When President Biden signed into law the April 24, 2024 National Security Package (H.R. 815), media outlets predominately focused their coverage on the long awaited United States (“US”) aid for Ukraine, Israel, and Taiwan that had been held up in Congress for months. However, this comprehensive piece of legislation also had numerous trade and sanctions-related provisions, including a significant amendment of the existing statute of limitations for the statutory bases of most US sanctions programs from 5 to 10 years. In this article, we examine another important sanctions-related provision hidden under “Other Matters” of Division G of H.R. 815, which requests the President to impose sanctions on individuals and entities (“persons”) that are already sanctioned under key Russia-related sanctions regulations of the European Union (“EU”) and the United Kingdom (“UK”), but not yet by the US. We also assess relevant compliance considerations for this forthcoming next wave of US sanctions.

Summary of the Legislation: H.R. 815, Division G, Section 1

Section 1(a), requires the President to first put together and submit a report to both the House and the Senate, no later than 90 days after the April 24th enactment (i.e., July 23, 2024), identifying all foreign persons (i.e., “non-US persons”) that are currently subject to sanctions issued by either the EU pursuant to EU Council Regulation No. 269/2014 (the “269/2014 Regulation”), as amended, or the UK pursuant to its Russia (Sanctions) (EU Exit) Regulations 2019, as amended, but that also meet the designation criteria of the following legal authorities administered by the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”):

• Global Magnitsky Human Rights Accountability Act (“Global Magnitsky Act”), 22 U.S.C. 10101 et seq.
• Executive Order (“E.O.”) 14024
• E.O. 14068
• E.O. 14071

Section 1(b) of Division G then provides that the President “may” impose sanctions authorized by the foregoing legal authorities on any foreign persons that were required to be identified in his report to Congress, who are not already subject to US economic sanctions programs as of the date of that report’s submission. Note that there may indeed be EU and/or UK sanctioned persons that are also already sanctioned by the US pursuant to other legal authorities (e.g., E.O. 13662 of OFAC’s Ukraine-/Russia-related Sanctions Program).

Although the imposition of such sanctions is not required under the legislation, it puts pressure on the President to do so because in practice if he doesn’t, he will have to be able to sufficiently explain the assessed gap between US sanctions and those of its key allies in relation to Russia. In short, except for some peculiar circumstance, expect the US government to designate every person identified in the President’s forthcoming report after July 23, 2024 on OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List. Any similar gaps between US sanctions and the UK and/or EU that may arise afterwards are not contemplated by H.R. 815.

Overview of the EU and UK Sanctions Regulations

UK Sanctions

The UK has imposed sanctions on Russia under the Russia (Sanctions) (E.U. Exit) Regulations 2019. One of the key sanctions restrictions is the “asset freeze”, which, broadly speaking, prohibits the provision of any funds or economic resources to persons that are designated (i.e., sanctioned) by the UK, and requires funds or economic resources of sanctioned entities and individuals to be frozen. This restriction also extends to entities that are “owned or controlled” by those who are sanctioned under this measure (even if such entities are not expressly named as sanctioned).

As to “ownership,” that includes entities owned more than 50 percent, whether individually or in the aggregate, by sanctioned persons. However, what is considered “control” is currently unsettled. The Court of Appeal has opined that any entity in which a sanctioned person “calls the shots” is itself sanctioned under the “control” test. Moreover, the Court of Appeal did not shy away from the corollary of that conclusion: given the UK’s designation of Russian President Putin, “the consequence might well be that every company in Russia was ‘controlled’ by Mr Putin and hence subject to sanctions.” [KM1] This case is currently on appeal to the UK Supreme Court. In the meantime, the UK’s Foreign, Commonwealth & Development Office issued a statement in which it, broadly speaking, stated that it does not consider every company incorporated in Russia as sanctioned via the Court of Appeal’s interpretation of “control”.

The bases on which the UK may designate a person are extremely broad. For example, a person may be sanctioned if:

• They are responsible for, engage in, provide support for, or promote any policy or action which destabilises Ukraine or undermines or threatens the territorial integrity, sovereignty or independence of Ukraine; or
• They are involved in obtaining a benefit from or supporting the Government of Russia, e.g., by carrying on a business of economic significance to the Government of Russia.

More than 2000 persons are currently designated under the UK’s Russia sanctions regime, and many others constructively sanctioned under the UK’s ownership and control rule. Interestingly, several high-profile individuals are sanctioned by the UK, but not by the US.

EU Sanctions

The EU’s 269/2014 Regulation (as amended) also imposes asset freeze restrictions that are similar to those imposed under the UK’s Regulations detailed above (including restrictions on entities that are “owned or controlled” by designated persons, subject to certain distinctions for the EU version of the rule), and can also be imposed on broad bases, for example on persons who:

• Support, materially or financially, or benefit from the Government of the Russian Federation, which is responsible for the destabilisation of Ukraine.
• Are leading businesspersons operating in Russia and their immediate family members, or other natural persons, benefitting from them, or businesspersons, legal persons, entities or bodies involved in economic sectors providing a substantial source of revenue to the Government of the Russian Federation, which is responsible for the annexation of Crimea and the destabilisation of Ukraine.

