U.S. and Canadian Sanctions Against Russiaweb1.amchouston.com/flexshare/003/ACCH/WebsiteInfo/... · U.S. and Canadian Sanctions Against Russia ... • May include designation of persons

U.S. and Canadian Sanctions Against Russia

Presentation to the Association of Corporate Counsel –Paul M. Lalonde & Kenneth J. Nunnenkamp

1

US Ukraine- Related Sanctions

US Sanctions: Legal Authority

• Statutory• Regulatory• Executive Orders• Interpretive Guidance

3

US Sanctions: Legal Authority -- Statutory

• General• International Emergency Economic Powers Act, 50 U.S.C. §1701

et. seq. ("IEEPA")• Trading With the Enemy Act, 50 U.S.C. App. § 1, et. seq.

("TWEA")

4


• Numerous specific statutes (examples)• Acts imposing sanctions against Iran

• Trade Sanctions Reform and Export Enhancement Act of 2000("TSRA"), 22 USC 7201-7211

• Comprehensive Iran Sanctions, Accountability, andDivestment Act of 2010 ("CISADA"), 22 USC 8501-8551

• National Defense Authorization Act For Fiscal Year 2012, Public Law112-81

• Iran Threat Reduction and Syria Human Rights Act, 22 USC 8701- 95• Iran Freedom and Counter-Proliferation Act (part of 2013 NDAA)

• Acts imposing sanctions against Cuba• Cuban Democracy Act, 22 USC 6001-6010• Cuban Liberty and Democratic Solidarity (Libertad) Act, 22 USC 6021-

6091

5


• Ukraine-Related Sanctions Legislation

• Ukraine Freedom Support Act ("UFSA"), Pub. Law No. 113-272• Combination of Mandatory and Optional Sanctions

• Mandatory sanctions on Rosoboronexport (Russian defense exporter)• Mandatory sanctions on entities/persons that transfer or broker defense exports from

Russia to Syria, Ukraine, Georgia, Moldova and other countries "of significant concern" such as "Poland, Lithuania, Latvia, Estonia and the Central Asia republics."

• Mandatory sanctions on Gaxprom if Gazprom withholds significant natural gas supplies from a NATO country or other named countries (i.e., uses it as a political weapon)

• Provides a "menu" of sanctions against persons or entities, similar to Iran program• Optional sanctions against financial institutions that knowingly engage in or facilitate

transactions prohibited under the sanctions

6

US Sanctions: Legal Authority -- Regulations

• General sanctions regulations• 31 C.F.R. Part 501: General Regulations Governing All

Sanctions Programs• Addresses definitions, reporting, TWEA penalties and

licensing procedures

• Specific program regulations (examples)• Ukraine Related Sanctions Regulations, 31 C.F.R. Part 589• Iranian Transactions and Sanctions Regulations, 31 C.F.R.

Parts 535, 560-62• Cuban Assets Control Regulations, 31 C.F.R. Part 515

7

US Sanctions: Legal Authority -- Executive Orders• All sanctions programs implemented initially by Executive Order(s)

• Issued pursuant to either:• IEEPA or TWEA• Specific statute (i.e., CISADA)

• Executive Orders• Declare the conditions are met for the imposition of sanctions• Establish the sanctions program• Provide guideposts for agency action• May include designation of persons or entities to Specially

Designated Nationals ("SDN") List• "Block" property and interests in property in the U.S., that enter

the U.S. (tangibly and intangibly), or that are or come within thepossession or control of a U.S. person

• Effect of blocking an asset -- may not be "transferred, paid,exported, withdrawn, or otherwise dealt in"

8

US Sanctions: Legal Authority• Statutes, regulations and Executive Orders all prohibit:

• Any activity that facilitates a blocked transaction• Facilitation is a broad concept that captures anything reasonably determined to aid or

abet a violation

• Often cited as a separate violation

• Requires an underlying violation or attempt

• Often cited for indirect activities/support

• ATP Tour: approving and facilitating payments to tour official "ordinarily resident in Iran"

• Great Western Malting: fined $1.34M for "performing various back office functions for the salesby a foreign affiliate of non-U.S origin barley malt to Cuba

• Any conspiracy formed to violate the sanctions (Life for Relief & Dev)

• Any transaction that avoids or has the purpose of evading or avoiding thesanctions (Sea Tel Inc.: export to South Korea with knowledge or reason toknow the products would be reexported to Iran)

• Any transaction causing a violation or that constitutes an attempt to violatethe sanctions

