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In a January 14 segment of the British news program, “The Briefing” (on British Internet radio channel, Monocle.com), host Nancy Durham spoke with Pillsbury partner Matias Travieso-Diaz on potential obstacles and practical implications in play in the reestablished diplomatic relations between the U.S. and Cuba.

Download Transcript: An Interview with Matias Travieso-Diaz on U.S.-Cuba Relations

(For further information on the legal considerations of doing business in Cuba, contact any member of Pillsbury’s International Trade Group.)

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The Obama administration implemented its promised changes to U.S. sanctions and export controls for Cuba effective January 16, 2015. Although most trade and transactions still are prohibited, the revisions to the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR) ease licensing requirements in a number of areas, including exports to and imports from Cuba of certain types of goods and services, telecommunications and Internet services, travel and travel services, financial services, remittances, and treatment of Cuban nationals in third countries.

Presidential Action to Relax the U.S. Cuba Embargo

The CACR, administered by the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) implements a comprehensive trade, investment, financial and travel embargo on Cuba prohibiting U.S. persons, including owned or controlled foreign subsidiaries of U.S. companies, from engaging in transactions in which Cuba or a Cuban national has a property interest. The EAR, administered by the Commerce Department’s Bureau of Industry and Security (BIS), control the export or reexport of goods, software and technology that are U.S. origin or contain more than de minimis U.S. content. Like the CACR, the EAR broadly prohibit trade with Cuba.

The CACR were first implemented in July 1963 under the authority of the Trading with the Enemy Act (TWEA). The sanctions were strengthened by the Cuba Democracy Act of 1992 which, among other things, prohibited the issuance of licenses for U.S.-owned foreign companies to trade with Cuba. The Cuban Liberty and Democratic Solidarity Act of 1996 (Helms/Burton) codified the CACR, requiring the President to instruct the Treasury and Justice Departments to enforce fully the CACR and prescribing conditions for the termination of the embargo including a determination that a transition government in Cuba is in power.

Both OFAC and BIS have retained licensing authority to permit certain types of transactions on a case-by-case basis. Also, the CACR incorporate exceptions that allow certain types of transactions, such as limited remittances to family members in Cuba, without requiring specific approval. OFAC and BIS have previously used their discretion to allow certain travel transactions, temporary sojourns of aircraft, agricultural exports and telecommunications services for Cuba, among other activities.

On December 17, 2015, President Obama made an unexpected announcement signaling a “new course” for Cuba after more than fifty years of comprehensive U.S. sanctions. Because of the statutory framework of the Cuba embargo, the changes are restricted to those the administration can implement within its executive discretion. Larger changes will require Congressional approval.

Announced Changes in U.S. Policy
OFAC and BIS both issued final rules amending their regulations for Cuba on January 15, 2015, which were published and became effective on January 16. See 80 Fed. Reg. 2286 and 80 Fed. Reg. 2291 (Jan. 16, 2015). Both agencies have issued additional guidance in the form of Frequently Asked Questions (FAQ). The key changes to U.S. policy are as follows:

Expanded exports of certain goods to Cuba’s private sector (§ 515.533; EAR § 740) – CACR § 515.533 permits transactions incident to the export or reexport of goods to Cuba that are authorized by BIS under the EAR. BIS has expanded authorizations for trade with Cuba via two license exceptions.

