December 22, 2014
On December 18, 2014, President Barack Obama signed the Ukraine Freedom Support Act of 2014 ("Ukraine Freedom Support Act"), which provides him with the authority to impose additional economic sanctions on foreign persons conducting particular transactions in certain Russian economic sectors, notably the energy and defense sectors. The law, which originated as S.2828 in the United States Senate and H.R. 5859 in the House of Representatives and passed both with unanimous consent, further increases the economic pressure on Russia followings its annexation of Crimea in March 2014 and its continued support of separatist activities in eastern Ukraine.
The law provides the President with new powers, though generally does not require that he impose new sanctions. Under the new legislation, the President shall impose certain penalties on Russian producers, transferors, or brokers of defense articles. Note, however, that the President must impose sanctions on Rosoboronexport, the Russian defense firm. In addition, the President may impose sanctions on a foreign person if he determines that foreign person knowingly made a significant investment in a special Russian crude oil project, and may sanction Gazprom if it withholds significant natural gas supplies from certain European countries. Importantly, the legislation also provides the President with authority to sanction foreign financial institutions that knowingly engage in certain significant transactions in the Russian defense or energy sectors, as well as on behalf of Specially Designated Nationals ("SDNs").
The law also contains a number of other provisions related to providing Ukraine with military assistance and other forms of aid.
The new legislation builds on the three Executive Orders ("E.O.s") issued by President Obama that authorize the Office of Foreign Assets Control ("OFAC") at the U.S. Department of the Treasury ("Treasury") to impose economic sanctions in response to further attempts by the Russian Federation and Ukrainian separatists to destabilize eastern Ukraine, and the ongoing occupation of Crimea. To date, OFAC has placed over 100 individuals and entities on the Specially Designated Nationals List ("SDN List") pursuant to the first two of these Executive Orders, E.O.s 13660 and 13661. In addition, on July 16, 2014, OFAC imposed its first set of sectoral-based sanctions authorized by the third Executive Order, E.O. 13662, and named several entities in Russia’s financial services and energy sectors to a newly-published Sectoral Sanctions Identification List ("SSI List"). In response to Russia’s continued activities in eastern Ukraine and its occupation of Crimea, on September 12, 2014, OFAC announced it was both expanding the scope of these sanctions and further adding to the number of sanctioned individuals and entities.
As the crisis continues to unfold, OFAC may utilize these new authorities to sanction foreign persons conducting prohibited transactions in certain Russian economic sectors. OFAC may also continue to place additional individuals and entities on the SDN List or SSI List, and may further expand the scope of the sanctions applicable to those entities placed on the SSI List. In addition, OFAC may begin undertaking enforcement actions against U.S. and foreign companies who violate the prohibitions set forth in Executive Orders 13660, 13661, and 13662, as well as the Ukraine Freedom Support Act. U.S. companies should pay close attention to further announcements by OFAC and ensure that they comply with the requirements of these regulations.
Upon request, a complete country-by-country comparison of sanctions actions and a list of sanctioned individuals and entities may be obtained from Gibson Dunn attorneys.
New Sanctions on Russia’s Defense and Energy Sectors
The law further pressures Russia’s defense and energy sectors, both by targeting specific companies and by prohibiting investment in new types of Russian economic projects. Regarding the defense sector, the law requires the President to impose three out of nine possible types of sanctions on Rosoboronexport. The law also grants discretion to the President to impose three types of sanctions on any entity determined by the President to be owned or controlled by the Government of the Russian Federation–or by a national of the Russian Federation–that knowingly manufactures or sells defense articles transferred into Syria or other specified countries or that transfers, brokers, or otherwise assists in the transfer of defense articles into Syria or other specified countries without the consent of the internationally recognized government of that country. Relatedly, the law also authorizes the President, within 45 days, to impose sanctions on any person that the President determines knowingly assists, sponsors, or provides financial, material, or technological support for, or goods or services to or in support of, such activities by these entities after the date of enactment of the Act.
Addressing the energy sector, the new legislation authorizes the President to impose three or more types of sanctions on a foreign person if the President determines that the foreign person knowingly makes a significant investment in a special Russian crude oil project. A special Russian crude oil project is defined as a project intended to extract crude oil from an exclusive economic zone of the Russian Federation in waters more than 500 feet deep, Russian Arctic offshore locations, or shale formations located in the Russian Federation. A foreign person is defined as any individual or entity that is not a United States citizen, a permanent resident alien, or an entity organized under the laws of the United States or any jurisdiction with the United States. Note that this new authority provides the President with discretion to target non-U.S. persons for conducting certain transactions in the Russian energy sector. The legislation also provides the President with authority to impose additional licensing requirements for or other restrictions on the export or reexport of items for use in the energy sector of the Russian Federation, including equipment used for tertiary oil recovery.
