Treasury clarifies 'new investment,' services bans in Russia sanctions

The U.S. Treasury Department defined the ban on "new investment in the Russian Federation," an aspect of sanctions that had raised questions from lawyers, and clarified bans on various services.

Transactions related to divesting or facilitating divestment of investments are allowed as long as they do not involve prohibited transactions, such as those involving blocked persons, according to the Treasury's Office of Foreign Assets Control, or OFAC. "Maintenance" transactions and activities, such as ensuring continuity of preexisting operations or preserving preexisting tangible property, are generally excluded from the ban.

Still, open questions might remain following the June 6 guidance, such as clarifying whether the domicile or jurisdiction of debt or equity securities is relevant to the prohibition on securities purchases.

"Does the 'in the Russian Federation' refer to the domicile of the issuer or to the jurisdiction in which the security is issued, or both?" Andrew Shoyer, a partner at Sidley Austin LLP, who co-leads the firm's global arbitration, trade and advocacy practice, wrote in an email.

Lawyers will discover what other open questions might remain after the guidance as they work with client banks.

"I learn as I go what real-life issues they have and whether the OFAC guidance is sufficient to address them or not," Shoyer added.

Brian Frey, a partner at Alston & Bird LLP and former federal prosecutor with the U.S. Department of Justice, said the guidance resolved questions.

"Businesses have been struggling to understand whether and to what extent they were prohibited from providing forward looking support for their subsidiaries and affiliates that are continuing to operate in Russia, and OFAC's thoughtful and detailed guidance is a welcome clarification," Frey wrote in an email.

Bans on services

The Treasury also issued guidance June 9 to clarify the bans related to certain accounting, trust and corporate formation services and management consulting services. For example, prohibited accounting services include tax preparation, but selling related software and providing educational services are generally allowed.

"In my view, those FAQs also are well thought-out and address specific use cases that are relevant to that sector," Anthony Rapa, a partner who leads the national security team at Blank Rome LLP, wrote in an email.

"Perhaps one lingering question is whether the general license for wind-down activities will be renewed July 7, but it is too early for OFAC to make any pronouncement on that in any event," Rapa added.

Other challenges

More sanctions-related challenges remain, Frey said. Many U.S. companies continue to struggle with "untangling ultimate beneficial ownership of companies" that operate in the U.S.

"For example, how confident is a company that leases property from a real estate developer that the developer doesn't have an ultimate beneficial owner somewhere in Russia?" he wrote. "While it's not the kind of circumstance in which OFAC is likely to penalize a company, it is nonetheless a challenge, and greater guidance from OFAC about what degree of diligence on U.S. companies is necessary to constitute good faith efforts to comply with the law would be welcome."

Secondary sanctions also are a major issue, particularly for international companies, Frey added.

"While OFAC's utilization of its secondary sanctions authority has historically been fairly limited, the rapid expansion of sanctions in Russia have heightened concerns among international companies about the possibility of new and broader uses of that authority," he wrote. "In the end, many non-U.S. companies are still left with the decision to either cut ties with their Russian operations or live in fear that OFAC may come knocking to impose sanctions."