What Are the Risks of Doing Business with the Russian Oligarchs List and the Russian Defense/Intelligence List?

There was some confusion, however, because the two actions both related to Russia and came within one day of each other.

1. The Administration provided a non-sanctions list of Russian senior political figures and oligarchs (the  “Russian Oligarchs List”) to the US Congress as required by CAATSA Section 241.
2. The Administration announced that, for now, it did not need to impose sanctions pursuant to CAATSA Section 231, which authorizes the imposition of sanctions on entities that have engaged in a significant transaction with one of a list of parties that is a part of, or operates for or on behalf of, the defense or intelligence sectors of the Russian government (“Russian Defense/Intelligence List”), which was announced in October 2017.

While these acts did not result in the imposition of any actual sanctions, they do provide additional hints to business where the Trump Administration is headed in the months ahead, identifying risk areas business can review and assess.

In particular, companies engaging in business in Russia should do due diligence to determine if any person on the Russian Oligarchs List owns or controls 50 percent or more of a current or potential business partner. If they do, a careful risk assessment should be conducted to see whether to proceed with future business and what measures, such as contract provisions, might allow them to exit from the contract or relationship if the Oligarch is subject to actual sanctions in future.

Companies selling to or purchasing from entities on the Russian Defense/Intelligence List need to check what they are buying/selling. Is it a defense or military article or service? Is the value of the transaction large? If so, there is a substantial risk of secondary sanctions on the company doing the transaction.

The Russian Oligarchs List Under CAATSA Section 241

On January 30, 2018, the Treasury Department published the Oligarch List pursuant to section 241 of CAATSA. The list of people provided in the report is not a sanctions list, so it does not impose any sanctions (although as a practical matter, a number of the individuals in the report are already subject to sanctions under other OFAC sanctions programs). The list identifies persons falling under one of the following three categories:

1. Senior political figures including senior members of Putin’s administration; Russian cabinet members; and other senior political leaders;
2. Oligarchs, Russian individuals with an estimated net worth of $1 billion or more; and
3. Parastatals, entities that are at least 25% owned by the Russian government and that had $2 billion or more in revenues in 2016.

Some independent reporting suggests the targeted names were largely derived from the Forbes list, including Russian billionaires with ties to Putin and Russian state-owned or controlled entities. There is also a classified appendix to the report, which sets out in greater detail the grounds for the listings and identifies additional persons not listed in the unclassified portion of the Section 241 list.

While no new sanctions were imposed at the time, based on comments from the Treasury secretary, future sanctions of parties listed under Section 241 may be forthcoming under other sanctions laws. In response to bipartisan, congressional criticism that the mere listing of persons did not go far enough, Secretary Mnuchin informed lawmakers of the Treasury Department’s intention to impose sanctions in the coming months. Treasury secretary Mnuchin has indicated that the Treasury Department will use the report to inform future targeted sanctions by stating “there will be sanctions that come out of this.

Executive Order 13661, which authorizes the imposition of sanctions on senior political figures and their supporters, is most likely the authority under which designations will be made. This may be all the more likely now with increased calls for action in response to Special Counsel Robert Mueller’s indictment of 13 Russians for meddling in the 2016 US presidential election, coupled with the congressional criticism.

In the meantime, persons may continue to do deals with companies owned by (or associated with) persons on the Section 241 list, provided of course that the listed person does not appear on the SDN list and is not otherwise subject to sanctions.

Businesses should, however, begin to identify if they have current contracts with businesses owned or controlled by listed Oligarchs, and include due diligence for future significant relationships (e.g. long-term contracts, joint ventures) with such owned or controlled businesses. If the United States designates the Oligarch in question as an SDN, businesses he owns 50% or more of will also be blocked by operation of US law. This means that contracts involving the Oligarch or his business in US dollars or otherwise subject to US law will be blocked. Moreover, financial institutions may be unwilling to take on the risk of handling transactions with SDN Oligarchs and their businesses even in other currencies.

The Russian Defense/Intelligence List Under CAATSA Section 231

On October 27, 2017, the Trump Administration published the Russian Defense/Intelligence List. That list was a list of entities that are part of, or operate for or on behalf of, the defense or intelligence sectors of the Russian government. As in the case of the Oligarch List, the publication of the Russian Defense/Intelligence List did not itself trigger sanctions, but set the stage for sanctions to be imposed with persons who engage in “significant transactions” with entities appearing on the Russian Defense/Intelligence List.

January 29, 2018 was the first date on which the US government could have imposed sanctions on persons that engage in a significant transaction with entities appearing on the Russian Defense/Intelligence List. However, the Trump Administration did not impose sanctions on that date, and indicated that its actions in persuading third countries not to do business with Russian defense or intelligence sectors has made imposing sanctions unnecessary for now, although they did not rule out imposing sanctions in the future. Unlike the Oligarchs List, which is administered by the Treasury Department, the Russian Defense/Intelligence List is administered by the State Department. There was no similar indication from the State Department indicating near term sanctions under Section 231.

Because the Trump Administration feels that it has effectively dissuaded parties from engaging in significant transactions potentially subject to Section 231, we believe the administration is more likely to approach parties that appear to have a deal in the works contrary to Section 231 objectives, and pressure such parties to cancel the deal, rather than pursue Section 231 sanctions.

In requests for guidance on how broadly the US government intends to enforce Section 231, the State Department has emphasized the following published guidance:

Q: What is a “significant transaction?”
 
A: In determining whether a transaction is “significant” for purposes of Section 231 of the Act, the Department of State will consider the totality of the facts and circumstances surrounding the transaction and weigh various factors on a case-by-case basis. The factors considered in the determination may include, but are not limited to, the significance of the transaction to US national security and foreign policy interests, in particular whether it has a significant adverse impact on such interests; the nature and magnitude of the transaction; and the relation and significance of the transaction to the defense or intelligence sector of the Russian government.
 
In this initial implementation stage, our focus is expected to be on significant transactions of a defense or intelligence nature with persons named in the Guidance. [emphasis added] If a transaction for goods or services has purely civilian end-uses and/or civilian end-users, and does not involve entities in the intelligence sector, these factors will generally weigh heavily against a determination that such a transaction is significant for purposes of Section 231.

The apparent caveat in the guidance, which limits it to the “initial implementation stage” at least suggests that, in the future, the State Department determination of what constitutes a significant transaction may change. This poses a heightened risk that a more expansive range of transactions may become significant transactions. What is not clear is whether the State Department will revise its guidance in advance or we become aware of the change due to future designation actions.

In the meantime, companies selling to or purchasing from entities on the Russian Defense/Intelligence List need to check what they are buying/selling. Is it a defense or military article or service? Is the value of the transaction large? If so, there is a substantial risk of secondary sanctions on the company doing the transaction.

In these cases, the company contemplating the transaction may not want to rely on receiving a warning call from the State Department and then attempt to exit the relationship. A call from the US government warning as to the potential for future sanctions likely will not qualify as force majeure. This means that any company that decides to proceed with an otherwise risky transaction with an entity that appears on the Russian Defense/Intelligence List should ensure that the contract includes a clause that will excuse non-performance in any case where they are notified of the possibility of future sanctions.