With the proliferation of OFAC designations of Russian businesspeople, trying to predict whether or not someone will be designated as a Specially Designated National (SDN) has become an important part of third party due diligence on Russian business partners.
SDNs are completely cut off from the U.S. market, and under the so-called “50 percent rule,” entities 50 percent or more owned by SDNs are themselves considered to be SDNs even if they are not specifically named on the SDN List.
A designation also frequently requires the termination of existing contracts, creating the risk of legal action and severe disruption to business relationships.
Unfortunately, the designation process is not transparent or governed by a single set of clear legal criteria. Therefore, we have reviewed recent designations; relevant legislation including the Countering America’s Adversaries through Sanctions Act (CAATSA), which identifies criteria for the Executive Branch to use in identifying oligarchs for inclusion in its mandated report on Russia’s most influential oligarchs; and previous Executive Orders to identify what appear to be the main criteria relied on by OFAC and which, we believe, should be considered in third party due diligence on Russian business partners. However, these criteria are not necessarily exhaustive or dispositive.
1. Proximity to President Putin – The U.S. sanctions regime is explicitly designed to influence the actions of the Kremlin by putting pressure on those closest to President Putin. CAATSA refers to “the most significant … oligarchs…as determined by their closeness to the Russian regime” Therefore, proximity to Putin is a key criterion. But how should it be measured? Clearly, inclusion in the January 2018 CAATSA report (though not a restricted party list), which named 96 oligarchs, is one indicium and should be the starting point in due diligence.
Other indicia include having been awarded a Russian state medal and having publicly reported family, friendship or business ties to Putin. For example, the majority (seven out of ten) of the SDNs who are on the CAATSA list have received state medals. Of the other 86 (non-designated) wealthy individuals on the CAATSA list, only 30 are known to have received state medals.
The three out of ten SDNs on the CAATSA list who have not received state medals are Boris Rotenberg, Gennady Timchenko and Kirill Shamalov. Rotenberg and Timchenko have been publicly mentioned by Putin as friends, and Timchenko’s wife and daughter have received Russian state medals; and Shamalov was until recently married to Putin’s youngest daughter.
2. Business sector – CAATSA and various Executive Orders have focused on certain key industrial sectors including energy, defense, financial services, cyber and real estate. Participation in one of these sectors makes designation more likely. For example, in its April 6 designations, OFAC stated explicitly that 5 of the 7 oligarchs (Vladimir Bogdanov, Oleg Deripaska, Igor Rotenberg, Kirill Shamalov and Viktor Vekselberg) were being designated for operating in the energy sector.
CAATSA also makes reference to parastatal entities, and participation in a high risk industry through a state-owned enterprise makes designation more likely. Other sectors, including telecommunications, tourism and agriculture have not been targeted and appear to be lower risk, especially if the enterprise has no connection to the state.
3. Acting on behalf of the state – Oligarchs who hold official positions and/or act on behalf of the state are at higher risk of being designated. In the April 6 designations, OFAC stated that three Forbes-listed designees – Suleiman Kerimov, Oleg Deripaska and Andrei Skoch — were being designated for being officials of the Russian government and/or (in the case of Deripaska) “acting on behalf of a senior official.”
4. Allegations of criminal activity – CAATSA requires identification of any indicia of corruption with respect to the identified individuals and discussions of such indices in the CAATSA report should be carefully considered in any due diligence. Consistent with the spirit of this requirement, OFAC appears to rely heavily on public allegations of any kind of criminal activity (not just corruption). Criminal conviction, or absence thereof, does not appear to be important (perhaps because OFAC believes that the subjects have the means to influence court proceedings to avoid convictions). However, the fact that the allegations come from a source outside the U.S. government does appear to be important as such third party allegations provide support for the designation and presumably allow OFAC to avoid relying publicly on confidential information.
In the April 6 designations, OFAC noted a French money laundering investigation of Kerimov, allegations of murder, money laundering, extortion and bribery against Deripaska and Skoch’s allegedly “longstanding ties to Russian organized criminal groups.”
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CAATSA also makes reference to the estimated net worth of the identified individuals and their non-Russian business affiliations. However, there does not (yet) appear to be a close correlation between these factors and likelihood of designation. The CAATSA report was taken explicitly from Forbes 2017 list of the world’s billionaires, which listed the oligarchs in order of net wealth. However, Forbes’ top 8 Russian oligarchs ranked by net wealth have not yet been designated.
In addition, there does not appear to be a clear correlation between overseas assets and designations. This is not surprising, given the difficulty in identifying overseas assets and the fact that, in some cases, doing business overseas could be an act of defiance of Putin’s “de-offshorization” policy and a Western orientation that U.S. policymakers may wish to support.
Predicting who is going to be designated is obviously more of an art than a science, especially because the designation process relies on confidential information. However, analysis of the four criteria discussed above can make the process more systematic and less speculative, which is valuable in the Ouija board world of third party due diligence.
Tom Firestone is a partner in the New York and Washington, DC offices of Baker McKenzie. He previously served as Resident Legal Adviser at the U.S. Embassy in Moscow.
Kerry Contini is a partner in Baker McKenzie’s trade compliance group based in Washington, DC.
Lyndon Allin is a senior associate in Baker McKenzie’s compliance and investigations group based in Washington, DC.