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U.S. Sanctions Target Russian Corruption, Human Rights Violations

Asserting that “the protection of human rights … is not left exclusively to the internal affairs of [any one] country,” in December 2012 the United States enacted the Sergei Magnitsky Rule of Law Accountability Act of 2012 (the “Magnitsky Act”).  Under the law, the President is required to identify individuals found to be involved in human rights violations and impose targeted sanctions on them.  Interestingly, as discussed below, these sanctions seem to be based in significant part on concerns about corruption in Russia.  While the U.S. government continues to aggressively enforce the Foreign Corrupt Practices Act with respect to parties giving bribes, the Magnitsky Act suggests that Congress may seek to employ economic sanctions to target recipients of corrupt payments.

Background.

Sergei Magnitsky died in prison in Moscow in November 2009.  His imprisonment, and the reputed mistreatment of him while in prison, made him something of a cause celebre.  Magnitsky, an accountant with a Russian law firm, was thrown in jail in November 2008 after he claimed that Russian law enforcement officials had misappropriated three Russian companies and procured a fraudulent $230 million tax refund from the government of Russia.

Following Magnitsky’s death, an investigative panel was convened by the Russian government to review the matter.  The panel concluded that, among other things, Magnitsky was illegally arrested and detained.  The panel also determined that Magnitsky was investigated by the same officials he had accused of corruption.  Magnitsky was apparently beaten savagely then denied medical treatment on the day he died.

The story is a sordid one but seemingly not unique.  In the Magnitsky Act, Congress specifically states as a basis for its action the show trials of Yukos executives, including Mikhail Khodorkovsky, as well as the murder and mistreatment of dozens of other named individuals based on the “wrongdoing” of Russian officials.  These actions are, according to Congress, of “profound concern to the United States government and to the American people.”

Restrictions imposed.

Under the Magnitsky Act, within 120 days of enactment of the Act, the President was required to identify and impose sanctions against certain individuals, including the following:

(A)  Persons responsible or involved in the detention, abuse, or death of Sergei Magnitsky, including persons who benefitted financially from the detention, abuse, or death of Magnitsky; and

(B)   Persons responsible for extrajudicial killing, torture, or other violations of human rights of specified individuals in Russia.

The President was directed to provide this information in unclassified form except in the case of information that would have an impact on national security.  In addition, the Magnitsky Act authorizes Congress to inquire with the President about whether a particular individual should be designated, and the President is required to respond within 120 days.

Under the Magnitsky Act, designated individuals are subject to visa restrictions, including the revocation of existing visas.  In addition, assets of any designated individual that are subject to U.S. jurisdiction are required to be blocked.  To enforce this blocking provision, the President is required to compel U.S. financial institutions “to certify … that, to the best of the knowledge of the financial institution, the financial institution has frozen all assets [of any designated individual].”

On April 12, 2013, the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) published a list of (the first) 18 individuals designated under the Magnitsky Act.  Each of these individuals is now listed on OFAC’s List of Specially Designated Nationals and Blocked Persons  with the identifier “MAGNIT”.  Effective immediately, therefore, all U.S. persons are significantly limited in terms of conducting any transactions with these individuals.  As to the certification requirement for U.S. financial institutions, it remains to be seen whether Treasury will pro-actively require such certifications or await blocking reports from financial institutions, then require them to certify as required under the law.

Conclusion.

It is well-known by now that the United States is not afraid to wade into what appear to be largely domestic affairs and take action against individuals or governments it deems to be doing wrong.  And human rights abuses have certainly been the, or at least a, basis for such action before, e.g., in the current comprehensive sanctions against Syria.  While Russia is considered an ally, and thus this is different than imposing restrictions on a pariah regime such as that in Syria, or when the United States re-introduced (before eliminating) sanctions on the Gaddafi regime in Libya in 2011, it is still not entirely surprising that the United States would take this action.

What we think is more notable in this matter is the link that Congress has drawn between corruption and human rights.  It seems quite reasonable to conclude that there is a valid link, but the extent to which that link has triggered sanctions in the past is not evident.  Given the U.S. government’s vigorous enforcement of corruption in the form of the Foreign Corrupt Practices Act, if Congress is increasingly seeing the ills of corruption as something that it can legislate through sanctions, it does not seem to be a huge leap to expect the United States to introduce restrictions against individuals in other parts of the world that have been the recipients of corrupt payments prosecuted under the FCPA.  Keep an eye on what Congress does next in this area.

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

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