OFAC Russia Sanctions Update: June 2022 #2 | Locke Lord LLP
On June 9, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) released eleven new FAQs (FAQ 1058, FAQ 1059, FAQ 1060, FAQ 1061, FAQ 1062, FAQ 1063, FAQ 1064, FAQ 1065, FAQ 1066, FAQ 1067 and FAQ 1068) relating to the Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587.
- FAQ 1058: Section 1(a)(ii) of Executive Order (“EO”) 14071 prohibits the export, re-export, sale, or supply directly or indirectly from the United States, or by a United States person, where that she is, of [accounting, trust and corporate formation, and management consulting services] to “person located in the Russian Federation”. OFAC interprets persons located in the Russian Federation to include persons ordinarily resident in the Russian Federation and entities incorporated or organized under the laws of the Russian Federation or any jurisdiction of the Russian Federation.
- FAQ 1059: In FAQ 1059, OFAC states that the decision made under EO 14071 of May 8, 2022, “Prohibitions on Certain Accounting, Trustee and Incorporation, and Management Consulting Services”, (the “Determination”), does not prohibit U.S. Persons from providing services to persons located outside the Russian Federation that are owned or controlled by persons located in the Russian Federation, provided that the provision of services is not intended to circumvent EO 14071 as the “indirect provision of prohibited services” to a person located in the Russian Federation. OFAC interprets the “indirect provision of prohibited services to include when the benefit of the services is ultimately received by a ‘person located in the Russian Federation’. In contrast, OFAC would not prohibit the provision of services to a non-Russian company that has a physical presence and operations outside the Russian Federation, including such company owned or controlled by persons located in the Russian Federation, provided that the Services are not to be subsequently exported or re-exported to persons located in the Russian Federation.
OFAC has provided the following scenarios which would have be prohibited under the determination:
- A U.S. business service provider administers a trust established under the laws of a U.S. state, where the trust exists primarily to hold, sell, or buy assets on behalf of a settlor, trustee, or beneficiary who is a natural person ordinarily resident in Russia.
- A U.S. business service provider registers a limited liability company in a third country on behalf of an individual ordinarily resident in Russia for the purpose of holding real estate assets, and that company has no other physical presence or operations in the third country.
OFAC provided the following service scenarios to a non-Russian affiliate of a Russian person who would not be prohibited under the determination:
- A US accounting firm provides tax preparation and advisory services to the US subsidiary of a Russian company. This US subsidiary has an office and employees in the United States and conducts business in the United States, and the services will not be exported or re-exported to the Russian parent company.
- A US management consulting firm provides strategic business advice to a subsidiary of a Russian company located in a third country. This subsidiary has an office and employees in the third country and carries out its activities in this third country, and the services will not be re-exported to the Russian parent company.
- FAQ 1060: The decision prohibits American persons from serving on the board of directors of a copy located in the Russian Federation. However, the determination prohibits US persons from acting as an agent, director, shareholder or signatory of a legal person on behalf of a person located in the Russian Federation.
- FAQ 1061: Noting that sanctions under EO 14071 are targeted rather than general, U.S. persons are prohibited from providing management consulting, trust and business formation, and accounting services to businesses located in the Federation of Russia (“Russian Companies”) in their capacity as employees. The determination, however, does not prohibit US nationals from being employees of Russian companies in other capacities not specifically covered by this determination. In addition, the determination excludes from the prohibition: (1) service to an entity located in the Russian Federation that is owned or controlled, directly or indirectly, by a US Person; and (2) any service related to the liquidation or disposal of an entity located in the Russian Federation that is not owned or controlled, directly or indirectly, by a Russian person.
- FAQ 1062: The determination makes it clear that a US subsidiary of a Russian Federation company cannot provide prohibited services to a Russian Federation parent company located in Russia.
- FAQ 1063: OFAC makes it clear in the determination that U.S. persons are prohibited from providing trust and incorporation services to persons located in the Russian Federation, whether the services are provided in connection with the formation of a new trust or company, or in connection with the administration or continuation of an existing trust or company. Please see FAQ 1034 for more information.
- FAQ 1064: OFAC makes it clear in the ruling that executive search and audit services are included in the ban on management consulting services imposed by the ruling. OFAC interprets management consulting services to include services related to strategic business advice; organizational and system planning, assessment and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions and organizational structure; staff augmentation and human resource policies and practices; and brand management. See FAQ 1034 for more information.
- FAQ 1065: The ban makes it clear that U.S. persons are prohibited from acting as voting proxies on behalf of or for actions of persons located in the Russian Federation, unless otherwise exempted or authorized by OFAC.
- FAQ 1066: The prohibitions imposed by the decision do not prohibit the provision of educational services, such as online university courses, on the subjects of accounting, management consulting or trust and business formation to persons located in the Russian Federation, provided that such services do not circumvent or circumvent the prohibition on providing the Subordinate Services to persons located in the Russian Federation.
- FAQ 1067: The decision does not prohibit US persons from exporting, re-exporting, selling or supplying, directly or indirectly, software to the Russian Federation, nor does the decision prohibit US persons from providing services associated with the export of such software, such as software design and engineering, provided that such associated services do not fall into the categories of management consulting, accounting or trust and business formation .
For example, the following scenario describes activities that would not be prohibited under the Determination:
- A US software company signs a contract with a company located in the Russian Federation (“Russian Company”) for the design, engineering, licensing and delivery of software that the Russian company uses to perform its accounting internal. As part of the contract, the American company provides ongoing updates and technical support services related to the software (for example, setting up new users and troubleshooting errors).
The following scenarios illustrate activities that would be prohibited under the Determination:
- An American management consulting company signs a contract with a Russian company to help the Russian company select new business application software. This contract includes assessing the needs of the Russian company, providing a list of possible software choices to the company, and providing ongoing consulting services on the implementation and use of the software in order to optimize the profits of the Russian company.
- FAQ 1068: For purposes of the determination, accounting services include tax return preparation and filing services. See FAQ 1059 for more information. The determination does not prohibit the export, re-export, sale or supply, indirectly or indirectly, of tax preparation software to the Russian Federation, as opposed to tax preparation and filing services . See FAQ 1067.
This document is intended as a guide only and does not replace specific legal or tax advice. Please contact the authors with any specific questions. We plan to continue to monitor the topics covered in this document and provide future updates to customers when useful.