  • License Exception “Support for the Cuban People” (SCP) authorizes a range of exports from the United States and reexports from third countries to the private sector in Cuba involving:
    • Sale or donation of (1) building materials, equipment and tools to construct or renovate privately owned buildings, residences, and religious or social/recreational facilities; (2) tools and equipment for private sector agricultural activity; and (3) items for private sector entrepreneurs, such as auto mechanics, barbers and restaurateurs.
    • Donation or temporary export for less than two years of items for use in scientific, archeological, cultural, ecological, educational, historic preservations or sporting activities (and, in the case of temporary exports, use in professional research).
    • Sale or donation of certain items for telecommunications, including Internet access and services, infrastructure creation and upgrades (including for the Cuban government and government-related entities in some cases).
    • Use for human rights organizations, individuals or NGOs for civil society purposes, or by news media personnel engaged in newsgathering and dissemination.
Only low-technology items classified as EAR99 or controlled only for anti-terrorism reasons are eligible under this license exception.
  • License Exception “Consumer Communications Devices” (CCD) – Established for Cuba in 2009, this license exception was expanded to allow sales in addition to donations of consumer electronics and software. Authorized items listed by specific export control classification numbers (ECCNs) for each category include certain computers and related equipment; input-output control units; network equipment; mobile phones; memory devices; consumer information security equipment and software; digital cameras; televisions and radios; recording devices; accessories for the above; and consumer software. BIS expanded the range of computers previously authorized and adjusted some other eligible categories. CCD may be used to sell authorized items to the Cuban government and related entities for resale to the Cuban people.

For exports and reexports authorized by BIS, OFAC eased the permitted terms of payment, allowing cash to be received before transfer of title and control. Previously, the regulations required that exporters be paid in cash prior to shipment, which created significant obstacles. Financing is permitted by non-U.S. banking institutions located in third countries, and can be confirmed or advised by U.S. banks. Further easing the burden on exporters, BIS provided guidance that Cuban government import agencies and other government-owned, -operated or -controlled companies may receive, deliver and act as consignees of items exported under the two license exceptions so long as the end user is a private party. The existing license exception for agricultural commodities (AGR) continues unchanged and BIS still will require licenses for medicine and medical devices.

Telecommunications Services (§ 515.542) – OFAC expanded the existing general license for telecommunications to authorize transactions to establish facilities to provide telecommunications services linking Cuba and third countries, in addition to Cuba and the United States, and to provide those services. Persons subject to U.S. jurisdiction also are authorized to enter into and make payments under contracts with all telecommunications providers in Cuba (not just non-Cuban providers) in order to provide such services to a particular individual in Cuba.

Internet Services and Exports (§ 515.578) – The export or reexport of Internet-related services incident to communication over the Internet continues to be authorized (e.g., messaging, chat, email, social networking, photos/movies, web browsing and blogging) and has been expanded to include domain registration and web hosting, except for the promotion of tourism. This includes providing free and widely available Internet services to otherwise prohibited officials or organizations. The CACR also now authorize software design, business consulting and IT management services related to or in support of items exported or reexported under EAR license exception CCD; foreign items that are not subject to the EAR but are reexported to Cuba and would meet the CCD criteria if subject to the EAR; and publicly available software not controlled by the EAR for that reason. Such items also may be imported back into the United States.

Imports of Cuban Goods and Services (§ 515.560, 578 & 582) – Imports of certain goods and services produced by independent Cuban entrepreneurs (as identified by the State Department on a list to be issued) are authorized under CACR § 515.582. Section 515.578 permits import to the United States of consumer electronics or software eligible for license exception CCD (or which would be eligible if U.S. controlled) and publicly available software not subject to the EAR. Finally, persons returning to the United States after authorized travel to Cuba may import merchandise not to exceed $400 in value, including up to $100 in alcohol or tobacco products.

Travel and Travel Services (§ 515.560, 572 & 580) – Tourist travel still is not permitted, but general licenses are available for twelve categories of travel: (1) family visits; (2) official business of U.S./foreign government and intergovernmental organizations; (3) journalistic activities; (4) professional research and meetings (e.g., telecommunications, agricultural and medical sales); (5) educational activities; (6) religious activities; (7) public performances, clinics, workshops and competitions; (8) support for the Cuban people; (9) humanitarian; (10) private foundations and research/educational institutes; (11) export/import or transmission of information or informational materials; and (12) certain export transactions which may be authorized under the EAR. The per diem rate for authorized travelers will no longer apply. All transactions ordinarily incident to travel within Cuba, including payment of living expenses and the acquisition in Cuba of goods for personal use, are authorized. Travel Service Providers (TSPs) and Carrier Service Providers (CSPs) are now authorized under a general license to provide travel services to persons who self-identify as qualifying under the regulations. The prior special licenses and annual reporting requirements no longer apply, but businesses operating under the new general licenses will need to maintain careful records. Finally, U.S. insurance companies are authorized to issue global health, life or travel insurance policies to cover non-Cuban residents traveling to or within Cuba.

