Sanctions remain a dynamic area of regulation and enforcement. In its first year, the Biden administration has already undertaken a number of different sanctions initiatives. The three examples below illustrate the range of strategies employed and their potential ramifications for private equity funds.
(1) Sanctions against Russia over Ukraine
In response to Russia’s actions in Ukraine, the United States stepped up economic pressure by imposing sweeping sanctions on major Russian financial institutions, Russian oligarchs and members of Russian President Vladimir Putin’s inner circle, and even Putin himself. -same. The Treasury Department’s Office of Foreign Assets Control (“OFAC”) also expanded restrictions on Russian sovereign debt trading and transactions involving debt and equity, and restricted the ability of U.S. financial institutions to clear transactions with some Russian banks. The United States has also imposed sanctions that it has disadvantaged in the past, including the removal of some Russian banks from the SWIFT financial messaging system and the imposition of sanctions on the company responsible for the construction of the Russian gas pipeline Nord Stream. 2 designed to double gas flow capacity between Russia and Germany.
Alongside the sanctions, the Justice Department recently announced a new task force, “KleptoCapture,” focused on seizing assets belonging to sanctioned individuals and criminal actors, and specifically targeting the crimes of Russian oligarchs and those who help or conceal their unlawful conduct.
Circumstances have changed since 2014, when the United States and its Western allies imposed sanctions after Russia seized Ukraine’s Crimean peninsula. Since then, Putin has built up Russia’s international reserves, reduced its public debt and increased trade agreements with non-European countries such as China. Meanwhile, Europe has become increasingly dependent on Russia for its energy needs. As a result, some believe that US sanctions may have less impact on the Russian economy, and that sanctions on Russia’s energy sector will likely have significant knock-on effects on European allies. However, the expanded sanctions against Russia are already having a dramatic effect on Russia’s ability to participate in the global economy.
Additionally, regulators are anticipating the possibility of Russia trying to evade sanctions by using cryptocurrencies. For example, Russia could carry out ransomware attacks to steal cryptocurrency and find people or entities willing to trade cryptocurrency, which it could do outside of the international banking system. Accordingly, the KleptoCapture Task Force is also focusing on this space.
(2) Sanctions in the Virtual Currency Space
The evolution of sanctions in the area of digital assets is particularly important given the growing threat that ransomware poses to the public and the economy. In response to this threat, OFAC has stepped up its efforts to combat ransomware payments.
In recent years, OFAC sanctions have increasingly targeted individuals and entities that have used virtual currency in criminal activities. For example, in 2021, OFAC reached a settlement of more than $500,000 with BitPay, Inc., a cryptocurrency payment processing platform, for allowing people in sanctioned jurisdictions to engage in digital currency-related transactions with BitPay’s merchant customers in violation of multiple sanctions.
OFAC has also sanctioned virtual currency exchanges themselves. In September 2021, OFAC placed a Russian-based virtual currency exchange (SUEX) on its Specially Designated Nationals and Blocked Persons List (“SDN List”) to facilitate financial transactions by ransomware actors. In November 2021, OFAC sanctioned another virtual currency exchange, Chatex, for facilitating ransomware payments.
OFAC can take legal action and impose penalties for violation of sanctions on a strict liability basis, which means that a U.S. person or entity may be deemed to have violated U.S. sanctions without knowledge or reason. to know that she was engaging in a transaction prohibited by the sanctions laws and regulations. .
OFAC discouraged US companies from making ransomware payments and issued guidelines warning companies that given the strict liability standard, they could face consequences for making a ransom payment to a hacker. which turned out to be a sanctioned entity, even though they were unaware of the identity of the hacker. identity at the time of payment. However, OFAC has indicated that it will consider all of the facts and circumstances surrounding the violation before imposing liability. Important mitigating factors include the company’s implementation of measures to prevent and protect against attacks, and reporting of the attack to the appropriate government agency.
(3) Anti-Corruption Sanctions and Enforcement
The Global Magnitsky Human Rights Accountability Act authorizes the US government to impose sanctions on those it deems to be human rights abusers and corrupt officials. A person or entity sanctioned under this law may be placed on the SDN list. Because of this designation, all of their assets and interests in property located in US jurisdictions are blocked and US persons are generally prohibited from engaging in transactions with them. OFAC also clarified that these sanctions apply to entities whose majority owner is a sanctioned person or entity.
This is of particular concern for entities or individuals engaged in international transactions. Private equity funds, especially those that have invested in and attracted investors from foreign countries, should be extra vigilant and closely follow OFAC’s framework for OFAC compliance commitments. OFAC has always made it clear that businesses facilitating or engaging in online commerce or businesses processing transactions using digital currency are responsible for ensuring that they do not engage in transactions prohibited by the OFAC sanctions.
Since the Global Magnitsky Act designates corrupt actors as SDN, it can potentially open another avenue for the government to bring corruption cases. This is important because, since strict liability applies to sanctions violations, using the Global Magnitsky sanctions program to prosecute corruption cases effectively reduces the government’s burden of proof. In other words, instead of proving intentional violations of the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws, prosecutors and regulators could potentially bring suits based on an underlying violation. sanctions for which a company can be held strictly responsible.
Learn more about our top ten regulatory and litigation risks for private funds in 2022.
Economic Sanctions and Asset Seizures: An Important Goal for the Biden Administration
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