CAATSA. Directive 4 prohibits the direct or indirect provision, exportation or re-exportation of goods, services (except for financial services) or technology in support of exploration and production of deep-water, Arctic offshore or shale projects involving Directive 4 entities, their property or interests in property, that have the potential to produce oil in the Russian Federation or the maritime area claimed by the Russian Federation and extending from its territory.

For projects initiated on or after 29 January 2018, the prohibitions apply to the provision, exportation or re-exportation of goods, services and technologies to projects that (i) have the potential to produce oil anywhere in the world; and (ii) are 33% owned by Directive 4 designated entities or where Directive 4 entities own a majority of the voting rights. OFAC has confirmed that the amendments do not change the applicability of OFAC’s 50 percent rule. The references to “33 percent or greater ownership” and “ownership or a majority of the voting interests” refer to a Directive 4 entity’s ownership (or an entity that is owned 50% or more by a Directive 4 entity) interest in a deepwater, Arctic offshore or shale project (see OFAC FAQs 373, 412 and 537). All interests must be aggravated and OFAC’s interpretation of terms such as “initiated”, “Arctic offshore projects” and “production” can be found in FAQs.

Section 223(a)

Section 223(a) of CAATSA states that OFAC may apply sanctions against “state-owned entit[ies] operating in the railway or metals and mining sectors of Russia. OFAC has clarified that section 223(a) does not require the imposition of sanctions. To date, OFAC as not opted to impose such sanctions (OFAC FAQ 539).

Section 225

Section 225 of CAATSA mandates the imposition of secondary sanctions on non-US Persons who knowingly make a “significant investment in a special Russian crude oil project”. A special Russian crude oil project is defined as a project that is “intended to extract crude oil from (a) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (b) Russian Arctic offshore locations; or (c) shale formations located in the Russian Federation”. The State Department has clarified that sanctions shall only be imposed for investments made on or after 1 September 2017. “Knowingly” means that a person has actual knowledge or should have known of the conduct, circumstance or result.

In determining whether an investment is “significant”, the State Department will consider the totality of the facts and circumstances surrounding the investment and weigh various factors on a case-by-case basis. This will include, but is not limited to: (i) the significance of the transactions to US national security and foreign policy interests; (ii) the nature and magnitude of the investment, including its size relative to the project’s overall capitalisation; and (iii) the relation and significant of the investment to the Russian energy sector. Investments include arrangements where goods or services are provided in exchange for equity in an enterprise or rights to a share of revenue or profits. An investment is not significant if US Persons would not require a specific licence from OFAC to make or participate in it.

Section 226

Section 226 mandates the termination or restriction of access to US correspondent and payable-through accounts by non-US financial institutions (“FFIs”) that knowingly (i) engage in significant transactions involving certain defence- and energy-related activities; or (ii) facilitate significant transactions on behalf of certain SDNs. FFIs will not be subject to sanctions solely on the basis of knowingly facilitating significant transactions on behalf of persons listed on OFACs Sectoral Sanctions Identification List pursuant to Directives 1 to 4 of E.O. 13662 (see OFAC FAQ 541).

OFAC will interpret the term “financial transaction” broadly to encompass any transfer of value involving an FFI. It will consider the totality of the facts and circumstances when determining whether transactions or financial transactions are “significant”, taking into account the following factors as with other sanctions programmes: (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis. The term “facilitated” will likewise be interpreted broadly (see further FAQ 542).

Section 228

Section 228 of CAATSA mandates the imposition of sanctions with respect to certain transactions with Foreign Sanctions Evaders and Serious Human Rights Abusers in the Russian Federation. To this end, blocking sanctions will be imposed on any non-US person that knowingly, on or after 2 August 2017, (i) materially violates, attempts to violate, conspires to violate or causes a violation of any Russian sanctions provision; or (ii) facilitates a significant transaction or transactions, including deceptive or structured transactions for or on behalf of any person that is subject to Russia sanctions or their immediate family members.

OFAC has provided definitions for the key terms referred to section 228 including “foreign persons”, “knowingly”, “materially violate”, “facilitation”, “significant transaction” and “deceptive or structured transactions” (see FAQ 545). OFAC will consider each breach on a case-by-case basis taking into account the seven broad factors listed under section 226 above (amongst others) and whether the violation is egregious in nature.

Section 231

Section 231 of CAATSA mandates the imposition of secondary sanctions on any person that knowingly engages in a significant transaction with a person that is a part of, or operates for or on behalf of, Russia’s defence or intelligence sectors. The State Department has published a list identifying such persons.

Section 232

Section 232 permits (but does not require) the President to impose a variety of export and financial secondary sanctions against persons that knowingly invest in, or sell, lease or provide goods or services in support of, Russian energy export pipelines. The State Department has clarified that section 232 only applies to investments in energy export pipeline projects that are initiated on or after 2 August 2017 (the relevant date being the date that the contract is signed) and on the provision of goods or services in support of them. Investments and loan agreements made prior to this date will be exempt.

The State Department is responsible for implementing some of the sanctions, while OFAC is responsible for implementing others and there may be different interpretations of the same terms. OFAC has stated it intends to issue formal regulations for the CAATSA sanctions it will administer.

On 20 December 2017, OFAC designated five Russian officials as SDNs under the 2012 Magnistky Act, which seeks to target individuals that are alleged to have engaged in serious human rights abuse and acts of corruption.

Commentary

The guidance issued by the Department of State and OFAC demonstrates their intention to implement CAATSA, as required by the statute. A number of these measures seek to target non-US persons and their dealings with Russian individuals or entities. Such persons should take note of these changes and exercise caution in light of these new measures. As usual, the primary risk mitigant is appropriate due diligence and screening on all parties involved in Russian-linked transactions and a thorough assessment of the applicability of US secondary sanctions to all transactions and underlying transactions.

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