The document provides an overview and summary of recent U.S. sanctions imposed in response to the Russian actions in Ukraine and the implications for global companies. It discusses the sanctions that have designated individuals and entities in Russia, examines entities that may be considered "owned or controlled" by designated persons, and outlines steps companies can take to mitigate risks from potential expansion of sanctions to other sectors of the Russian economy.

1. GOOD. SMART. BUSINESS. PROFIT.
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2. Russian Sanctions: What the U.S. and OFAC
Directives Mean for Global Companies
June 11, 2014

3. Chelsie Chmela
Events Manager
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3

4. Jonathan Epstein
Partner, Holland & Knight
Tom Morante
Partner, Holland & Knight
SPEAKING TODAY

5. Copyright © 2014 Holland & Knight LLP. All Rights Reserved
Russian Sanctions: What the U.S. and
OFAC Directives Mean for
Global Companies
ETHISPHERE WEBINAR
Jonathan Epstein and Thomas F. Morante
Partners, Holland & Knight LLP
Jonathan.Epstein@hklaw.com (202) 828-1870
Tom.Morante@hklaw.com (954) 468-7862
June 11, 2014

6. Overview: Rapid Changes in U.S. Sanctions
• How do U.S. Sanctions affect the global industry?
• Focus on the U.S. rapid escalation of sanctions against Russia
(Ukraine-related Sanctions)
• The hardest question is how to evaluate the risk of further
Ukraine/Russia sanctions?
• Forecasting the possible effect of future sanctions on Ukraine and
practical implications requires some “big picture” analysis
6

7. Ukraine Crises Related Sanctions – Overview
• Rapid imposition and changes between March 6, 2014 and April 28,
2014.
• To date there have been four rounds of designations “targeting” certain
Russian oligarchs (and individuals associated with the takeover in
Crimea), but these oligarchs own major entities that have been
designated as SDNs.
• Very real possibility of “sectoral” sanctions against Russian financial
and energy sectors.
• Difficult risk analysis for companies doing business in Russia.
7

8. U.S. Sanctions to Date –
Designation of Individuals and Entities as SDNs
• To date approximately 45 individuals (most Russian oligarchs associated with
President Putin’s inner circle) have been designated SDNs.
• To date approximately 19 entities have been designated as being owned or
controlled by such individuals including:
– Investcapitalbank
– JSB Sobinbank
– SMI Bank
– Zest Leasing
– Rossiya Bank
– Chernomorneftegaz
– Transoil
• Entities “owned or controlled” by such persons is a major issue.
• Separately on 20 May 2014 – the U.S. designated another 12 Russian
individuals associated with the death of an Russian activist lawyer, Sergei
Magnitsky in 2009.
8

9. Who May Be Sanctioned?
• U.S. Sanctions Authority
– Executive Orders 133660, 133621, and 133622 issued in March
2014
– The Support for the Sovereignty, Integrity, Democracy, and
Economic Stability of Ukraine Act of 2014, Pub L. 113-95 (April 3,
2014)
• Persons who may be sanctioned
– Are officials of the Russian Government
– Operate in sections of the Russian economy designated by the U.S.
Government such as financial services, energy, metal and mining,
engineering and defense/arms
– Are involved in destabilizing Ukraine, misappropriating state assets,
or asserting authority of portions of Ukraine without authority
– Contribute to corruption in the Russian Federation
9

10. What Are the Sanctions Against Persons Designated
under these Ukraine-related Sanctions?
• U.S. Persons must block the assets of such person (e.g., U.S. banks
would block any USD transaction by such person).
• U.S. Persons may not provide or receive goods, services, or funds
from such person.
• Individuals designated cannot enter the U.S. (visa ban).
• “Any person” including a non-U.S. person that materially assists such
person by providing financial, material, or technological support, or
goods or services may itself be designated an SDN.
• For entities designated on the “Entity List” administered by the U.S.
Department of Commerce’s Bureau of Industry and Security, No
Person can export or re-export U.S.-origin goods or technology to
such person.
10

11. Entities “Owned or Controlled” by a Person
Designated under Ukraine-related Sanctions
• If an SDN owns 50% or more of the entity then:
– The entity is an asset of the SDN, and U.S. persons must treat that
entity, as a matter of law, as if it were an SDN (e.g., block property,
not do business, etc).
• OFAC will look at corporate ownership in cascading manner and if
at any point the 50% ownership is not met entity is not blocked.
• No aggregation (e.g., where multiple SDNs collectively hold 50%
or more interest).
• If an SDN owns less than 50% or otherwise has indicia of control then:
– U.S. Persons do not have the authority to block such entities assets.
– U.S. Persons should use diligence in determining whether to do
business with such entity.
– The U.S. Government will look at other indicia of control to
determine if or whether the entity is effectively controlled by an SDN.
11

