Russia-Related Service Restrictions Causing Compliance Challenges, Lawyers Say
Although many of the U.S. sanctions against Russia have been in place for months, companies are still dealing with a range of compliance challenges, Crowell & Moring trade lawyers said this week, especially involving Russia-related service restrictions. They also said they don’t expect the pace of sanctions to slow anytime soon, especially as the U.S. ramps up enforcement efforts this year.
“It is only going to get worse,” DJ Wolff said during a March 7 webinar hosted by the law firm. “This is a one-way ratchet,” he said, adding that the U.S. and others are “going to continue to layer on additional restrictions that aren't going away anytime soon.”
Companies are trying to “grapple” with “understanding the various services prohibitions” that the U.S. has imposed on Russia, said Anand Sithian, especially in the lending and financial services sectors. He has specifically seen U.S. tax service firms and banks encounter issues handling requests from Russian companies working on behalf of non-Russian people. Those companies, for example, may ask a U.S. firm to prepare financial records in connection with a tax refund for Russian tax authorities, Sithian said, which could violate U.S. sanctions.
Another “trickier scenario” involves non-U.S. companies that are still operating in Russia through a Russian subsidiary, he said. Those companies need to examine their “U.S.-person touch points,” Sithian said, including whether they have any U.S.-person board members and whether those board members are “providing strategic business advice,” which could be captured by the management consulting services restrictions.
“All of this has led us to understand that there is an immense amount of Russian wealth and business activity in the Western economy,” Sithian said. Russian oligarchs are “using complex legal structures” to hide their ownership stakes, and “that requires financial institutions, multinational companies and other service providers and goods providers to really understand who are their borrowers, who are their counterparties, and where are goods being sold or for whose benefit.”
Another sector in which companies are facing compliance challenges is in the “lending context,” Carlton Greene said. He said he advises companies to make sure they have strong contract clauses and covenants that “protect you against” any potential sanctions violations. The most common covenants require the borrower to certify that it’s not a sanctioned party, Greene said, and that they won’t use the money to “engage in any dealings or for the benefit of any sanctioned party.” He also said companies can insert language to make sure any money used to pay back a loan is money “in which no sanctioned party has any kind of property interest.”
Russian sanctions compliance challenges aren’t expected to ease, particularly as the Treasury Department looks to increasingly target sanctions evasion networks this year (see 2303030018). “I think over the next year we'll see a major focus on sanctions evasion, particularly by third-country supporters of Russia,” said Jason Prince, a Crowell lawyer and former chief counsel for the Office of Foreign Assets Control. He pointed to designations OFAC has already taken this year to target evasion networks (see 2302010023). “I think we'll see more of that,” he said.
OFAC may also decide to add Gazprombank to its Specially Designated Nationals List, Prince said, adding that the Russian bank has been one of the more “noteworthy exceptions” to OFAC’s sanctions campaign against Russia’s financial sector. “One can presume that -- given that Gazprombank plays a central role in energy-related financing in and related to Russia -- that [adding it to the SDN List] has been a key consideration,” he said.
Companies also should closely monitor OFAC’s General License 8, Prince said, which is set to expire in May (see 2211100082). The license authorizes certain energy-related transactions with several Russian companies.
“It's worth keeping an eye on whether OFAC will extend that deadline, and if so, for how long?” Prince said. “If it doesn't extend it, I think OFAC has indicated that they would provide a reasonable wind-down period, but that's worth watching.”