9

US Sanctions: 3 Basic Types

• Country Based -- prohibits a broad spectrum of activities based on

the country• Current country based sanctions: Cuba, Iran, North Korea,

Sudan, Syria, Crimea

• Targeted -- sanctions are imposed on specific individuals, entities oractivities within a country

• Examples: Ukraine related, Belarus, Venezuela, Burma,Lebanon

• Activity based -- sanctions people or countries based on certainactivities

• Examples: Cyber-related, Rough Diamond, Magnitsky

10

Ukraine Related Sanctions -- People

• Those close to Russian President Vladimir Putin (the "Oligarchs") (and entitiesthey own/control)

• Individuals "responsible for or complicit in" actions destabilizingthe Ukraine, EO 13660 (March 6, 2014); Officials of the Russiangovernment

• Persons and entities designated over the next several months• Persons/Entities designated became Specially Designated

Nationals ("SDN")• Freezes assets in the US• Prohibits virtually any unauthorized transaction with the person

designated and with any entity "owned" or "controlled" by anSDN (OFAC license is required for all transactions covered)

• Travel Prohibition

11

Ukraine Related Sanctions -- Sector Based

• Sectoral sanctions -- Directives 1 - 4• Expanded sanctions to designated entities and people involved

in various industries:• Finance, Energy, Defense, Materiel

• Finance sector: Prohibits new debt or equity only (first > 90days, then > 30)

• Energy sector: Prohibits new debt > 90 days to Russianenergy sector

• Defense and materiel sectors: Prohibits new debt > 30 days• Designated people/entities added to Sectoral Sanctions

Identification ("SSI") List• Different from SDN designation

12

Ukraine Related Sanctions -- Other Agency Actions

• Departments of Commerce and State place "holds" on the processing of licenses for exports of certain items to Russia (March 26-27, 2014)

• Commerce Department, Bureau of Industry and Security ("BIS")• August 2014, license required for EAR controlled exports to Russian

energy sector (i.e., E&P in deepwater, Arctic offshore)• Items include: ECCNs 0A998, 1C992, 3A229, 3A231, 3A232,

6A991, 8A992 8D992• Items listed in Supplement No. 2 to Part 746 (List of Schedule B

numbers)• Presumption of denial for any license requests• Broader impact than SSI list, which focused on debt and was

limited to designated entities

13

Ukraine Related Sanctions -- Other Agency Actions

• State Department

• Presumption of denial for defense exports to Russia andCrimea• Case-by-case review to determine Russian military benefit

• Revoked existing licenses where possible

14

Ukraine Related Sanctions -- Crimea

• Broad, country-based type sanctions applied to Crimea, EO 13685 (Dec. 19, 2014)

• Prohibits virtually all transactions in and with Crimean persons and businesses

• General Licenses issued to allow "wind-down" of operations in and with Crimea by 1/31/15

15

Ukraine Related Sanctions -- General Licenses

• 9 General Licenses issued so far

• Define exceptions to the sanctions(i.e., medical supplies, Internet communications software, etc.)

• The issuance of General Licenses suggests these sanctions are settling in for a long period

16

Ukraine Related Sanctions -- the 50% rule

• Sanctions apply to all entities in which designated person owns,directly or indirectly, 50% or greater interest (These "owned" entitiesare sanctioned even if not specifically included on SDN List)

• Applies if SDNs own 50% interest "individually or in the aggregate"

• This rule applies under all sanctions programs, but is especiallyrelevant to the Ukraine related sanctions because certain sanctionedpersons have sought to avoid the impact of these sanctions throughdivestitures of small portions of assets -- sometimes to other blockedpersons

17

Ukraine Related Sanctions -- Penalties for Violations

• IEEPA governs. 50 U.S.C. § 1705: Unlawful to violate, attempt to violate, conspire to violate, or cause a violation of any license, order, regulation, or prohibition

• Civil (Strict Liability): $250,000 or 2X the amount of the transaction, per violation

• Criminal (Willful): $1 Million per violation (individuals, imprisonment upto 20 years)

18

Ukraine Related Sanctions -- Status

• Few licenses have been issued from OFAC

• No known licenses for Crimea

• No published enforcement actions relating to Russia

19

Ukraine Related Sanctions -- Practical Considerations

• Jurisdiction• Sanctions programs require an analysis of the nationality and/or location of

the entity engaging in the transaction and origin of the goods or services• The US takes a broad view of jurisdiction, and an equally broad view of

items classified as “US goods” or “US services”• Sectors that receive special attention include energy, financial services

