December 24, 2014

U.S. Economic Sanctions - Recent Developments President Prohibits Trade with and New Investment in the Crimea Region of Ukraine and Announces Changes to the Cuba Embargo; Congress Passes New Laws Authorizing New Ukraine-Related Sanctions and Targeted Sanctions Against Venezuelan Government Officials SUMMARY In December, new sanctions involving the situation in Ukraine and targeting certain Venezuelan government officials came into force, and an initiative to ease certain elements of the Cuban sanctions program was announced. With regard to the situation in Ukraine, on December 18 the Ukraine Freedom Support Act of 2014 (“UFSA”) became law. The UFSA is a congressional initiative designed to help assist the Government of Ukraine in restoring its sovereignty and territorial integrity and to deter the Government of the Russian Federation from further destabilizing the situation in Ukraine.

Current

Ukraine-related sanctions already prohibit U.S. persons from engaging certain transactions involving various Russia- and Ukraine-based sanctions targets, and the UFSA expands the potential scope of Ukraine-related sanctions targets by authorizing President Obama to impose additional sanctions against foreign persons that engage in certain transactions in various Russian economic sectors, in particular in the energy and defense sectors.

Although President Obama signed the UFSA into law, the

Administration released a statement that it does not intend to impose sanctions under UFSA at this time. On the other hand, on December 19, in coordination with the European Union, which announced its own Crimea-related measures on December 18, the President issued a new Executive Order which prohibits new investment in the Crimea region of Ukraine (“Crimea”) and generally prohibits trade with Crimea, and further authorizes the imposition of blocking sanctions on persons operating in Crimea. On December 19, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) also announced the

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designation of an additional 24 “Ukrainian and Russian-backed separatists and the militias…they lead or support” as specially designated nationals (“SDNs”) under its existing Ukraine-related sanctions authority.1 On December 18, President Obama also signed the Venezuela Defense of Human Rights and Civil Society Act of 2014 (“VDHRA”) into law. VDHRA requires the President to impose sanctions on officials of the Government of Venezuela or their proxies that the President determines has engaged in human rights abuses in response to anti-government protests that began in February 2014. Finally, with regard to Cuba, on December 17 President Obama announced that the United States would take steps to normalize diplomatic and economic relations with Cuba, and that the United States would implement changes to its current sanctions policies and regulations with respect to Cuba. While the broader U.S. embargo against Cuba will remain in place, the announced changes will result in changes to the implementation of that embargo. The changes are not effective immediately. OFAC will implement the changes by amendments to the Cuban Assets Control Regulations, and other changes will be implemented by the Department of Commerce by amendments to the Export Administration Regulations. None of the changes will have effect until the new regulations are issued. Since there is little detail on the Cuba-related changes available at this time, the details are not discussed in this memorandum.2

UFSA UFSA builds on the prior Executive Orders issued by President Obama authorizing asset-blocking of targeted parties and “sectoral” sanctions on targeted entities in Russia’s financial services, energy and defense sectors.3 Although the White House stated that UFSA does not indicate a change in the Obama Administration’s sanctions policy and the Administration does not intend to impose sanctions under UFSA at this time,4 UFSA provides significant additional sanctions authority that could be utilized, in conjunction with or as an enhancement of existing authorities, “if circumstances warrant.”5 Defense and Energy Sector Sanctions UFSA requires the President, within 30 days, to impose at least three sanctions from a menu of nine on Rosoboronexport, a Russian defense firm identified as a weapons exporter, subject to certain exceptions provided for in UFSA. UFSA also requires the President to impose sanctions on any person determined to be a foreign entity owned or controlled by the Government of the Russian Federation or nationals of the Russian Federation that knowingly6 manufactures, sells, transfers, brokers or otherwise assists in the transfer of defense articles into Ukraine, Syria, Georgia or Moldova, or any other country subsequently designated by the President, without the consent of the internationally recognized government of such countries, or any foreign person7 that knowingly assists or supports such entities with respect to such activities.