Banking and Credit Cards in Cuba (§ 515.560, 571, 579 & 584) – U.S. depository institutions are permitted to open correspondent accounts at Cuban financial institutions to support financial transactions permitted under the CACR. Authorized travelers to Cuba may use U.S. credit, debit and stored value cards, and instruments such as checks, drafts and travelers’ checks. U.S. financial institutions are authorized to process such transactions, and U.S. persons providing such services may rely on the traveler with regard to compliance unless they know or have reason to know that the transaction is not authorized. The revised CACR also permit depository institutions to process transfers for authorized business in Cuba of third-country official missions; intergovernmental organizations in which there is U.S. participation or observer status; and employees, grantees, contractors of the same or their co-habitant family members.

Remittances (§ 515.560 & 570) – Remittance levels for a single Cuban national have been raised from $500 to $2,000 per quarter (except for certain officials of the government or Communist party). Authorized travelers to Cuba may carry up to $10,000 for remittances. Certain remittances may be made without limit for relatives who are students in Cuba; humanitarian projects in or related to Cuba; human rights, democracy or civil society groups related to Cuba; and support for the development of private business. Remittance forwarders and banks no longer require a specific license to process such remittances.

Other Support for Private Business (§ 515.570 & 575) – U.S. persons may make remittances without limit to individuals or privately owned entities “to support the development of private businesses, including small farms” (CACR § 515.570(g)(3)). This section does not authorize investment with respect to Cuba, thus the remittance cannot be used to obtain an ownership interest. Section 575(a) authorizes a broad general license for humanitarian projects, including transactions related to such projects as construction projects to benefit independent civil society groups; environmental projects; projects suitable for the development of small-scale private enterprise; agricultural and rural development that promotes independent activity; and micro financing projects, except for loans, extensions of credit or other financing prohibited by CACR 515. § 208.

Cuban Nationals in Third Countries or the United States (515.505 & 585) – Cuban nationals who take up permanent residence outside of Cuba are now considered unblocked parties under section 515.505(a)(2). U.S.-owned or controlled entities operating outside the United States are authorized to engage in services and financial transactions with Cuban individuals in third countries, regardless of residency. Banks are authorized to unblock any account that was blocked solely due to the prior status of a now unblocked person, provided they obtain adequate documentation. Cuban nationals were already eligible to be unblocked when moving to the United States. New section 515.571(a)(5) authorizes U.S. depository institutions to open and maintain accounts for Cuban nationals present in the United States with non-immigrant status, although such accounts must be closed prior to the Cuban national’s departure or blocked.

Next Steps and Challenges
President Obama has directed the State Department to review Cuba’s status as a “state sponsor of terrorism” over the next six months, and removal from that list could open the door to further potential export control changes. Congress, however, is divided on Cuba sanctions reform, and a number of senators and representatives have strongly criticized the Administration’s policy. As discussed above, broader relaxation of the Cuba embargo will require congressional action. There are strong constituencies that will fight reform efforts, especially as the United States heads into a presidential election cycle.

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A number of useful FAQs, notices and rules documents have been released by U.S. government agencies following President Obama’s December 17, 2014, announcement of plans to normalize relations with Cuba. Below, you will find several useful links to those documents.

From the U.S. Department of Commerce:

Bureau of Industry and Security – Final Rule

Bureau of Industry and Security – FAQ

From the U.S. Department of the Treasury:

Office of Foreign Assets Control – Final Rule

Office of Foreign Assets Control – FAQ Related to Cuba

From the U.S. Department of Transportation:

Notice on Expanded Flight Implementation to Cuba

For legal guidance on the many regulatory and compliance issues involved with doing business in Cuba, contact any of the professionals in Pillsbury’s International Trade Group.

