Apr

2

New Russia Sanctions Passed by Congress Are Needlessly Confusing


Posted by Clif Burns at 2:16 pm on April 2, 2014
Category: Economic SanctionsOFACRussia Sanctions

Putin Feeds Animals by premier.gov.ru [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3APutin_animals.jpegAbout the only thing the current partisanly-split Congress can agree on is sanctions legislation: first Iran and now Russia. So the Ukraine Aid bill passed yesterday contains the obligatory sanctions provisions. The problem is, however, that even though both sides of the aisle love economic sanctions, neither side understands them, and, as a result, the bill is a mess.

Mostly the new sanctions mandate the President to impose sanctions on people he finds have done bad things: “undermin[ing] the peace, security, stability, sovereignty, or territorial integrity of Ukraine” or “ordering, controlling, or otherwise directing, acts of significant corruption in Ukraine” or the Russian Federation.  Of course, it’s up to the President to determine who these folks are, and this is a power he already has under the International Emergency Economic Powers Act (“IEEPA”) as evidenced by the last two rounds of designations. But, hey, this allows Congress to get in the game too and tell the voters at home they stood up for Ukraine, even if it is, more or less, an empty gesture.

The problem comes with respect to the particular sanctions that Congress tells the President to impose on those who have engaged in undermining security of Ukraine or directing corruption in Ukraine or the Russian Federation. At first, these look pretty standard: asset blocking and visa bans. But then we get to the exception:

The requirement to block and prohibit all transactions in all property and interests in property under paragraph (1)(A) shall not include the authority to impose sanctions on the importation of goods.

What this means is far from clear. Let’s say that the White House sanctions Alexei Kirillovich Vronsky (we’ll call him Captain Vronsky for convenience). Now let’s say that he’s short of cash after having all of his assets blocked, so he decides to sell $300 million dollars of Oblonsky Vodka to the United States. In a normal blocking scenario, the $300 million destined to Captain Vronsky would be blocked by the U.S. banks before they could be wired. Does this contravene the exception? The vodka can still be imported into the United States without problem as long as Captain Vronsky isn’t paid. On the other hand, doesn’t the blocking in this case effectively prohibit the importation of the vodka into the United States? Who knows? Certainly no one on the Hill does.

But there’s an even more hilarious mistake. The bill doesn’t define importation. Does it mean importation into the United States or Russia? Or anywhere else for that matter? An exportation from the United States is, after all, an importation somewhere else, whether Russia or some place else. So can Captain Vronsky import a shiny new Corvette into Russia from Detroit? Does the exception prohibit blocking the funds he uses to pay for the imported/exported Corvette?

Of course, the only thing clear as a result of this mess of an exception is that Captain Vronsky, even if he can buy a car from Detroit, can’t buy a condo in Detroit, since there would clearly be no importation (whichever way you define it) in that case.  I also predict the Office of Foreign Assets Control (“OFAC”), which will administer these sanctions, will take the narrow view of the exception and say that blocking payment for the goods does not prohibit their importatiion, which can still occur as long as no payments are made.

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Mar

27

BIS Halts Processing on All Export Licenses for Russia


Posted by Clif Burns at 12:28 pm on March 27, 2014
Category: BISDDTCRussia DesignationsRussia Sanctions

A notice that further processing of all export licenses for CCL items to Russia just appeared in the last several days in the slider on the home page of the website for the Bureau of Industry and Security (“BIS”):

(I’m posting a screenshot because there is no reliable permalink to the slider image).

Existing licenses are not affected; only license applications that were not granted as of March 1, 2014, are covered by this policy. Compare this to the U.K. action which suspended all existing licenses and applications for military and dual-use items destined for the Russian military “which could be or are being deployed against Ukraine.” The State Department has not yet taken action on licenses and applications for USML items to Russia, although possible action in that regard is rumored.

UPDATE: DDTC has just posted this on the home page of its website:

The Department of State has placed a hold on the issuance of licenses that would authorize the export of defense articles and defense services to Russia. State will continue this practice until further notice.

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Mar

25

OFAC: Keeping Us Safe from MOOCs


Posted by Clif Burns at 5:24 pm on March 25, 2014
Category: Cuba SanctionsEconomic SanctionsIran SanctionsSudanSyria

By Aristóteles Sandoval [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3A16-02-2011_Guadalajara_Libre_en_Palacio_Municipal.jpgThis blog previously reported on the impact of OFAC sanctions on the Massive Open Online Courses, quaintly known as MOOCs, offered by the for-profit Coursera. The sanctions have led Coursera to block students with IP addresses from Iran, Cuba and Sudan, a half-hearted attempt by the company to comply with U.S. sanctions.   Those sanctions, in general, prevent providing services to nationals of blocked countries even outside their home countries, so offering MOOCs to Iranians in, say, Germany, would be equally problematic. (Coursera gave Syrian students a reprieve relying, rather questionably, on an exemption in Syria General License 11A for educational exports by NGOs).

