U.S. and Canadian Sanctions Against Russia. Presentation to the Association of Corporate Counsel Paul M. Lalonde & Kenneth J.

Transcription

1 1 U.S. and Canadian Sanctions Against Russia Presentation to the Association of Corporate Counsel Paul M. Lalonde & Kenneth J. Nunnenkamp

2 US Ukraine- Related Sanctions

3 US Sanctions: Legal Authority Statutory Regulatory Executive Orders Interpretive Guidance 3

4 US Sanctions: Legal Authority -- Statutory General International Emergency Economic Powers Act, 50 U.S.C et. seq. ("IEEPA") Trading With the Enemy Act, 50 U.S.C. App. 1, et. seq. ("TWEA") 4

5 US Sanctions: Legal Authority -- Statutory Numerous specific statutes (examples) Acts imposing sanctions against Iran Trade Sanctions Reform and Export Enhancement Act of 2000 ("TSRA"), 22 USC Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA"), 22 USC National Defense Authorization Act For Fiscal Year 2012, Public Law Iran Threat Reduction and Syria Human Rights Act, 22 USC Iran Freedom and Counter-Proliferation Act (part of 2013 NDAA) Acts imposing sanctions against Cuba Cuban Democracy Act, 22 USC Cuban Liberty and Democratic Solidarity (Libertad) Act, 22 USC

6 US Sanctions: Legal Authority -- Statutory Ukraine-Related Sanctions Legislation Ukraine Freedom Support Act ("UFSA"), Pub. Law No Combination of Mandatory and Optional Sanctions Mandatory sanctions on Rosoboronexport (Russian defense exporter) Mandatory sanctions on entities/persons that transfer or broker defense exports from Russia to Syria, Ukraine, Georgia, Moldova and other countries "of significant concern" such as "Poland, Lithuania, Latvia, Estonia and the Central Asia republics." Mandatory sanctions on Gaxprom if Gazprom withholds significant natural gas supplies from a NATO country or other named countries (i.e., uses it as a political weapon) Provides a "menu" of sanctions against persons or entities, similar to Iran program Optional sanctions against financial institutions that knowingly engage in or facilitate transactions prohibited under the sanctions 6

7 US Sanctions: Legal Authority -- Regulations General sanctions regulations 31 C.F.R. Part 501: General Regulations Governing All Sanctions Programs Addresses definitions, reporting, TWEA penalties and licensing procedures Specific program regulations (examples) Ukraine Related Sanctions Regulations, 31 C.F.R. Part 589 Iranian Transactions and Sanctions Regulations, 31 C.F.R. Parts 535, Cuban Assets Control Regulations, 31 C.F.R. Part 515 7

8 US Sanctions: Legal Authority -- Executive Orders All sanctions programs implemented initially by Executive Order(s) Issued pursuant to either: IEEPA or TWEA Executive Orders Specific statute (i.e., CISADA) Declare the conditions are met for the imposition of sanctions Establish the sanctions program Provide guideposts for agency action May include designation of persons or entities to Specially Designated Nationals ("SDN") List "Block" property and interests in property in the U.S., that enter the U.S. (tangibly and intangibly), or that are or come within the possession or control of a U.S. person Effect of blocking an asset -- may not be "transferred, paid, exported, withdrawn, or otherwise dealt in" 8

9 US Sanctions: Legal Authority Statutes, regulations and Executive Orders all prohibit: Any activity that facilitates a blocked transaction Facilitation is a broad concept that captures anything reasonably determined to aid or abet a violation Often cited as a separate violation Requires an underlying violation or attempt Often cited for indirect activities/support ATP Tour: approving and facilitating payments to tour official "ordinarily resident in Iran" Great Western Malting: fined $1.34M for "performing various back office functions for the sales by a foreign affiliate of non-u.s origin barley malt to Cuba Any conspiracy formed to violate the sanctions (Life for Relief & Dev) Any transaction that avoids or has the purpose of evading or avoiding the sanctions (Sea Tel Inc.: export to South Korea with knowledge or reason to know the products would be reexported to Iran) Any transaction causing a violation or that constitutes an attempt to violate the sanctions 9

10 US Sanctions: 3 Basic Types Country Based -- prohibits a broad spectrum of activities based on the country Current country based sanctions: Cuba, Iran, North Korea, Sudan, Syria, Crimea Targeted -- sanctions are imposed on specific individuals, entities or activities within a country Examples: Ukraine related, Belarus, Venezuela, Burma, Lebanon Activity based -- sanctions people or countries based on certain activities Examples: Cyber-related, Rough Diamond, Magnitsky 10