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Ukraine Freedom Support Act

The enactment of the Ukraine Freedom Support Act of 2014 starts the timeline for the following new extraterritorial sanctions:

  • Sanctions on Rosoboronexport (effective January 17, 2015) – The President is required to impose three or more sanctions from the list of options below. Rosoboronexport is the sole state broker and exporter/importer of Russian defense products. Despite the President’s stated intent not to use the sanctions authorized under the act, it is not clear how he will be able to avoid the requirement of this mandatory provision.
  • Arms-Related Activities in Syria, Ukraine, Georgia and Moldova (effective February 1, 2015) – The President is required to impose three or more sanctions from the list of options below against Russian and Russian-owned or controlled parties who are determined to produce, transfer or broker sales of defense articles to these countries without the support of their internationally recognized governments or who provide support for these activities. Although nominally mandatory, the determination with regard to parties is discretionary, giving the President flexibility to apply this provision.
  • Investment in Crude Oil Projects (effective February 1, 2015) – The President is authorized to impose three or more sanctions from the list of options below on foreign persons that are determined to have knowingly made a significant investment in a “special Russian crude oil project,” which includes Russian deepwater, arctic offshore, and shale formation projects “intended to extract crude oil.” The U.S. Treasury and Commerce Departments have interpreted similar language to include gas projects that may produce oil.
  • Foreign Financial Institutions (effective June 16, 2015) – Sanctions may be imposed on foreign financial institutions that knowingly (a) engage in significant transactions with parties sanctioned under this statute, or (b) facilitate significant financial transactions on behalf of Russian Specially Designated Nationals (SDNs) designated under Ukraine-related sanctions. The sanctions authorized for such activities are prohibitions or restrictions on opening or maintaining correspondent and payable-through accounts in the United States.

Read more: U.S. Sanctions Legislation Targets Russia While EU and U.S. Expand Crimea Sanctions

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President Obama made an unexpected announcement this week signaling a “new course” for Cuba after more than fifty years of comprehensive U.S. sanctions. Reestablishing diplomatic relations is a major change. In terms of business impact, however, the announcement signaled small openings and incremental extensions of existing licensing policy. Existing legislation mandates the embargo and codifies the Cuban Assets Control Regulations at 31 C.F.R. Part 515 (CACR), limiting what the President can accomplish without support from Congress. Thus, major changes to U.S. sanctions and export control policy will not happen in the short term. However, the President does have limited licensing discretion and the signaled changes may open business opportunities for certain exports markets including telecommunications, building materials, agricultural equipment, and certain goods for use by Cuban entrepreneurs. Simplification of existing travel authorizations as well as authorization for certain banking and credit card services are also planned. None of these anticipated changes will be effective until regulations are issued by the relevant U.S. agencies.

Background on U.S. Cuba Embargo

The CACR, administered by the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) implements a comprehensive trade, investment, financial and travel embargo on Cuba prohibiting U.S. persons, including owned or controlled foreign subsidiaries of U.S. companies, from engaging in transactions in which Cuba or a Cuban national has a property interest. First implemented in July 1963 under the authority of the Trading with the Enemy Act (TWEA), the sanctions have been strengthened by the Cuba Democracy Act of 1992, which, among other things, prohibited the issuance of licenses for foreign U.S.-owned companies to trade with Cuba. The Cuban Liberty and Democratic Solidarity Act of 1996 (Helms/Burton) codified the CACR, requiring the President to instruct the Treasury and Justice Departments to enforce fully the CACR and prescribing conditions for the termination of the embargo including a determination that a transition government in Cuba is in power.

However, despite these statutory provisions, OFAC has licensing authority under the CACR to permit certain transactions within the scope of the sanctions and the Commerce Department’s Bureau of Industry and Security (BIS) has licensing authority for exports and re-exports of U.S. origin goods and technology to Cuba. This allows some limited degree of executive discretion which both OFAC and BIS have used to issue licenses and to establish license exceptions for certain travel transactions, temporary sojourns of aircraft, agricultural exports and telecommunications services for Cuba, among other activities.

