Worldwide: Sanctions Round-Up: Fourth Quarter 2014

The fourth quarter of 2014 was marked by a major shift in the United States' approach to Cuban relations. While the parameters of the new relationship between the United States and Cuba have yet to be defined, President Obama has made a strong commitment to thawing relations between the two countries. In contrast, the United States and the European Union maintained strong sanctions against Russia in an effort to resolve the crisis in Ukraine. Finally, as the P5+1 was unable to reach an agreement with Iran regarding its nuclear program by the November deadline, the US and the EU have extended temporary sanctions relief until this summer.

Included in this quarter's sanctions round-up is a discussion of:

  • US and EU continue sanctions against Russia for its activity in Ukraine;
  • US and EU sanctions against the Crimea region;
  • US makes major change in Cuban relations;
  • The EU extends its sanctions programs for Syria;
  • US Enforcement Actions;
  • US sanctions target terrorists abroad;
  • OFAC sanctions target drug-trafficking operations in Central and South America.

RUSSIA-RELATED SANCTIONS FOR Q4 OF 2014

This quarter saw the continuance of sanctions pressure on Russia from both the US and EU, in further attempts to dissuade Moscow from supporting rebels in eastern Ukraine. The US and EU have so far sought to coordinate their sanction regimes, but disunity may be on the horizon. While US lawmakers appear poised to double-down on sanctions against Russia, some European leaders are more reticent, citing the economic connectedness between Russia and Europe. Russia faces an imminent recession due to depressed oil prices and western sanctions.

US Passes the "Ukraine Freedom Support Act of 2014"

On December 18, President Obama signed into law the "Ukraine Freedom Support Act of 2014" (the "UFSA"), which was unanimously passed by the US Congress. The UFSA states that it is US policy to assist the government of Ukraine in restoring its sovereignty and territorial integrity to deter the government of the Russian Federation from further destabilizing and invading Ukraine and other independent countries in Eastern Europe and Central Asia. The UFSA authorizes certain sanctions against Russia, most of which are non-mandatory, giving the President discretion over whether and how to impose a list of nine specified sanctions. The sanctions allow for additional pressure on Russian defense, energy and banking sectors.

The UFSA only mandates sanctions against a single entity, Rosoboronexport—the state agency that promotes Russia's defense exports and arms trade. Specifically, the law directs the President to impose at least three sanctions from a list of nine outlined in the statute, which the President has yet to do as of the end of the year. The UFSA further directs the President to impose sanctions on any other Russian person he determines to be involved in the transfer of weapons from Russia into Syria, Ukraine, Georgia, Moldova and other "specified countries" without that government's consent.

The UFSA targets Russia's energy sector by directing the President to impose sanctions on any foreign person that knowingly makes a "significant investment" in a "special Russian crude oil project." The UFSA also directs the President to bar investment or credit to OAO Gazprom (Russia's state-owned natural gas company), in the event that it withholds significant natural gas supplies from NATO-member countries or from specified countries such as Ukraine, Georgia or Moldova. The UFSA authorizes the President to take other discretionary actions, such as restricting the export of items for Russia's energy sector (i.e., oil recovery equipment). The UFSA also authorizes the President to prohibit Russian financial institutions from maintaining correspondent accounts in the US, if the President determines they have conducted significant transactions on behalf of any other sanctioned person. Notably, the law gives the President permission to waive any sanctions in the interests of US national security. The UFSA provides the President with discretion to impose the following menu of sanctions against Russian persons:1