-2U.S. Economic Sanctions - Recent Developments December 24, 2014

Regarding the energy sector, UFSA: 

Authorizes the President to impose sanctions on any foreign person if the President determines that the foreign person knowingly makes a “significant”8 investment in a project intended to extract crude oil from Russian deep water, Arctic offshore or shale formations;9



Authorizes the President to impose additional restrictions on the export or reexport of items for use in the energy sector of the Russian Federation, including equipment used for tertiary oil recovery; and



Requires the President to impose at least two sanctions on Gazprom, as discussed below, if the President determines that Gazprom is withholding “significant” natural gas supplies from member countries of the North Atlantic Treaty Organization, Ukraine, Moldova or Georgia.

The menu of sanctions provided under UFSA are: 

Prohibited Property Transactions/Blocking Sanctions: The President may prohibit any person from transacting or otherwise dealing in any property and interests in property of the foreign person that is subject to the jurisdiction of the United States. This does not include a prohibition on the importation of goods to the United States.



Prohibition on Banking Transactions: The President may prohibit financial institutions from processing transactions that are subject to the jurisdiction of the United States and that involve a property interest of the foreign person.10



Equity and Debt Prohibitions: Similar to the Ukraine “sectoral” sanctions already in place, the President may prohibit U.S. persons11 from transacting in, financing or otherwise dealing in debt of the foreign person of longer than 30 days’ maturity (for foreign persons targeted by UFSA’s defense-related provisions) or 90 days’ maturity (for foreign persons targeted by UFSA’s energy-related sanctions) and equity of the foreign person, if the debt or equity is issued on or after the date sanctions are imposed. If the President imposes sanctions on Gazprom under UFSA, this sanction and at least one additional sanction must be imposed.



Export-Import Bank Sanctions: The President may direct the United States Export-Import Bank not to approve the issuance of any guarantee, insurance, extension of credit or credit participation in the extension of credit in connection with the exportation of goods or services to the foreign person.



Procurement Sanctions: The President may prohibit the head of any executive branch agency from procuring goods or services from the foreign person.



Arms Export Prohibition: The President may prohibit the exportation or provision of any defense article or defense service to the foreign person and the issuance of any license or approval under the International Traffic in Arms Regulations (which regulate the export of defense articles and services) to the foreign person.



Dual-Use Export Prohibition: The President may prohibit the issuance of any license and suspend any license for the transfer to the foreign person of “dual-use” items (i.e., commercial items that have potential military applications).12



Visa Bans on Individuals: If the foreign person is an individual, the President may prohibit the individual from entering the United States.



Principal Executive Officers: The President may impose any of the above sanctions on the principal executive officers of a foreign entity, or any person performing a similar function.

In addition to various exceptions built into UFSA, the sanctions do not apply to the importation of goods, and the President may waive certain sanctions with respect to a foreign person or a specific transaction if -3U.S. Economic Sanctions - Recent Developments December 24, 2014

the President determines that the waiver is in the national security interest of the United States and submits a report to the appropriate congressional committees. Foreign Financial Institution Sanctions UFSA authorizes the President to impose sanctions against foreign financial institutions (“FFIs”) that knowingly engage in two types of activity.13 First, UFSA authorizes the President to impose sanctions on an FFI that is determined to have knowingly engaged, on or after the date of enactment of UFSA, in “significant transactions” involving foreign persons that have been sanctioned under UFSA if the transaction involves the sanctionable defense article and energy sector activities described above under “Defense and Energy Sanctions.” involving Rosoboronexport.

The authority does not, however, cover significant transactions

UFSA also authorizes the President, after June 16, 2015, to impose

sanctions against an FFI that is determined to have knowingly facilitated a “significant” financial transaction on behalf of any Russian person designated as an SDN pursuant to UFSA or other U.S. sanctions related to Ukraine. Sanctions against FFIs available under UFSA are similar to those available to FFIs under the Iran Financial Sanctions Regulations (“IFSR”), which target FFIs engaged in certain “significant” transactions related to Iran.14 Under UFSA, FFIs may be subject to a prohibition on the opening, or a prohibition or imposition of strict conditions upon the maintaining in the United States of a correspondent account or payable through account by the FFI.15 UFSA does not define “significant” transactions. In the context of the IFSR, OFAC uses a facts-andcircumstances-based approach to determine significance, and, given the similarity between the FFIrelated provisions of IFSR and UFSA, it is possible that, if issued, any executive order or regulation implementing UFSA could take a similar approach.16 UFSA also contains various provisions related to providing Ukraine with military assistance and other forms of aid.