In total, asset freezes and travel bans have been imposed by the EU on over 1900 persons under the EU Russia sanctions, some of which have (like with the UK sanctions) not been sanctioned by the US. Many more are constructively sanctioned under the EU’s ownership and control rule. However, Division G of H.R. 815 is likely to significantly reduce these gaps.

Overview of Relevant OFAC Sanctions Programs

As detailed above, Division G of H.R. 815 contemplates 4 specific US legal authorities, which include the Global Magnitsky Act that is a statutory authority buttressing OFAC’s Global Magnitsky Sanctions Program, and 3 related Executive orders that comprise a significant part of the agency’s overall Russia Harmful Foreign Activities Sanctions Program. Persons designated on the SDN List under any of these authorities are subject to full blocking sanctions (i.e., “asset freezes” like the EU and UK), and US persons—i.e., US citizens, permanent residents, entities organized under the laws of the US (including their foreign branches), or any person in the US—are prohibited from engaging in virtually any transactions with them. There are other less restrictive lists administered as well by OFAC in relation to its Russia Harmful Foreign Activities Sanctions Program, and although H.R. 815 does not appear to contemplate them since there are no UK or EU equivalents, in theory they could be used for targeting EU/UK sanctioned persons by the US government.

Global Magnitsky Sanctions Program

E.O. 13818, issued in part pursuant to the Global Magnitsky Act, while also expanding on its designation criteria, authorizes the imposition of sanctions on foreign persons that are determined to be:

• Responsible for, complicit, or to have otherwise engaged in serious human rights abuse;
• Current or former government officials, and persons acting on their behalf, that are responsible for, complicit, or have otherwise engaged in corruption; or
• Leaders or officials of entities, including government entities, that have engaged or whose members have engaged in the foregoing conduct.

Like most US sanctions authorities, E.O. 13818 also includes the boilerplate “derivative” designation criteria to target persons who:

• Materially assist, sponsor, or provided financial, material, or technological support for, or goods or services to or in support of persons that are designated or blocked under E.O. 13818; or
• Are owned or controlled by, or that have acted or purported to act for or on behalf of, persons already designated or blocked under E.O. 13818.

Russian Harmful Foreign Activities Sanctions Program

The 3 Executive orders specifically referred to in Division G are E.O. 14024, E.O. 14068, and E.O. 14071. E.O. 14024 and the national emergency declared therein acts as the backbone of OFAC’s Russian Harmful Foreign Activities Sanctions Program, which has been the go-to authority for designating persons related to Russia since the full-scale invasion of Ukraine began in February 2022. E.O. 14024 possesses numerous and broad designation criteria. One such designation criteria—expanded by several later determinations—includes any persons determined by either the secretaries of Treasury or State to operate or have operated in the technology, defense, architecture, engineering, construction, manufacturing, transportation, metals and mining, quantum computing, accounting, trust and corporation formation services, management consulting, or financial services sectors of Russia’s economy.

Other examples of E.O. 14024’s designation criteria include persons determined to be involved in:

• Malicious cyber-enabled activities, election interference, and transnational corruption;
• Unlawful killings or bodily harm;
• Undermining the peace, security, political stability, or territorial integrity of the US or its allies/partners;
• Circumventing US sanctions; or
• Cutting or disrupting gas or energy supplies to Europe, the Caucasus, or Asia, who are also Russian individuals or entities.

While E.O. 14024 incorporates boilerplate “derivative” designation criteria, it also targets any persons who are:

• Leaders, officials, senior executive officers, or board members of the Government of the Russian Federation, or of an entity that has engaged in any of the foregoing activity; or
• Agencies or instrumentalities of the Government of the Russian Federation.

Executive orders 14068 and 14071 were issued after E.O. 14024 to take additional steps with respect to the national emergency initially declared therein. However, neither of those two orders possess any designation criteria for the imposition of sanctions on any persons, and are primarily related to the imposition of certain prohibitions related to imports, exports, and investment transactions. It remains unclear why they were included in Division G for purposes of the President’s required report when in their current rendition they cannot be relied upon to impose sanctions on any foreign persons.

OFAC’s 50 Percent Rule

Entities that are owned 50 percent or more by any persons designated or blocked under the foregoing Executive orders, whether individually or in the aggregate, are also blocked, regardless of whether such entity is itself identified on OFAC’s SDN List. This is known as OFAC’s “50 Percent Rule.” In contrast to its EU or UK counter parts that extend relevant sanctions to entities that are “controlled” by a sanctioned person, OFAC’s 50 Percent Rule speaks only to ownership and not to control.