11 Ukraine Related Sanctions -- People Those close to Russian President Vladimir Putin (the "Oligarchs") (and entities they own/control) Individuals "responsible for or complicit in" actions destabilizing the Ukraine, EO (March 6, 2014); Officials of the Russian government Persons and entities designated over the next several months Persons/Entities designated became Specially Designated Nationals ("SDN") Freezes assets in the US Prohibits virtually any unauthorized transaction with the person designated and with any entity "owned" or "controlled" by an SDN (OFAC license is required for all transactions covered) Travel Prohibition 11

12 Ukraine Related Sanctions -- Sector Based Sectoral sanctions -- Directives 1-4 Expanded sanctions to designated entities and people involved in various industries: Finance, Energy, Defense, Materiel Finance sector: Prohibits new debt or equity only (first > 90 days, then > 30) Energy sector: Prohibits new debt > 90 days to Russian energy sector Defense and materiel sectors: Prohibits new debt > 30 days Designated people/entities added to Sectoral Sanctions Identification ("SSI") List Different from SDN designation 12

13 Ukraine Related Sanctions -- Other Agency Actions Departments of Commerce and State place "holds" on the processing of licenses for exports of certain items to Russia (March 26-27, 2014) Commerce Department, Bureau of Industry and Security ("BIS") August 2014, license required for EAR controlled exports to Russian energy sector (i.e., E&P in deepwater, Arctic offshore) Items include: ECCNs 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992 8D992 Items listed in Supplement No. 2 to Part 746 (List of Schedule B numbers) Presumption of denial for any license requests Broader impact than SSI list, which focused on debt and was limited to designated entities 13

14 Ukraine Related Sanctions -- Other Agency Actions State Department Presumption of denial for defense exports to Russia and Crimea Case-by-case review to determine Russian military benefit Revoked existing licenses where possible 14

15 Ukraine Related Sanctions -- Crimea Broad, country-based type sanctions applied to Crimea, EO (Dec. 19, 2014) Prohibits virtually all transactions in and with Crimean persons and businesses General Licenses issued to allow "wind-down" of operations in and with Crimea by 1/31/15 15

16 Ukraine Related Sanctions -- General Licenses 9 General Licenses issued so far Define exceptions to the sanctions(i.e., medical supplies, Internet communications software, etc.) The issuance of General Licenses suggests these sanctions are settling in for a long period 16

17 Ukraine Related Sanctions -- the 50% rule Sanctions apply to all entities in which designated person owns, directly or indirectly, 50% or greater interest (These "owned" entities are sanctioned even if not specifically included on SDN List) Applies if SDNs own 50% interest "individually or in the aggregate" This rule applies under all sanctions programs, but is especially relevant to the Ukraine related sanctions because certain sanctioned persons have sought to avoid the impact of these sanctions through divestitures of small portions of assets -- sometimes to other blocked persons 17

18 Ukraine Related Sanctions -- Penalties for Violations IEEPA governs. 50 U.S.C. 1705: Unlawful to violate, attempt to violate, conspire to violate, or cause a violation of any license, order, regulation, or prohibition Civil (Strict Liability): $250,000 or 2X the amount of the transaction, per violation Criminal (Willful): $1 Million per violation (individuals, imprisonment up to 20 years) 18

19 Ukraine Related Sanctions -- Status Few licenses have been issued from OFAC No known licenses for Crimea No published enforcement actions relating to Russia 19

20 Ukraine Related Sanctions -- Practical Considerations Jurisdiction Sanctions programs require an analysis of the nationality and/or location of the entity engaging in the transaction and origin of the goods or services Inbound/Outbound The US takes a broad view of jurisdiction, and an equally broad view of items classified as US goods or US services Sectors that receive special attention include energy, financial services (including insurance), pharmaceuticals/medical devices, and shipping Sanctions programs impact imports, exports, and reexports Facilitation raises unique challenging risks Diligence with respect to supply chain and distributors is critical, particularly to guard against SDNs or diversion 20

