OFAC Publishes Key Guidance on Russia-Related Prohibitions Involving New Investment and Accounting, Trust and Corporate Formations, and Management Consulting Services

In June 2022, the Treasury Department’s Office of Foreign Assets Control (OFAC) published new Frequently Asked Questions (FAQs) regarding the prohibition of new investment and the provision of certain accounting, trust and corporate formations, and management consulting services to any person within the Russian Federation. The new FAQs clarify the scope of prohibited activities and provide guidance for US persons engaging with and working for companies in Russia.

Each of the Russia-related prohibitions and new FAQs are summarized below.

New Investment Ban FAQs

On June 6, 2022, OFAC issued a series of FAQs clarifying the ban on new investment in Russia, which was imposed through a series of executive orders (EO). EO 14066, issued on March 8, 2022 prohibits new investment in Russia’s energy sector. EO 14068, issued on March 11, 2022, prohibits new investment in any sector of the Russian economy as determined by the Secretary of the Treasury. Finally, EO 14071, issued on April 6, 2022 and the most far-reaching of the three EOs, prohibits any new investment in Russia by a US person.

These broad prohibitions left many questions regarding what activities may fall within “new investment.” Through these seven FAQs, OFAC sought to provide guidance on some of those questions, including its interpretation of “new investment” and details specific kinds of transactions that are not prohibited.

FAQ 1049 explains that OFAC’s interpretation of “investment” includes “the commitment of capital or other assets for the purpose of generating returns or appreciation.” Additionally, OFAC defines “new” as commitments made after the effective dates of the EOs and includes a party exercising its rights under an agreement made prior to the EOs. OFAC stipulates that its definition of “new investment” does not include the “maintenance” of investments made prior to the respective EOs.

FAQ 1050 further expounds on what activities fall within the scope of “maintenance”. A list of activities can be found in the FAQ, but generally, OFAC exempts “all transactions ordinarily incident to performing under an agreement in effect prior to the effective date of the respective EO prohibitions … provided that such transactions are consistent with previously established practices and support pre-existing projects or operations.” OFAC makes clear that expanding pre-existing agreements would not be considered “maintenance.”

FAQ 1051 provides that the export or import of goods, services, or technology that follow ordinary sale terms to or from Russia do not fall within the definition of new investment. However, US persons are prohibited from exporting, reexporting, or importing certain goods and services involving Russia as described in EO 14068. In addition, although not referenced in the FAQ, the provision of software to Russia is also subject to separate, and stringent, licensing requirements under the Export Administration Regulations.

FAQ 1052 states that US persons can continue funding their Russia-based subsidiaries or affiliates as long as those funds fall within the definition of “maintenance” as defined by FAQ 1050. Essentially, US persons are prohibited from undertaking new projects or expanding existing projects with their Russian subsidiaries after the effective date of the relevant EOs.

FAQ 1053 reinforces that transactions related to divestment or facilitating divestment of a pre-existing investment in Russia are not prohibited. The FAQ notes that the new investment prohibitions under EOs 14066, 14068, and 14071 prohibit the approval, financing, facilitation, or guarantee by a US person of a transaction by a foreign person, if that transaction would be prohibited for a US person. On the other hand, the FAQ indicates, those provisions do not prohibit US persons from facilitating the wind down or divestment of an existing investment in Russia if such action is on behalf of the selling party only.

FAQ 1054 states that US persons are prohibited from purchasing new and existing debt and equity securities issued by an entity in the Russian Federation; but adds that the new investment prohibitions do not prohibit US persons from selling or divesting, or facilitating the sale or divestment of, such debt or equity securities issued by a Russian entity to a non-US person. US persons may continue to hold such securities, and may purchase shares in a US fund that contain Russian debt or securities so long as those holdings are not a predominant share by value of debt or equity securities issued by Russian entities.

FAQ 1055 clarifies that US persons may lend funds to, or purchase equity interests, in entities located outside of Russia as long as the following two conditions are met: 1) funds are not intended for new projects or operations in Russia and 2) revenues from the non-Russian entity are not predominantly derived from investments in Russia.

Accounting, Trust and Corporate Formations, and Management Consulting FAQs

On May 8, 2022, OFAC issued a determination pursuant to EO 14071 prohibiting US persons from exporting, reexporting, selling, or supplying, directly or indirectly, services related to accounting, trust and corporate formation, and management consulting to any person located in the Russian Federation. This prohibition became effective on June 7, 2022.

