Importance of Post-Acquisition Compliance Program Integration and OFAC Sanctions Enforcement
Alongside the imposition of sanctions and export controls measures, particularly those involving Russia, the US government is also continuing to prioritize enforcement actions to ensure that these new measures are effective and to help prevent efforts to evade these measures. For example, in July 2022, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the US Department of Commerce’s Bureau of Industry and Security (BIS) published a joint alert warning financial institutions of potential Russian and Belarusian export control evasion, as discussed in Arnold & Porter’s Advisory. In addition, in public statements and press releases in connection with its sanctions programs and efforts, US government agencies and officials voice strong willingness to take enforcement actions against companies and institutions that fail to comply with the sanctions and export controls measures.1 The focus on enforcement has already started in the Russia context. For example, on August 31, 2022, BIS issued a charging letter against PJSC Lukoil for violation of US export controls, alleging that the company exported a US manufactured aircraft from Dubai to Russia in violation of US export control laws.2 In addition, on September 30, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed secondary sanctions on Sinno Electronics Co., Limited, a Chinese entity, and Taco LLC, an Armenian entity, for supporting Radioavtomatika LLC, a Russian defense procurement firm identified on OFAC’s Specially Designated Nationals And Blocked Persons List (SDN List).3
We anticipate that OFAC will continue to pursue investigations, and ultimately, pursue further enforcement actions. An early example of the types of enforcement actions OFAC can bring in the context of its Ukraine/Russia-related sanctions program is that involving S&P Global, Inc. (S&P Global) which was announced on April 1, 2022, just a couple months after the imposition of new sanctions measures against Russia following Russia’s invasion of Ukraine. While this enforcement action was based on sanctions measures that existed before 2022, under OFAC’s Ukraine-Related Sanctions Regulations, the enforcement action highlights several important aspects of the sanctions laws that apply with equal force to the newer, more specific sanctions measures involving Russia and imposed under the Russia Harmful Foreign Activities Sanctions Regulations, as well as other sanctions regulations.
Details of Enforcement Action Against S&P Global
On April 1, 2022, OFAC announced a settlement with S&P Global for apparent violations of Ukraine-Related Sanctions Regulations. According to the settlement announcement, S&P Global, through its then-newly acquired subsidiary, Petroleum Industry Research Associates, Inc. (PIRA), engaged in apparent violations of sanctions that prohibit dealing in new “debt” of JSC Rosneft (Rosneft) of longer than 90 days maturity, by reissuing and redating an August 2015 invoice to Rosneft multiple times in 2016 and 2017 to receive payments more than 90 days after the original invoice date. (OFAC has issued similar restrictions on financing in the context of other sanctions programs, including the Russia Harmful Foreign Activities Sanctions Regulations.) S&P Global agreed to pay $78,750 to settle its potential civil liability.
The specific facts of the apparent violation were as follows. In August 2015, before being acquired by S&P Global, PIRA issued an invoice for $82,500 to Rosneft, with a payment date of October 18, 2015. Rosneft, however, did not make payments by the due date. When Rosneft attempted to make payment in May 2016, PIRA’s bank rejected the payment “in accordance with the sanctions program.” Rosneft attempted to make the payment again later that month. This time, the bank requested additional information from Rosneft, but Rosneft did not respond to the request. In July 2016, instead of requesting a license from OFAC to receive the payment outside of the 90-day maturity limit, PIRA then suggested that Rosneft make payments in check instead of bank transfers. Rosneft, in turn, suggested that PIRA contact its bank since the payments were “returned by the bank because of sanctions policy.”
In August 2016, S&P Global acquired PIRA and started integrating PIRA’s business into its operations. In the same month that it acquired PIRA, S&P Global employees (formerly PIRA employees) reissued and redated the August 2015 invoice with a new date of August 26, 2016 to Rosneft. In doing so, S&P Global management apparently emphasized the importance of timely payment to Rosneft, noting that “when the payment is made against an old invoice (as recent ones were), the bank may perceive that to be ‘extending credit’ to a Russian company, which we cannot do by law.” Pursuant to the newly-issued invoice, S&P Global received a portion of the original invoice amount ($55,000) in October 2016 from Rosneft.
