3rd part of a perfect overview on economic sanctions made by Marian Dent from Pericles. Covers following sections: SSI Lists, OFAC Directive 4, Export Administration Regulations, Dual use technologies, European export controls, other countries imposing sanctions (UK, Canada, Switzerland, Norway, Japan, Australia), Contracts, Compliance and Damage Control

1. ECONOMIC SANCTIONS- DAY 3 1

2. WHAT AGAINST WHOM—SSI LISTS 2
Directive 1 Finance Sector
Directive 2 Energy Sector
Directive 3 Defense Sector
Directive 4 Energy Sector Exportation or reexportation of goods, services (except financial) or tech for deepwater, Arctic offshore or shale projects
Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft
Remember this slide? For OFAC today, we are looking closely at Directive 4: Export Controls in the Energy Sector

3. 3
Directive 4 The following activities by a U.S. person or within the United States are prohibited except to the extent provided by law or unless licensed or otherwise authorized by [OFAC]: The provision, exportation or reexportation, directly or indirectly, of goods, services (except for financial services) or technology in support of exploration or production for deepwater, Arctic offshore or shale projects [hereinafter DWAOSP] that have the potential to produce oil in the [RF] or in the maritime area claimed by the [RF] and extending from its territory, and that involve any person deemed to be subject to this Directive, its property or its interests in property. [+ the usual evasion and conspiracy prohibitions]

4. 4
Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft
OFAC DIRECTIVE 4 APPLIES TO 5 COMPANIES

OFAC is part of the Department of the Treasury and deals specifically with issues related to economic sanctions regimes.

This was passed September 12

5. BIS SIMILAR YET DIFFERENT

BIS ADMINISTERS THE EAR

EAR EXISTS ALL THE TIME—EVEN WHEN SANCTIONS ARE OVER AND OFAC STOPS WORRYING ABOUT RUSSIA

BIS HAS BOTH GENERAL PROHIBITIONS AND PROHIBITIONS ON SPECIFIC ENTITIES

AUGUST 6

BIS adds Section 746.5 of EAR

BIS Adds United Shipbuilding to Entity List

SEPT 17

BIS adds 10 entities to entity list
•
5 in oil sector and only limited according to 746.5,
•
5 in defense & exports prevented entirely. 5

6. BIS SIMILAR YET DIFFERENT 6
EAR 746.5 [A] license is required to export, reexport or transfer (in-country) any item subject to the EAR listed in Supplement No. 2 to this part and items specified in ECCNs 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999 when you know that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia, or are unable to determine whether the item will be used in such projects.

7. BIS SIMILAR YET DIFFERENT 7
EXAMPLE
COMMERCE CONTROL LIST (CCL) ECCNS 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, AND 8D999

8. 
Directive 4 Companies

Provided end use could be DWAOSP

Gazprom;

Gazpromneft;

Lukoil;

Rosneft; and

Surgutneftegas.
First: United Shipbuilding
Next 5 More Defense Contractors for all end uses:
•
Almaz-Antey Air Defense Concern Main System Design Bureau;
•
Tikhomirov Scientific Research Institute of Instrument Design;
•
Mytishchinski Mashinostroitelny Zavod
•
Kalinin Machine Plant, JSC;
•
Dolgoprudny Research Production Enterprise. 8
REMEMBER THIS SLIDE?-EAR EL
Oil Sector
Defense Sector
Plus any export with military end uses or end users- 744.21.

9. BIS SIMILAR YET DIFFERENT

SO YOU HAVE

1) a group of export prohibitions that apply to all exports of goods for DWAOSP that has the possibility to produce oil with somewhat the same provisions applying in the OFAC regs

2) a group of export prohibitions that are the same for named oil companies

3) a group of export prohibitions for all items for named military suppliers

4) a complete prohibition of any goods for any military end uses or end users

PLUS

No savings clauses for existing contracts
•
In General License 2, OFAC gave a two week wind down for oil projects, possibly to avoid too much harm to Exxon, BIS didn’t give a wind down period, but might have given individual licenses in order to match OFAC

Former license exceptions are now over

Restricted products re-exported to Russia without a license on or after August 6 may be considered violations

Burden of Proof is on exporter to prove the end use is not DWAOSP.
NOTE: 746.5 (1) SAYS OILS AND GAS DWAOSP PROJECTS BOTH NEED A LICENSE– 746.5(2)(C) SAYS PRESUMPTION OF DENIAL IS ONLY FOR OIL PROJECTS 9

10. BIS SIMILAR YET DIFFERENT
BIS EXPORT CONTROLS ALSO CONTROL

“TRANSSHIPMENT”

General Inventory Exception

FOREIGN MADE GOODS THAT INCORPORATE US TECH

EG that uses controlled US origin software or software that is comingled with US software

FOREIGN MADE GOODS THAT ARE “DIRECT PRODUCTS” OF US TECHNOLOGY

EG a chemical agent produced in India using US patented processes.

