Russia Sanctions: Is OFAC Flip-Flopping on its Blocked Entity Guidance?

OFAC Flip-Flopping on its Russian Sanctions Blocked Entity Guidance

Originally Published May 27, 2014.

An interesting Russia sanctions revelation was made in the most recent chapter of the SpaceX bid protest lawsuit against United Launch Alliance (ULA).  The Office of Foreign Assets Control (OFAC) appears to have backtracked on its own blocked entity guidance in an opinion letter penned by the Chief Counsel (Foreign Assets Control).

The Chief Counsel states that unless and until some “affirmative determination” by the Treasury that an entity is “owned or controlled” by a blocked person no blocking of that entity is required by law.[1]  In contrast, OFAC’s written guidance states that “[t]he property and interests in property of [an entity owned by a blocked person] are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on . . . [the SDN List].”[2]

That opinion letter was submitted to Judge Braden of the United States Court of Federal Claims as part of the Government’s motion to dissolve a preliminary injunction prohibiting ULA from buying rockets made by a Russian state-controlled entity thought to be controlled by a person listed in the Annex of Exec. Order 13661.  This situation arose because SpaceX utilized the often broad (and also vague) language found in OFAC’s regulations, orders, and opinions to privately enforce U.S. economic sanctions against its competitor in a bid for a valuable U.S. Air Force contract.

At issue were ULA’s Atlas 5 rockets, which use engines purchased from a Russian state-controlled company called NPO Energomash.  SpaceX was able to convince the court to issue a preliminary injunction on April 30, 2014 prohibiting the U.S. Air Force and ULA from “making any purchases from . . . NPO Energomash . . . unless and until the court received the opinion of the . . . Treasury that any such purchases or payments will not directly or indirectly contravene Executive  Order 13661.”[3]

Exec. Order 13661 blocked the property of additional persons contributing to the situation in Ukraine.  The annex to this order lists Russian Deputy Prime Minister Dmitry Rogozin, the official in charge of Russia’s space effort.  NPO Energomash, however, was not specifically targeted by the order.  Nevertheless, SpaceX questioned whether the proposed engine purchases would violate economic sanctions levied against Rogozin.

The position taken by SpaceX was not unreasonable. When OFAC rolled out its webpage for Ukraine-related sanctions it posted guidance entitled “Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked.”  In that guidance OFAC broadly states that the property and interests in property of an entity is blocked if that entity is at least 50% owned by a blocked person.  Such an entity is blocked “regardless of whether the entity itself is [listed].”[4]  In accordance with this guidance, the fact that NPO Energomash is not explicitly listed does not, in and of itself, mean that U.S. persons are authorized to transact with it.

Further confusing the issue is OFAC’s vague guidance that in “certain OFAC sanctions programs (e.g., Cuba and Sudan) there is a broader category of entities whose property and interests in property are blocked based on, for example, ownership or control.”[5]  However, the guidance fails to specify whether this broader category of unlisted blocked entities applies to the Ukraine-related sanctions program.  At this point SpaceX could have reasonably believed that U.S. persons are prohibited from transacting with NPO Energomash for being either owned or controlled by Rogozin.

On May 8, 2014 the court dissolved its preliminary injunction after it received the abovementioned opinion letter.  In that opinion the Chief Counsel clarifies that the blocking of property and interests in property of persons “owned or controlled” by a senior official of the Russian Federation Government or by a person listed in the annex of the order “requires that the . . . Treasury make an affirmative determination to trigger the blocking.”[6]  As such, NPO Energomash cannot be considered a blocked person because no such “affirmative determination” has been made.

OFAC’s guidance and opinion letter appear to be inconsistent.  The guidance clearly cautions U.S. persons of the possibility of dealing in blocked property belonging to unlisted blocked persons.  However, the opinion clearly states that no such unlisted blocked persons can exist in the Ukraine-related sanctions program without further “affirmative determination” by the Treasury.

Unless there is some form of affirmative determination that does not include listing an entity in the annex of an executive order or on the SDN List, it appears that OFAC has cleared away some of the regulatory uncertainties being faced by U.S. businesses in Russia.  U.S. persons might no longer have to concern themselves with anticipating present violations when transacting with an entity only believed to be owned or controlled by a blocked person.

The impact of this opinion is unclear.  Perhaps this regulatory clarification will undermine the efficacy of the sanctions in achieving U.S. foreign policy goals.  Without the uncertainty U.S. businesses may be more inclined to do business with state-owned enterprises in Russia until each such entity is explicitly listed.  However, it still behooves U.S. businesses to anticipate the future listing of a suspect entity when assessing the future risk and profitability of a proposed transaction.

Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes.  Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.

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1. May 8, 2014 Opinion Letter, Docket #27-1, Space Exploration Technologies Corp. v. United States, No. 14-CV-00354-SGB (Fed. Cl. May 8, 2014).

2. Office of Foreign Assets Control, Guidance On Entities Owned By Persons Whose Property And Interests In Property Are Blocked [herein after OFAC Guidance] available at http://www.treasury.gov/resource-center/sanctions/Documents/licensing_guidance.pdf.

3. Preliminary Injunction, Docket #10, Space Exploration Technologies Corp. v. United States, No. 14-CV-00354-SGB (Fed. Cl. Apr. 30, 2014).

4. OFAC Guidance supra note 2.

5. Id. (emphasis added).

6. May 8, 2014 Opinion Letter, Docket #27-1, Space Exploration Technologies Corp. v. United States, No. 14-CV-00354-SGB (Fed. Cl. May 8, 2014); see also Exec. Order 13661 § 1(a)(ii)(C).