To recover the remaining amount, S&P Global reissued the original August 2015 invoice again by creating two new invoices of $13,750 each. Rosneft made payments on one of these invoices in December 2016. Having still not received $13,750 from Rosneft, S&P Global then reissued and redated the invoice in September 2017; Rosneft ultimately made the remaining payments in October 2017.
OFAC determined that S&P Global appeared to have violated Directive 2 of Executive Order 13662 and the Ukraine-Related Sanctions Regulations by dealing in new debt of longer than 90 days maturity of Rosneft, through reissuing and redating its original August 2015 invoices and receiving payments after 90 days of the original invoice date. S&P Global did not voluntarily disclose the apparent violation to OFAC.
Implications of S&P Global Settlement
The S&P Global settlement was OFAC’s second-ever enforcement action involving apparent violations of OFAC’s sectoral sanctions program prohibiting dealings in certain new debts and new equity of certain designated entities. This enforcement action highlights OFAC’s position, as previously indicated in informal guidance issued by OFAC, that allowing payment terms to be extended beyond any applicable specified maturity limit is a prohibited transaction in new “debt.”4 This interpretation would likely apply not only to prohibitions on such transactions under the Ukraine-Related Sanctions Regulations, but also to similar prohibitions under the recently-expanded Russia Harmful Foreign Activities Sanctions Regulations and other sanctions programs that have financing-related prohibitions.
Significantly, this enforcement action also highlights the sanctions-related risks in the context of mergers and acquisitions; and therefore, the importance of quickly integrating compliance programs in a newly acquired entity following a merger or an acquisition. (For example, in this instance, S&P Global first reissued the invoice to Rosneft during the same month that S&P Global acquired PIRA.) Indeed, in announcing the settlement, OFAC stressed that US companies should conduct “sanctions-related due diligence and tak[e] active steps to extend their compliance programs, including training and monitoring, to newly incorporated businesses and their employees” and that “companies should continue to closely oversee their new business elements in addition to their existing units to identify any additional sanctions-related issues and take appropriate preventative or remedial measures” following a merger and acquisition transaction.
Nor is this the first time OFAC has highlighted compliance risks arising from newly acquired foreign affiliates. In 2019, for example, OFAC brought several enforcement actions based on conduct of foreign affiliates, as discussed in Arnold & Porter’s previous Advisory. The S&P Global settlement is a reminder that this remains an area for heightened due diligence and that OFAC will continue to bring enforcement actions in this area—particularly as we anticipate enforcement activity in the context of US sanctions involving Russia picks up.
* Junghyun Baek contributed to this Advisory. Mr. Baek is a graduate of Harvard Law School and is employed at Arnold & Porter’s Foreign Legal Consultant Office as a Law Clerk.
© 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.
See, e.g., Press Release, US Dep’t of the Treasury, Remarks by Under Secretary for Terrorism and Financial Intelligence Brian Nelson at SIFMA’s Anti-Money Laundering and Financial Crimes Conference (May 25, 2022), available here (“[A]s appropriate, we will take enforcement actions. Enforcement is one of the tools we use to promote compliance, and this is particularly important in the context of our Russia sanctions program. We will take enforcement actions against institutions or individuals that evade, avoid, cause a violation of, or conspire or attempt to violate OFAC regulations.”).
Press Release, US Dep’t of Commerce, Bureau of Industry and Security, BIS Takes Enforcement Action Against PJSC Lukoil for Violation of US Export Controls (Aug. 31, 2022), available here.
Press Release, US Dep’t of the Treasury, Treasury Imposes Swift and Severe Costs on Russia for Putin’s Purported Annexation of Regions of Ukraine (Sep. 30, 2022), available here.
OFAC Frequently Asked Questions, No. 419, available here.