September 29, 2017: OFAC updates Russian sectoral sanctions

Last Friday, in line with the CATS Act (actually, a specific sub-section targeted at the Ukraine/Russia-related sanctions program), OFAC issued updated Directives 1 and 2 (which implement the changes in the securities subject to restrictions), as well as an updated FAQ. The Notice notes that some of the changes in the amended Directives are not effective until November 28th.

Here are the modified FAQs:

370. What do the prohibitions in Directives 1 and 2 mean? Are they blocking actions? 

The sectoral sanctions imposed on specified persons operating in sectors of the Russian economy identified by the Secretary of Treasury were done under Executive Order 13662 through Directives issued by OFAC pursuant to its delegated authorities. Directive 1, as amended on September 29, 2017 in accordance with the Countering Russian Influence in Europe and Eurasia Act of 2017 (CRIEEA) (Pub. L. 115-44, title II), prohibits transacting in, providing financing for, or otherwise dealing in debt of specified tenors or equity if that debt or equity was or is issued on or after the relevant sanctions effective date (“new debt” or “new equity”) by, on behalf of, or for the benefit of the persons operating in Russia’s financial sector named under Directive 1, their property, or their interests in property.  The relevant tenors of prohibited debt are noted in the table below.

Period when the debt was issued

Applicable tenor of prohibited debt

On or after July 16, 2014 and before September 12, 2014

Longer than 90 days maturity

On or after September 12, 2014 and before November 28, 2017

Longer than 30 days maturity

On or after November 28, 2017

Longer than 14 days maturity

There were two prior versions of Directive 1, which were issued on July 16, 2014 and September 12, 2014, and which were superseded by the September 29, 2017 version of Directive 1.  The prior versions of Directive 1 prohibited the same activities, but involving debt of longer than 90 days maturity (July 16, 2014 version) and 30 days maturity (September 12, 2014 version) or equity if that debt or equity was issued on or after the date a person was determined to be subject to Directive 1.   

Directive 2, as amended on September 29, 2017 in accordance with CRIEEA, prohibits transacting in, providing financing for, or otherwise dealing in new debt of specified tenors by, on behalf of, or for the benefit of the persons operating in Russia’s energy sector named under the Directive 2, their property, or their interests in property.  The relevant tenors of prohibited debt are noted in the table below.

Period when the debt was issued

Applicable tenor of prohibited debt

On or after July 16, 2014 and before November 28, 2017

Longer than 90 days maturity

On or after November 28, 2017

Longer than 60 days maturity

There were two prior versions of Directive 2, which were issued on July 16, 2014 and September 12, 2014, and which were superseded by the September 29, 2017 version of Directive 2.  The prior versions of Directive 2 prohibited the same activities, but involving debt of longer than 90 days maturity if that debt was issued on or after the date a person was determined to be subject to Directive 2.

These actions pursuant to Directives 1 and 2 prohibit transactions by U.S. persons as defined in E.O. 13662, wherever they are located, and transactions within the United States. This action does not require U.S. persons to block the property or interests in property of the entities identified in the Directives, nor will persons identified in Directives 1 and 2 be added to the Specially Designated Nationals (SDN) List. U.S. persons should reject transactions or dealings that are prohibited by Directives 1 or 2, and to the extent required by Section 501.604 of the Reporting, Procedures and Penalties Regulations (31 C.F.R. part 501), U.S. persons must report to OFAC any rejected transactions within 10 business days. [9-29-2017]


371. What does OFAC interpret to be debt and equity? Are there other prohibited activities under Directives 1, 2, and 3? Can U.S. financial institutions continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the entities subject to these Directives? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.  

The term debt includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. The term equity includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.

The prohibitions in Directive 1 apply to all transactions involving new debt with a maturity of longer than 30 days or new equity; all financing in support of such new debt or new equity; and any dealing in, including provision of services in support of, such new debt or new equity. 

The prohibitions in Directive 2 apply to all transactions involving new debt with a maturity of longer than 90 days; all financing in support of such new debt; and any dealing in, including provision of services in support of, such new debt. 

