Many U.S.-based companies that do business with Russia may be happy that recent sanctions in response to the nation’s activities in Ukraine do not include the entire Russian economy.
But that also makes matters more complex for general counsel and others who need to comply with the new regulations.
The recently imposed targeted sanctions by the United States and the European Union against Russia can be more difficult to comply with than prior country-wide sanctions, such as against Iran.
These recent sanctions are limited to certain individuals or companies in Russia, as opposed to the economy as a whole.
“It’s easier to comply with a country-wide embargo,” confirmed William M. McGlone, co-head of Latham & Watkins’ Export Controls, Economic Sanctions & Customs Practice, in an interview with InsideCounsel.
The former chair of the Committee on Export Controls and Economic Sanctions of the American Bar Association's Section of International Law and Practice, McGlone points out that the majority of business activity involving U.S. firms in Russia remains “permissible.” But the EU and U.S. sanctions “target certain sectors of the Russian economy,” he adds. The sectors that are now most at risk for being impacted by the sanctions are defense, energy, finance and banking.
If U.S. businesses think they may need to comply with these sanctions against Russia, McGlone says many companies opt to “err on the conservative side.” In fact, many firms will operate as if all businesses worldwide are covered. He warns that currently there is a “very aggressive enforcement climate” by U.S. officials.
If businesses need clarification, U.S. government agencies have released frequently asked question documents, as well as other guidance. But do not expect too much if you choose to contact a government agency for interpretive guidance. McGlone said it “is not always immediate” nor is it always “helpful.” It makes sense, given the risk, to rely on specialized counsel with expertise in the field, he added.
McGlone points out as well that U.S. companies are required to immediately comply with sanctions, and need to screen business activities in Russia and check lists to ensure they are in compliance. There is no grandfathering option or phase-in provision on these sanctions.
“U.S. persons, U.S. firms are immediately expected to follow these rules as soon as they are published,” McGlone said.
Initially, the U.S. sanctions were more aggressive that the ones from the EU. Then it changed this week, with the EU sanctions now similar to those found in the United States.
To get an idea how the sanctions work, on July 29 the U.S. Department of the Treasury added three Russian banks — Bank of Moscow, Russian Agricultural Bank and VTB Bank OAO — to the Sectoral Sanctions Identifications List (SSI) that the Office of Foreign Assets Control (OFAC) first announced on July 16, according to an advisory note to clients published by Latham & Watkins.
“These ‘sectoral’ sanctions prohibit US persons from transacting in, providing financing for, or dealing in new debt of longer than 90 days maturity or new equity for these financial institutions,” the statement explains. “These restrictions also apply to entities that are owned 50 percent or more by entities on the SSI List.”
Still, there are some reported loopholes or gaps when it comes to the Russian sanctions. For instance, The Wall Street Journal reported how EU subsidiaries of the Russian banks are exempt from the sanctions. Also, the U.S. sanctions did not include OAO Sberbank, which is Russia’s largest bank, The Journal reported.
For those companies which violate sanctions, be forewarned. Penalties are steep and the U.S. government recently penalized European banks for illegally financing entities. For instance, BNP Paribas will pat almost $9 billion after pleading guilty to two charges of dealing with the U.S.-sanctioned countries of Sudan, Iran and Cuba, InsideCounsel reported.