FinCEN Alert Highlights Potential U.S. Commercial Real Estate Investments by Sanctioned Russian Elites and Their Proxies (January 30, 2023)
As the world watched in horror over the atrocities occurring in the war zones of Ukraine this week, global leaders re-doubled their efforts to bring increasing sanctions pressure to bear on Russian industry, the Russian economy and the sphere of influence surrounding Russian President Vladimir Putin. The U.S., UK and EU rolled out a series of new or newly-tightened sanctions measures over the course of the week, and signaled that more tools remain in the sanctions toolkit going forward. DOJ also announced a number of enforcement actions initiated as part of “Task Force KleptoCapture,” including a criminal indictment against a Russian oligarch for attempting to evade previously imposed sanctions.
- Charges and Seizures Targeting Sanctioned Russian Oligarchs. DOJ has filed the first criminal charges against a Russian oligarch following the recent invasion of Ukraine. Konstantin Malofeyev is described as a “Kremlin-linked Russian oligarch” responsible for multiple media outlets in and outside of Russia that operate as a “pro-Putin propaganda network.” On Wednesday, DOJ announced an indictment against Malofeyev filed in the Southern District of New York for conspiring to violate and violating Crimea-related sanctions imposed against him in late 2014. The allegations are based entirely on actions taken before the current invasion and focus on Malofeyev’s employment of a U.S. citizen and television producer, Jack Hanick. Hanick is alleged to have assisted Malofeyev in post sanctions efforts to acquire a Bulgarian television network and conceal Malofeyev’s identity as the buyer. In addition, the indictment alleges that Hanick assisted Malofeyev in transferring a $10 million investment in a Texas bank through the use of a shell corporation to conceal Malofeyev’s ownership and circumvent the sanctions. Hanick was indicted for his role in November 2021 and his prosecution is ongoing.
DOJ also announced the seizure of a $90 million yacht known as “Tango” and owned by sanctioned Russian oligarch Viktor Vekselberg. The yacht was seized with the assistance of law enforcement authorities in Spain and based on a civil seizure warrant issued by the district court for the District of Columbia. Like Malofeyev, Vekselberg was sanctioned in 2018 before the recent invasion and is also alleged to have used shell companies to conceal his ownership. The basis for the seizure includes that Vekselberg was the beneficiary of payments made through U.S. banks for the maintenance of Tango. These enforcement actions exemplify DOJ’s more aggressive approach since forming Task Force KleptoCapture, including a willingness to take action based on historical activity and pursue criminal charges even if extradition to the U.S. is unlikely.
- Prohibition on New Investment in Russia. Noting that the measure would “ensure the enduring weakening of the Russian Federation’s global competitiveness,” the White House on Wednesday afternoon announced that President Biden had signed a new Executive Order (E.O.) prohibiting new investment in Russia by any U.S. persons, regardless of their location. The E.O. also contains language empowering the Secretary of Treasury, in consultation with the Secretary of State, to prohibit the export, reexport, sale, or supply of any category of services to any person located in the Russian Federation. While the new investment ban had immediate effect, the services export restrictions remain prospective and undefined. Their inclusion in the E.O. does, however, signal that what allowable commercial ties remain between the United States and Russia are in scope for further restriction.
- Full Blocking Sanctions on Sberbank and Alfa Bank. After initially restricting debt and equity transactions with Russia’s largest financial institution, the Public Joint Stock Company Sberbank of Russia (Sberbank), and its largest private bank, Joint Stock Company Alfa-Bank (Alfa-Bank), in late February, the Department of Treasury on Wednesday imposed full blocking sanctions against those institutions. These new measures prohibit U.S. entities and individuals from transacting with Sberbank and Alfa-Bank, and freeze any of those institutions’ assets that touch the U.S. financial system. The blocking sanctions also apply to 42 named Sberbank subsidiaries, 6 named Alfa-Bank subsidiaries, and any other entity in which those financial institutions hold a fifty percent or greater ownership interest.
In conjunction with the sanctions announcement, the Department of Treasury issued general licenses permitting the wind down of transactions with Sberbank through 12:01 AM eastern daylight time on April 13, 2022, and with Alfa-Bank through 12:01 AM eastern daylight time on May 6, 2022. Additionally, certain limited transactions with those banks and other sanctioned Russian financial institutions will continue to be permitted in the mid-term, pursuant to several general licenses issued by OFAC on Wednesday. These include:
- Certain transactions necessary for dealing in debt or equity with certain Russian financial institutions and for winding down derivatives contracts entered into prior to 4:00 PM eastern standard time on February 24, 2022, through 12:01 AM eastern daylight time on May 25, 2022;
- Transactions necessary to the wind down of Sberbank CIB USA Inc. and any subsidiaries, through 12:01 AM eastern daylight time on June 7, 2022; and
- Certain energy-related transactions, through 12:01 AM eastern daylight time on June 24, 2022.
- Sanctions on Elites, Including Vladimir Putin’s Daughters. The White House additionally announced that numerous Russian elites would be added to the Department of Treasury, Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals list (SDN list), preventing U.S. persons from transacting with them, and freezing any assets they hold in the United States. These included Vladimir Putin’s two adult daughters— Katerina Vladimirovna Tikhonova and Maria Vladimirovna Vorontsova—and Russia’s Security Council, including former President and Prime Minister of Russia Dmitry Medvedev and Prime Minister Mikhail Mishustin.