(including insurance), pharmaceuticals/medical devices, and shipping

• Inbound/Outbound• Sanctions programs impact imports, exports, and reexports

• Facilitation raises unique challenging risks

• Diligence with respect to supply chain and distributors is critical, particularly toguard against SDNs or diversion

20

Ukraine Related Sanctions -- Practical Considerations(Cont’d)

• Purpose• Even for transactions that involve permissible goods, the purpose of

the transaction should be evaluated separately • For example, while medical supplies sold to a hospital may be permissible,

government sales (such as to a Health Ministry or a foreign military) may be sanctioned

• Similarly, providing support to (facilitating) an impermissible transaction creates liability• For example, providing accounting or actuarial services to a third-country

business that is predominantly engaged in sanctionable transactions could be subject to sanction

• Whether the initial purpose is permissible, commercial activities designed to evade sanctions, result in diversion of products, or benefit sanctioned parties, may be subject to sanctions

21

The Canadian Sanctions Regime: Ukraine-related Sanctions

Canada – Sanctions Regime

• United Nations Act• Canadian implementation of sanctions adopted by UN Security Council

• Special Economic Measures Act• Other sanctions• As dictated by foreign policy of the Government of Canada• Independent of UN

• Criminal Code – Terrorist groups

• Proceeds of Crime (Money Laundering) and Terrorist Financing Act• Freezing Assets of Corrupt Foreign Officials Act

23

Canada – SEMA

• SEMA = framework legislation

• Specific measures adopted by Regulations

• Sanctions can encompass: • Limitations on official and diplomatic contacts or travel• Restrictions or prohibitions on trade or other economic activity between Canada

and the target state• Seizure or freezing of property situated in Canada

24

Canada – SEMA

• Offences and punishment

8. Every person who willfully contravenes or fails to comply with an order or regulation made under section 4

(a) is guilty of an offence punishable on summary conviction and is liable to a fine not exceeding twenty-five thousand dollars or to imprisonment for a term not exceeding one year, or to both; or(b) is guilty of an indictable offence and is liable to imprisonment for a term not exceeding five years.

• Possibility of a fine with no maximum limit

25

Canada – SEMA Russia Sanctions

• March 17, 2014, the Special Economic Measures (Russia) Regulations

• Multiple amendments

• Include 3 Schedules of sanctioned persons

• Schedule 1 – reasonable grounds to believe are senior officials of the Government of Russia (or their families or entities they control), or individuals or entities ‘engaged in activities that directly or indirectly facilitate, support, provide funding for, or contribute to a violation or attempted violation of the sovereignty or territorial integrity of Ukraine or that obstruct the work of international organizations in Ukraine’

• Schedules 2 and 3 – “…reasonable grounds to believe is a person owned or controlled by, or acting on behalf of” a person sanctioned in Schedule 1.

26


• Section 3: Prohibits any persons in Canada and Canadians abroadfrom:

• dealing in any property held by or on behalf of a person designated in schedule 1, or facilitating or providing financial or other related services in respect of such a dealing;

• making any goods available to a person designated in schedule 1; and

• providing any financial or related services to or for the benefit of a person designated in schedule 1

27


• Section 3.1(1): Prohibits any person in Canada and any Canadian abroad to “…transact in, provide or otherwise deal in a loan, bond or debenture, of longer than 30 days maturity in relation to:”

• a Schedule 2 person,• the property of Schedule 2 person, or• the interests or rights of property of a Schedule 2 person.

28


• Section 3.1(1.1): Prohibits any person in Canada and any Canadian abroad to “…transact in, provide or otherwise deal in a loan, bond or debenture, of longer than 90 days maturity in relation to:”

• a Schedule 3 person,• the property of Schedule 3 person, or• the interests or rights of property of a Schedule 3 person.

29


• Section 3.1(2)• 3.1(1) and (1.1) Do not apply in respect of a loan issued or bond or debenture

that was issued before the designated person was listed in Schedule 2 or 3.

30


• Section 3.2: Prohibits any person in Canada and any Canadian abroad to “…transact in, provide or otherwise deal in a capital funding through the transaction of shares in exchange for ownership interest in relation to:”

• a Schedule 2 person,

• the property of a Schedule 2 person, or

• the interests or rights of property of a Schedule 2 person.

• Does not apply to capital funding that occurred before the designated person was listed in Schedule 2.

31


Month Day Year Dentons US LLP Document reference # 32

• Section 3.3: Oil Exploration or Production

• Prohibits persons in Canada and any Canadian outside Canada from exporting, selling, supplying or shipping any listed goods, wherever situated, to Russia or to any person in Russia for use in any of the following activities: • offshore oil exploration or production at a depth greater than 500 metres;• oil exploration or production in the Arctic; or• Shale oil exploration or production.