  1. Export-import bank assistance—the President may direct the Export-Import Bank of the United States not to approve the issuance of any guarantee, insurance, extension of credit or participation in the extension of credit in connection with the export of any goods or services to the foreign person.
  2. Procurement sanction—the President may prohibit the head of any executive agency from entering into any contract with the foreign person.
  3. Arms export prohibition—the President may prohibit the exportation or provision of any defense article or defense service to the foreign person.
  4. 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 any item covered by the Export Administration Act of 1979.
  5. Property transactions—the President may prohibit any person from acquiring, holding, withholding, using, transferring, withdrawing, transporting or exporting any property that is subject to the jurisdiction of the United States and with respect to which the foreign person has any interest.
  6. Banking transactions—the President may prohibit any transfers of credit or payments between financial institutions to the extent that such transfers or payments are subject to the jurisdiction of the United States and involve any interest of the foreign person.
  7. Prohibition on investment in equity or debt of a sanctioned foreign person—the President may prohibit any United States person from transacting in, providing financing for or otherwise dealing in—

    a. debt of longer than 30 days maturity with respect to the foreign person.

    b. equity of the foreign person.

  8. Exclusion from the United States and revocation of visa or other documentation.
  9. Sanctions on principal executive officers—the President may impose on an entity's principal executive officers any of the aforementioned sanctions.

Additionally, UFSA authorizes (but does not require) providing lethal assistance to Ukraine's military and makes provisions for the support of internally displaced persons in Ukraine. Russia's Foreign Ministry described the law as "overtly confrontational" and said that the recent widening of US sanctions could hamper joint negotiations on Iran's nuclear program and the crisis in Syria. President Obama had intimated that he did not want the US to get "too far ahead" of its European allies regarding sanctions against Russia; however, the White House said that UFSA gives the President wide discretion to maneuver. The administration reached out to EU allies after the bill's passage, assuring them that the new legislation does not signal a change in the overall sanctions policy of the US.

So far, none of the sanctions authorized by UFSA have been implemented by the President, who has signaled his intention to keep US sanctions against Russia closely aligned with those of the EU. We expect UFSA's mandatory sanctions against Rosoboronexport to be forthcoming.

US and EU Impose New Comprehensive Sanctions Against Crimea Region

On December 18, the EU adopted Council Regulation (EU) No. 1351/2014, expanding its sanctions against the Crimea region in Ukraine. The new sanctions ban all European "investment" in Crimea, widely defined to include the purchase of real estate or entities, financing Crimean companies and providing supply-related services. The regulation also bans the sale of energy exploration products and travel to Crimea.

On December 19, President Obama signed new executive order, E.O. 13685, entitled "Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to the Crimea Region of Ukraine." The order prohibits new investment in the Crimea region of Ukraine by US persons; while "new investment" is not defined in the order, OFAC has elsewhere defined "new investment" as "(a) a commitment or contribution of funds or other assets; or (b) a loan or other extension of credit."2 The order also prohibits the importation of any goods, services or technology from the Crimea region of Ukraine into the United States; the exportation, re-exportation, sale, or supply of any goods, services or technology from the United States to the Crimea region of Ukraine; and any approval, financing, facilitation or guarantee by a US person of any such transaction by a foreign person. The new order provides OFAC with the authority to block assets of persons found to be operating in Crimea by designating them as SDNs. Simultaneously, OFAC issued General License 4, authorizing the humanitarian exportation of agricultural commodities, medicine and medical supplies into Crimea. On December 30, OFAC issued General License 5, which allows for transactions in Crimea that are incident and necessary to the winding down or divestiture of transactions and investments in the country. The license authorizes such wind-down activity until February 1, 2015.

US and EU Maintain Sanctions Targeting Specific Sectors of the Russian Economy

This summer, OFAC first issued sanctions pursuant to Executive Order (E.O.) 13662, which authorizes sanctions targeting the banking, energy and defense sectors of the Russian economy (the "SSI Sanctions"). This quarter, the landscape of the SSI Sanctions remained unchanged.

On October 6, OFAC issued Ukraine General License Number 3, authorizing transactions with DenizBank, A.Ş. (based in Turkey), which would otherwise be prohibited under Directive 1. Specifically, the United States exempted DenizBank from the sectoral sanctions, despite its Russian ownership. DenizBank is owned by Sberbank, Russia's largest bank, which was designated as a SSI Entity on September 12.