- Sanctions on Russian State-Owned Entities. On Thursday, the U.S. State Department and Department of Treasury announced sanctions against two significant Russian state-owned entities, as well as their subsidiaries and board members: Joint Stock Company United Shipbuilding (USC), which develops and constructs most of Russia’s warships, and Public Joint Stock Company Alrosa (Alrosa), which OFAC described as the world’s largest diamond mining company, accounting for twenty-eight percent of global diamond mining. In a press release, the Department of Treasury described these efforts as “cutting off additional sources of support and revenue for the Government of the Russian Federation (GoR) to wage its unprovoked war against Ukraine.”
With respect to USC, the Department of State designated the company, eight of its board members, and twenty-eight of its subsidiaries, resulting in their being added to OFAC’s SDN list. Alrosa was previously subject to more limited sanctions that restricted U.S. persons from transacting or dealing in new debt or equity with the company. However, OFAC on Thursday expanded those sanctions by adding it to the SDN list, freezing any U.S.-based Alrosa assets and fully blocking U.S. persons from transacting with the company.
Pursuant to a general license issued by OFAC in conjunction with the designation, U.S. persons have until 12:01 AM eastern daylight time on May 7, 2022 to wind down transactions with Alrosa and any entities in which it has a fifty-percent or greater ownership interest. A second general license permits wind down transactions with Alrosa USA, Inc. through 12:01 AM eastern daylight time on June 7, 2022.
- General License Authorizing Transactions Related to Telecommunications and Internet-Based Communications. Finally, on Thursday, the Department of Treasury issued a general license clarifying that certain transactions related to telecommunications and internet-based communications are not banned. Specifically, the license permits all transactions ordinarily incident and necessary to the receipt or transmission of telecommunications involving Russia. It also allows the exportation, reexportation, sale, or supply by U.S. persons to Russia of certain services, as well as software, hardware, and technology incident to the exchange of communications over the internet.
- Fifth sanctions package imminent. The EU has announced plans for its fifth round of sanctions against Russia, currently under discussion and with approval considered imminent. The content of the package was outlined in a press statement on Tuesday, and then contextualized in a speech to the European Parliament by President Ursula von der Leyen on Wednesday. President von der Leyen reflected the mounting anger at news of atrocities committed by Russian forces in Ukraine, stating that, “…last week, humanity itself was killed in Bucha.”
- Six pillars. The fifth round of sanctions is described as having 6 pillars:
- An import ban on coal from Russia, said to be worth €4 billion per annum, and the first time the EU has directly sanctioned the import of fossil fuels;
- A full transaction ban on four key Russian banks, including VTB, with the aim that they be “totally cut off from the markets”;
- A ban on Russian and Russian-operated ships from entering EU ports, and a ban on Russian and Belarusian road transport operators;
- An export ban on certain technology, machinery and transport equipment;
- An import ban on products including wood, cement, seafood and alcohol;
- A prohibition in respect of EU public funds, yet to be finalized, but with suggestions it could be a ban on Russian companies’ involvement in public procurement in EU Member States, or the exclusion of all financial support to Russian public bodies.
- The EU is not done. President von der Leyen went on to warn that these will not be the last sanctions against Russia that the EU will issue. Firmly in the EU’s sights are revenues Russia receives from fossil fuels. The EU is also looking to spread the message and encourage nations outside of the EU – particularly China – to respect what the EU is doing. In a direct message to the Chinese authorities, President von der Leyen called on them to take a clear stance, in support, on how we globally treat violations of international law such as Russia is committing in Ukraine.
- UK ratchets up. Again, motivated by “reports of abhorrent attacks on civilians”, the UK’s Foreign Secretary, Liz Truss, on Wednesday announced further sanctions on Russia. The intention is to cut off key sectors of the Russian economy and end the UK’s dependence on Russian energy. Echoing sentiments conveyed by President von der Leyen in the European Parliament, Foreign Secretary Truss stated that, “Together with our allies, we are showing the Russian elite that they cannot wash their hands of the atrocities committed on Putin’s orders.”
- Sanctions against banks, investment and energy. Key measures announced by the UK include:
- Asset freezes against Sberbank and Credit Bank of Moscow, said to have been coordinated with the United States;
- A ban on all new outward investment to Russia, similar to that announced by the United States;
- An end to all dependency on Russian coal and oil by the end of this year, with all imports of gas brought to a stop as soon as possible after that;
- Banning the export of oil refining equipment to Russia from next week;
- Banning imports of iron and steel products with further restrictions on the export of quantum and advanced material technologies.
- Oligarchs in relevant industries are also targeted. Eight oligarchs, active in the industries being targeted by the more general sanctions, have been named specifically with the result being an asset freeze on them personally, including UK-based assets they control. These include the CEO of GazpromNeft, the son of the co-owner of Russia’s largest gas pipeline producer and the founder / CEO of Novatek, one of Russia’s leading natural gas producers.
While the sanctions have showed no outward signs of slowing or reversing Russia’s aggression in Ukraine, they have continued to evolve in a rapid and increasingly coordinated fashion across major western powers. They are also moving increasingly into areas such as Europe’s and the UK’s energy-related dependence on Russia that have long been seen as bulwarks against a full economic assault on the Russian economy – and Putin’s most powerful geopolitical bargaining chip. While Russia has clearly crossed any number of red lines over the last several weeks, it appears that the West is increasingly galvanized for a long-term sanctions counter-offensive that if it holds could be transformative to the economic dynamics of Europe and beyond.