The President can also impose sanctions on Gazprom, the Russian energy company, if he determines that it is withholding significant natural gas supplies from member countries of the North Atlantic Treaty Organization ("NATO") or from countries such as Ukraine, Georgia, or Moldova.
The Ukraine Freedom Support Act also identifies specific penalties that the President can impose. They include:
The legislation contains a number of exceptions and waivers, including a national security waiver that permits the President to waive certain sanctions with respect to a foreign person or a specific transaction if the President determines that the waiver is in the national security interest of the United States and submits to the appropriate congressional committees a report on the determination and the reasons for the determination. Additionally, the sanctions do not apply to the importation of goods.
New Sanctions on Russian and Other Foreign Financial Institutions
The legislation also provides the President with the authority to impose sanctions on foreign financial institutions that engage in significant transactions involving a number of activities. In particular, such foreign financial institutions are prohibited from engaging in such transactions with Rosoboronexport or any entity determined by the President to be owned or controlled by the Government of the Russian Federation or by a national of the Russian Federation that knowingly manufactures or sells defense articles transferred into Syria or other specified countries, or that transfers, brokers, or otherwise assists in the transfer of defense articles into Syria or other specified countries without the consent of the internationally recognized government of that country. Relatedly, foreign financial institutions are prohibited from engaging in any transactions involving a person the President determines to be knowingly assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, such activities by these entities.
Foreign financial institutions are also prohibited from engaging in transactions involving entities that the President has determined made significant investment in a special Russian crude oil project, or with Gazprom if the President determines that Gazprom is withholding significant natural gas supplies from particular countries.
Finally, foreign financial institutions may be sanctioned if the President determines that they have knowingly facilitated a significant financial transaction, 180 days or more after the enactment of the Act, on behalf of any SDN that has been designated pursuant to the Ukraine crisis.
Under the Ukraine Freedom Support Act, the President has the authority to prohibit foreign financial institutions that violate these restrictions from opening or maintaining correspondent accounts in the United States.
Implications and Recommendations
By signing the Ukraine Freedom Support Act, President Obama has significantly increased his authority to pressure Russia to cease its activities in Crimea and eastern Ukraine. While the President can now target a wider range of persons who do business in the Russian economy, it remains unclear to what extent the Administration will exercise these powers. In public statements, Administration officials have noted that imposing significant additional sanctions on Russia–particularly if not done in coordination with European allies–could seriously complicate United States and European Union attempts to maintain a unified political front to oppose Russian aggression.
While the Administration may be reluctant to begin immediately enforcing these penalties, foreign companies should avoid any of the prohibited transactions specified in the legislation. These new sanctions are similar to what the United States has imposed in recent years on Iran, and provide the President with the authority to target firms outside U.S. jurisdiction.
In addition, U.S. companies should continue to ensure that they are in compliance with all relevant Russia sanctions, including the four directives on the SSI List. They should also continue to closely monitor any additional designations, Executive Orders, legislation, or regulations. In monitoring SDN designations and SSI List additions, note that other entities that do not appear on the SDN List or SSI List may be subject to the applicable sanction under the 50 Percent Rule.
U.S. companies and foreign companies that conduct transactions in the United States should also be cautious about conducting any business with companies on the SSI List. OFAC has not yet commenced public enforcement proceedings against U.S. persons for violating the recent sanctions on Russia, but may be looking to show that these sanctions have teeth. U.S. companies should avoid engaging in any activities that could run afoul of OFAC regulations and that garner significant public attention, as this may result in increased OFAC scrutiny.
Finally, the increasing number of SSI List-related Directives and designations has created a patchwork of regulations that require careful due diligence efforts by U.S. companies. For example, certain Russian companies are subject to the sanctions contained in particular Directives, but not others. Others may be subject to multiple Directives carrying different restrictions based on the underlying trade-related activity involved. As a result, our clients and friends should ensure that they are complying with each Directive, as well as with the Entity List maintained by the Bureau of Industry and Security ("BIS") at the United States Department of Commerce.
 Statement by the President on the Ukraine Freedom Support Act (Dec. 18, 2014). Available at http://www.whitehouse.gov/the-press-office/2014/12/18/statement-president-ukraine-freedom-support-act.