OFAC provided additional guidance about the SSI Sanctions program throughout this quarter. On November 18, OFAC clarified its definition of "shale projects" in Directive 4 of the sectoral sanctions. Specifically, OFAC explained that as long as the projects in question are neither deepwater nor Arctic offshore projects, the prohibitions do not apply to exploration or production through shale to extract oil or gas in reservoirs.

On December 11, OFAC provided additional guidance on several of the Directives:

  • OFAC clarified that although US persons may engage in commercial transactions with SSI Entities, the terms of those transactions must conform to the 30-day and 90-day debt prohibitions under Directives 1, 2 and 3. For the sale of goods and services, payment terms should not exceed the 30- or 90-day limitation.
  • OFAC clarified the meaning of the term "production" in Directive 4. Specifically, "production" refers to the lifting of oil to the surface and the gathering, treating, field processing and field storage of such oil. Accordingly, "production" ends once the extracted oil is transported from the field production site. Therefore, US persons may enter transactions with SSI entities relating to transportation, refinement and other post-production processes.
  • OFAC clarified the meaning of the term "Arctic offshore projects" in Directive 4. Specifically, the term applies to projects that have the potential to produce oil in areas that (1) involve offshore drilling operations and (2) are located above the Arctic Circle. The term does not refer to horizontal drilling projects originating onshore, even if such operations extend below the seabed to areas above the Arctic Circle.

In October, the EU announced that it will also maintain its current sectoral sanctions regime targeting Russia, having previously promised to review and reconsider the restrictions. In late December, three major Russian banks filed an appeal with the European Court of Justice, challenging the legality of the EU sanctions imposed on them.

US and EU Continue to Issue Blocking Sanctions to Target Russian Individuals and Entities

Pursuant to E.O. 13660, on December 19, OFAC designated twenty-four Ukrainian- and Russian-backed separatists and the militias or entities they support. The designated persons were described as being responsible for "actions or policies that threaten the peace, security, stability, sovereignty or territorial integrity of Ukraine." Among the designated persons was the Russian-nationalist biker group, the Night Wolves, and its high-profile leader, Aleksandr "the Surgeon" Zaldostanov. Zaldostanov is said to have developed a close friendship with President Putin in recent years, and the Night Wolves have been affiliated with separatists' activities in eastern Ukraine and Crimea.

On November 29, the EU imposed new sanctions on thirteen Ukrainian separatists individuals and five related entities accused of organizing "rogue" elections in the eastern Ukrainian regions of Donetsk and Luhansk, issuing asset freezes and travel bans on the individuals and their organizations.

US Makes New Magnitsky Act Designations

On December 29, OFAC imposed sanctions against four individuals under the Magnitsky Act, the first such sanctions since May 2014. The Magnitsky Act, passed in 2012, was originally intended to punish Russian officials responsible for the death of Russian lawyer Sergei Magnitsky in a Moscow prison after he exposed political corruption in the country. The Magnitsky Act directs the Treasury Department to impose sanctions against persons determined to be responsible for extrajudicial killings, torture, or other gross human rights violations committed against individuals seeking to expose political corruption in Russia. Individuals sanctioned under the Act are prohibited from entering the US and are blocked from accessing assets in US banks. The four individuals sanctioned under the Act in December are Apti Kharonovich Alaudinov,Magomed Khozhakhmedovich Daudov, Victor Yakovlevich Grin and Andrei Alexandrovich Strizhof. Mr. Grin and Mr. Strizhof were described as Russian officials who were implicated in the death and subsequent cover-up of the death of Sergei Magnitsky, himself. Alaudinov and Daudov are Chechen officials who were allegedly implicated in the kidnapping, torture, and later framing of a noted Chechen activist—a "Mr. Kutayev"—earlier this year.

To read this Round-Up in full, please click here.

Footnotes

1. "Persons" includes individuals and entities.

2. For example, sanctions against Iran and Syria also contain "new investment" prohibitions. See 31 C.F.R. § 542.311 (Syria); 31 C.F.R. § 560.316 (Iran).

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