CRIMEA REGION SANCTIONS The December 19 executive order (“EO”), entitled “Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to the Crimea Region of Ukraine,” establishes broad-based sanctions regarding transactions involving Crimea and provides OFAC with additional authority to designate persons operating in Crimea as SDNs. First, the EO prohibits new investment in Crimea by a U.S. person.17 “New investment” is not defined in the EO. For purposes of Syrian and Iranian sanctions administered by OFAC, which also contain new investment prohibitions, the term generally means “(a) a commitment or contribution of funds or other assets; or (b) a loan or other extension of credit.”18 If OFAC implements the EO by regulation, it is possible that OFAC could follow a similar approach. -4U.S. Economic Sanctions - Recent Developments December 24, 2014

The EO further generally prohibits U.S. trade with Crimea.

Specifically, the EO prohibits:

(i) the

importation into the United States of any goods, services or technology from Crimea; and (ii) the exportation, reexportation, sale or supply from the United States or by a U.S. person, wherever located, of any goods, services or technology to Crimea. 19 Facilitation by a U.S. person of any transaction by a foreign person that would be prohibited for a U.S. person to engage in directly is also prohibited. OFAC issued a general license which allows, subject to conditions and limitations, the exportation and reexportation from the United States or by a U.S. person of agricultural commodities, medicine, medical supplies and replacement parts for medical supplies to Crimea or to persons in third countries for resale to Crimea, as well as transactions related to actions permitted by the license, such as shipping, insurance, financing and payments.20 Third, the EO authorizes OFAC to designate as an SDN, and thereby block all property and interests in property of the SDN that are in the United States or the possession or control of a U.S. person, any person determined to: (i) operate in Crimea; (ii) be a leader of an entity operating in Crimea; (iii) be owned or controlled or acting on behalf of any person designated as an SDN under the EO; or (iv) have materially assisted or supported any person designated as an SDN under the EO. Additionally, any person who meets the SDN designation criteria is prohibited from entering the United States. The Crimea sanctions (and the additional designations under EO 13660, described below) were designed to “complement the recent measures taken by the European Union,”21 which, on December 18, expanded restrictions on investments in Crimea and Sevastopol.22

ADDITIONAL SDN DESIGNATIONS On December 19, OFAC designated 24 additional “Ukrainian and Russian-backed separatists and the militias or entities they lead or support” as SDNs under the authority of EO 13660, issued on March 6, 2014. OFAC imposed the sanctions “in light of the continued conflict in eastern Ukraine and Russia’s continued disregard for its obligations under the Minsk agreements.”23

VDHRA VDHRA was enacted to address “violence and killings perpetrated by [Venezuela’s] public security forces” in response to anti-government protests that began in February 2014.24 VDHRA requires the President to designate as an SDN and exclude from the United States any foreign person, including any current or former official of the Government of Venezuela or persons acting on their behalf, that the President determines is responsible for significant acts of violence or human rights abuses in Venezuela against persons associated with the anti-government protests, has directed the arrest or prosecution of a person primarily because of the person’s exercise of freedom of expression or assembly, or has knowingly materially assisted or supported the commission of these acts. To date, no SDNs have been designated pursuant to the VDHRA. The requirement to impose sanctions terminates on December 31, 2016. -5U.S. Economic Sanctions - Recent Developments December 24, 2014

