ECONOMIC SANCTIONS- DAY 3

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WHAT AGAINST WHOM—SSI LISTS

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Directive 1 Finance Sector

Directive 2 Energy Sector

Directive 3 Defense Sector

Directive 4 Energy Sector

Exportation or reexportation of goods, services (except

financial) or tech for deepwater, Arctic offshore or

shale projects

Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft

Remember this slide? For OFAC today, we are looking closely at Directive 4: Export Controls in the Energy Sector

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Directive 4 The following activities by a U.S. person or within the United States

are prohibited except to the extent provided by law or unless licensed or otherwise authorized by [OFAC]:

The provision, exportation or reexportation, directly or indirectly, of goods, services (except for financial services) or technology in

support of exploration or production for deepwater, Arctic offshore or shale projects [hereinafter DWAOSP] that have the potential to produce oil in the [RF] or in the maritime area claimed by the [RF]

and extending from its territory, and that involve any person deemed to be subject to this Directive, its property or its interests in property.

[+ the usual evasion and conspiracy prohibitions]

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Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft

OFAC DIRECTIVE 4 APPLIES TO 5 COMPANIES

OFAC is part of the Department of the Treasury and deals specifically with issues related to economic sanctions regimes. This was passed September 12

BIS

SIMILAR YET

DIFFERENT

BIS ADMINISTERS THE EAR EAR EXISTS ALL THE TIME—EVEN WHEN

SANCTIONS ARE OVER AND OFAC STOPS WORRYING ABOUT RUSSIA

BIS HAS BOTH GENERAL PROHIBITIONS AND PROHIBITIONS ON SPECIFIC ENTITIES

AUGUST 6 BIS adds Section 746.5 of EAR BIS Adds United Shipbuilding to Entity List

SEPT 17 BIS adds 10 entities to entity list

• 5 in oil sector and only limited according to 746.5, • 5 in defense & exports prevented entirely.

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BIS

SIMILAR YET

DIFFERENT

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EAR 746.5 [A] license is required to export, reexport

or transfer (in-country) any item subject to the EAR listed in Supplement No. 2 to this part and items specified in ECCNs 0A998,

1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999 when you know that the

item will be used directly or indirectly in exploration for, or production of, oil or gas

in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale

formations in Russia, or are unable to determine whether the item will be used in

such projects.

BIS

SIMILAR YET

DIFFERENT

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EXAMPLE COMMERCE

CONTROL LIST (CCL) ECCNS 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, AND 8D999

Directive 4 Companies Provided end use could

be DWAOSP Gazprom; Gazpromneft; Lukoil; Rosneft; and Surgutneftegas.

First: United Shipbuilding Next 5 More Defense Contractors for

all end uses: • Almaz-Antey Air Defense Concern

Main System Design Bureau; • Tikhomirov Scientific Research

Institute of Instrument Design; • Mytishchinski Mashinostroitelny

Zavod • Kalinin Machine Plant, JSC; • Dolgoprudny Research Production

Enterprise. 8

REMEMBER THIS SLIDE?-EAR EL

Oil Sector Defense Sector

Plus any export with military end uses or end users- 744.21.

BIS

SIMILAR YET

DIFFERENT

SO YOU HAVE 1) a group of export prohibitions that apply to all exports of goods for

DWAOSP that has the possibility to produce oil with somewhat the same provisions applying in the OFAC regs

2) a group of export prohibitions that are the same for named oil companies

3) a group of export prohibitions for all items for named military suppliers

4) a complete prohibition of any goods for any military end uses or end users

PLUS No savings clauses for existing contracts

• In General License 2, OFAC gave a two week wind down for oil projects, possibly to avoid too much harm to Exxon, BIS didn’t give a wind down period, but might have given individual licenses in order to match OFAC

Former license exceptions are now over Restricted products re-exported to Russia without a license on or

after August 6 may be considered violations Burden of Proof is on exporter to prove the end use is not DWAOSP.

NOTE: 746.5 (1) SAYS OILS AND GAS DWAOSP PROJECTS BOTH NEED A LICENSE– 746.5(2)(C) SAYS PRESUMPTION OF DENIAL IS ONLY FOR OIL PROJECTS

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BIS

SIMILAR YET

DIFFERENT

BIS EXPORT CONTROLS ALSO CONTROL “TRANSSHIPMENT” General Inventory Exception

FOREIGN MADE GOODS THAT INCORPORATE US TECH EG that uses controlled US origin software or

software that is comingled with US software FOREIGN MADE GOODS THAT ARE “DIRECT PRODUCTS” OF

US TECHNOLOGY EG a chemical agent produced in India using US

patented processes.