Last week, the Office of Foreign Assets Control gave Iranian students, both inside and outside Iran, a partial reprieve from the ban on MOOCs when it issued Iran General License G. That license permits enrollment of Iranians, both in and out of Iran, in MOOCs

provided that the courses are the equivalent of courses ordinarily required for the completion of undergraduate degree programs in the humanities, social sciences, law, or business, or are introductory undergraduate level science, technology, engineering, or math courses ordinarily required for the completion of undergraduate degree programs in the humanities, social sciences, law, or business.

Sadly, there was no happiness in Coursera-ville, because the license is restricted to “accredited graduate and undergraduate degree-granting academic institutions.” Not all of Coursera’s courses are offered by accredited academic institutions, so some of its course offering will not benefit from this general license.

Another beneficiary of the new general license would appear to be EdX, the MOOC platform founded by Harvard and MIT. EdX partners with other accredited academic institutions that provide the various offerings made available by EdX. One significant difference between EdX and Coursera is that EdX sought and obtained a license to provide MOOCs to students in  Cuba, Iran and Sudan. Apparently that license did not cover provision of STEM courses, i.e., courses in science, technology, engineering and mathematics, without specific approval by OFAC, according to this Harvard Crimson article.  That article went on to note the refusal of OFAC to permit a MOOC entitled “Flight Vehicle Aerodynamics” taught by MIT faculty.

This would mean that EdX and Coursera no longer need specific licenses for Iranian students to participate in courses taught by accredited institutions other than certain advanced STEM courses. However, licenses will still be required to initiate Cuban and Sudanese students into the intricacies of George Eliot’s Middlemarch or the structure of French symbolist poetry. (It is well known that familiarity with Eliot and Valéry are mere stepping stones to terrorist and anti-American activity, so we will be safe from literary Cuban and Sudanese terrorists, at least for the moment.) This General License, however, probably has no effect on the “Flight Vehicle Aerodynamics” course, because although it is far from clear what is meant by STEM courts “ordinarily required for the completion of undergraduate degree programs in the humanities, social sciences, law, or business,” it is probably safe to assume that “Flight Vehicle Aerodynamics” is not among them.

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Mar

24

Issuing Credit Cards to Russian Oligarchs Again: Priceless


Posted by Clif Burns at 5:05 pm on March 24, 2014
Category: OFACRussia DesignationsRussia Sanctions

SMP Bank Credit Cards via http://smpbank.ru/uploads/show/c20c2f8bd8d7d2550bdd3b4c38bbdd00839d8fd2.jpg [Fair Use]Last week, this blog reported that the effect of the Russia sanctions was, at least in certain instance, the imposition of sanctions on certain parties not named in the designation lists. This would occur due to OFAC’s rule that treats entities not named in specific designation orders as blocked if the unnamed entity is owned 50 percent or greater by parties blocked in a designation order (or as a result of the 50 percent rule). In this regard, we noted that SMP Bank in Russia was blocked because of the ownership interests of Arkady and Boris Rotenberg in the bank. Both Rotenbergs were specifically named in designation orders. As a result, MasterCard and Visa stopped allowing their credit cards to be processed through SMP Bank.

Well, today Visa and MasterCard had a change of heart and permitted SMP Bank to continue serving its Russian oligarchs and other customers. Although details of this change of heart are scarce, this blog has learned that the reason for this has to do with informal guidance from OFAC. Since neither Arkady nor Boris Rotenberg individually hold 50 percent or greater in SMP Bank, their interests are not aggregated merely because of their family relationship. This does not, however, preclude OFAC from adding SMB Bank by name to a future designation list based on the participation and control of the brothers Rotenberg.

So, for the moment at least, oligarchs can go back to charging their purchases of Almas Beluga caviar once again.

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Mar

21

Beware the Fifty Percent Rule


Posted by Clif Burns at 6:15 pm on March 21, 2014
Category: Russia Designations

Central Branch, Bank Rossiya via http://web.abr.ru/moscow/office/4375/ [Fair Use]One of the challenges in compliance with the requirement to refrain from doing business with individuals and entities sanctioned under the new Russian sanctions (or any other sanctions program for that matter) is dealing with the so-called 50 percent rule used by the Office of Foreign Assets Control in enforcing sanctions programs. Under that rule, any entity controlled by a designated individual or entity, or in which a designated entity or individual owns a 50 percent or greater interest, is itself deemed to be designated. Even though this entity is not specifically named or designated, the effect of this rule is to require U.S. persons to block its assets and to refrain from engaging in transaction with this entity.

That means, of course, that compliance requires you to  trace all the way up the ladder the ownership structure of any entity with which you are doing business to assure that a designated party does not have an ownership interest that would cause the entity you are dealing with to also be subject to sanctions. The designated entity could be three or more layers up, and as long each company in the chain has at least 50 percent of the company below, the bottom layer company will also be designated.

With that principal in mind, it is not surprising that the new Russia/Ukraine designations have effectively designated parties not actually appearing by name on the lists of sanctioned parties. The first such instance I’ve discovered is Sobinbank which is owned by Rossiya Bank. The second is SMP Bank which is owned by Arkady and Boris Rotenberg, both of whom were named as individuals covered by the Russia sanctions.

Both Visa and Mastercard have cut off dealings with both Sobinbank and SMP Bank because of their connections to individuals and entities designated under the Russia sanctions.

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