Announced Changes in U.S. Policy

On December 17, 2014, President Obama announced his intent to make licensing changes for Cuba which include:

  • Expanded exports of goods/services to Cuba’s private sector – This authorization is expected to allow exports of building materials for private residential construction, goods for use by private sector Cuban entrepreneurs, and agricultural equipment for small farmers. Existing agricultural sales programs also may be expanded by loosening the definition of “cash in advance.”
  • Telecommunications – Additional exports relating to telecommunications and internet will be authorized. Although the scope is unclear, this change in policy will reportedly pertain to (a) certain consumer communications devices, related software, applications, hardware, and services, (b) items to establish and update communications-related systems; and (c) telecommunication infrastructure to provide telecommunications and internet services between the United States and Cuba.
  • Banking and Credit Cards – U.S. financial institutions will be permitted to open correspondent accounts at Cuban financial institutions to support permitted financial transactions. Travelers to Cuba will be able to use U.S. credit and debit cards. This opening may permit U.S. companies to issue cards for use in Cuba and to establish merchant relationships.
  • Travel – Tourist travel still will not be permitted, but general licenses will be available for twelve categories of travel. General licenses are already available for a number of these categories, which may be expanded (e.g., family visits; official business of U.S./foreign government and intergovernmental organizations; journalistic activities; professional research and meetings; educational activities; religious activities; and travel related to certain authorized transactions and business such as telecommunications, agricultural and medical sales). Other travel categories requiring specific licenses will be authorized under general licenses (e.g., public performances, clinics, workshops and competitions; support for the Cuban people; humanitarian; private foundations and research/educational institutes; and export/import or transmission of information or informational materials). There will be a new general license for travel service providers, although it is unclear how much this would expand OFAC’s existing travel service provider licensing program. There have been no statements yet from the Administration regarding how or whether other licensing policies relating to travel, travel services and exports of aircraft and vessels may change.
  • Remittances – Remittance levels will be raised from $500 to $2,000 per quarter (except for certain officials of the government or Communist party). Remittances for humanitarian projects, support for the Cuban people and support for the development of private businesses in Cuba will not require a specific license. Remittance forwarders will not require a specific license.
  • Application of Cuba Sanctions in Third Countries – U.S. owned or controlled entities will be permitted by general license to engage in services and financial transactions with Cuban individuals in third countries. This permission would not apply to persons or companies in Cuba, but could ease business with the many Cubans who have moved to other countries. There would be additional allowances for Cuba-related meetings in third countries and foreign vessels engaging in humanitarian trade with Cuba.

Next Steps and Challenges

All of the proposed changes must be implemented and are not yet in effect. It will be important to review the specific language of the planned general licenses and regulatory updates. OFAC has announced that it intends to issue regulatory amendments to the CACR in the coming weeks, and BIS will implement changes to the Export Administration Regulations. Among these changes, President Obama has directed the State Department to review Cuba’s status as a “state sponsor of terrorism” over the next six months, and removal from that list could open the path for potential relaxation of export control restrictions.

Congress is divided on Cuba sanctions reform. A number of legislators, including the chairs and ranking members of key committees, are opposed to the President’s announcement. As discussed above, broader relaxation of the Cuba embargo will require congressional action. There are strong constituencies that will fight reform efforts, especially as the United States heads into a Presidential election cycle.

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Stephan E. Becker, Pillsbury partner, will co-present on the topic of “U.S. Sanctions Relating to the Unrest in Ukraine: Compliance Challenges,” on Thursday, October 9 at 1:00pm.

The United States began by imposing sanctions on persons and entities associated with the unrest in the Ukraine, but the sanctions have been expanded to target broader segments of the Russian economy with the adoption of new sectoral sanctions.