DEMINIMUS RULE 25%

ITEMS “PASSING BACK” THROUGH US

EG items previously exported but returned for repair.

TECH INFORMATION

DEEMED EXPORTS 10

11. 11
EUROPEAN EXPORT CONTROLS

DUAL USE TECHNOLOGY: COUNCIL REG 428/2009

EACH STATE OF THE EU HAS ITS OWN REGIME FOR LICENSING EXPORTS

However, states should consult with each other

One state can request another state not to grant a license.

STATES SET PENALTIES

STATES MUST KEEP AND SHARE INFORMATION ON EXPORTS AND ON LICENSES GRANTED.

BROKERING IN ILLEGAL EXPORTS IS ITSELF ILLEGAL

12. 12
EUROPEAN EXPORT CONTROLS

EU—COUNCIL REG 833 AS AMENDED BY 960

EU GRANDFATHERS IN EXISTING CONTRACTS, FRAMEWORK AGREEMENTS & ANCILLARY CONTRACTS

NO REEXPORT, DEEMED EXPORT OR DEMINIMUS RULE (BUT MEMBER STATES?)

EU EXEMPTS NON-MILITARY AEROSPACE, EXPORTS INTENDED FOR THE MAINT. & SAFETY OF EXISTING CIVIL NUCLEAR CAPABILITIES IN EU, SERVICES FOR EVENTS THREATENING HEALTH, SAFETY, ENVIRONMENT

DIFFERENT LIST OF PROHIBITED GOODS

LIMITED LIST OF SERVICE CONTRACTS

DIFFERENT “ENTITY LIST” (ANNEX IV)

EU SPECIFICALLY INCLUDES INSURANCE & REINSURANCE

13. 13
OFAC Directive 4 The following activities by a U.S. person or within the United States are prohibited except to the extent provided by law or unless licensed or otherwise authorized by [OFAC]: The provision, exportation or reexportation, directly or indirectly, of goods, services (except for financial services) or technology in support of exploration or production for deepwater, Arctic offshore or shale projects [DWAOSP] that have the potential to produce oil in the [RF] or in the maritime area claimed by the [RF] and extending from its territory, and that involve any person deemed to be subject to this Directive, its property or its interests in property. [+ the usual evasion and conspiracy prohibitions]
RECALL OFAC DIRECTIVE 4?

14. SOME VERY PICKY EU/US DISTINCTIONS

US “DWAOSP” ARCTIC OFFSHORE AND SHALE PROJECTS WITH POTENTIAL TO PRODUCE OIL

US “IN SUPPORT OF” DWAOSP”
 MARITIME AREA & EXTENDING FROM ITS TERRITORY 14

EU HAS DWOASOP (ART 3A) DEEP WATER OIL ARCTIC ___AND SHALE OIL

EU “NECESSARY FOR DWASOP.

MARITIME AREA NOT MENTIONED
It’s too early to know the significance of these differences.

15. SANCTIONS IN OTHER JURISDICTIONS 15

16. UK SANCTIONS

Of course the EU sets the basic prohibitions.

Blocking Sanctions

Terrorist Asset Freezing Act of 2010

https://www.gov.uk/government/publications/financialsanctions- consolidated-list-of-targets

Financing Restrictions- HM Treasury tightened sanctions implementation on July 31.

Export Controls -Department of Business Innovation & Skills Export Controls Organization (UK BIZ ECO)

https://www.gov.uk/controls-on-dual-use-goods

Standard Individual Export License (SIEL) or Trade Control License (for military goods) 16

17. UK SANCTIONS FAQS

Goods listed in Annex II to Council Reg 833/2014, plus dual-use and military exports need a license

The only presumption of denial is for

goods listed in Annex II to CR 833/2014 if they are intended for DWOASOP & contract concluded after Aug 1.

Technical assistance, brokering and financial services related to the above.

Inter alia, do not process payments for the aforementioned transactions without a separate license.

Prohibited items used as components are not prevented.

Military exporters will be notified whether additional licensing is needed.

Expect a license to take about 20 days. 17

18. UK SANCTIONS FAQS

“Arctic” means north of Arctic Circle

EU has not defined “Deep Water.” UK FAQs refer readers to the US 500 foot definition.
18
The UK tends to impose lighter penalties than the United States

19. CANADIAN SANCTIONS 19
Recall the sanctions chronology comparison with the US and the EU that we used in classes 1 and 2? Next we will use this with Canada to see how it coordinates and differs from the US and EU.

