Attorney Adam M. Smith, a former senior advisor to the director of OFAC, shares insights and perspective on sanctions.
Editor’s Note: NeuGroup is running weekly special sessions on the Russian-Ukrainian crisis. Senior executive advisor Paul Dalle Molle, a former banker with extensive European experience, leads the discussions.
By Paul Dalle Molle
At this week’s NeuGroup Russia session, members heard insights on sanctions and the road ahead from Adam M. Smith, a partner at Gibson, Dunn & Crutcher’s Washington, D.C. office, who is a leading expert in sanctions compliance, international trade law, embargoes and export controls. Mr. Smith served as the senior advisor to the director of the US Treasury Department‘s Office of Foreign Assets Control (OFAC) and the director for multilateral affairs on the US National Security Council.
Unprecedented response. Before addressing the specific concerns of corporate treasury executives and fielding questions on a variety of topics, Mr. Smith said members should keep in mind the unprecedented nature of the current situation, highlighting these points:
- Never have sanctions been imposed against a country with an economy and a state infrastructure as large and sophisticated as Russia’s.
- Never have so many countries, 46, joined together so swiftly to sanction a country that is perceived to have broken generally accepted behavioral norms.
- Never has European enforcement been so immediate and unhesitating.
- Never have so many multinational companies, over 400, so quickly condemned a country and announced their exits or suspensions of activities there.
“We are experiencing an impressive, historic response in what can already be considered a multilateral ‘victory’ by countries and companies which are united in a sense of moral outrage,” Mr. Smith said. “How well all this will work in the long run remains to be seen, of course; but the response of Western democracies and multinational companies has been impressive.”
Friend or foe? One member raised a question about Russia’s decrees regarding “friendly” and “unfriendly” countries: Assume a company is ultimately owned and controlled by an entity headquartered in an unfriendly (US/EU) country, and does a transaction that is compliant with US and EU sanctions. Would that transaction also be compliant with Russian counter-sanctions if routed through one of the corporate’s subsidiaries in a friendly country?
- Mr. Smith pointed out that he is not a Russian counsel and that companies must consult their Russian advisors on such matters. Based on his frequent dialogue with Russian attorneys, he knows that the latter are also living with many unknowns, chief among them whether these counter-sanctions will be interpreted strictly or loosely by the Russian authorities, depending on how they serve Russia’s interests.
- That said, his expectation is that over time, the Russian authorities are likely to interpret the decrees as looking to the ultimate country of ownership and control rather than to the country of a subsidiary.
Cautious banks. As at every session, members have asked many questions about banks, with some complaining that they seem to be excessively cautious, declining to help US or EU corporate clients with legitimate transactions that do not violate sanctions. Mr. Smith acknowledged this thorny issue, but his views contained a note of optimism.
- “There are over 250 banks in Russia. While the biggest ones are sanctioned, most are not,” Mr. Smith observed. “Over time, it should become clear to banks and companies which transactions are compliant with both sanctions and counter-sanctions, and it should be possible to avoid sanctioned banks.
- “Let’s keep in mind that the way that sanctions are designed by the US, EU and others implies a willingness for some private sector international economic trade with Russia to continue, especially for oil and gas, agricultural goods, food, medicines, medical devices, minerals and other commodities.”
- This also allows multinational companies to fulfill their payment obligations to staff, suppliers and for local taxes, he added. There are already OFAC general licenses for some activities, e.g., oil & gas exports, and there may be specific licenses forthcoming, he said.
Fear of imprisonment. When members raised the possibility that top Russian managers of multinational companies could be jailed if plants shut or operations halt, Mr. Smith said he has also heard this mentioned by some US and Russian contacts.
- However, he is not aware of any actual instances of this happening, noting that only Russian counsel is qualified to provide an informed view.
Fear of nationalization. Mr. Smith recognizes that there is a real possibility that Russia will nationalize foreign-owned banks and companies. However, he once again sounded a cautiously positive note about the situation.
- “So far, it seems that the Russian oligarchs and business professionals are recommending that their government not make wholesale nationalizations, for many reasons. The Russian authorities will do, of course, what they believe to be in the best interests of their country, but this reaction from the Russian professional community leads me to believe that selective nationalizations are much more likely than wholesale ones.”
Breach of contract. Companies must consider how “self-sanctioning,” the voluntary nature in which companies announced their exits from Russia or their suspension of activities there, affects their ability to recover value from their ceased operations.
- According to Mr. Smith, since no laws compel multinationals to leave, it would seem difficult to litigate against breach of contract lawsuits or to claim against force majeure clauses in contracts and with insurers. Of course, every situation is unique, and every situation requires scrutiny by counsel.
Expert perspective on OFAC. Mr. Smith closed this session with some general comments on OFAC. He said Multinational companies need to keep in mind that OFAC is an extremely small agency, comprised entirely of professionals (no political appointees). Also:
- Specific Licenses are difficult to get, don’t become public information unless disclosed by the grantee and often take a long time, although OFAC can act urgently in a true emergency.
- OFAC is not interested in the business cases or business effects of a proposed Specific License, but is concerned in their humanitarian effects and in the policy arguments being proposed.
- He also said that OFAC is not trying to “play gotcha” and punish companies when minor violations occur in an otherwise vigilant, systematic attempt to comply.