US Bans Accounting, Trust, Company Formation and Management Consulting Services and Imposes Export Restrictions to Russia | Dorsey & Whitney LLP

The United States announced a new round of economic sanctions against Russia that builds on existing sanctions and extends them to new sectors of the Russian economy. The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced the new sanctions on May 8, 2022. First, effective June 7, 2022, it will be illegal to provide accounting, trust, and business formation, and management consulting services from the United States or by American persons located anywhere else in Russia. Second, OFAC laid the groundwork for imposing future additional sanctions on individuals who continue to operate in these three sectors of the Russian economy after May 8, 2022. Third, OFAC added dozens of entities, of individuals and cargo ships affiliated with Russian companies for its Specially Designated Nationals and Blocked Persons List (“SDN List”). At the same time, OFAC issued three General Licenses (“GLs”) to allow for the phasing out of certain transactions affected by these new prohibitions. Finally, on May 9, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) separately issued a new rule that significantly expands the variety of industrial products subject to export license restrictions. when the destination is Russia.

OFAC New Actions

OFAC issued two rulings under Executive Orders (“EO”) 14024 and 14071, both of which relate to accounting, trust and business formation services, and management consulting services. The U.S. Departments of State and Treasury made these decisions after finding that these sectors were contributing to the ongoing emergencies President Biden declared with respect to Russia under the Economic Powers Act of International Emergency (“IEEPA”) and therefore justified the imposition of new economic sanctions. In August 2021, President Biden issued EO 14024, which authorized the US Secretary of the Treasury to issue rulings that subject individuals operating in certain sectors of the Russian economy to potential sanctions designations due to the aggression. of Russia and its efforts to undermine the security of countries. and areas important to the national security of the United States. As part of this two-step process, OFAC then has the authority to target specific individuals operating in the sectors subject to sanctions determinations. President Biden had also issued EO 14071 in April 2022 following Russia’s expanded invasion of Ukraine, which authorizes OFAC to ban the supply of “any category of services” from the United States. or by U.S. persons to anyone in Russia.

As a result of this latest OFAC ruling under EO 14071, effective June 7, 2022, U.S. persons will no longer be able to export, directly or indirectly, accounting, trust, and incorporation services. , and management consulting to Russia. However, this prohibition does not apply to companies in Russia that are owned or controlled by US companies, nor does it apply to liquidation transactions to terminate or divest existing business dealings with Russia. In addition, OFAC has issued GL 35 to authorize transactions usually incidental and necessary to the export by or from the United States of credit rating or auditing services to any person in Russia until to August 20, 2022.

Under EO 14024, the Treasury Department has determined that Russia’s accounting, trust and business formation, and management consulting sectors may be subject to future sanctions designations. This determination allows for future sanctions designations by OFAC against specific companies or individuals operating in these industries, which could include full blocking sanctions under the SDN List or other less restrictive prohibitions. Under this EO 14024 decision, OFAC could potentially impose future sanctions on non-Russian persons, including international accounting and consulting firms, should they continue to operate in these sectors of the Russian economy after the May 8, 2022.

OFAC also added 22 entities, 33 people and 69 freighters to its SDN list. Some of these sanctioned entities and individuals are associated with other entities already subject to US sanctions (including 27 Gazprombank board members). The sanctioned Russian vessels belong to sanctioned persons already on the SDN list. Newly sanctioned entities include three major Russian state-owned media outlets: Channel One Russia, Television Station Russia-1 and NTV Broadcasting Company.

OFAC has also issued several GLs to allow certain transactions to continue that would otherwise be subject to the new prohibitions. GL 33 authorizes the winding down of operations under existing contracts with the three newly sanctioned Russian media companies until 12:01 a.m. EDT June 7, 2022. (OFAC amended GL 25A to clarify that authorization for certain telecommunications and communications related Internet-based companies does not extend to transactions with the three newly sanctioned Russian media companies mentioned above). GL 34 allows the phasing out of services to Russia that are in the three sectors subject to the EO 14071 ban with the same June 7 deadline as GL 33. As mentioned above, GL 35 allows the provision of rating services credit and audit to Russia until 12:01 a.m. EDT August 20, 2022. Each of these GLs contains specific limitations that require careful reading to ensure compliance with OFAC rules.

New definitions of Russian accounting, trust and business formation, and management consulting services

OFAC has also published Frequently Asked Questions (“FAQs”) that provide additional detail on how OFAC defines accounting, trust and business formation, and management services. These definitions apply both to the prohibition on the supply of services from the United States or by American persons, which takes effect on June 7, 2022, and to the determination of the Russian economic sectors which have been subject to of potential sanctions starting May 8. 2022. Anyone operating in these sectors in Russia after May 8, 2022 could become such a target of OFAC sanctions without notice, for example by being added to the SDN list.

OFAC has provided the following three definitions.

  • Accounting sector includes the measurement, processing and transfer of financial data about economic entities.
  • Fiduciary and Incorporation Services Sector includes assisting individuals in the formation or structuring of legal persons, such as trusts and corporations; act or cause another person to act as directors, administrative secretaries and trustees, fiduciary trustees, registered agents or registered shareholders of legal persons; 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.
  • Management Consulting Sector includes strategic advice; organizational and system planning, assessment and selection; marketing objectives and policies; mergers, acquisitions and organizational structure; staff augmentation and human resource policies and practices; and brand management.

New BRI rule.

The new BIS rule adds 478 different ten-digit Schedule B provisions (under 205 subheadings at the six-digit level) to Supplement No. 4 to Part 746 of the Export Administration Regulations (“EAR “). Supplement No. 4 contains a list of industrial products that require an export, re-export or in-country transfer license when the destination is Russia. BIS has a policy of refusing license applications for items on this list in Supplement No. 4, unless the item is required for health, safety or humanitarian purposes.

This BRI rule aligns EAR export sanctions against Russia with allied efforts. The list includes a wide range of machinery and equipment that are already subject to EU export restrictions due to Russia’s aggression against Ukraine. The BIS Rule also adds new Schedule B codes and descriptions to Supplement No. 4 to make it more user-friendly for members of the trading community who may be more accustomed to the ten-digit system used for Schedule B and Schedule B. Harmonized Tariff Schedule of the United States (“HTSUS”) for US import duties.

The BRI’s expanded adoption and use of these Schedule B numbers is a clear signal that the administration intends to introduce more and more non-strategic industrial products that are not normally subject to controls. export under the Trade Control List (“CCL”) of the EAR in the BIS licensing system if the destination is Russia. This steady escalation of export controls by the BRI therefore reflects how OFAC is gradually imposing economic sanctions on other sectors of the Russian economy, which will continue to erode the normal functioning of industry and commerce. Russian forces and thus increase the economic cost of the Russian war. in Ukraine.

Conclusion

Many major international companies have already suspended or ceased their dealings with Russia due to US and allied sanctions or reputational issues from Russia’s brutal war in Ukraine. As a result of these latest actions by OFAC and the BIS, certain service providers and goods exporters who still do business in Russia must now consider the new general sanctions imposed on the export of services and goods to Russia, which which could affect their ability to continue to operate under any existing contracts or commitments.

OFAC and the BRI imposed these sanctions after imposing several rounds of prior sanctions against Russia and Belarus, which we have summarized here, here, here, hereand here. As with previous rounds, the Biden administration passed these sanctions in concert with similar actions by the European Union, the United Kingdom and other allies. Although the United States has not yet imposed a full trade embargo on Russia under US law of the type imposed on Cuba or Iran, these new sanctions described above will certainly further reduce the scope remaining business relationships with Russia that are permitted under U.S. law.