The prohibitions in Directive 3 apply to all transactions involving new debt with a maturity of longer than 30 days; all financing in support of such new debt; and any dealing in, including provision of services in support of, such new debt. 

All the prohibitions in these Directives extend to rollover of existing debt, if such rollover results in the creation of new debt with a maturity of longer than 30 days (for persons subject to Directives 1 or 3) or longer than 90 days (for persons subject to Directive 2). 

Transacting in, providing financing for, or otherwise dealing in any debt or equity issued by, on behalf of, or for the benefit of persons subject to Directives 1, 2, or 3 is permissible, if the debt or equity was issued prior to the date on which the person was determined to be subject to the relevant Directive. In addition, transacting in, providing financing for, or otherwise dealing in debt instruments with maturities of 30 days or less (issued by, on behalf of, or for the benefit of persons subject to Directives 1 or 3) or 90 days or less (issued by, on behalf of, or for the benefit of persons subject to Directive 2), even if they are issued after the sanctions effective date, is permissible. Transacting in, providing financing for, or otherwise dealing in new equity instruments of persons subject to Directives 2 and 3 is permissible. U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the persons subject to the Directives, so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in transaction types prohibited by these Directives. 

On September 12, 2014, OFAC amended and reissued Directive 1, changing the allowable maturity of debt instruments issued by, on behalf of, or for the benefit of persons subject to Directive 1 from longer than 90 days to longer than 30 days. Transacting in, providing financing for, or otherwise dealing in debt with maturity of 90 days or less issued by, on behalf of, or for the benefit of the persons identified under Directive 1 is not prohibited if such debt instruments were issued prior to September 12, 2014, and the terms of such instruments do not change subsequently (see FAQ 394 for additional detail on what constitutes the changing of terms). Rollovers of such instruments must comply with the 30-day maturity limit imposed on September 12, 2014. [9-29-2017]

394. If a U.S. person entered into a revolving credit facility or long-term loan arrangement for a person determined to be subject to Directives 1, 2, or 3 prior to the sanctions effective date, what are the restrictions on drawdowns from that facility? Do all drawdowns and disbursements pursuant to the parent agreement need to carry repayment terms of 30 days or less (for persons subject to Directives 1 and 3) or 90 days or less (for persons subject to Directive 2)? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

If a U.S. person entered into a long-term credit facility or loan agreement prior to the sanctions effective date, drawdowns and disbursements with repayment terms of 30 days or less (for persons subject to Directives 1 and 3) or 90 days or less (for persons subject to Directive 2) are permitted. Drawdowns and disbursements whose repayment terms exceed the applicable authorized tenor are not prohibited if the terms of such drawdowns and disbursements (including the length of the repayment period, the interest rate applied to the drawdown, and the maximum drawdown amount) were contractually agreed to prior to the sanctions effective date and are not modified on or after the sanctions effective date. U.S. persons may not deal in a drawdown or disbursement initiated after the sanctions effective date with a repayment term of longer than 30 days (for persons subject to Directives 1 and 3) or 90 days (for persons subject to Directive 2), if the terms of the drawdown or disbursement were negotiated on or after the sanctions effective date. Such a newly negotiated drawdown or disbursement would constitute a prohibited extension of credit. [9-29-2017] 


395. Do Directives 1, 2, and 3 prohibit U.S. persons from dealing in or processing transactions under a letter of credit that was issued on or after the sanctions effective date and that carries a term of longer than 30 days maturity (for Directives 1 and 3) or 90 days maturity (for Directive 2) when the beneficiary or the issuing bank of that letter of credit is one of the entities identified as subject to the Directives? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

U.S. persons may deal in (including act as the advising or confirming bank or as the applicant (i.e., the purchaser of the underlying goods or services)) or process transactions under a letter of credit in which an entity subject to Directive 1, 2, or 3 is the beneficiary (i.e., the exporter or seller of the underlying goods or services) because the subject letter of credit does not represent an extension of credit to the SSI entity. U.S. persons may deal in (including act as the advising or confirming bank or as the applicant or beneficiary) or process transactions under a letter of credit where the issuing bank is an SSI entity provided that the terms of all payment obligations under the letter of credit conform with the debt prohibitions under the applicable Directives. For example, a U.S. bank acting as the negotiating bank for a letter of credit issued by an SSI entity subject to Directive 1 should ensure that it receives reimbursement from the SSI entity within the allowable 30-day debt limit. 

