Attorneys are inundated with calls from clients struggling to figure out how to deal with broad sanctions imposed on Russia following its invasion of Ukraine while seeking clarity about additional restrictions getting released on a rolling basis.
It will take many weeks for companies to wind down their business with Russian banks and assets that are on their books, said Michael Parker, who heads the anti-money laundering and sanctions practice at law firm Ferrari & Associates.
“What you’re talking about is a full-blown new sanctions program effectively shutting the financial industry of a major state-power out of the U.S. financial system,” said Parker, who previously investigated and prosecuted sanctions violations at the Treasury and Justice departments.
Companies must figure out what goods they can continue sending Russia by obtaining a license or, in the case of private equity firms, identify limited partners and shareholders who’ve landed on Treasury’s list of individuals and companies with whom they can no longer conduct transactions. Known as the Specially Designated Nationals list, the prohibitions extend to any secondary party to which the named SDN owns at least a 50% stake.
“It almost becomes a cascade ripple effect as people come to understand what the rules mean and how that impacts their specific company profile,” said Ama Adams, a partner focused on international transactions at Ropes & Gray.
“As people are getting up to speed with what the new regulations and restrictions are, it can be a very frenzied pace to try to understand what the potential touchpoints are,” Adams added.
Details continue to trickle out of the Biden administration on the full range of economic sanctions and export controls designed to punish Russia. The Treasury and Commerce departments have been implementing the first phase of restrictions via new rules and compliance aid.
Mindful that the Justice Department is prepared to bring criminal enforcement actions against willful sanctions evaders, private attorneys are scrambling to get answers from regulators to help their clients avoid government scrutiny at a later stage.
Take Ken Rivlin, a partner at Allen & Overy. He said he answered “18 or so sets of questions” from clients on Feb. 25 alone. There are two main lines of inquiry, Rivlin said. First, clients want know, “What do the rules say and do they affect me in particular?” Second, they are asking, “Here’s a project either in place or anticipated. How do the sanctions impact it?”
Chase Kaniecki, an international trade and national security attorney for Cleary Gottlieb Steen & Hamilton in Washington, said he’s spent the better part of four days on back-to-back, 30- and 60-minute calls with clients that have questions about how the sanctions will affect them.
A European client he spoke with was looking to enter into joint venture in Russia, “and now with everything that’s going on they pressed pause on that particular project, just to see how everything shakes out,” he said.
He also spoke with a U.S. investor that was considering an acquisition of a company in Russia that has operations in both Russia and Ukraine. “Again, there they pressed pause,” Kaniecki said.
Questions he said he gets from clients cover a broad range— how do they pay employees in Russia, can they continue to operate there, how does money flow among different banks, and how can they avoid relationships with people covered by sanctions.
“It really shows you that people are really thinking hard,” Kaniecki said. “These are having a significant impact on the ability of both U.S. and non-U.S. companies to operate in Russia.”
The U.S. has relied on economic sanctions more frequently as a foreign policy tool in the past two decades. Yet the business community is accustomed to a multi-year ramp-up of new requirements, such as when sanctions were imposed on Iran, rather than a fuller-scale and rapidly shifting rollout that’s now transpiring.
U.S. penalties on Russia have already moved through several stages within a compressed time period, with more escalations remaining a distinct possibility.
Because of the fast-moving situation, companies will have to perform their due diligence multiple times, said Antonia Tzinova, a partner in the Washington, D.C., office of Holland & Knight LLP who is part of the firm’s international trade group.
“What is particularly different is that things are ongoing,” Tzinova said. “It’s not like one packet of sanctions and we learn about it and we start applying them.”
Lawyers are helping businesses navigate through such thorny issues as determining an allowable timeframe to disentangle their Russian assets, how to react if they’re in the midst of a transaction, and—to the extent possible—how to maintain operations in or involving Russia.
Financial institutions “are doing their best to ensure that they are keeping on top of this very rapidly developing situation,” but it’s inevitable that various organizations will struggle to implement the “wide ranging and complicated sanctions,” said Jessica Carey, who co-chairs the litigation department and the economic sanctions and anti-money laundering practice at Paul, Weiss, Rifkind, Wharton & Garrison LLP.
While some of the new rules are clear, such as to avoid engaging with certain Russian banks, lawyers who specialize in sanctions compliance havebeen huddling on how to get more precise guidance from Treasury’s Office of Foreign Assets Control, which administers and enforces economic sanctions.
“There’s already some engagement by the bar with OFAC and I expect that there’s going to be more,” said David Laufman, a partner at Wiggin and Dana who was chief of the DOJ National Security Division’s Counterintelligence and Export Control Section. “Attorneys specializing in sanctions compliance have been communicating with each other. ‘What are you hearing? What do you think about this? What do you think about going to OFAC to try to get clarity on x or y?’”
The trade bar is robust, but small, Adams said. “So we often work together, especially where there are areas of opaqueness or where we think, ‘perhaps this is not what OFAC meant when it said this. Has anyone reached out?’” she added.
—With assistance from John Hughes and Chris Opfer