January 30, 2018

Upcoming Russian Corruption Designations Likely to be Challenged

by  Jeremy Paner

Late last month, the U.S. Government sanctioned a number of alleged human rights abusers and corrupt actors located throughout the world.  The White House and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed these sanctions more than a year after Congress delegated the underlying designation authority pursuant to the Global Magnitsky Human Rights Accountability Act.[1] While the annex to the Executive Order implementing these sanctions lists two Russian individuals, the sanctions do not focus on the alleged corruption and human rights abuses of any particular country or region.  OFAC is likely to concentrate future corruption-related sanctions on Russia following the submission of a Congressionally mandated report due by the end of this month.

Section 241 of the Countering America’s Adversaries Through Sanctions Act (CAATSA) requires the U.S. Department of the Treasury to submit a report to Congress by January 29, providing certain information on allegedly corrupt Russian oligarchs and parastatal entities.  Most importantly, this report will opine on the likely effects of various sanctions, including debt and equity restrictions, blocking parastatal entities, and imposing secondary sanctions.[2]  It appears that Congress will use the conclusions of this report to delegate additional corruption-related sanctions authorities in the near future. 

The Effects of Designation

Sanctioned individuals and companies petition for reconsideration of their designations and seek delisting for a number of reasons.  First, most sanctions programs block funds and  interests in property, and prohibit dealings with connections to the United States. These prohibitions make otherwise legitimate international business very costly, if not impossible.  Second, major non-U.S. financial institutions generally apply U.S. sanctions and refuse to conduct or facilitate transactions for listed parties, even when they have no such direct legal obligation.  A former OFAC Director referred to this voluntary application of U.S. law in Congressional testimony as “a decisive ‘force multiplier’” in the effectiveness of U.S. sanctions programs.[3]

Lastly, but perhaps most importantly from the perspective of designated individuals, targeted sanctions generally label designees as criminals.  This may cause irreparable psychological and reputational harm to the listed individuals.  Unfortunately for the accused, OFAC does not provide notice or opportunity to be heard prior to publicly announcing its determination and listing.  The lack of due process protections creates problems for both the designees and OFAC, which may be unaware of exculpatory information prior to making its public determinations.

Successful Delisting Petitions  

In addition to presenting OFAC with exculpatory information, there are a number of ways to successfully advocate for delisting.  Irrespective of the specific facts surrounding a petition for removal, it is of paramount importance to maintain an open and transparent dialogue with OFAC.  Designees would be well advised to consider the initial petition for delisting as the beginning of a lengthy conversation with OFAC.  The duration of the process will largely depend on the responsiveness and candor of the petitioner.

Most successful requests for reconsideration are premised on a clear demonstration that “the circumstances resulting in the designation no longer apply.”  31 C.F.R. §501.807.  OFAC will delist individuals who provide credible evidence of changed circumstances such that the basis of their designation is no longer valid.  Petitioners may submit a variety of documents, including affidavits, letters of resignation, and/or articles of dissolution in order to credibly demonstrate that they no longer act for or on behalf of, or provide services for designated parties.

Petitioners may also assert that OFAC erred in its determination.  The true nature of these errors are usually only apparent after the petitioners have reviewed the administrative record (“evidentiary” in OFAC parlance) supporting the listing.  A careful assessment of this document may reveal certain defects in the decision-making process, including an arbitrary and capricious dismissal of potentially exculpatory information and a reliance upon uncorroborated reporting.  In short, sometimes OFAC simply gets it wrong.

We will continue to monitor sanctions targeting alleged corruption and publish updates as significant developments arise.

[1] National Defense Authorization Act for Fiscal Year 2017, Public Law No: 114-328 (12/23/2016), sections 1261-1265.

[2] Under other sanctions programs, foreign financial institutions that knowingly facilitate or provide significant financial transactions to individuals or entities subject to secondary sanctions may be expelled from the U.S. financial system.

[3] Prepared Testimony by Daniel Glaser and Adam Szubin Before a House Foreign Affairs Joint Subcommittee Hearing, “Isolating Proliferators and Sponsors of Terror: The Use of Sanctions and the International Financial System to Change Regime Behavior” (2007), https://archive.org/details/gov.gpo.fdsys.CHRG-110jhrg34715.