Archive for the ‘Russia Sanctions’ Category


Jul

21

ExxonMobil Fined Two Million Dollars for Two Milliliters of Ink.


Posted by at 7:11 am on July 21, 2017
Category: OFACRussia SanctionsSDN List

By Dyor, STRF.ru (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons [cropped]
ABOVE: Igor Sechint

Yesterday the Office of Foreign Assets Control (“OFAC”) announced that it was fining ExxonMobil $2 million in connection with contracts signed by ExxonMobil with Rosneft in violation of the Ukraine Related Sanctions Regulations. The basis for the fine was not dealing with Rosneft itself; rather, OFAC premised the fine on the fact that Igor Sechin, an individual designated under Executive Order 13661 and the Ukraine Sanctions, signed the contracts. Simultaneously with the OFAC announcement, ExxonMobil filed suit in federal court in Texas seeking to overturn the penalty.

The OFAC announcement is unusual in that rather than simply announcing the fine and going through its usual analysis of how it calculated the penalty, OFAC responds to arguments made by ExxonMobil that it did not violate the sanctions.  ExxonMobil argued that OFAC had designated Sechin in his private capacity and not in his capacity as an official of Rosneft. OFAC harrumphs, as if it were completely obvious, that there is no private/official distinction in designations. According to OFAC, it is completely clear that there will be a problem if the blocked officer signs any agreement with a U.S person. It supports this with a Burma FAQ that deals with a different situation, that was contained in a section dealing with the Burma regulations and that OFAC has removed from its website.

OFAC’s glib rejection of a public/private distinction is not founded in any analysis of the regulations at issue. In fact, as everyone has known for quite some time, the rules do not clearly address situations where an officer of a company is designated and blocked by OFAC but the company itself is not. The Ukraine regulations refer to Executive Order 13661 as defining what activities are illegal. That relevant part of the order is Section 4 which prohibits

the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to this order

It also prohibits the “receipt … of funds, goods, or services” from any such blocked person.

So how does Sechin’s signature of the Rosneft deals step over a line? Certainly ExxonMobil wasn’t providing any funds, goods or services for his benefit. The contracts were for the benefit of Rosneft. Nor did ExxonMobil receive any “funds, goods, or services” from Sechin in the contract. Unless perhaps OFAC thinks that Sechin provided a service to ExxonMobil when he whipped out his pen and spent three seconds spreading ink over the signature line.

If that is the illegal service that was being provided, and it seems that it is because OFAC is drawing a line at the signature line, it’s not very defensible. Let’s say that Sechin hid in a closet and told another company official to sign. That’s a service too. In fact, there is no way to imagine a scenario where a top official of a company does not ultimately approve a major contract, which is also a service, meaning that OFAC’s effort to maintain a distinction between sanctioning Rosneft and sanctioning its officers falls completely apart.

The FAQ relied on by OFAC does not help its position either. Because OFAC has disappeared this crucial guidance (in fact the only guidance from OFAC anywhere on the signature issue) from its website, I’ve retrieved it from the Wayback Machine:

285. If a Burmese Government minister is an SDN, how does that impact the ministry he leads?

A government ministry is not blocked solely because the minister heading it is an SDN. U.S. persons should, however, be cautious in dealings with the ministry to ensure that they are not, for example, entering into any contracts that are signed by the SDN. [03-18-13]

Significantly, guidance on the minister of a government ministry is not necessarily relevant to a situation involving an official of a private company. Additionally, it is hard to justify punishing a company for violating the Ukraine sanctions because it did not read a web document about another set of sanctions.  Not to mention that this guidance no longer exists at all.

It’s easy to see what ExxonMobil sued. I’ll be watching the lawsuit closely. Pass the popcorn.

