U.S. Tests New Sanctions Strategies on Russia, Venezuela

with co-author Nick Turner

It appears the Trump administration has decided to embrace economic sanctions as a tactical foreign policy weapon, using the U.S. Office of Foreign Assets Control (OFAC) to maximize its leverage over foreign adversaries. In particular, OFAC is sanctioning major companies — United Company RUSAL (RUSAL) and Petróleos de Venezuela (PdVSA), to name just two — as a way to influence their beneficial owners and, more importantly, their home governments. What does this mean for bystanders in Asia-Pacific and elsewhere?

“Not Permanent”

What makes the OFAC’s new strategy remarkable is that the U.S. Treasury Department has accompanied the sanctions with explicit conditions for their removal, including requiring individual owners to divest or transfer control to U.S. allies (i.e., regime change).

In the first instance, RUSAL’s beneficial owner, Oleg Deripaska, a Russian businessman included in the so-called “Putin list,” was required to divest a significant portion of his holdings and take other measures in order to obtain sanctions relief for the companies. During negotiations with RUSAL from April 2018 to January 2019, Treasury Secretary Steven Mnuchin maintained that sanctions relief would be premised on Deripaska’s relinquishing control over his companies. The OFAC lifted the sanctions on RUSAL and other Deripaska-linked companies on January 27, 2019. Deripaska, however, remains a specially designated national (SDN).

On the day after it removed RUSAL from the SDN List, January 28, 2019, the OFAC sanctioned PdVSA and other Venezuelan persons tied to the Nicolas Maduro regime. In the news release announcing the sanctions, the OFAC stated:

As with previous OFAC designations of certain Venezuelan officials and their supporters, U.S. sanctions need not be permanent. Sanctions are intended to change behavior. The United States has made it clear that we will consider lifting sanctions for those who take concrete, meaningful and verifiable actions to support democratic order and combat corruption in Venezuela, including PdVSA.

To make their intentions even more clear, three days later, on January 31, 2019, the OFAC issued FAQ 660, which states, in part:

The path to sanctions relief for PdVSA and its subsidiaries is through the expeditious transfer of control of the company to Interim President Juan Guaidó or a subsequent, democratically elected government that is committed to taking concrete and meaningful actions to combat corruption, restore democracy and respect human rights.

Similar demands were made in conjunction with the OFAC’s sanctioning of Venezuela-based television network Globovisión on January 8, 2019.

To be clear, the companies are not accused of wrongdoing, and the OFAC has always been willing to delist sanctioned companies that distance themselves from their SDN owners. And the OFAC 50 Percent Rule allows SDNs to unblock nonsanctioned companies by divesting their holdings to below 50 percent. However, the recent trend toward sanctioning companies directly and making public demands for their owners to divest is something new, and it’s worth noting.

Should I stay or should I go?

When RUSAL was sanctioned on April 6, 2018, many non-U.S. companies severed their business ties to the company in order to minimize their own exposure to OFAC risk. However, companies that stuck with RUSAL, taking comfort in the OFAC’s numerous Russia-related general licenses and extensions, had their patience rewarded when the OFAC lifted the sanctions in January 2019. To our knowledge, there are no pending enforcement cases against non-U.S. companies in relation to their business with Deripaska’s companies.

The OFAC has followed the same tack with PdVSA, issuing a slew of general licenses to ease the effects on petroleum markets from the sudden SDN designations. It is unlikely that the PdVSA sanctions will be as quickly resolved as those involving Deripaska, as national regime change is more difficult than a transfer of company shares.

Stay Sharp

There were warning signs ahead of both companies’ listings. Deripaska was among the senior Russian government officials and businessmen named pursuant to the Countering America’s Adversaries Through Sanctions Act (CAATSA) months before the OFAC sanctioned him and his companies. The OFAC gradually ramped up sanctions against PdVSA following the issuance of Executive Order 13808 on August 24, 2017. In both cases, media reports speculated about the likelihood of sanctions well in advance of the OFAC’s actions.

Non-U.S. companies, especially financial institutions, should keep aware of such developments in U.S. foreign policy and “hot spots” where economic sanctions are likely to be used.

Non-U.S. companies should also focus on developing robust (but flexible) compliance policies and procedures to anticipate and respond to rapid sanctions deployments. Some good practices include:

• Ensuring policies against business with sanctioned persons allow for case-by-case exceptions where the law permits and according to clear criteria and lines of authority.
• Front-line staff should have clear guidance for identifying and escalating high-risk activities for immediate review by compliance and legal teams based on qualified external guidance.
• Touchpoints to U.S. persons and the U.S. financial system should be mapped out to ensure compliance with U.S. primary sanctions where general licenses may not cover ongoing activities.
• Senior management should be personally involved in making risk-based decisions and communicating key compliance messages to internal and external stakeholders.
• Legal and compliance teams should keep abreast of new developments and pronouncements from U.S. officials concerning expectations for non-U.S. companies doing business with major sanctioned companies, as well as applicable general licenses, likely outcomes and timelines for the removal of sanctions.