DEMINIMUS RULE 25% ITEMS “PASSING BACK” THROUGH US EG items previously exported but returned for

repair. TECH INFORMATION DEEMED EXPORTS

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EUROPEAN EXPORT CONTROLS

DUAL USE TECHNOLOGY: COUNCIL REG 428/2009 EACH STATE OF THE EU HAS ITS OWN REGIME FOR LICENSING

EXPORTS However, states should consult with each other One state can request another state not to grant a license.

STATES SET PENALTIES STATES MUST KEEP AND SHARE INFORMATION ON EXPORTS

AND ON LICENSES GRANTED. BROKERING IN ILLEGAL EXPORTS IS ITSELF ILLEGAL

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EUROPEAN EXPORT CONTROLS

EU—COUNCIL REG 833 AS AMENDED BY 960 EU GRANDFATHERS IN EXISTING CONTRACTS, FRAMEWORK AGREEMENTS & ANCILLARY CONTRACTS NO REEXPORT, DEEMED EXPORT OR DEMINIMUS RULE (BUT MEMBER STATES?) EU EXEMPTS NON-MILITARY AEROSPACE, EXPORTS INTENDED FOR THE MAINT. & SAFETY OF EXISTING CIVIL NUCLEAR CAPABILITIES IN EU, SERVICES FOR EVENTS THREATENING HEALTH, SAFETY, ENVIRONMENT DIFFERENT LIST OF PROHIBITED GOODS LIMITED LIST OF SERVICE CONTRACTS DIFFERENT “ENTITY LIST” (ANNEX IV) EU SPECIFICALLY INCLUDES INSURANCE & REINSURANCE

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OFAC Directive 4 The following activities by a U.S. person or within the United States

are prohibited except to the extent provided by law or unless licensed or otherwise authorized by [OFAC]:

The provision, exportation or reexportation, directly or indirectly, of goods, services (except for financial services) or technology in

support of exploration or production for deepwater, Arctic offshore or shale projects [DWAOSP] that have the potential to produce oil in the [RF] or in the maritime area claimed by the [RF] and extending

from its territory, and that involve any person deemed to be subject to this Directive, its property or its interests in property.

[+ the usual evasion and conspiracy prohibitions]

RECALL OFAC DIRECTIVE 4?

SOME VERY PICKY EU/US DISTINCTIONS US “DWAOSP” ARCTIC

OFFSHORE AND SHALE PROJECTS WITH POTENTIAL TO PRODUCE OIL US “IN SUPPORT OF”

DWAOSP” MARITIME AREA &

EXTENDING FROM ITS TERRITORY 14

EU HAS DWOASOP (ART 3A) DEEP WATER OIL ARCTIC ___AND SHALE OIL

EU “NECESSARY FOR

DWASOP. MARITIME AREA NOT

MENTIONED It’s too early to know the significance of these differences.

SANCTIONS IN OTHER JURISDICTIONS

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UK SANCTIONS

Of course the EU sets the basic prohibitions. Blocking Sanctions Terrorist Asset Freezing Act of 2010 https://www.gov.uk/government/publications/financialsanctions-

consolidated-list-of-targets

Financing Restrictions- HM Treasury tightened sanctions implementation on July 31.

Export Controls -Department of Business Innovation & Skills Export Controls Organization (UK BIZ ECO) https://www.gov.uk/controls-on-dual-use-goods

Standard Individual Export License (SIEL) or Trade Control License (for military goods)

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UK SANCTIONS FAQS

Goods listed in Annex II to Council Reg 833/2014, plus dual-use and military exports need a license

The only presumption of denial is for goods listed in Annex II to CR 833/2014 if they are intended for

DWOASOP & contract concluded after Aug 1. Technical assistance, brokering and financial services related to

the above. Inter alia, do not process payments for the aforementioned transactions

without a separate license.

Prohibited items used as components are not prevented. Military exporters will be notified whether additional licensing is

needed. Expect a license to take about 20 days. 17

UK SANCTIONS FAQS

“Arctic” means north of Arctic Circle EU has not defined “Deep Water.” UK FAQs refer

readers to the US 500 foot definition.

18 The UK tends to impose lighter penalties than the United States

CANADIAN SANCTIONS

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Recall the sanctions chronology comparison with the US and the EU that we used in classes 1 and 2? Next we will use this with Canada to see how it coordinates and differs from the US and EU.