Photo Credit: By Dyor, STRF.ru (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons [cropped]. Copyright 2009 Dyor, STRF.ru

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May

3

Maybe BIS Should Read This Blog More Often


Posted by at 6:21 pm on May 3, 2017
Category: BISEntity ListOFACRussia Sanctions

Vladimir Putin via http://en.kremlin.ru/events/president/news/27394 [Fair Use]Way back in January of this year, I pointed out a problem that the Bureau of Industry and Security (“BIS”) and the Office of Foreign Assets Control  (“OFAC”) may have unwittingly created for U.S. manufacturers of encryption-enabled products, i.e., virtually anything that touches the Internet or a private network.  Both agencies had imposed sanctions on the FSB, the Kremlin spy agency formerly known as the KGB.  The problem with this otherwise laudable move is that the FSB regulates import of encryption products into Putinstan, er, Russia, and these restrictions could effectively prevent exports of U.S. encryption items into Russia.  This would happen because U.S. exporters were forbidden from filing the necessary paperwork with the FSB by virtue of its addition to OFAC’s SDN List and BIS’s Entity List.

Well, OFAC heard the howls of industry and in just after a little more than a week after the issue had come to light issued General License 1 to permit the filing with the FSB of the necessary paperwork for imports of these products.  BIS, however, slept through those howls and did nothing.   The original post on this problem had noted the difficulties posed by BIS having put FSB on the Entity List.   It was at least possible that the FSB notification and application forms could contain unpublished EAR99 technology regarding the device to be exported to Russia, in which case a BIS license would be necessary before the notification or application could be sent to the FSB.   That would be the case even after the OFAC General License authorized the notification and application forms to be sent

Rip van BIS-winkle has finally roused itself from its slumber on this issue.  On April 17, 2017, BIS amended the Entity List designation for FSB to remove the license requirement for transactions for “items subject to the EAR” that are “related to transactions that are authorized by the Department of the Treasury’s Office of Foreign Assets Control pursuant to General License No. 1 of February 2, 2017.” What do you want to bet that a number of FSB applications were filed with technology “subject to the EAR” without the required license before this amendment to the Entity List? Technology, even technology relating to an EAR99 item, is subject to the EAR unless it has already been published or has arisen during “fundamental research.” Few people would think that unpublished information about a commercial EAR99 item would require a license. Most people probably felt that the OFAC General License got them to the finish line when dealing with the FSB. It now does, but it did not before April 17.

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Jan

24

OFAC Designation of Putin’s Spy Agency May Trip Up U.S. Exports


Posted by at 9:47 pm on January 24, 2017
Category: BISEncryptionOFACRussia SanctionsSanctions

Vladimir Putin via http://en.kremlin.ru/events/president/news/27394 [Fair Use]The recent OFAC sanctions on Russia’s FSB né KGB, which is the Kremlin’s spy agency, may have unintended consequences. According to this article on the Russian website by my friend Иван Ткачёв (Ivan Tkachev) the FSB, besides doing typical spy things, is also responsible for overseeing the importation of encryption devices into Russia. This shouldn’t come as a big surprise since the NSA, our very own spy agency, has its nose in the encryption export business as anyone who has ever filed an annual self-classification report or a semi-annual sales report for encryption products knows perfectly well.

For items where encryption is a primary function, an FSB approval of the product is necessary prior to import. For items where encryption is ancillary (such as mobile phones, laptops, etc.) notification must be given to the FSB. Clearly a request for approval filed by a U.S company with the FSB is now forbidden. Even a notification for ancillary encryption products may be problematic.

A prior designation of FAU Glavgosekspertiza Rossii, a Russian federal agency that it is required to approve construction project designs, created similar unintended consequences and led OFAC, on December 20, 2016, to issue a general license permitting U.S. companies to seek reviews from FAU Glavgosekspertiza Rossii for certain construction projects in Russia. Perhaps a general license will be issued to permit filing these encryption notices and approval requests with the FSB, but there is no telling when at this point.

The other issue which may occur and which would require action by the Bureau of Industry and Security is that the FSB was also added to the Entity List. If the notifications or approval requests contain any technology subject to the EAR, a BIS license is required. It seems likely that this will be the case given the broad definition of technology in the EAR unless all the information in the documents supplied to the FSB has been “published” as defined in section 734.7 of the EAR.

 

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Oct

27

The Kremlin’s Janitor: New Sanctions on Russia Pose Dilemma for U.S.