NEXT STEPS The decision not to impose sanctions under UFSA, which provides the President with both the authority to significantly expand Ukraine-related sanctions and significant discretion regarding whether to do so, could be driven by a desire not to act in a manner that outpaces the European Union. Notably, the European Union recently elected not to impose new sanctions on Russia citing concerns about Russia’s economy. Whether the U.S. imposes sanctions under UFSA will likely depend on both Russia’s future course of action and whether the European Union chooses to adopt similar sanctions. In that regard, the White House noted that if Russia “implements its commitments [under the Minsk agreements] and abides by international law, sanctions could be rolled back.”25 U.S. persons should assess whether and to what extent they are engaged in business or transactions that involve the import or export of goods or services with respect to Crimea. In addition, notwithstanding the Presidential announcement that the Administration does not intend to impose sanctions under UFSA, given that the President now has the authority to impose sanctions on foreign financial institutions for dealings relating to Russia, and is required to impose sanctions on Rosoboronexport, it may be prudent for foreign financial institutions to assess whether they are engaging in any transactions involving activity targeted by UFSA or with entities targeted under the Ukraine Sanctions. We encourage clients interested in further information concerning UFSA, Executive Orders, OFAC designations, VDHRA and related measures in the European Union, including the scope of their application and manner of compliance, to contact the Sullivan & Cromwell lawyers identified at the end of the memorandum. Sullivan and Cromwell expects to issue another memorandum when details of the changes to the Cuban Assets Control Regulations and other steps to implement President Obama’s policy announcement are made public. *

*

Copyright © Sullivan & Cromwell LLP 2014 -6U.S. Economic Sanctions - Recent Developments December 24, 2014

*

ENDNOTES 1

U.S. Department of the Treasury, Press Release, “Treasury Targets Additional Ukrainian Separatists and Russian Individuals and Entities” (Dec. 19, 2014); available at: http://www.treasury.gov/press-center/press-releases/Pages/jl9729.aspx.

2

For a description of the changes to the Cuba program announced by the President, see Press Release, The White House, Fact Sheet: Charting a New Course on Cuba (Dec. 17, 2014), http://www.whitehouse.gov/the-press-office/2014/12/17/fact-sheet-charting-new-course-cuba.

3

For information regarding Ukraine-related U.S. sanctions that are currently in force, see our previous memoranda to clients entitled “Ukraine-Related Sanctions: U.S. and EU Take Coordinated Action to Restrict Access of Russian State-Owned Banks to U.S. and EU Capital Markets, Restrict Trade with Russia, Including for Certain Deep Water, Arctic Offshore and Shale Exploration and Production Projects, and Sanction Additional Persons and Entities; U.S. Supplements Sectoral Sanctions Guidance,” “Ukraine-Related Sanctions: Latest Developments Include U.S. Introduction of Sectoral Sanctions Imposing Targeted Sanctions on Certain Entities in Russia’s Financial Services and Energy Sectors; U.S. Designating Additional Persons and Entities as Blocked Persons; and New EU Designations Targeting Additional Individuals and Entities,” “Ukraine-Related Sanctions: U.S. and EU Expand the List of Parties Targeted by Economic Sanctions in Response to Evolving Ukraine Crisis and Russia’s Failure to Meet Geneva Commitments; New Measures Target Certain Russian Officials and Persons Close to President Putin, Including Several Russian Entities; Package of Sanctions Now Includes Expanded List of Blocked Persons, Travel and Visa Bans and Export Denials” and “UkraineRelated Economic Sanctions: U.S. and EU Adopt Economic Sanctions in Response to the Current Situation in Ukraine; Additional Measures Likely if Current Situation Persists or Escalates” available here.

4

See White House, Office of the Press Secretary, “Statement by the President on the Ukraine Freedom Support Act,” (Dec. 18, 2014), available at: http://www.whitehouse.gov/the-pressoffice/2014/12/18/statement-president-ukraine-freedom-support-act.

5

See White House Press Release, supra note 4.

6

UFSA defines the term “knowingly,” with respect to conduct, a circumstance or result, to mean that a person had actual knowledge of, or should have known about, the conduct, circumstance or result.

