On May 8, 2022, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued a Determination in accordance with Executive Order (EO) 14071 (April 6, 2022) (the Determination) which prohibits the export, re-export, sale or supply (directly or indirectly) of any accounting, trust and business formation, or management consulting services (Covered Services) to any person located in Russia . This prohibition applies to all US persons (wherever located) and all persons located in the United States (regardless of nationality).
As discussed in our customer alert of April 7, 2022, the EO established both a ban on all new investment in Russia and a ban on the provision of certain services to be identified by OFAC. The determination implements the sections of the OE that target the services. In consultation with the Department of State, OFAC may exercise its authority under the EO to prohibit additional services in the future.
I. SERVICES COVERED
The decision limits the provision of the following covered services to persons located in Russia:
Accounting services: This includes services related to the measurement, processing and evaluation of financial data on economic entities.1
Trust and business formation services: this includes services relating to assisting individuals in the formation or structuring of legal persons, such as trusts and corporations; act or cause others to act as directors, secretaries, administrative trustees, fiduciary trustees, registered agents or registered shareholders of legal entities; provide a registered office, a business address, a mailing address or an administrative address for legal persons; and the provision of administrative services for trusts. Please note that all of these activities are standard activities of trust and corporate service providers, although they may be provided by other persons.2
Management consulting services: this includes services related to strategic business advice; organizational and system planning, assessment and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions and organizational structure; staff augmentation and human resource policies and practices; and brand management.3
OFAC targeted these covered services because Russian elites relied on these US services to set up front companies, reallocate resources, and hide assets from sanctioning authorities. It is also clear that Russian companies, including state-owned companies, have used these services to operate and generate revenue, much of which supports Russia’s war in Ukraine. It is for this reason that the UK implemented a very similar service ban on May 4, 2022.
II. EFFECTIVE DATE AND GENERAL LICENSES
This ban goes into effect on June 7 at 12:01 a.m. Eastern Daylight Time. However, OFAC has issued General License 34which authorizes until July 7 at 12:01 a.m. Eastern Daylight Time, all transactions usually incidental and necessary to the liquidation of the accounting, trust and incorporation, or management consulting services that were in progress at the time of publication of the decision.
OFAC has also issued General License 35which allows transactions usually incidental and necessary to the provision of credit rating or auditing services in Russia until August 20, 2022. In this context, “credit rating services” means services related to credit ratings ability of a borrower to meet its financial commitments, including analysis of creditworthiness generally or with respect to a specific debt or financial obligation.4 The term “auditing services” means the examination or inspection of business records by an auditor, including verification of accounts, statements, or other representation of the auditee’s financial condition or regulatory compliance.5
The determination contains two exclusions. First, Covered Services may be provided to entities in Russia that are owned or controlled (directly or indirectly) by a US Person. Second, Covered Services may be provided in connection with the liquidation or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person.
IV. NEW BLOCKING SANCTIONS
OFAC issued a second determination authorizing blocking penalties for anyone (including non-US persons) who operates or has operated in the accounting, trust, and business formation and management consulting sectors of the Russian economy. This determination was issued by OFAC pursuant to Section 1(a)(i) of Executive Order 14024, which authorizes OFAC to impose blocking penalties, after consultation with the U.S. Department of State, on any person operating in sectors of the Russian economy to be identified by OFAC and the State Department. Accordingly, non-U.S. persons and entities that provide covered services to persons in Russia may be designated on the Specially Designated Nationals and Blocked Persons List (“SDN List”). The impact of such a designation is that all property and proprietary interests of the designated party in US jurisdiction or in the possession of a US person are blocked (frozen). Further, US Persons are strictly prohibited from dealing with the Designated Party. These sanctions apply not only to the party named on the SDN list, but also to any entity owned 50% or more by the named party.
In addition to the two rulings issued on May 8, 2022, OFAC has designated numerous individuals and entities to the SDN List. These include board members of two of Russia’s largest banks, Sberbank and Gazprombank; a Russian public bank, Moscow Industrial Bank (and 10 of its subsidiaries); a state-backed arms manufacturer, Promtekhnologiya; and three of Russia’s state-controlled television channels that generate revenue for the state, Channel One Russia, Television Station Russia-1 and NTV Broadcasting Company.
Donald W. Smith contributed to this article
1 See FAQ 1034.
4 See FAQ 1035.