As the war continues in Ukraine, pressure from the European Union (“E.U.”) and the United States (“U.S.”) continue to mount on Russia’s global interests. On April 6, 2022, the United States issued Executive Order 14071, “Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression” (“the Order”). Under the Order, among other things, it prohibits:
The exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any category of services as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to any person located in the Russian Federation;
On May 8, 2022, the Office of Foreign Asset Control (“OFAC”), together with the Department of State, issued Determination Pursuant to Section 1(a)(ii) of Executive Order 14071 (the, “Determination”), clarifying the meaning of the phrase “any category of services.” The Determination clarifies that the Administration will target accounting, trust and corporate formation, and management consulting services. In an OFAC press release, it emphasized that “wealthy Russians have relied on U.S. expertise to set up shell companies, move wealth and resources to alternate jurisdictions, and conceal assets from authorities around the world. In addition, Russian companies, particularly state-owned and state-supported enterprises, rely on these services to run and grow their businesses, generating revenue for the Russian economy that helps fund Putin’s war machine.”
The Determination is effective June 7, 2022; however, OFAC also issued General License No. 34, allowing companies to wind down these services by July 7, 2022.
Businesses determining whether the clarification applies to their ongoing Russian business operations should evaluate whether their activities meet the following definitions as provided by OFAC FAQ 1034: the following apply:
- “Accounting services” – includes services related to the measurement, processing, and transfer of financial data about economic entities.
- “Trust and corporate formation services” – includes services related to assisting persons in forming or structuring legal persons, such as trusts and corporations; acting or arranging for other persons to act as directors, secretaries, administrative trustees, trust fiduciaries, registered agents, or nominee shareholders of legal persons; providing a registered office, business address, correspondence address, or administrative address for legal persons; and providing administrative services for trusts. Please note that all of these activities are common activities of trust and corporate service providers (TCSPs), although they may be provided by other persons.
- “Management consulting services” – includes services related to strategic advice; organizational and systems planning, evaluation, and selection; marketing objectives and policies; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.
Additionally, it is likely OFAC will define the term “Russian person” as an individual who is a Russian citizen or national, or an entity organized under the laws of Russian.
Importantly, the Determination does not apply and will not impact businesses engaged in the following services:
- Any service to an entity located in Russia that is owned or controlled, directly or indirectly, by a U.S. person;
- Any service in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person.
OFAC also extended the blocking sanctions of EO 14024 to these same categories of services. These blocking sanctions are already in effect; however, OFAC must make specific SDN designations, and the blocking sanctions do not automatically apply to individuals or entities involved in these service sectors. OFAC did determine and add several individuals and entities to its SDN List following the Determination, including bank executives, a state-sponsored weapons manufacturer, and Russian television stations. These designations seek to discourage those “critical to Russia’s ability to wage war against Ukraine.”
The G7 agreed with the U.S. services ban and it is expected that the E.U. and United Kingdom (“U.K.”) will issue similar type sanctions. For example, the U.K. already issued a ban prohibiting the Russian Federation from using accounting, public relations services, and management services in the U.K.
Because of the Determination’s far-reach, it is likely to impact several businesses still operating in or with Russia, even if those entities are not categorized as per se accounting firms. In light of this clarification, businesses with ongoing operations in Russia should work with legal counsel to evaluate whether their activities meet OFAC’s definition of accounting, trust and corporate formation, and management consulting. Additionally, businesses should engage in risk analysis assessments to determine the cost of continuing business in Russia. As businesses terminate relationships or otherwise cease their Russian operations, those remaining may subject themselves to the possibility of increased scrutiny and sanctions violations.