21 Ukraine Related Sanctions -- Practical Considerations(Cont d) Purpose Even for transactions that involve permissible goods, the purpose of the transaction should be evaluated separately For example, while medical supplies sold to a hospital may be permissible, government sales (such as to a Health Ministry or a foreign military) may be sanctioned Similarly, providing support to (facilitating) an impermissible transaction creates liability For example, providing accounting or actuarial services to a third-country business that is predominantly engaged in sanctionable transactions could be subject to sanction Whether the initial purpose is permissible, commercial activities designed to evade sanctions, result in diversion of products, or benefit sanctioned parties, may be subject to sanctions 21

22 The Canadian Sanctions Regime: Ukraine-related Sanctions

23 Canada Sanctions Regime United Nations Act Canadian implementation of sanctions adopted by UN Security Council Special Economic Measures Act Other sanctions As dictated by foreign policy of the Government of Canada Independent of UN Criminal Code Terrorist groups Proceeds of Crime (Money Laundering) and Terrorist Financing Act Freezing Assets of Corrupt Foreign Officials Act 23

24 Canada SEMA SEMA = framework legislation Specific measures adopted by Regulations Sanctions can encompass: Limitations on official and diplomatic contacts or travel Restrictions or prohibitions on trade or other economic activity between Canada and the target state Seizure or freezing of property situated in Canada 24

25 Canada SEMA Offences and punishment 8. Every person who willfully contravenes or fails to comply with an order or regulation made under section 4 (a) is guilty of an offence punishable on summary conviction and is liable to a fine not exceeding twenty-five thousand dollars or to imprisonment for a term not exceeding one year, or to both; or (b) is guilty of an indictable offence and is liable to imprisonment for a term not exceeding five years. Possibility of a fine with no maximum limit 25

26 Canada SEMA Russia Sanctions March 17, 2014, the Special Economic Measures (Russia) Regulations Multiple amendments Include 3 Schedules of sanctioned persons Schedule 1 reasonable grounds to believe are senior officials of the Government of Russia (or their families or entities they control), or individuals or entities engaged in activities that directly or indirectly facilitate, support, provide funding for, or contribute to a violation or attempted violation of the sovereignty or territorial integrity of Ukraine or that obstruct the work of international organizations in Ukraine Schedules 2 and 3 reasonable grounds to believe is a person owned or controlled by, or acting on behalf of a person sanctioned in Schedule 1. 26

27 Canada SEMA Russia Sanctions Section 3: Prohibits any persons in Canada and Canadians abroad from: dealing in any property held by or on behalf of a person designated in schedule 1, or facilitating or providing financial or other related services in respect of such a dealing; making any goods available to a person designated in schedule 1; and providing any financial or related services to or for the benefit of a person designated in schedule 1 27

28 Canada SEMA Russia Sanctions Section 3.1(1): Prohibits any person in Canada and any Canadian abroad to transact in, provide or otherwise deal in a loan, bond or debenture, of longer than 30 days maturity in relation to: a Schedule 2 person, the property of Schedule 2 person, or the interests or rights of property of a Schedule 2 person. 28

29 Canada SEMA Russia Sanctions Section 3.1(1.1): Prohibits any person in Canada and any Canadian abroad to transact in, provide or otherwise deal in a loan, bond or debenture, of longer than 90 days maturity in relation to: a Schedule 3 person, the property of Schedule 3 person, or the interests or rights of property of a Schedule 3 person. 29

30 Canada SEMA Russia Sanctions Section 3.1(2) 3.1(1) and (1.1) Do not apply in respect of a loan issued or bond or debenture that was issued before the designated person was listed in Schedule 2 or 3. 30

31 Canada SEMA Russia Sanctions Section 3.2: Prohibits any person in Canada and any Canadian abroad to transact in, provide or otherwise deal in a capital funding through the transaction of shares in exchange for ownership interest in relation to: a Schedule 2 person, the property of a Schedule 2 person, or the interests or rights of property of a Schedule 2 person. Does not apply to capital funding that occurred before the designated person was listed in Schedule 2. 31

32 Canada SEMA Russia Sanctions Section 3.3: Oil Exploration or Production Prohibits persons in Canada and any Canadian outside Canada from exporting, selling, supplying or shipping any listed goods, wherever situated, to Russia or to any person in Russia for use in any of the following activities: offshore oil exploration or production at a depth greater than 500 metres; oil exploration or production in the Arctic; or Shale oil exploration or production. The new measures also prohibit the provision to Russia or to any person in Russia of any financial, technical or other services related to such prohibited goods. Month Day Year Dentons US LLP Document reference # 32

