US-OFAC sanctions affect Swiss companies

Cross Border, Trade Compliance, Export controls, Sanctions, Embargos

The US-OFAC sanctions on Russia have basically unlimitied extraterritorial reach and can affect Swiss companies.

A. How are Swiss companies affected?

On April 6, 2018, the US Office of Foreign Assets Control (OFAC) of the U.S. Treasury Department used its sanctions law and executive orders to target the Russian economy and Russian business representatives in Europe: Seven prominent Russian businessmen, twelve companies, seventeen high-ranking Russian government officials, a state Russian arms trading company and its subsidiaries were all placed on the US sanctions list.

It is important to consider that some of the listed persons and companies (SDNs) hold shares in Swiss companies. This has very concrete consequences for these companies, because the so-called primary US sanctions do not only directly affect the sanctioned persons and companies, but also those non-US companies that are controlled by these sanctioned persons or companies (shareholding >50%).

From now on, all US persons (companies, green card holders, residents) are prohibited from doing business with the newly listed SDNs or with companies controlled by the SDNs. Any funds or property of such SDNs shall be blocked with immediate effect and reported to OFAC.

This affects not only the sanctioned companies and their controlled entities, but indirectly all business partners, such as Swiss companies. A business partner of a sanctioned company runs the risk of being sanctioned if business relations with sanctioned companies are maintained, even if there is no direct link to the USA. (see also the Background section below for additional information).

B. What to do?

Swiss companies should consider the following questions in order to assess and minimise their own risk:

  • Screen all business partners to identify if they are on the sanctions lists
  • Check shareholder/owner structure of business partner related to SDNs to exclude that they own or control a share>50%, subjecting the majority-owned business to OFAC sanctions. Develop a strategy to deal with sanctioned business partners or entities;
    • Determine the extent and type of business relationship;
    • Seek legal counsel regarding the modification or cessation of contractual relationships (we hope you have clear contract clauses for such cases!)
    • Plan how to communicate the situation with authorities, internal stakeholders and shareholders;
    • Determine whether sanction compliance can be improved through greater monitoring of regulatory changes, the development of an action plan and / or allocating for such events in future legal agreements.

C. Background information

Russia's sanctions are based on the Countering America's Adversaries Through Sanctions Acts (CAATSA). This was adopted by Congress in August 2017. Executive Orders 13662 and 13661 gave the President the right to sanction other non-US persons who perform significant transactions with SDNs or provide certain types of support for SDNs, including:

  • acting directly or indirectly for or on behalf of any of the sanctioned parties or pretending to act; or
  • material support, sponsorship or provision of financial, material or technological assistance for goods or services to support one of the sanctioned parties.
  • knowingly engaging in a significant transaction or transactions, including misleading or structured transactions, for or on behalf of a person subject to US sanctions in relation to the Russian Federation or enabling a child, spouse, parent or sibling of such sanctioned persons. (see 228 CAATSA)
  • knowingly facilitating a "significant financial transaction on behalf of a Russian person" that is on the SDN list under the Russian and Ukrainian sanctions programme. (see 226 CAATSA)

These sanctions do not only apply to US persons: In the past, the US has often claimed jurisdiction over non-US persons, based on a US nexus of the transaction. Under CAATSA, the secondary sanctions go even further: the US authorities are authorized to also penalize non-US companies if they conduct significant transactions with sanctioned persons, even if these transactions are not related to the US at all. A definition of the term "significant" is also not conclusively defined in the OFAC FAQ on sanctions in Russia and leaves companies unclear as to what constitutes a “significant transaction”.

The MME Compliance Team supports companies in the implementation of tailored internal compliance programs (ICP) to meet the challenges of the increasingly complex trade compliance world. Our experts are happy to support you in complying with national and international sanctions, export controls or customs management.

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