• The new measures also prohibit the provision to Russia or to any person in Russia of any financial, technical or other services related to such prohibited goods.



Section 3.3: Oil Exploration and Production• New Schedule 4 identifies goods subject to the new ban along

with their Harmonized System code. Goods include various codes under Chapters 73, 82, 84, 87 and 89.


Meaning of “Canadian”:• SEMA Section 2: “Canadian” means a person who is a citizen within the meaning of the Citizenship Act or a body corporate incorporated or continued by or under the laws of Canada or of a province

• Application for Removal from Schedule:• Section 8 SEMA (Russia) Regulations: Review mechanism to remove names from the schedule on an application by a designated person

• 90 day process

• Lack of transparency

• To date, 2 removals-ExpoBank-RosEnergoBank

34

Canada – SEMA Russia SanctionsSection 4 - Exemptions:

• Payments pursuant to contracts entered into with persons designated in schedule 1 before their designation, provided not for their benefit

• Pension payments to any person in Canada or Canadian abroad

• Transactions in respect of diplomatic missions

• Transactions to UN agencies, the International Red Cross and Red Crescent Movement, and Canadian NGOs in certain circumstances

• Transactions necessary for a Canadian to transfer to a person designated in schedule 1 any accounts, funds or investments held by a person designated in schedule 1 when that person became a designated person

• Financial services required in order for a designated person to obtain certain legal services in Canada; and

• Payments to any person in Canada or any Canadian abroad in respect of loans entered into by a person before they became a designated person

35


Section 5 – Causing or assisting:

• Prohibited for any person in Canada or Canadian abroad to do anything that causes, assists or promotes, or intended to cause, assist or promote any act or thing prohibited under sections 3 to 3.2

• Extremely broad and problematic drafting

36


Financial Institutions – Continuing obligation to determine• Section 6: Listed financial institutions “…must determine on a

continuing basis whether [they] are in possession or control of property owned or controlled by or on behalf of a designated person listed in Schedule 1”

• Includes banks, credit unions, insurance companies, trust and loan companies, securities dealers, portfolio managers or investment counselors

• Compliance requires sophisticated, ongoing KYC programs

37


Special Economic Measures (Russia) Permit Authorization Order

• Authorizes the Minister of Foreign Affairs to issue a permit to carry out a specified activity or transaction, or any class of activity or transaction, that is restricted or prohibited under the SEMA (Russia) Regulations

• Permits and reasons are not publicized

• No time frame for making the decision

• Not clear what criteria may be applied

• Process – letter to DFATD, with supporting information and records

• Strategic use

38

SEMA Ukraine Sanctions

• Similar to Russia sanctions

• No Schedule 2 or 3

• No sections 3.1 and 3.2

• Targets 49 individuals and 4 entities • “for which the Governor in Council considers there are reasonable

grounds to believe that they are engaged in activities that directly or indirectly facilitate, support, provide funding for, or contribute to the deployment of Russian armed forces to Crimea or to the seizing of control of Ukrainian government and military entities inside Crimea.”

• Which are partners, relations, or entities controlled by such individuals and entities

• A senior executive of an entity taking part in such activities

39

Other Ukraine Sanctions

• March 5, 2014, Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations

• Gives effect to requests from Ukraine government to freeze assets of former leaders and senior officials or their associates and family members suspected of having misappropriated state funds, or obtained property inappropriately as a result of their office or family, business or personal connections

• These are fairly prominent individuals, and asset freezing tends to be politically motivated

40

Canada – Issues with Sanctions Compliance

Application and interpretation challenges:

• No jurisprudence

• No DFATD guidance on compliance issues

• Little OFSI guidance

• No advance ruling/interpretations (or even informal decisions)

• Can request permit or confirmation – occasionally an equivalent mechanism

• Reluctance of officials to discuss Russia and Ukraine sanctions, even informally

• No transparency in section 8 removal applications

• No transparency in permit authorization process

41

Questions?


Kenneth Nunnenkamp

Tysons Corner

1 703 574 4241

[email protected]

Paul Lalonde

Toronto

1 416 361 2372

[email protected]

Dentons locations

49 countries

125 locations

This will be our global footprint when our combinations with 大成and MLA are officially launched下图为Dentons与大成及MLA合并后的办公室分布图

11 June 2015 43

Documents

U.S. and Canadian Sanctions Against Russiaweb1.amchouston.com/flexshare/003/ACCH/WebsiteInfo/... · U.S. and Canadian Sanctions Against Russia ... • May include designation of persons