Notably, the determination carved out two categories of services that do not fall within its prohibitions. Specifically, the determination does not specifically prohibit (1) services to an entity located in Russia that is owned or controlled, directly or indirectly, by a US person, or (2) services in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person. More details about the services ban can be found here.

The accounting, trust and corporate formations, and management consulting sectors were also identified as subject to additional sanctions pursuant to section 1(a)(i) of EO 14024, which permits the US government to sanction companies and individuals found to operate or have operated in such sectors going forward. At the time, OFAC issued guidance in the form of FAQs, including FAQ 1034, which clarified certain definitions. However, as of May 9, 2022, many questions remained unanswered regarding the scope and nature of these prohibitions.

Therefore, OFAC issued new FAQs on June 9, 2022 to help clarify some of these questions.

FAQ 1058 provides guidance on the meaning of “person located in the Russian Federation” for the purposes of EO 14071. “Persons in the Russian Federation, individuals ordinarily resident in the Russian Federation, and entities incorporated or organized under the laws of the Russian Federation or any jurisdiction within the Russian Federation” all fall within the scope of this definition.

FAQ 1059 clarifies OFAC’s interpretation of the “indirect” provision of prohibited services to include when a benefit of the services is ultimately received by a person located in Russia. This means a US person could not establish a trust within the US to hold, sell, or purchase assets on behalf of a beneficiary who is an individual ordinarily resident in Russia. However, this interpretation would not prohibit US persons from providing accounting, trust and corporate formation, and management consulting services to a non-Russian company located outside of Russia that is ultimately owned or controlled by a person located in Russia, so long as those services are not further exported or reexported to persons in Russia. Thus, US persons could provide these services to US subsidiaries of Russian companies provided that those services are not directly or indirectly reexported to the Russian parent companies.

FAQ 1060 states that the prohibition on trust and corporate formation services do not prohibit US persons from serving on the board of directors of companies located in Russia. However, US persons would be prohibited from providing nominee officer or director services if contracted to serve on behalf of a person located in Russia.

FAQ 1061 explains that US persons are prohibited from providing management consulting, trust and corporate formation services, and accounting services to persons in Russia in their capacity as employees of companies located within the Russian Federation (Russian companies). US persons are not prohibited from providing other services as part of their employment by Russian companies, provided that those services are not separately prohibited.

FAQ 1062 confirms that a US subsidiary of a Russian company may not provide prohibited accounting, trust and corporate formations, or management consulting services to its parent company.

FAQ 1063 clarifies that the prohibitions do not differentiate between new or existing trusts. This means US persons are prohibited from providing trust and corporate formation services to persons located in Russia regardless of whether the services are to create a new trust or company or to continue providing trust administration and related services to an existing trust or company.

FAQ 1064 states that OFAC’s interpretation of management consulting services includes executive search and vetting services. The FAQ also reiterates OFAC’s definition of “management consulting services” from an earlier FAQ (FAQ 1034). As indicated in both FAQs, OFAC defines “management consulting services” as including “services related to strategic business advice; organizational and systems planning, evaluation, and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.”

FAQ 1065 clarifies that US persons are prohibited from serving as voting trustees on behalf of, or for shares of, persons located in Russia, unless otherwise exempt or authorized by OFAC.

FAQ 1066 provides that supplying educational services on subjects related to accounting, management consulting, or trust and corporate formation to persons in Russia is not prohibited. However, these educational services may not be used as an evasion method to provide the underlying prohibited services.

FAQ 1067 confirms that US persons are not prohibited from exporting, reexporting, selling, or supplying software to Russia. Furthermore, services associated with an export of such software, such as software design and engineering, are not prohibited as long as the associated services do not constitute management consulting, accounting, or trust and corporate formation services. Therefore, a US company could license and deliver software to a Russian company and continue to provide technical support related to that software. However, the US company could not provide ongoing advisory services regarding the use of such software to improve the Russian company’s profits. Although not referenced in the FAQ, the provision of software to Russia is also subject to separate, and stringent, licensing requirements under the Export Administration Regulations.

FAQ 1068 clarifies that tax preparation and filing activities fall within the scope of accounting services and are prohibited, unless otherwise exempt or authorized by OFAC.

Conclusion

The US and its allies continue to impose strict economic and financial measures against Russia in response to its invasion of Ukraine, targeting individuals, economic sectors, and specific goods. These actions have resulted in almost 1,000 business cutting back operations or pledging to leave Russia.

We will continue to monitor the sanctions and export control restrictions as they emerge.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.