33 Canada SEMA Russia Sanctions Section 3.3: Oil Exploration and Production New Schedule 4 identifies goods subject to the new ban along with their Harmonized System code. Goods include various codes under Chapters 73, 82, 84, 87 and 89. Month Day Year Dentons US LLP Document reference # 33

34 Canada SEMA Russia Sanctions Meaning of Canadian : SEMA Section 2: Canadian means a person who is a citizen within the meaning of the Citizenship Act or a body corporate incorporated or continued by or under the laws of Canada or of a province Application for Removal from Schedule: Section 8 SEMA (Russia) Regulations: Review mechanism to remove names from the schedule on an application by a designated person 90 day process Lack of transparency To date, 2 removals -ExpoBank -RosEnergoBank 34

35 Canada SEMA Russia Sanctions Section 4 - Exemptions: Payments pursuant to contracts entered into with persons designated in schedule 1 before their designation, provided not for their benefit Pension payments to any person in Canada or Canadian abroad Transactions in respect of diplomatic missions Transactions to UN agencies, the International Red Cross and Red Crescent Movement, and Canadian NGOs in certain circumstances Transactions necessary for a Canadian to transfer to a person designated in schedule 1 any accounts, funds or investments held by a person designated in schedule 1 when that person became a designated person Financial services required in order for a designated person to obtain certain legal services in Canada; and Payments to any person in Canada or any Canadian abroad in respect of loans entered into by a person before they became a designated person 35

36 Canada SEMA Russia Sanctions Section 5 Causing or assisting: Prohibited for any person in Canada or Canadian abroad to do anything that causes, assists or promotes, or intended to cause, assist or promote any act or thing prohibited under sections 3 to 3.2 Extremely broad and problematic drafting 36

37 Canada SEMA Russia Sanctions Financial Institutions Continuing obligation to determine Section 6: Listed financial institutions must determine on a continuing basis whether [they] are in possession or control of property owned or controlled by or on behalf of a designated person listed in Schedule 1 Includes banks, credit unions, insurance companies, trust and loan companies, securities dealers, portfolio managers or investment counselors Compliance requires sophisticated, ongoing KYC programs 37

38 Canada SEMA Russia Sanctions Special Economic Measures (Russia) Permit Authorization Order Authorizes the Minister of Foreign Affairs to issue a permit to carry out a specified activity or transaction, or any class of activity or transaction, that is restricted or prohibited under the SEMA (Russia) Regulations Permits and reasons are not publicized No time frame for making the decision Not clear what criteria may be applied Process letter to DFATD, with supporting information and records Strategic use 38

39 SEMA Ukraine Sanctions Similar to Russia sanctions No Schedule 2 or 3 No sections 3.1 and 3.2 Targets 49 individuals and 4 entities for which the Governor in Council considers there are reasonable grounds to believe that they are engaged in activities that directly or indirectly facilitate, support, provide funding for, or contribute to the deployment of Russian armed forces to Crimea or to the seizing of control of Ukrainian government and military entities inside Crimea. Which are partners, relations, or entities controlled by such individuals and entities A senior executive of an entity taking part in such activities 39

40 Other Ukraine Sanctions March 5, 2014, Freezing Assets of Corrupt Foreign Officials (Ukraine) Regulations Gives effect to requests from Ukraine government to freeze assets of former leaders and senior officials or their associates and family members suspected of having misappropriated state funds, or obtained property inappropriately as a result of their office or family, business or personal connections These are fairly prominent individuals, and asset freezing tends to be politically motivated 40

41 Canada Issues with Sanctions Compliance Application and interpretation challenges: No jurisprudence No DFATD guidance on compliance issues Little OFSI guidance No advance ruling/interpretations (or even informal decisions) Can request permit or confirmation occasionally an equivalent mechanism Reluctance of officials to discuss Russia and Ukraine sanctions, even informally No transparency in section 8 removal applications No transparency in permit authorization process 41

42 Questions? Paul Lalonde Toronto paul.lalonde@dentons.com Kenneth Nunnenkamp Tysons Corner kenneth.nunnenkamp@dentons.com Month Day Year Dentons US LLP Document reference # 42

43 Dentons locations This will be our global footprint when our combinations with 大成 and MLA are officially launched 下图为 Dentons 与大成及 MLA 合并后的办公室分布图 49 countries 125 locations 11 June