By George Benaur
July 12, 2018
A few weeks ago, I presented at the Moscow Stock Exchange on the U.S. sanctions developments and legal options available to affected companies in Russia. The event was across the street from the famous Lenin library and a block from where I was born. More than forty different Russian company representatives attended. To prepare, I consulted with several former prosecutors, investigators, and due diligence and compliance experts, and extensively researched the regulations, to come up with practical options for companies facing the challenges of doing international business under the evolving, complex sanctions regulations promulgated by the U.S. Treasury Department’s Office of Foreign Assets Control.
Indeed, OFAC is becoming increasingly aggressive and is targeting non-U.S. entities. For example, a month ago, the U.S. Justice Department charged employees of the Russia-based joint stock company Sovfracht with conspiring to launder money and to violate U.S. economic sanctions against Syria and Crimea by sending jet fuel to Syria via a Russian shipping company and freight forwarder. Experts from the intelligence community, with whom I spoke, believe that additional sanctions against Russia are likely to come in the future and it is not likely that they will be lifted any time soon. It is also likely that there will be additional litigations and prosecutions concerning these matters in the future.
Russians feel the same. Many in Moscow told me they expected sanctions to stay in place at least another five years. The problem is that people who have nothing to do with sanctions, but who want to do international business, are being affected by sanctions and are searching for answers. The reality is that the OFAC Russia sanctions are impacting regular small to medium-sized businesses. Banks have tightened their internal compliance departments and shut down accounts and transactions that they deem to be too high risk. As a result, regular businesses that are not directly named in any sanctions programs are experiencing major problems with conducting international businesses. These companies and individuals in Russia, however, are not always aware of the legal rights and options available to them or to their U.S. partners in the American legal system.
One such option is to try to apply for and obtain a license from OFAC, or, in other words, an authorization to engage in a transaction that otherwise would be prohibited. There are two types of licenses: general licenses and specific licenses. A general license authorizes a particular type of transaction for a class of persons without the need to apply for a license. General licenses are announced by OFAC and do not require a separate application. In circumstances where there is no general license, a company can apply for a specific license, which is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application.
There are indeed examples when specific licenses were obtained within a matter of days. For example, earlier this year, Swiss pump-maker Sulzer obtained a specific license authorizing the completion of the transfer of the shares so that the famous Renova Group could reduce its ownership in the company to a minority, holding 48.83% of the shares in Sulzer. Sulzer now holds 15.24% of its own shares and confirms that it is no longer a blocked party or subject to sanctions under U.S. law.  Although this transaction was authorized over the weekend, most situations take much longer, typically at least four months.
Before making any application for a specific license, it is important to first conduct a risk management analysis and determine whether doing so is an advisable course of action for a company. It is also important to make sure that the application for a license is well-documented in order to create a record. For example, OFAC regulations advise that “Applicants may be required to furnish such further information as is deemed necessary to a proper determination by the Office of Foreign Assets Control.” Given experience with litigating decisions of administrative agencies such as OFAC, appealing the decision typically requires proving that this decision was “arbitrary and capricious” and the only way to do that is to have a thorough record proving that the decision was clearly contrary to the law.
Given the fact that experts on both sides of the Atlantic expect sanctions to stay in place for a long time, ignoring these matters is not an option. Companies must implement internal compliance programs to assess their sanctions exposure. Russian companies and individuals need to be aware of their rights in U.S. and seek to assert their rights, whether through specific license applications with OFAC or challenging de-designations from banks, in order to protect the interruption of international business.
The future will show what additional regulations will be promulgated and which cases get filed. It will also be interesting to see whether OFAC can handle the scope of inquiries for specific licenses and challenges that are very likely to increase, unless the regulations are significantly clarified and we escape from the current hysteria and fear of compliance issues blanketing the financial industry.