7

UFSA defines the term “foreign person” to mean any individual or entity that is not a United States citizen, a permanent resident alien, or an entity organized under the laws of the United States or any jurisdiction within the United States.

8

UFSA does not define “significant” with respect to investments in Russian crude oil projects or the withholding of natural gas resources.

9

UFSA calls such projects “special Russian crude oil project[s],” and defines the term to mean a project intended to extract crude oil from: (i) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (ii) Russian Arctic offshore locations; or (iii) shale formations in the Russian Federation.

10

Generally, this would mean that a financial institution that is a U.S. person would have to reject (i.e., decline to process) any transfer in which the foreign person has an interest. Generally, regulations promulgated by OFAC require U.S. financial institutions to report payments rejected due to sanctions-related reasons within 10 business days. See 31 C.F.R. § 501.604.

11

For purposes of Ukrainian sanctions, the term “U.S. person” means any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.

-7U.S. Economic Sanctions - Recent Developments December 24, 2014

ENDNOTES (CONTINUED) 12

For more information on previous actions taken by the U.S. Department of State and the U.S. Department of Commerce’s Bureau of Industry and Security regarding the exportation of defense articles and dual-use items, see our memoranda to clients entitled, “U.S. and EU Expand the List of Parties Targeted by Economic Sanctions in Response to Evolving Ukraine Crisis and Russia’s Failure to Meet Geneva Commitments; New Measures Target Certain Russian Officials and Persons Close to President Putin, Including Several Russian Entities; Package of Sanctions Now Includes Expanded List of Blocked Persons, Travel and Visa Bans and Export Denials” and “U.S. and EU Take Coordinated Action to Restrict Access of Russian State-Owned Banks to U.S. and EU Capital Markets, Restrict Trade with Russia, Including for Certain Deep Water, Arctic Offshore and Shale Exploration and Production Projects, and Sanction Additional Persons and Entities; U.S. Supplements Sectoral Sanctions Guidance” available here.

13

UFSA defines FFI as any foreign entity that is engaged in the business of accepting deposits, making, granting, transferring, holding or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent. The term does not include international financial institutions such as the World Bank, the International Fund for Agricultural Development or any other international financial institution notified by OFAC.

14

See 31 C.F.R. §§ 561.201-204.

15

The term “correspondent account” means an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution. The term “payable-through account” means an account opened at a depository institution by a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a subaccount, in banking activities usual in connection with the business of banking in the United States.

16

In evaluating whether a transaction is “significant,” the IFSR considers, among other things, the size, number and frequency of transactions; the nature of the transaction; management awareness or whether the transaction was part of a business strategy; whether the relationship between the FFI and the sanctions target was direct or indirect; the impact of the transaction on the goals of the sanctions; whether deceptive practices were used to obscure the parties or nature of the transaction; and other relevant factors. See 31 C.F.R. § 561.404.

17

The EO defines “U.S. person” as any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States. EO § 8(c).

18

See 31 C.F.R. § 542.311 (Syria); 31 C.F.R. § 560.316 (Iran).

19

OFAC generally interprets the prohibition on exporting services to a targeted jurisdiction to prohibit U.S. persons from providing services where the benefit of such service is received in the targeted jurisdiction. This would generally prohibit U.S. financial institutions from processing payments involving Crimea.

20

For more information, see OFAC, “General License No. 4, Authorizing the Exportation or Reexportation of Agricultural Commodities, Medicine, Medical Supplies and Replacement Parts,” available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl4.pdf.

21

See U.S. Department of the Treasury Press Release, supra note 1.

22

See European Council Regulation (EU) No 1351/2014 (18 Dec. 2014).

23

For additional information regarding the individuals and entities designated as SDNs, see U.S. Department of the Treasury Press Release, supra note 1.

24

VDHRA § 2.9. -8-

U.S. Economic Sanctions - Recent Developments December 24, 2014

ENDNOTES (CONTINUED) 25

See U.S. Department of the Treasury Press Release, supra note 1.

-9U.S. Economic Sanctions - Recent Developments December 24, 2014

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