U.S. persons may not deal in (including act as the advising or confirming bank or as the beneficiary) or process transactions under a letter of credit if all of the following three conditions are met: (1) the letter of credit was issued on or after the sanctions effective date, (2) the letter of credit carries a term of longer than 30 days maturity (for persons subject to Directives 1 and 3) or 90 days maturity (for persons subject to Directive 2), and (3) an SSI entity is the applicant of the letter of credit. This would constitute prohibited activity because the subject letter of credit would represent an extension of credit to the SSI entity. [9-29-2017]

405. Does the prohibition on “otherwise dealing in new debt” of longer than 30 days maturity (for persons subject to Directives 1 and 3) or 90 days (for persons subject to Directive 2) of SSI entities, their property, or their interests in property prohibit dealing in debt with maturity that exceeds the applicable authorized tenor in which the SSI entity is not directly or indirectly the borrower? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

Directives 1 and 3 prohibit U.S. persons from dealing in debt of longer than 30 days maturity and Directive 2 prohibits U.S. persons from dealing in debt of longer than 90 days maturity issued on or after the sanctions effective date in cases where the new debt is issued by an SSI entity subject to these Directives. Directives 1, 2, and 3 do not prohibit U.S. persons from dealing with an SSI entity as counterparty to transactions involving debt issued on or after the sanctions effective date by a non-sanctioned party. For example, U.S. persons are not prohibited from dealing in a loan exceeding the applicable authorized tenor that is issued after the sanctions effective date of sanctions provided by an SSI entity to a non-sanctioned third-party, dealing with an SSI entity who is the underwriter on new debt of a non-sanctioned third party exceeding the applicable authorized tenor, or accepting payment under a letter of credit with terms exceeding the applicable authorized tenor that is issued, advised, or confirmed by an SSI entity, so long as the SSI entity is not the borrower. [9-29-2017]

408. Is a U.S. person permitted under Directives 1, 2, or 3 to extend credit for greater than 30 days (for persons subject to Directives 1 or 3) or 90 days (for persons subject to Directive 2) to a non-sanctioned party for the purpose of purchasing goods or services from a person subject to Directives 1, 2, or 3? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

Directives 1, 2, and 3 do not prohibit U.S. persons from extending credit for longer than 30 days (for persons subject to Directives 1 or 3) or 90 days (for persons subject to Directive 2) to non-sanctioned parties for the purpose of purchasing goods or services from an SSI entity, so long as the SSI entity is not the indirect borrower. [9-29-2017] 


409. If a person determined to be subject to Directives 1, 2, or 3 makes successive draws under a short-term facility created after the sanctions effective date (e.g., it borrows $100 million with a 15-day maturity, then at the end of the 15 days, the debt “rolls over”), does the facility become prohibited if the SSI borrower makes successive short-term borrowings that cumulatively add up to more than 30 days (for persons subject to Directives 1 or 3) or 90 days (for persons subject to Directive 2)? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

Two conditions must be met for short-term facilities created after the sanctions effective date to be permissible. As long as (1) each individual disbursement has a maturity of 30 or 90 days or less (depending on the applicable Directive) and the disbursement is paid back in full before the next disbursement and (2) the lender is not contractually required to roll over the balance for a cumulative period of longer than 30 or 90 days (depending on the applicable Directive) at the borrower’s request (i.e., it has the option to refuse the request for a new short-term loan and terminate the facility), the loan is not prohibited, even though the same borrower may obtain a series of short-term loans from the same lender over a cumulative period exceeding 30 or 90 days (depending on the applicable Directive). U.S. persons may not deal in a drawdown or disbursement initiated after the sanctions effective date with a repayment term of longer than the applicable authorized tenor if the terms of the drawdown or disbursement are negotiated or re-negotiated on or after the sanctions effective date. Such a newly negotiated drawdown or disbursement would constitute a prohibited extension of credit. [9-29-2017]


