United States: OFAC Releases Guidance Regarding Prohibition On New Investment In Russia And Provides Further Clarifications Regarding Investments In Chinese Military-Industrial Complex Companies

Key Takeaways:

• Recent OFAC guidance continues to emphasize the importance of sanctions compliance for investment funds
• OFAC provides definitions of "investment" and "new investment" in connection with the ban on new investments in Russia by U.S. persons, and clarifies that certain maintenance activities are exempt from the ban
• U.S. persons who hold securities of Chinese Military-Industrial Complex ("CMIC") Companies can receive cash dividends and stock splits from CMICsand are not obligated to divest CMIC securities

I. OFAC Publishes FAQs Addressing Ban on New Investment in Russia

On April 6, 2022, President Biden signed Executive Order ("EO") 14071, which prohibits all "new investment in the Russian Federation by a United States person." As Foley Hoag discussed in a prior alert, at that time, there was no guidance provided as to the scope of the investment prohibition. On June 6, 2022, the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") released much-awaited guidance on the ban, including definitions of the terms "investment" and "new investment." A summary of the key aspects of that guidance is provided below:

What is an "Investment"?

OFAC has defined "investment" as "a commitment of capital or other assets for the purpose of generating returns or appreciation."

What is a "New Investment"?

For purposes of EO 14071, new investments are commitments made on or after April 6, 2022, the date of the issuance of EO 14071, and can include commitments made pursuant to an agreement entered into prior to that date if such commitment occurs after that date.

OFAC has provided the following examples of new investment:

• The purchase or acquisition of real estate in the Russian Federation, other than for noncommercial, personal use.
• Entry into an agreement requiring the commitment of capital or other assets for the establishment or expansion of projects or operations in the Russian Federation, including the formation of joint ventures or other corporate entities in the Russian Federation.
• Entry into an agreement providing for the participation in royalties or ongoing profits in the Russian Federation.
• The lending of funds to persons located in the Russian Federation for commercial purposes, including when such funds are intended to be used to fund a new or expanded project or operations in the Russian Federation.
• The purchase of an equity interest in an entity located in the Russian Federation.
• The purchase or acquisition of rights to natural resources or exploitation thereof in the Russian Federation.
• The purchase of both new and existing debt and equity securities issued by an entity in the Russian Federation.

OFAC has also provided examples of certain activities that would not be considered new investment:

• Entry into, performance of, or financing of a contract, pursuant to ordinary commercial sales terms, to sell or purchase goods, services, or technology to or from an entity in the Russian Federation.
  • E.g., a payment of an invoice for goods, where payment is made within the contracted time period and such payment does not involve participation in royalties or ongoing profits.

• The export or import of goods, services, or technology, or related sales or purchases, to or from the Russian Federation, provided that such transaction is made pursuant to ordinary commercial sales terms.
• Maintenance of a pre-existing investment in the Russian Federation, which includes:
  • Transactions to ensure continuity of pre-existing projects or operations located in the Russian Federation, including payments to employees, suppliers, landlords, lenders, and partners;
  • The preservation and upkeep of pre-existing tangible property in the Russian Federation; and
  • Activities associated with maintaining pre-existing capital investments or equity investments.
• Wind down or divestment of a pre-existing investment, such as a pre-existing investment in an entity, project, or operation, including any associated tangible property, located in the Russian Federation.

What are Maintenance Activities?

As set forth above, maintenance activities are exempt from the ban on new investments into Russia. OFAC has stated that maintenance "includes all transactions ordinarily incident to performing under an agreement in effect prior to the [E]ffective [D]ate [i.e. April 6, 2022], provided that such transactions are consistent with previously established practices and support pre-existing projects or operations."

OFAC has also clarified that, in connection with maintenance activity, agreements entered into prior to April 6, 2022, may also be modified or altered, and new contracts or agreements may be entered into, provided that the underlying transactions are consistent with previously established practices and support pre-existing projects or operations (such as modifications to substitute suppliers, conduct maintenance or repairs, or comply with new environmental or safety standards.)