Introduction

1. On 6th April 2018 the United States Office of Foreign Asset Affairs (“OFAC”) extended the US Specially Designated Nationals List (“SDN List”) to 7 leading Russian oligarchs (Vladimir Bogdanov, Oleg Deripaska, Suleiman Kerimov, Igor Rotenberg, Kirill Shamalov, Andrei Skoch and Viktor Vekselberg) and their children, spouses, parents and siblings, 12 companies and 17 senior Russian government entities.  A number of these oligarchs are heavily involved in the energy sector.  

1. On 23rd April OFAC issued two General Licenses Nos. 12A and 14 which were designed to ameliorate some of difficulties which must have arisen from the sanctions, especially with United Company Rusal. On 6th April OFAC had previously issued General Licenses Nos. 12 and 13.  Further General Licenses may follow in response to particular problems.

1. The sanctions have already given rise to various issues in relation to the performance of contracts governed by English law: for example, whether any force majeure or other contractual provisions can be invoked (and if so when) or whether such contacts are now tainted by illegality, especially where payment is effected by US dollar remittances through the United States banking system.   Advice in relation to the effect of the sanctions is not assisted by the somewhat opaque statutory language.   The true construction and impact of the relevant legislation is obviously governed by United States law.  Guidance is available from the OFAC website where “Frequently Asked Questions” are purportedly answered.   The purpose of this Note is to highlight some of the issues which might arise for the purpose of advising clients.  

Who has been caught?

4. The SDN List was extended to cover the oligarchs identified above and designated oligarch-owned companies: Agroholding Kuban, Basic Element Ltd., B-Finance Ltd., EN+ Group PLC, Gaz Group, Gazprom Bureni OOO, JSC Eurosibenergo, Ladoda Menedzhment OOO, NVP Engineering Open Joint Stock Company, Renova Group, Russian Machines and United Company Rusal PLC.  It is said that EN+ Group, which owns a controlling stake of Rusal, and Rusal - one of the world's largest aluminium producers - are responsible for 7% of global aluminium.

5. On the basis of the Department of the Treasury’s “Revised guidance on entities owned by persons whose property and interests in property are blocked” dated 13^th August 2014, entities which are not on the SDN List can nevertheless be considered SDN entities if they are 50% or more owned by an entity on the SDN list (with further guidance where there may be a significant ownership interest less than 50%).   The Treasury’s statement provides as follows:

“Persons whose property and interests in property are blocked pursuant to an Executive order or regulations administered by OFAC (blocked persons) are considered to have an interest in all property and interests in property of an entity in which such blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest. Consequently, any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC's list of Specially Designated Nationals ("SDNs"). Accordingly, a U.S. person generally may not engage in any transactions with such an entity, unless authorized by OFAC. …..

U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest. Such entities may be the subject of future designation or enforcement action by OFAC. Furthermore, a U.S. person may not procure goods, services, or technology from, or engage in transactions with, a blocked person directly or indirectly (including through a third party intermediary).”

Extra Territorial Effect

6. On 2^nd August 2017 the President signed into law the Countering America’s Adversaries Through Sanctions Act 2017 (“CAATSA”) which, among other things, imposed new sanctions on Iran, Russia, and North Korea.   A significant feature of this regime is that it has extraterritorial effect.  Section 228 of CAATSA amended section 10 the Support for the Sovereignty, Integrity, Democracy and Economic Stability of Ukraine Act 2014 (“SSIDES”) by providing that the President could: 

“impose the sanctions described in subsection (b) with respect to a foreign person if the President determines that the foreign person knowingly on or after the date of the enactment of the Countering Russian Influence in Europe and Eurasia Act of 2017 ….

(b)   facilitates a significant transaction or transactions, including deceptive or structured transactions, for or on behalf of –

(A)       any person subject to sanctions imposed by the United States with respect to the Russian Federation; or

(B)       any child, spouse, parent or sibling of any individual described in subparagraph (A)”.  (added emphasis)

What is a “Significant Transaction”?

7. Guidance to this question can be found in OFAC’s FAQ 545:

“For purposes of section 10(a)(2) of SSIDES, OFAC will consider the totality of the facts and circumstances when determining whether transactions are “significant.” OFAC will consider the following list of seven broad factors that can assist in the determination of whether a transaction is “significant”: (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis.”

8. Furthermore, for purposes of section 10(a)(2) of SSIDES, a transaction is not significant if U.S. persons would not require specific licenses from OFAC to participate in it.

What is meant by “facilitates … for and on behalf of”?  