20. 20
Reminder: US/EUSanctions Chronology
•
European Union

March 17 Council Decision 2014/145/CFSP & Reg. 269/2014

3/21, 4/28, 5/28- adds people

June 23 D 386 , CR 692- Cr. goods

July 29 Joint US/EU Ann’cem’t

July 30-31

Annex I to CR 428/2009 (dual use)

CR 833/2014 (finance sanctions)

Annex 2 to CR 833/2014 (shale etc)

CR 825/2014 (Crimea investment)

CR 826/2014 (more officials)

Sept 8 Decision 2014/658-9/CFSP &CR 959-961/2014, & Amendmt to CR 428/2009

Coming Soon--Guidance
United States

March 6 E.O. 13660

March 16 E.O. 13661

March 20 E.O. 13662 (SSI)

April 28 (7 officials, 17 co’s.)

May 8, 31 CFR 589

July 16 Directives 1 & 2, SSI List

July 29 Joint US/EU Ann’cem’t

Aug 13-OFAC Guidance (50%)

Sept 12 Amend Directive 1

Directives 3 and 4

General License 1(a)

Sept 17 Amend EAR 744.21

21. 
March 17 Council Decision 2014/145/CFSP & Reg. 269/2014

3/21, 4/28, 5/28- adds people

June 23 D 386 , CR 692- Cr. goods

July 29 Joint US/EU Ann’cem’t

July 30-31

Annex I to CR 428/2009 (dual use)

CR 833/2014 (finance sanctions)

Annex 2 to CR 833/2014 (shale etc)

CR 825/2014 (Crimea investment)

CR 826/2014 (more officials)

Sept 8 Decision 2014/658-9/CFSP &CR 959-961/2014, & Amendmt to CR 428/2009

Coming Soon--Guidance 21
Canada Sanctions Chronology

March 17, Special Economic Measures (SOR/2014-58) – Designated Persons-Schedule 1

3/18, 3/21, 4/28, 5/4, 5/12, 6/21-adds people.

July 24 Broadens, adds financial sanctions (SOR/2014- 184) –Schedules 2 & 3

Aug 6 - adds people

Sept16 Regs amended to add names, and tighten financial restrictions 30 days + equity

Sept 29—Consolidated regulations released.
•
European Union
Canada

22. CANADIAN SANCTIONS TODAY 22

Schedule 1 (SDN Equivalent)

At least 100 individuals and entities (not including Sergei Chemezov or Sechin or Rosneft)

Schedule 2 (Financial Sanctions on Financial entities—30 days debt and equity)

Gasprombank, VEB, VTB, Bank of Moscow, Rosselkhozbank Plus Sberbank

Schedule 3 (Financial Sanctions on Energy/Military Companies)

Currently only “OAO Novatek” What’s missing? Export controls

23. CANADIAN SANCTIONS TODAY 23

http://laws.justice.gc.ca/eng/regulations/SOR- 2014-58/FullText.html

Canada grandfathers in preexisting contracts in their financial sanctions

Canadian blocking sanctions allow payments from the designated person’s funds to third parties.

Canadian sanctions are enforced by the Royal Canadian Mounted Police

Requires Canadians and people in Canada to report.

Wilful violators can be fined any amount and imprisoned up to 5 years.

Includes sanctions against assisting and promoting

Canadian Sanctions are vigorously enforced.

24. 24
SWISS « ANTI- CIRCUMVENTION » RULES
On April 2 and again on August 27 Switzerland passed measures designed to avoid circumvention of the sanctions imposed by the world community. It has also passed export controls on military and dual use goods.
But Switzerland has not recognized Russia’s annexation of Crimea and thus has effectively prohibited trade with Crimea and Sevastopol.

25. 25

April 2—individuals on EU list cannot enter into new business relations with Swiss intermediaries to transfer assets through Switzerland

List is regularly updated to match EU designated persons.

Crimea and Sevastopol Transactions

Prohibits creation of JVs and granting of loans or credit for infrastructure projects in the transport, energy or telecom industries

Especially if exploiting oil, gas or mineral resources of the area

Financial Transactions

Authorization from SECO (Swiss Secretariat for Econ Affairs) needed to undertake financial instruments with duration over 90 days with 5 Russian banks (50+% rule applies)

Authorization will be granted “if the contemplated loan does not cause the total value of the financial instruments held by the applicant to exceed the average value of that total during the preceding three years.”