 Exec. Order No. 13,660 of March 6, 2014, Blocking Property of Certain Persons Contributing to the Situation in Ukraine, 79 Fed. Reg. 13,491 (Mar. 10, 2014), available at https://federalregister.gov/a/2014-05323. For a more in-depth discussion of this Executive Order, see Client Alert, Gibson, Dunn & Crutcher, LLP, President Obama Signs Executive Order Targeting Persons Threatening Peace, Sovereignty, and Territorial Integrity of Ukraine; European Union Sanctions Former Ukrainian Leaders (Mar. 10, 2014), http://www.gibsondunn.com/wp-content/uploads/documents/publications/President-Obama-Signs-Executive-Order-Targeting-Persons-Threatening-Peace-Territorial-Integrity-of-Ukraine.pdf
 Exec. Order No. 13,661 of March 16, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine, 79 Fed. Reg. 15,535 (Mar. 19, 2014), available at https://federalregister.gov/a/2014-06141. For a more in-depth discussion of this Executive Order, see Client Alert, Gibson, Dunn & Crutcher, LLP, President Obama Signs Executive Order Blocking Property of Additional Persons Contributing to the Situation in Ukraine and Designates Russian and Former Ukrainian Officials (Mar. 18, 2014), http://www.gibsondunn.com/publications/pages/President-Obama-Signs-Executive-Order-Blocking-Property-of-Additional-Persons-Contributing-to-Situation-in-Ukraine.aspx.
 Exec. Order No. 13,662 of March 20, 2014, Blocking Property of Additional Persons Contributing to the Situation in Ukraine, 79 Fed. Reg. 16,167 (Mar. 24, 2014), available at https://federalregister.gov/a/2014-06612. For a more in-depth discussion of that Executive Order, see Client Alert, Gibson, Dunn & Crutcher, LLP, President Obama Signs Third Executive Order Blocking Property of Additional Persons Contributing to the Situation in Ukraine and Targeting Certain Russian Economic Sectors (Mar. 25, 2014), http://www.gibsondunn.com/wp-content/uploads/documents/publications/President-Obama-Signs-Third-Executive-Order-Blocking-Property-of-Additional-Persons-Contributing-to-Situation-in-Ukraine.pdf.
 Office of Foreign Assets Control, Sectoral Sanctions Identifications List (Sept. 12, 2014), available at http://www.treasury.gov/ofac/downloads/ssi.pdf.
 See Client Alert, Gibson, Dunn & Crutcher, LLP, U.S. Treasury Department Imposes Additional Sanctions on Russian Entities in Financial Services and Energy Sectors in Response to the Evolving Ukraine Crisis; Expands List of Blocked Persons (Sept. 22, 2014), http://www.gibsondunn.com/publications/Pages/US-Treasury-Dept-Imposes-Additional-Sanctions–Russian-Entities-in-FinancialServices–Energy-Sectors-UkraineCrisis.aspx.
 Ukraine Freedom Support Act of 2014, H.R. 5859, 113th Cong. §4(a)(1) (2014) (enrolled).
 Ukraine Freedom Support Act at § 4(a)(2)(A). Note that the specified countries are Ukraine, Georgia, Moldova, or any other country designated by the President as a country of significant concern, such as Poland, Lithuania, Latvia, Estonia, and the Central Asia republics. See Ukraine Freedom Support Act at § 4(a)(3).
 Ukraine Freedom Support Act at § 4(a)(2)(B).
 Ukraine Freedom Support Act at § 4(b)(1).
 Ukraine Freedom Support Act at § 2(6).
 Ukraine Freedom Support Act at § 4(b)(3).
 Ukraine Freedom Support Act at § 4(c).
 Ukraine Freedom Support Act at § 4(d)(2), § 4(e).
 Ukraine Freedom Support Act at § 4(d)(1).
 Ukraine Freedom Support Act at § 5(a).
 Ukraine Freedom Support Act at § 5(b).
 Ukraine Freedom Support Act at § 5(c).
 See, e.g., Peter Baker, Obama Signals Support for New U.S. Sanctions to pressure Russian Economy, N.Y. Times, Dec. 16, 2014, at A14. Available at http://www.nytimes.com/2014/12/17/world/europe/obama-signing-russia-ukraine-sanctions-bill.html.
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Eric Lorber* – Washington, D.C. (+1 202-887-3758, firstname.lastname@example.org)
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* Mr. Lorber previously served at the U.S. Department of Treasury on the Iran sanctions desk in the Office of Terrorist Financing and Financial Crime, as well as in the Chief Counsel’s Office at OFAC. He is not yet admitted to practice in the District of Columbia, and currently practices under the supervision of the Principals of the Firm.
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