9. On one narrow view this might only mean a person cannot act in an agency capacity “for or on behalf of” any person subject to sanctions.  On this basis the section would not affect a transaction concluded with a sanctioned person or company.  However this is obviously not the view of OFAC (FAQ 545) and would be contrary to the policy considerations underlying the sanctions regime:

“For purposes of section 10(a)(2) of SSIDES, facilitating a significant transaction for or on behalf of a person will be interpreted to mean providing assistance for a transaction from which the person in question derives a particular benefit of any kind (as opposed to a generalized benefit conferred upon undifferentiated persons in aggregate). Assistance may include the provision or transmission of currency, financial instruments, securities, or any other value; purchasing, selling, transporting, swapping, brokering, financing, approving, or guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.” (added emphasis)

Transportation and Commodity Contracts

10. Accordingly facilitating includes the provision of transportation services (as well as sale and purchase).  Whether a particular agreement would represent a “significant transaction” will depend the factors identified by OFAC.   It has been suggested that a one-off contract involving no deceptive practice would perhaps not be considered “significant”, in contrast to a long term contract.[1]   However no specific guidance is given other OFAC’s FAQ 545.

General Licenses

11. The effect of the position is to some extent mitigated by the issuance of a number of General Licenses.

12. General License 12A dated 23^rd April 2018 replaced General License 12 and authorised all transactions ordinarily incident to the continuity of operations or to facilitate a wind down, by the sanctioned entities listed in General License 12A, or the provision of services by the employee to such blocked entities, until 5^th June 2018.  Under 12A(b), payments to or for the direct or indirect benefit of a sanctioned person must be made into a blocked account, except as authorised by General License 14 (see below).

13. General License 13 dated 6^th April 2018 authorised certain transactions necessary to divest or transfer debt, equity or other holdings in three SDNs (including Rusal) “to a non-US person”.

14. General License 14 dated 23^rd April provided that “all transactions and activities” which were otherwise prohibited “that are ordinarily incident and necessary to the maintenance or wind down of operations, contracts or other agreements …. involving RUSAL PLC or any other entity in which United Company RUSAL PLC owns, directly or indirectly, a 50 percent or greater interest and het were on effect prior to April 6 2018 are authorised through” to 23^rd October 2018.

15. In other words, transactions with RUSAL already in place at the date of the sanctions were given a period of 6 months to “unwind”.  Further General License 14(b) unblocked funds to be used “for maintenance or wind-down activities authorized by this general license.”

16. Thus General License 14 represents an important carve-out as far as Rusal transactions are concerned.

Effect on English Law Contracts

17. This will have to be worked out on a case-by-case basis by reference to any specific contractual provisions (i.e. force majeure or sanctions clauses).  There may also be questions as regards whether the effect of the US sanctions renders a contract subject to English law illegal and unenforceable.

18. The first question will be whether the particular transaction is caught by the US sanctions regime.  This will largely depend upon the construction and effect of the amendment to section 10 of SSIDES which will be a matter of US law.    However at the moment (and in the absence of more specific guidance) FAQ 545 provides guidance as to the likely approach to be adopted.          

19. The second question will be whether, even if the US sanctions regime is applicable, a contract governed by English law is rendered illegal and unenforceable by reference to an overseas statutory regime.  In Rallis Bros. v. Compania Naviera Sota y Aznar [1920] 2 KB 287 the Court of Appeal established a common law rule that where an act required by a contract to be performed in a foreign country becomes illegal under that country’s law, the contractual obligation to perform that act is discharged. Applying that principle, it was held that where under a contract governed by English law, charterers had agreed to pay freight in Spain to shipowners at a particular rate, and the Spanish government, after the conclusion of the contract, promulgated an order that freight should not exceed a fixed sum which was less than the agreed rate, the charterers were only obliged to pay the fixed rate rather than the agreed rate.

20. The principle was restated by Lord Collins in Ryder Industries Ltd v Chan (HKCFA: 17/11/2015) at [57].  A contract governed by English law will not usually be affected by illegality under some other system of law unless the contract to be performed involved “a sufficiently serious breach of foreign law which reflects important policies of the foreign state or separate law district may be such that it would be contrary to public policy to enforce a contract. But there is no basis in authority or principle for holding that every breach of foreign law would come into this category”.  

21. However the editors of the 4th Supplement to Dicey, Morris and Collins: The Conflicts of Laws (15th Ed) at para 32-102 suggest that there may be scope for adopting a flexible approach to the question whether a contract is tainted by illegality in the light of the decision of the Supreme Court in Patel v Mirza [2016] UKSC 42.   

22. Finally there are also wider commercial considerations.  Even if the contract governed by English law is not rendered unenforceable, a contractual party with interests or assets in the United States may nevertheless be (or feel) exposed.