410. Are U.S. persons prohibited from entering into new contracts after the sanctions effective date with persons subject to Directives 1, 2, or 3 that provide payment terms to the SSI entities of greater than 30 days (for persons subject to Directives 1 or 3) or 90 days (for persons subject to Directive 2)? For instance, if a U.S. person agrees to sell shares or assets to an SSI entity in a corporate transaction that becomes effective on or after the sanctions effective date, is the U.S. person prohibited from agreeing to deferred purchase payments, even if no interest is involved, that may be paid more than the permissible number of days later by the SSI entity? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

Directives 1 and 3 prohibit new extensions of credit to SSI entities of greater than 30 days maturity and Directive 2 prohibits new extensions of credit to SSI entities of greater than 90 days maturity, and these prohibitions include deferred purchase agreements extending payment terms of longer than 30 days or 90 days (depending on the applicable Directive) to an SSI entity. Such agreements would constitute a prohibited extension of credit to an SSI entity if the terms were longer than the permissible number of days and the agreement was entered into on or after the sanctions effective date. OFAC does not consider the inclusion of an interest rate to be a necessary condition for establishing whether a transaction represents new debt. [9-29-2017] 

415. For persons determined to be subject to multiple Directives, how do the prohibitions and exemptions listed under one Directive affect prohibitions and exemptions under the other Directives? 

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

Each Directive operates independently of the others. If a transaction involves a person subject to two Directives, for example, a U.S. person engaging in that transaction must comply with the requirements of both Directives. Exemptions in one Directive apply only to the prohibitions contained in that Directive and do not carry over to another Directive. For example, if a person is subject to both Directive 2 and Directive 4, the exemption for the provision of financial services by U.S. persons or in the United States under Directive 4 does not supersede the prohibition in Directive 2 on dealing in debt of longer than 90 days maturity of such a person. For these reasons, when OFAC references a prohibition involving an “SSI entity” in these FAQs or in other guidance, it is referring to an entity subject to the Directive(s) at issue in a particular FAQ or piece of guidance. [9-29-2017]

419. How should U.S. persons account for the 30- and 90-day debt prohibitions under Directives 1, 2, and 3 as they relate to payment terms for the following types of transactions: (1) the sale of goods to an SSI entity, (2) the provision of services to and subscription arrangements involving SSI entities, and (3) progress payments for long-term projects?

Note:  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017.  For additional information regarding what the amended Directives prohibit, see FAQ 370.

U.S. persons may engage in commercial transactions with SSI entities provided that any such transactions do not represent a direct or indirect dealing in prohibited debt or equity. Because offering payment terms of longer than 30 or 90 days to an SSI entity generally constitutes a prohibited dealing in debt of the SSI entity, U.S. persons should ensure that payment terms conform with the applicable debt prohibitions. For sales of goods to an SSI entity, U.S. persons may extend payment terms of up to 30 or 90 days from the point at which title or ownership of the goods transfers to the SSI entity. For the provision of services to, subscription arrangements involving, and progress payments for long-term projects involving SSI entities, U.S. persons may extend payment terms of up to 30 or 90 days from the point at which a final invoice (or each final invoice) is issued. Payments made under these types of payment terms should utilize a value date of not later than 30 or 90 days from either the point at which title or ownership has transferred (for payments relating to sales of goods) or the date of each final invoice (for payments relating to services, subscription arrangements, and progress payments). In the event that a U.S. person believes that it may not receive payment in full by the end of the 30- or 90-day period, the U.S. person should contact OFAC to determine whether a license or other authorization is required. [9-29-2017]

Links:

OFAC Notice

Directive 1

Directive 2

FAQ

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