During this PLI webinar, the following topics will be discussed:

  • The scope of the U.S. sanctions administered by the Treasury and Commerce Departments
  • The implementation of sectoral sanctions on the Russian financial, defense and oil& gas sectors
  • Recent expansions of the sanctions and potential future changes

For more information and to register, please visit the event page.

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The United States recently expanded sanctions and export controls against the Russian defense sector. These designations and export control steps have implications for defense contractors, parts suppliers and brokers.

The Office of Foreign Assets Control (OFAC) recently expanded the list of Specially Designated Nationals (SDNs) to include entities in the Russian defense sector and also expanded its sectoral sanctions, which previously applied to the financial and energy sectors, to include the Russian defense sector. The U.S. Department of Commerce, Bureau of Industry and Security (BIS) also expanded export controls applicable to Russia’s defense industry.

Sanctions Designations
On September 12, 2014, OFAC added five new entities as SDNs in the Russian defense sector including:

  • Almaz-Antey Air Defense Concern Main System Design Bureau
  • JSC, Tikhomirov Scientific Research Institute of Instrument Design
  • JSC, Kalinin Machine Plant
  • JSC, Mytishchinski Mashinostroitelny Zavod, OAO
  • Dolgoprundy Research Production Enterprise, OAO

The Russian defense entities that were previously designated as SDNs in July 2014 include:

  • Almaz-Antey Corp.
  • Federal State Unitary Enterprise State Research and Production Enterprise Bazalt
  • JSC Concern Sozvezdie
  • JSC MIC NPO Mashinostroyenia
  • Kalashnikov Concern
  • KBP Instrument Design Bureau
  • Radio-Electronic Technologies
  • Uralvagonzavod
  • United Shipbuilding Corp.

All transactions involving the property or interests in property of these SDNs held by U.S. persons or in the United States are prohibited. This prohibition includes transactions in U.S. dollars that clear through the United States whether or not U.S. persons are involved. The sanctions apply to any company owned 50 percent or more by one of these companies. If equipment was ordered or purchased but money is still owed, shipment of the items may be blocked. OFAC guidance should be sought before proceeding.

Sectoral Sanctions
OFAC also issued Directive 3 pursuant to Executive Order 13662 restricting transactions with specified defense entities involving new debt with a maturity of more than 30 days. New debt is defined as bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers’ acceptances, discount notes or bills, or commercial paper, issued after the date that the person was listed under the Directive. Financing and providing services in support of the debt are also prohibited. Currently, Rostec is the only entity that has been listed under Directive 3. However, the prohibitions in Directive 3 also apply to any company owned 50 percent or more by Rostec, which is a large conglomerate with numerous subsidiaries and ownership stakes in Russian defense industry companies. OFAC has indicated that providing Rostec and its subsidiaries with deferred purchase agreements extending payment terms of longer than 30 days would constitute a prohibited extension of credit. This prohibition will be of particular importance to suppliers and other parties that provide goods or services to the Rostec family of companies.

Export Controls
BIS expanded the Entity List to impose export control restrictions on the SDNs added by OFAC as described above. The BIS Entity List already covered the nine SDNs previously designated by OFAC in the defense sector. Transactions with these entities involving any item subject to the Export Administration Regulations (EAR) require a license that is subject to a policy of denial. This restriction applies to reexports of items that are subject to the EAR even if a U.S. person is not involved in the transaction.

BIS also prohibited the export of certain items to Russia without a license when the exporter knows that the item is intended for a “military end use” or “military end user” in Russia. This prohibition extends to Russia the “military end use/end user” rule that previously applied only to China. The ECCN list covered by this rule is contained in EAR Part 744, Supplement No. 2. License applications for these items will be reviewed on a case-by-case basis, but will be subject to denial if the items would make a material contribution to Russia’s military capabilities. Items not listed in Supplement No. 2 are not subject to these restrictions even if destined for use by a military end user, though would be subject to the above SDN and Entities List prohibitions if destined for one of those companies.