12. The Issue of “Owned or Controlled” Entities/Property Creates the
Greatest Risk for Companies Doing Business in Russia
• Sogaz Insurance
– Owned by Rossiya Bank, but Rossiya sold its interest below 50%
– OFAC has provided informal guidance
• Gunvor Group – Swiss Oil Trading Entity
– Mentioned in White House Press briefing as having links to Putin
– Timchenko sold his entire stake in Gunvor the day before he was
designated an SDN
– OFAC has provided informal guidance
12

13. Have There Been General Sanctions on Russia?
• BIS (civil export licenses) and DDTC (military export licenses) ceased
processing licenses to Russia in early March 2014.
• April 28, 2014, agencies announced they would deny pending
licenses, and revoke existing licenses for “high technology” items to
Russia that have military utility.
• FAA prohibited certain overflights of Crimea by U.S. air carriers and
U.S. registered aircraft.
13

14. New Ukraine-Related Sanctions Regulations
• “Abbreviated” regulations issued as final rule on May 8, 2014
• Do not expand sanctions
• Primary focus is to provide structure/guidance into how U.S. persons
(principally financial institutions) should deal with blocked property and
purported transfer of blocked property
• Codifies 50% rule discussed above for duty to block
• Provides general license for U.S. lawyers to represent blocked entities,
and receive payment from outside the U.S. for such services.
14

15. Transfers & Purported Transfer under New Regulations
• Effective date is when the person or entity was designated, or for
assets, the date of actual or constructive notice of such property is
blocked:
• Transfers after the “effective date” are null and void unless licensed or
authorized by OFAC
– Example: Order to liquidate stock given after the effective date
• Transfers prior to the “effective date” are only valid if the person
holding or maintaining the property had written notice/written evidence
of transfer prior to that date.
– Example: Liquidated stock order was made prior to date of
designation of person
15

16. Transfers & Purported Transfer under New Regulations
• OFAC may license/validate transfer before, during, or after they occur.
• If a U.S. Person makes a transfer it shall not be “null and void” with
respect to that U.S. Person, where the U.S. Person establishes to
OFAC’s satisfaction that:
– Transfer was not a willful violation and U.S. Person did not have
reason to know based on facts & circumstances that it was a
violation.
– Report filed with OFAC (including evidence of misrepresentation by
third-party where applicable)
16

17. What Is the Likelihood of
Further Sanctions Against Russia?
• Factors increasing the likelihood of further sanctions:
– Continued violence in Ukraine
– Referendum by separatists in May by separatists
– President Putin has not (apparently) done anything to try and stem
actions by separatists in Ukraine
• Factors deescalating crisis:
– Drawback of Russian troops from borders
– “recognition” on election of M. Poroshenko as new President of
Ukraine
• Face to face meeting with Putin
• News reports that Russia ambassador will return to Ukraine
17

18. Recent G-7 Meeting in Brussels
• Russia was excluded from talks
• President Obama statement of time-frame on 5 June 2014 – threatens
“Sectoral Sanctions”:
“We will have a chance to see what Mr. Putin does over the next
two, three, four weeks” . . . and if he remains on the current
course, then we’ve already indicated what kinds of actions that
we’re prepare to take”
18

19. Will the U.S. and other Countries Impose Sectoral Sanctions?
• Threat of sanctions on of the Russian economy designated by the U.S.
Government such as financial services, energy, metal and mining,
engineering and defense/arms
• To date sanctions have been measured
– Probably all designations are made at a very high level
– OFAC’s willingness to engage on the “owned or controlled” issue is
telling that the U.S. Government is carefully measuring sanctions
– Notwithstanding broad language in Executive Orders, sanctions
have been targeted
– Interim regulations give insight into complexity of blocking Russian
assets
• Will the U.S. act unilaterally if Europe won’t act?
– France hesitant to renege on $1.6 billion sale of warships to Russia
– EU economies much more dependant on Russian energy
19