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Reminder: US/EUSanctions Chronology • European Union March 17 Council Decision

2014/145/CFSP & Reg. 269/2014 3/21, 4/28, 5/28- adds people June 23 D 386 , CR 692- Cr. goods July 29 Joint US/EU Ann’cem’t July 30-31

Annex I to CR 428/2009 (dual use) CR 833/2014 (finance sanctions) Annex 2 to CR 833/2014 (shale etc) CR 825/2014 (Crimea investment)

CR 826/2014 (more officials) Sept 8 Decision 2014/658-9/CFSP

&CR 959-961/2014, & Amendmt to CR 428/2009

Coming Soon--Guidance

United States March 6 E.O. 13660 March 16 E.O. 13661 March 20 E.O. 13662 (SSI) April 28 (7 officials, 17 co’s.) May 8, 31 CFR 589 July 16 Directives 1 & 2, SSI List July 29 Joint US/EU Ann’cem’t Aug 13-OFAC Guidance (50%) Sept 12 Amend Directive 1 Directives 3 and 4 General License 1(a)

Sept 17 Amend EAR 744.21

March 17 Council Decision 2014/145/CFSP & Reg. 269/2014

3/21, 4/28, 5/28- adds people June 23 D 386 , CR 692- Cr. goods July 29 Joint US/EU Ann’cem’t July 30-31

Annex I to CR 428/2009 (dual use) CR 833/2014 (finance sanctions) Annex 2 to CR 833/2014 (shale etc) CR 825/2014 (Crimea investment)

CR 826/2014 (more officials) Sept 8 Decision 2014/658-9/CFSP

&CR 959-961/2014, & Amendmt to CR 428/2009

Coming Soon--Guidance 21

Canada Sanctions Chronology March 17, Special Economic Measures (SOR/2014-58) – Designated Persons-Schedule 1 3/18, 3/21, 4/28, 5/4, 5/12, 6/21-adds people. July 24 Broadens, adds financial sanctions (SOR/2014-184) –Schedules 2 & 3 Aug 6 - adds people

Sept16 Regs amended to add names, and tighten financial restrictions 30 days + equity Sept 29—Consolidated regulations released.

• European Union Canada

CANADIAN SANCTIONS TODAY

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Schedule 1 (SDN Equivalent) At least 100 individuals and entities (not including Sergei Chemezov or Sechin or Rosneft)

Schedule 2 (Financial Sanctions on Financial entities—30 days debt and equity)

Gasprombank, VEB, VTB, Bank of Moscow, Rosselkhozbank Plus Sberbank

Schedule 3 (Financial Sanctions on Energy/Military Companies)

Currently only “OAO Novatek”

What’s missing? Export controls

CANADIAN SANCTIONS TODAY

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http://laws.justice.gc.ca/eng/regulations/SOR-2014-58/FullText.html Canada grandfathers in preexisting contracts in their financial sanctions Canadian blocking sanctions allow payments from the designated person’s funds to third parties. Canadian sanctions are enforced by the Royal Canadian Mounted Police

Requires Canadians and people in Canada to report. Wilful violators can be fined any amount and imprisoned up to 5 years. Includes sanctions against assisting and promoting Canadian Sanctions are vigorously enforced.

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SWISS « ANTI-CIRCUMVENTION » RULES

On April 2 and again on August 27 Switzerland passed measures designed to avoid circumvention of the sanctions imposed by the world community. It

has also passed export controls on military and dual use goods.

But Switzerland has not recognized Russia’s annexation of Crimea and thus has effectively prohibited trade with Crimea and Sevastopol.

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April 2—individuals on EU list cannot enter into new business relations with Swiss intermediaries to transfer assets through Switzerland

List is regularly updated to match EU designated persons. Crimea and Sevastopol Transactions

Prohibits creation of JVs and granting of loans or credit for infrastructure projects in the transport, energy or telecom industries Especially if exploiting oil, gas or mineral resources of the area

Financial Transactions Authorization from SECO (Swiss Secretariat for Econ Affairs) needed to undertake financial instruments with duration over 90 days with 5 Russian banks (50+% rule applies) Authorization will be granted “if the contemplated loan does not cause the total value of the financial instruments held by the applicant to exceed the average value of that total during the preceding three years.” Prohibits financial intermediaries from establishing new relationships with named entities.