 

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On August 13, 2014, the Office of Foreign Assets Control (OFAC) issued new guidance on ownership/control for determining blocked parties. This represented the first significant update on this topic since February 14, 2008, and may have important practical implications for how companies conduct due diligence, assess whether potential business associates or customers are blocked under U.S. law, and determine when it is safe to deal in or transfer the property of such persons.

OFAC previously has implemented guidance that an entity that is owned 50 percent or greater by a blocked party would itself be considered blocked, even if the entity was not expressly identified on the List of Specially Designated Nationals (SDNs). Until the latest guidance, OFAC’s policy was not to combine ownership shares of different entities in applying the 50 percent test.

On August 13, OFAC stated that it will now “aggregate” the ownership shares of all SDNs that may own part of an entity. Any entity owned 50 percent or greater by SDNs is now considered blocked by operation of law.
The new guidance also clarifies that ownership of less than 50 percent or control by other means does not automatically lead to blocking However, OFAC may determine to specifically designate an entity that has a significant minority ownership interest or is controlled by an SDN.

For entities that have had over 50 percent ownership by SDNs, divestment by those SDNs of their ownership would eliminate the automatic blocking. However, such divestment must take place outside of the United States or otherwise be authorized by the U.S. government. There also are certain limitations—for example, blocked property in the possession of U.S. persons remains blocked even if there is subsequent divestment outside of the United States.

The guidance applies for purposes of application of the Sectoral Sanctions Identification List (“SSI List”). Thus, ownership interests of entities on the SSI List should be aggregated to determine if additional entities are subject to the SSI List restrictions. Importantly, ownership interests of SDNs and SSI list entities are not combined when determining an entity’s ownership. OFAC only will aggregate within the distinct programs.

This technical change in OFAC’s “counting” for ownership may have an impact on due diligence evaluations. It may be necessary to review past due diligence on key business partners, vendors and customers, particularly where there was any indication of minority SDN ownership. Looking ahead, it will be important for companies to update their internal compliance and due diligence policies to reflect the ownership and control guidance.

 

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In response to the continuing situation in eastern Ukraine and Crimea, the European Union (EU) has adopted further significant sanctions against Russia. On 6 August 2014, Russia responded.

The EU is continuing to intensify sanctions against Russia in response to the rising tensions in eastern Ukraine and Crimea. A number of key restrictive measures came into force on 1 August 2014, contained in Council Regulation (EU) No 833/2014 of 31 July 2014 (“Council Regulation”).

Financial Sanctions

New sectoral sanctions prohibit EU nationals and companies entering into contracts after 1 August 2014 to buy or sell a range of specified financial instruments (with a maturity exceeding 90 days) issued by the following major state owned Russian banks – Bank for Development and Foreign Economic Affairs (“VEB”), Gazprombank, Russian Agricultural Bank (Rosselkhozbank), Sberbank and VTB Bank OAO. This prohibition extends to their non-EU subsidiaries owned over 50 percent and those acting on their behalf. Services related to the issuing of such financial instruments, e.g. brokering, also are prohibited.

Other Restrictions

Further sanctions measures adopted by the EU include:

(i) an arms embargo (which includes a ban on the purchase, import or transport of military goods from Russia);

(ii) an export ban on dual-use goods for military end users; and

(iii) measures to curtail access to certain equipment and technologies, particularly in the oil exploration and production sector.

These measures have followed other recent sanctions aimed at Russia. In particular, EU Regulation 825/2014 on 30 July 2014 already had placed a ban on providing loans or other credit in a wide range of sectors in Crimea and Sevastopol.

To date, the EU also has frozen the assets of, and banned travel for, many individuals, including certain Russian and Ukrainian officials, who are deemed responsible for destabilizing the situation in eastern Ukraine. The EU also has frozen the assets of a number of entities in Russia and the Ukraine, making it an offence to deal in assets belonging to listed entities.

Russia Retaliates

In response, on 6 August 2014, Russia imposed a one-year import ban on certain agricultural and food products originating from countries that have introduced sanctions against Russia (or acceded to such sanctions). Furthermore, the Russian government is considering banning transit flights across its territory for EU and US airlines.

