by Antoinette D. Paytas, Partner (retired)
The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions against targeted foreign countries, regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or the economy of the United States. All U.S. persons and entities within the United States must comply with OFAC regulations, regardless of where they’re located.
OFAC Compliance Concerns
Specially Designated Nationals (SDNs)
SDNs are individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. The assets of SDNs are blocked and U.S. persons are generally prohibited from dealing with them. OFAC publishes the list on their website and it is frequently updated.
Sectoral Sanctions Identification (SSI) List
In July 2014, OFAC created a new type of sanctions regime, the “sectoral sanctions,” with the goal of limiting certain sectors of the Russian economy from gaining access to U.S. capital and debt markets, as well as U.S. technology and expertise in the energy sector. U.S. persons are not prohibited from dealing with SSI parties, but there are limitations. U.S. persons are prohibited from dealing in many types of new debt of an SSI party and new equity issued by SSI parties (or companies in which a targeted person holds a sufficiently large stake). Other sectoral sanctions prohibit U.S. persons from providing, exporting, or reexporting, directly or indirectly, goods, services (except for financial services), or technology in support of exploration or production for deep-water, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in the maritime area claimed by the Russian Federation and extending from its territory.
OFAC’s 50% Rule
The SDN list and SSI List apply not only to the companies named on the lists, but also to any other company that is 50% or more owned by a listed party. This means that businesses cannot simply screen a party’s name against the OFAC lists. They also must determine whether a party is directly or indirectly owned — in the aggregate — 50 percent or more by an SDN or SSI party. Global ownership is complex and dynamic, spanning multiple countries and levels. Layers of leadership obscure the visibility of a company’s ultimate owner, or the owner’s owner. As a result, due diligence should go beyond only screening names against the SDN and SSI list to include analyzing ownership structures.
The U.S. has imposed sanctions on Russian persons (individuals, entities, and vessels) in response to Russia’s invasion of Ukraine, election interference, other malicious cyber-enabled activities, human rights abuses, use of a chemical weapon, weapons proliferation, illicit trade with North Korea, and support to Syria and Venezuela. In addition, the U.S. has added a number of Russian oligarchs and the companies they own or control to the SDN list. Ownership in Russia can be opaque and difficult to determine.
Successive administrations have used sanctions extensively against Iran to try to change Iran’s behavior. On May 8, 2018, President Trump announced that the United States would no longer participate in the Iran nuclear deal. The effect of President Trump’s announcement is a return to the pre- January 2016 U.S. sanctions position on Iran. This action requires U.S. companies to ensure their global compliance policies prevent non-U.S. subsidiaries from doing business with Iran, with only a few limited exceptions.
The U.S. government has imposed sanctions on the Government of Venezuela and includes all entities owned or controlled by the Government of Venezuela escalating its pressure campaign aimed at forcing President Nicolás Maduro to step down. This includes entities owned 50 percent or more by the Government of Venezuela. Also included are any entities that are less than 50% owned, but otherwise controlled, by the Government of Venezuela.
Compliance with OFAC regulations can be complicated and depends on your business operations and your target customers. Thomsen and Burke’s goal is to assist clients in evaluating and implementing an OFAC compliance program. By leveraging our experience working with technology companies of all sizes and across a variety of industries, as well as with OFAC on https://t-b.com/practices/investigations-and-enforcement/enforcement matters, we provide deal counsel with timely advice and the company with prioritized remedial actions, where appropriate.
Disclaimer: This document may be considered Attorney Advertising. It is provided for informational purposes only and is not to be considered legal advice. Its distribution does not establish an attorney-client relationship. Each situation is unique and the techniques used will differ depending on the facts and circumstances. Therefore, this document does not describe the work that may be performed in any particular matter.