20. Why Expanding Sanctions Against Russia Is Difficult
20

21. How Do Major Trends in U.S. Sanctions Affect
Likelihood of Broad Sanctions?
• Trend away from Broad “Country” Based Sanctions
– Cuba, Iran, Syria, Sudan, and North Korea
• “List Based”, “Targeted” or “Limited Sanctions Programs” (“Specially
Designated Nationals”)
– Belarus – Burma – Ivory Coast – Congo
– Iraq – Lebanon – Liberia – Somalia
– Yemen – Zimbabwe – Ukraine/Russia – Central African Republic
21

22. 22
What is the Likelihood the U.S. Will Impose Secondary Sanctions
Against Non-U.S. Entities?
• Historically U.S. has focused on primary sanctions
– Affect U.S. companies, U.S. citizens
– Any transaction with U.S. nexus
– Strict liability, civil and criminal penalties
• Expanded Use by U.S. of Extraterritorial (Secondary) Sanctions – primarily driven
by legislation
– Affect anyone engaging in certain conduct
• Sanctions against non-U.S. entities for engaging in significant transactions
with or providing material goods, services to, in certain product sectors (e.g.,
carrying refined petroleum products to Iran, or to certain Specially
Designated Nationals (“SDNs”), even where there is no U.S. nexus)
• Specifically targeting non-U.S. financial and insurance industries for
sanctions
– Knowledge requirement, discretion in enforcement, enumerated sanctions
• Expanding sanctions to cover U.S. “owned or controlled” subsidiaries – making
them subject to primary sanctions (Cuba/Iran)

23. Potential for “Secondary Sanctions”
• Ukraine Related Executive Orders contain language used to impose
secondary sanctions on Iranian entities, proliferators of weapons of
mass destruction, terrorist groups
“Any person” including a non-U.S. person that materially assists such
person by providing financial, material, or technological support, or
goods or services may itself be designated an SDN.
• U.S. Officials have not articulated an intent to impose secondary
sanctions under this authority:
– These Executive Orders differ from Iran/Terrorist E.O.s in that they
are a “threat” rather than an actively enforced “rule”
• However, secondary sanctions, like those imposed on foreign financial
institutions doing business with Iran, are not out of the realm of
possibility.
23

24. Insurance, Finance, and the “Penumbra”
Effect of U.S. Sanctions
• Internal risk management policies of banks, insurers, and other entities
often broader than the law requires
– Sogaz Insurance
– Banks unwilling to wire funds relating to food sales to Iran, even
though “safe harbor” applies
– Banks “firing” clients doing business in high risk areas
• Already seeing effect on:
– Insurance
– Lending into Russia
• Even if SDN designation only has “primary” effect as a legal matter,
such designation will have broad “secondary” effect.
24

25. What Can Global Companies Do to Mitigate Risk?
• Existing Business Relationships
– Identify your business activities in or related to Russia and Crimea
– If you have major trading parties determine who owns these entities
– Develop contingency plans if additional Russian entities are
designated or sectors are targeted (e.g., the energy sector)
– Review contractual provisions/consider additional contractual
language
• New Business
– Length and scope of agreement
– Revisit sanctions clauses
– What currency is payment made in?
– Is there a way to structure the deal to reduce risk?
25

26. What Can Global Companies Do to Mitigate Risk?
• Stay current
– The situation is rapidly changing
– Unlike Iran – real possibility that Russia will retaliate with
countermeasures
– Document your diligence
• Third-Parties
• Take into consideration third-party actions (e.g., insurers, financers)
who may be making their own assessments and decisions as to
whether to enter into a particular transaction
– Insurers no longer writing political risk in some areas
26

27. Advising on Sanctions Issues in Particular Transactions
• Advice in necessarily fact specific
– Import versus export/nature of product
– When was the contract entered into?
– Who are the parties involved
• Apply facts to various U.S. laws (contract sanctity, scope differ)
• Consider U.S. Government interpretation and enforcement versus strict
legal reading of laws
• Recently collecting diligence about Russian entities (native language
research – to make ownership determinations)
• Advice may be couched as
– “Risk” of sanction versus “black letter” legal opinion
– Discussion of non-legal practical risk and consideration (e.g.,
insurance coverage, ship mortgages, banking restrictions)
27

28. Conclusion
Jonathan Epstein, Esq.
Holland & Knight LLP
(202) 828-1870
jonathan.epstein@hklaw.com
Thomas F. Morante, Esq.
Holland & Knight LLP
(954) 468-7862
Tom.Morante@hklaw.com
28

29. Q&A

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