This past week’s activities represent the first significant expansion of EU sanctions beyond a limited asset freeze list. Companies should actively assess whether they face exposure in Europe or otherwise in their business interests in Russia and/or the Ukraine.

 

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The United States, European Union and Canada each took steps recently to expand sanctions against Russia, including the targeting of major defense companies and the addition of export controls. These designations and export control steps have implications for defense contractors and brokers.

The Office of Foreign Assets Control (“OFAC”) listed the following Russian defense-sector companies as Specially Designated Nationals (“SDNs”) effective July 16, 2014:

  • Almaz-Antey Corp.
  • Federal State Unitary Enterprise State Research and Production Enterprise Bazalt
  • JSC Concern Sozvezdie
  • JSC MIC NPO Mashinostroyenia
  • Kalashnikov Concern
  • KBP Instrument Design Bureau
  • Radio-Electronic Technologies
  • Uralvagonzavod.

In addition, on July 29, 2014, OFAC designated the United Shipbuilding Corporation, which designs and repairs both military and commercial ships in Russia.

New transactions with these Russian companies by U.S. companies, citizens or permanent residents or persons in the United States are prohibited. As a consequence, transactions in dollars in which funds transfers clear through the U.S. banking system are subject to blocking as well. In addition, the sanctions apply to any company owned 50 percent or more by one of these manufacturers.

These designations, however, do not apply to equipment previously manufactured by these companies and already purchased and fully paid for. Such equipment is not blocked and may be possessed and used by persons subject to U.S. jurisdiction. Further, the sanctions do not prohibit new sales or lease transactions for such equipment in the secondary market. For example, according to OFAC guidance, if a U.S. person owns 100 AK-47 rifles originally manufactured by Kalashnikov Concern and purchased outright before July 16, 2014, these rifles may be re-sold in the secondary market so long as the sanctioned Russian companies or other SDNs are not part of the transaction.

If equipment has been ordered or acquired from one of these Russian companies, but money is still owed, the items may be blocked. Depending on the transaction, the sanctioned companies may continue to have an interest in the equipment. OFAC has recommended that any purchaser in such a situation seek guidance on whether the U.S. government would consider the items to be blocked.

In addition to the OFAC SDN designations, these nine companies have been added to the U.S. Bureau of Industry and Security (“BIS”) Entity List. Any export or re-export to these companies of goods, software or technology subject to the Export Administration Regulations (“EAR”) is now prohibited without a license, with a presumption that any such license request will be denied. Jurisdiction is based on U.S. content. Non-U.S. persons acting outside of the United States are subject to the prohibition if exporting or re-exporting to these companies items that are subject to the EAR.

The U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”) has not yet issued a new policy statement concerning these companies. Exports of defense articles and defense services to Russia, however, are subject to a policy of denial. Brokering requests related to the resale of previously purchased defense articles from defense sector companies may be approved, although companies are advised to contact DDTC for guidance.

Actions in Other Jurisdictions
To date, the European Union (“EU”) has designated only one entity within the arms and materiel industry, Almaz-Antey Corp. The EU, however, has placed restrictions on exports of dual-use goods and technology that could be intended for a military end use/end user in Russia. The sale, supply, transfer or export directly or indirectly to a person in Russia or for use in Russia is prohibited. Further, the EU has prohibited technical assistance and financing/financial assistance relating to items on the Common Military List or dual-use goods that could be used for a military end use or end user, as well as the provision to, manufacture or maintenance for, or use of such items by a Russian person or in Russia. Pre-existing contract obligations, however, may be authorized.

Canada has designated eight of the same entities that the U.S. designated for operating in the arms and materiel industry. Property of the designated entities that is within Canada or the possession of a Canadian person is now blocked.

Sanctions and export controls continue to evolve in response to events in Ukraine and Russia. The defense manufacturing and materiel sector in Russia likely will continue to be a target of sanctions by the U.S. and other western governments.