SWISS « ANTI-CIRCUMVENTION » RULES

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Export Controls Must notify SECO for export of certain goods to DWOASOP Export prohibited if end user is in Crimea or Sevastopol Military goods to Russia and Ukraine prohibited, dual use goods require a license, and licenses are only restrictively granted

Location of the Swiss ordinances August 27 ordinance (in German): http://www.seco.admin.ch/themen/00513/00620/00622/05405/index.html?lang=de&download April 2 ordinance: https://www.news.admin.ch/message/index.html?lang=en&msg-id=52530 Export controls: https://www.news.admin.ch/message/index.html?lang=en&msg-id=52530 Punishment for violating the rules can be fines of up to 1mil Swiss Franks and imprisonment up to 5 years.

SWISS « ANTI-CIRCUMVENTION » RULES

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Have been mirroring the E.U.

sanctions

NORWEGIAN SANCTIONS

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JAPANESE SANCTIONS

http://www.mofa.go.jp/region/europe/russia/index.html Are targeted mainly at Ukrainian related persons and companies. April 29-visa restrictions for 23 people July 28-

froze assets of 40 people and two entities All goods imported to Japan directly from Crimea or Sevastopol need a license

September 25- Japan will “tighten” exports of military and dual use tech Five named banks will not be able to issue securities or get loans of more than 90 days without a license.

(a cumulative 50+% rule applies) The Economist posited on Sept 29 that Japanese sanctions are so mild and Japan is unlikely to impose strict sanctions on Russia due to its concern for energy security after the Fukushima disaster in 2011.

AUSTRALIA

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Autonomous Sanctions Regulations of 2011 http://www.dfat.gov.au/sanctions/sanctions-regimes/ukraine.html July 17—”SDN” list of 50 people and 11 companies August 30-unincorparated addition 113/60??? September 1—Australia announces it “will begin to restrict

access of RF state-owned banks to capital markets trade and investment in Eastern Ukraine & Crimea arms and dual use goods exports; export of goods and services for DWASOP; sale of Australian uranium to Russia.

But!!! Nothing Yet!!!

AUSTRALIA

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Sunset October 1,

2024

Negligence Standard.

In future may apply to

Subsidiaries.

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Contracts, Compliance and Damage Control

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Depends on the Law of the Contract of course Is a contract entered into in violation of law automatically null and void?

If so, is a contract entered into after sanctions have gone into effect completely void, or will it be revivable after sanctions end?

Are Sanctions a Force Majeure event? How do you need to exhaust your options before effectively claiming force majeure? Do you need to apply for a license even if there is little to no chance it will be granted?

How should you revise Force Majeure clauses to best encompass sanctions? Do MAC clauses encompass sanction related difficulties? What other clauses should you worry about?

Representations and Warranties? Law of the contract? Place of litigation or arbitration?

EFFECT ON CONTRACTS

Compliance?

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Be aware of different standards of mens rea. OFAC is prosecuting fewer but larger cases, BIS cases are more frequent. Facilitation Problems Referrals Deviation from standard practices Changing business practices to enable an otherwise sanctioned transaction is actionable. Russian companies changing business practices before the problem arises (ie to remove decision making from a US/EU national) is not actionable.

US/EU persons must not facilitate but are not required to prevent a transaction in Russian companies they work for.

Compliance?

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STEP 1—Immediate Check-accounts, assets in your control, contracts STEP 2—Risk Assessment STEP 3—Establish a Compliance Policy Who, what, how Target High Risk Areas Include automated Screening Include internal “sanctions”

STEP 4—Train STEP 5—Audit & Monitor Include reports to board

STEP 6—Regular updates And keep a paper trail of all the above

Damage Control!

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Ensure Violations are stopped immediately Assess How did it happen? Rogue or systematic? How credible is your information? Intentional or Negligent?

Interview Witnesses Preserve Documents Stop all regular destruction processes!

Keep info closely held Think about whether to voluntarily disclose to government!

Voluntary Disclosure

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Can significantly mitigate damages But what is considered voluntary disclosure? Treatment differs with each agency/country

Failure to disclose could compound the violation. But Assess First: Disclosure doesn’t mean no investigation, it means you voluntarily allow an investigation. Will disclosure uncover past transgressions? Will attorneys’ advice need to be disclosed. Disclosure alone isn’t enough—you may have to try to reverse the transaction(s). Consider the international ramifications and the possible need to disclose and negotiate simultaneously with multiple countries’ authorities.

The End

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Thanks for taking the course!