Posted by at 10:35 pm on October 27, 2016
Category: BISOFACRussia Sanctions

Kremlin.ru [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commonshttp://commons.wikimedia.org/wiki/File%3AVladimir_Putin_at_the_Millennium_Summit_6-8_September_2000-19.jpgAs the U.S. considers more sanctions on Russia, given its cybershenanigans and its involvement in Syria on behalf of Bashar al-Assad, it is running into some unexpected difficulties. The quote of the week, from this article, explains part of the issue:

“While the president has full sanction authority, there’s nobody left to sanction in Russia besides the janitor in the Kremlin,” said Michael Kofman, a global fellow at the Wilson Center’s Kennan Institute in Washington. “In terms of expanding any kind of commercial or financial sanctions, we’re basically maxed out.”

While that is probably an exaggeration, it is not far from the truth. What that means is that individually targeted sanctions are becoming less effective, forcing a consideration of sector-based sanctions, which lead to their own problems in terms of collateral consequences. For example, the sanctions on Rosboronexport had to be revised because it prevented Afghanistan from getting parts for the Mi-17 helicopters that it uses.

Other possible sanctions would impact our allies as well as Putin and his cronies. Options such as preventing U.S. bank from buying ruble-based bonds, cutting off Russia from the SWIFT transfer system, or an embargo on energy exports, would each hurt Europe as much as Russia. Europe gets almost of one-third of energy from Russia.

This illustrates the problem of economic sanctions in a global economy. It’s one thing to whack an economically isolated country. You could cut Granada off from the world economy and the biggest impact would be that your holiday eggnog would have to go nutmeg-less. But for developed or developing economies that are largely integrated into the world economy, economic sanctions will have undesired and unintended effects.

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Jun

7

Russia Sanctions Aren’t Rocket Science


Posted by at 7:08 pm on June 7, 2016
Category: OFACRussia Sanctions

OA 4 Launch by NASA via http://www.nasa.gov/sites/default/files/styles/full_width_feature/public/thumbnails/image/oa-4-launch-1c_0.jpg?itok=LZznlmsx [Public Domain - Work of U.S. Government]The U.S. still buys certain rocket engines from Russia for rockets that, among other things, launch U.S. satellites. This has gotten various Hill types, including Senator John McCain, all worked up and provides an opportunity for them to demonstrate their lack of knowledge about the current sanctions against Russia.

Indeed, Senator McCain a few days ago launched a letter to OFAC demanding that they justify this “selective enforcement of sanctions.” The problem, as the Senator thinks he sees it, is that Sergei Chemezov, who is on the SDN List, is on the Board of Directors of Roscosmos, which makes the engines. Novikombank, which is on the Sectoral Sanctions Identifications List, as is its owner Rostec, finances Roscosmos. So, according to Senator McCain, it’s game over, case closed, for Roscosmos:

[W]e are funneling U.S. taxpayer dollars to a Russian space agency that is financed by a sanctioned Russian bank, which is owned by a sanctioned Russian defense company, and which is controlled by a sanctioned Russian CEO, who also happens to be a close personal friend of Vladimir Putin.

Why this is “selective enforcement” of the Crimea sanctions is far from clear. To begin with, Senator McCain lumps the SDN List and the SSI List together as equivalent sanctions, which they aren’t. A company owned by one on the SSI List is not automatically blocked or even put on the SSI List.  Next, he doesn’t understand OFAC’s guidance which blocks companies that are owned 50 percent or more by blocked companies; it does not automatically block companies controlled by blocked entities. So Roscosmos isn’t automatically blocked because it’s financed by an unblocked bank on the SSI List that is owned by another entity (Rostec) on the SSI List just because Rostec is controlled by an SDN.

Now, leaving aside whether this is “selective enforcement,” which it’s not, there may be an argument, perhaps, that OFAC ought to sanction Roscosmos because of its connections with these companies. This is something OFAC has the discretion to do but which it is not required to do and which would not make it guilty of “selective enforcement” if it does not. Still, that question is not simply answered by looking around and pointing to all of Roscosmos’s unsavory connections. If Roscosmos produces something that the United States needs, then to target Roscosmos in that situation would be, as they (sorta) say, targeting your own foot.

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Copyright © 2016 Clif Burns. All Rights Reserved.
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