Similarities Between the Designation Criteria of the US, UK, and EU

Given the extremely broad, yet similar, designation criteria of all 3 jurisdictions, there is unlikely to be a scenario in which a person already sanctioned by the UK and/or the EU is unable to satisfy the relevant designation criteria of the available US legal authorities for the President to designate in response to Division G of H.R. 815. However, it remains unclear from the language of Division G whether persons that may be constructively blocked under the respective UK and/or EU ownership and control rules are also supposed to be identified in the President’s report and subject to potential US sanctions, and if they are, to what extent that may occur. Therefore, while persons identified under relevant UK and EU sanctions lists are more or less likely to find themselves identified on OFAC’s sanctions lists soon, constructively blocked entities most likely will not, especially in consideration of the different scope of each jurisdiction’s ownership and/or control rules.

Compliance Considerations

Engaging in global commerce increases the risk of dealing with persons or countries/regions that may be sanctioned under the US, UK, and/or the EU’s respective sanctions regimes, each with its own scope of prohibitions and repercussions. However, the US has the most far reaching and arguably “extraterritorial” sanctions regime of all 3 jurisdictions. For example, the foregoing OFAC sanctions programs’ prohibitions apply not only to US persons, but also to any non-US person whose actions directly or indirectly cause a US person to engage in a prohibited transaction. Furthermore, pursuant to the “SDN Crossover Rule,” where OFAC has no jurisdiction, but items subject to the Export Administration Regulations (“EAR”) of the US Department of Commerce’s Bureau of Industry and Security (“BIS”)—e.g., U.S. origin items anywhere in the world—are involved, a BIS license may be required if they are bound for a person designated under certain OFAC sanctions programs (including Russia-related programs). Finally, even where there is no such “US nexus” to a transaction involving a sanctioned person for any prohibitions to apply, non-US persons can risk exposure to so-called “secondary sanctions,” including the potential application of “derivative sanctions” described above.

With the forthcoming wave of OFAC designations on persons already sanctioned by the EU and/or UK, the need for having an adequate sanctions compliance controls in place that is mindful of all 3 jurisdictions is further underscored for businesses and financial institutions that already had an elevated risk in dealing with such persons. Relevant measures to consider include the following:

1.  Ensure that your restricted party screening procedures and third-party applications include screening against all jurisdictions’ sanctions lists (especially if they aren’t already incorporating all OFAC sanctions lists).

2.  Ensure that you are obtaining ownership and control information in consideration of all 3 jurisdictions’ unique ownership and control tests, for screening purposes. Although OFAC’s 50 Percent Rule is much more relaxed when it comes to “control” by a designated person, there are certain important distinctions with regard to applicable “ownership” thresholds. By way of example, while OFAC’s threshold for ownership begins at 50 percent, in the UK and the EU it begins at more than 50 percent. Also, OFAC and the EU consider the ownership criterion to be satisfied if the aggregated ownership interests of two or more sanctioned parties exceeds the applicable threshold, whereas the UK ownership interests are not aggregated.

3.  Identify in advance any business interests that may already exist with a UK or EU sanctioned person under the relevant regulations detailed above, and whom are not yet sanctioned under the relevant OFAC sanctions programs. The language of Division G, Section 1of H.R. 815 suggests that the required report of the President and the forthcoming sanctioned persons could also include entities that are constructively blocked under the UK and/or EU ownership and control rules. Therefore, such entities should be considered a potential target as well in identifying relevant US sanctionable business interests. Once such business interests are identified, consider preparing in advance for the imposition of relevant US sanctions (e.g., divestment, liquidation, etc.). Should the business interests continue after the imposition of applicable US sanctions, actively monitor for any OFAC general license authorizations (e.g., wind-down licenses) and relevant guidance (e.g., OFAC FAQs).

The importance of compliance is underscored by the growing surge of enforcement actions in the US, EU, and UK, especially in view of the strict liability nature of the UK and US sanctions laws, where a person can be held liable even if they inadvertently violated relevant prohibitions. Note that the EU regime varies by country and in some cases, imposes liability only where a person knew or ought to have known that their actions violated sanctions.

The authors of this joint blog post are Kian Meshkat (on US sanctions considerations) and Mikhail Vishnyakov and Anna-Rose Davies (on UK and EU sanctions considerations). Kian is the Principal Attorney of Meshkat Law, P.C., specializing in US economic sanctions and export controls matters. Mikhail is a Partner at Cooke, Young & Keidan LLP, specializing in international arbitration, litigation, and financial sanctions matters. Anna-Rose Davies is an Associate at Cooke, Young & Keidan LLP, specializing in litigation, including involving sanctioned parties. If you have any questions, please contact either Kian at [email protected], Mikhail at [email protected], and/or Anna-Rose Davies at [email protected].