Prohibits financial intermediaries from establishing new relationships with named entities.
SWISS « ANTI- CIRCUMVENTION » RULES

26. 26

Export Controls

Must notify SECO for export of certain goods to DWOASOP

Export prohibited if end user is in Crimea or Sevastopol

Military goods to Russia and Ukraine prohibited, dual use goods require a license, and licenses are only restrictively granted

Location of the Swiss ordinances

August 27 ordinance (in German): http://www.seco.admin.ch/themen/00513/00620/00622/05405/index.html?lang=de& download

April 2 ordinance: https://www.news.admin.ch/message/index.html?lang=en&msg- id=52530

Export controls: https://www.news.admin.ch/message/index.html?lang=en&msg- id=52530

Punishment for violating the rules can be fines of up to 1mil Swiss Franks and imprisonment up to 5 years.
SWISS « ANTI- CIRCUMVENTION » RULES

27. 27
Have been mirroring the E.U. sanctions
NORWEGIAN SANCTIONS

28. 28
JAPANESE SANCTIONS

http://www.mofa.go.jp/region/europe/russia/index.html

Are targeted mainly at Ukrainian related persons and companies.

April 29-visa restrictions for 23 people

July 28-

froze assets of 40 people and two entities

All goods imported to Japan directly from Crimea or Sevastopol need a license

September 25-

Japan will “tighten” exports of military and dual use tech

Five named banks will not be able to issue securities or get loans of more than 90 days without a license.

(a cumulative 50+% rule applies) The Economist posited on Sept 29 that Japanese sanctions are so mild and Japan is unlikely to impose strict sanctions on Russia due to its concern for energy security after the Fukushima disaster in 2011.

29. AUSTRALIA 29

Autonomous Sanctions Regulations of 2011

http://www.dfat.gov.au/sanctions/sanctions- regimes/ukraine.html

July 17—”SDN” list of 50 people and 11 companies

August 30-unincorparated addition 113/60???

September 1—Australia announces it “will begin to restrict

access of RF state-owned banks to capital markets

trade and investment in Eastern Ukraine & Crimea

arms and dual use goods exports;

export of goods and services for DWASOP;

sale of Australian uranium to Russia.

But!!! Nothing Yet!!!

30. AUSTRALIA 30
Sunset October 1, 2024
Negligence Standard.
In future may apply to Subsidiaries.

31. 31
Contracts, Compliance and Damage Control

32. 32

Depends on the Law of the Contract of course

Is a contract entered into in violation of law automatically null and void?

If so, is a contract entered into after sanctions have gone into effect completely void, or will it be revivable after sanctions end?

Are Sanctions a Force Majeure event?

How do you need to exhaust your options before effectively claiming force majeure? Do you need to apply for a license even if there is little to no chance it will be granted?

How should you revise Force Majeure clauses to best encompass sanctions?

Do MAC clauses encompass sanction related difficulties?

What other clauses should you worry about?

Representations and Warranties?

Law of the contract?

Place of litigation or arbitration?
EFFECT ON CONTRACTS

33. Compliance? 33

Be aware of different standards of mens rea.

OFAC is prosecuting fewer but larger cases, BIS cases are more frequent.

Facilitation Problems

Referrals

Deviation from standard practices

Changing business practices to enable an otherwise sanctioned transaction is actionable.

Russian companies changing business practices before the problem arises (ie to remove decision making from a US/EU national) is not actionable.

US/EU persons must not facilitate but are not required to prevent a transaction in Russian companies they work for.

34. Compliance? 34

STEP 1—Immediate Check-accounts, assets in your control, contracts

STEP 2—Risk Assessment

STEP 3—Establish a Compliance Policy

Who, what, how

Target High Risk Areas

Include automated Screening

Include internal “sanctions”

STEP 4—Train

STEP 5—Audit & Monitor

Include reports to board

STEP 6—Regular updates

And keep a paper trail of all the above

35. Damage Control! 35

Ensure Violations are stopped immediately

Assess

How did it happen?

Rogue or systematic?

How credible is your information?

Intentional or Negligent?

Interview Witnesses

Preserve Documents

Stop all regular destruction processes!

Keep info closely held

Think about whether to voluntarily disclose to government!

36. Voluntary Disclosure 36

Can significantly mitigate damages

But what is considered voluntary disclosure?

Treatment differs with each agency/country

Failure to disclose could compound the violation.

But Assess First:

Disclosure doesn’t mean no investigation, it means you voluntarily allow an investigation.

Will disclosure uncover past transgressions?

Will attorneys’ advice need to be disclosed.

Disclosure alone isn’t enough—you may have to try to reverse the transaction(s).

Consider the international ramifications and the possible need to disclose and negotiate simultaneously with multiple countries’ authorities.

37. The End 37
Thanks for taking the course!