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Volume XII, Number 183

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Economic Sanctions and Asset Seizures: An Important Focus for the Biden Administration

Sanctions continue to be a dynamic area of regulation and enforcement. In its first year, the Biden Administration has already undertaken a number of different sanctions initiatives. The three examples below highlight the range of strategies employed and their potential ramifications for private investment funds.

  1. Sanctions on Russia over Ukraine

In response to Russia’s actions in Ukraine, the U.S. has ramped up economic pressure by imposing sweeping sanctions on major Russian financial-institutions, Russian oligarchs, and members of Russian President Vladimir Putin’s inner circle, and even Putin himself. The Department of Treasury’s Office of Foreign Assets Control (“OFAC”) has also expanded restrictions on trading Russian sovereign debt and transactions involving debt and equity, and restricted the ability of U.S. financial institutions to clear transactions with certain Russian banks. The U.S. has also imposed sanctions that in the past it has disfavored, including removing some Russian banks from the SWIFT financial messaging system and imposing sanctions on the company in charge of building Russia’s Nord Stream 2 gas pipeline designed to double gas flow capacity between Russia and Germany.

Alongside sanctions, the Department of Justice recently announced a new task force, “KleptoCapture,” focused on seizing assets belonging to sanctioned persons and criminal actors, and specifically targeting the crimes of Russian oligarchs and those who aid or conceal their unlawful conduct.

Circumstances have changed since 2014 when the U.S. and its western allies imposed sanctions after Russia seized Ukraine’s Crimean Peninsula.  Since then, Putin has built up Russia’s international reserves, reduced its public debt, and increased trade deals with non-European countries like China. Meanwhile, Europe has grown increasingly dependent on Russia for its energy needs. As a result, some speculate that U.S. sanctions may have less of an impact on Russia’s economy, and sanctions on Russia’s energy sector are likely to have significant repercussions for European allies. However, the expanded sanctions against Russia are already having a dramatic effect on Russia’s ability to participate in the global economy.

Moreover, regulators are anticipating the possibility that Russia may try to evade sanctions through the use of cryptocurrencies. For example, Russia could conduct ransomware attacks to steal cryptocurrency and could find people or entities willing to trade in cryptocurrency, which it could do outside of the international banking system. Accordingly, Task Force KleptoCapture is also focused on this space.

  1. Sanctions in the Virtual Currency Space  

Sanctions developments in the digital assets space are especially important given the growing threat that ransomware poses to the public and the economy.  In response to this threat, OFAC has ramped up its efforts to fight ransomware payments.

In recent years, OFAC sanctions have increasingly targeted individuals and entities who have used virtual currency in connection with criminal activity. For example, in 2021, OFAC entered into a $500,000 plus settlement with BitPay, Inc., a cryptocurrency payment processing platform, for allowing persons in sanctioned jurisdictions to engage in digital currency-related transactions with BitPay’s merchant customers in violation of multiple sanctions.

OFAC has also sanctioned the virtual currency exchanges themselves. In September 2021, OFAC placed a Russian-based virtual currency exchange (SUEX) on its Specially Designated Nationals and Blocked Persons List (“SDN List”) for facilitating financial transactions for ransomware actors. In November 2021, OFAC sanctioned another virtual currency exchange, Chatex for its facilitation of ransomware payments.

OFAC can bring enforcement actions and impose penalties for sanctions violations based on strict liability, meaning that a U.S. person or entity can be deemed to have violated U.S. sanctions without having knowledge or reason to know it was engaging in a transaction prohibited under sanctions laws and regulations.

OFAC has discouraged U.S. companies from making ransomware payments and issued guidance warning companies that given the strict liability standard they could face consequences for making a ransom payment to a hacker that turned out to be a sanctioned entity, even if they were not aware of the hacker’s identity at the time of the payment. However, OFAC has indicated it will consider the totality of facts and circumstances surrounding the violation before imposing liability. Important mitigating factors include the company’s implementation of measures to prevent and protect against attacks, and reporting the attack to the appropriate government agency.

  1. Sanctions and Anti-Corruption Enforcement

The Global Magnitsky Human Rights Accountability Act authorizes the US government to impose sanctions on those it deems to be human rights abusers and corrupt government officials. An individual or entity sanctioned under this Act can be included in the SDN List.  As a result of this designation, all of their property and interests in property within U.S. jurisdictions are blocked and U.S. persons are generally prohibited from engaging in transactions with them. OFAC has also clarified that these sanctions apply to entities whose majority owner is a sanctioned individual or entity.

This is especially concerning for entities or persons engaged in international transactions. Private investment funds, especially those who made investments in and draw investors from foreign countries, must be extra vigilant and closely follow OFAC’s Framework for OFAC Compliance Commitments. OFAC has consistently made clear that companies facilitating or engaging in online commerce or companies processing transactions using digital currency are responsible for ensuring that they do not engage in transactions prohibited by OFAC sanctions.

Because the Global Magnitsky Act designates corrupt actors as SDNs, it can potentially open another avenue for the government to bring corruption cases. This is important because, given that strict liability applies to sanctions violations, the use of the Global Magnitsky sanctions program to prosecute corruption cases effectively lowers the government’s evidentiary burden.  In other words, instead of proving intentional violations of the Foreign Corrupt Practices Act (FCPA) and other anti-corruption statutes, prosecutors and regulators could potentially bring actions based on an underlying sanctions violation for which a company can be held strictly liable.

Dorothy Murray, Joshua M. Newville, Todd J. Ohlms, Seetha Ramachandran, Jonathan M. Weiss, Julia Alonzo, James Anderson, Julia M. Ansanelli, Adam L. Deming, William D. Dalsen, Amy Gordon, Reut N. Samuels and Hena M. Vora also contributed to this article.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 68
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About this Author

Partner

Steven Baker is a partner in the Litigation department and a member of the International Arbitration group. He has over 25 years of experience advising clients on complex, often multi-jurisdictional disputes in a wide range of industries, including asset management, technology, life sciences, financial services and defence sectors. He also has extensive experience advising upon and managing disputes for clients involving major technology or telecommunications projects and their financing, technology licensing and misappropriation of trade secrets.

...
+44.20.7280.2238
Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm
Partner

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

212.969.3315
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723
William Komaroff Litigation White Collar Attorney Proskauer Law Firm New York
Partner

Bill Komaroff is a partner in the Litigation Department and White Collar Practice Group. He has a nationwide federal practice focused on corporate defense and investigations, counseling and defending institutional and individual clients in connection with a broad array of complex government investigations, prosecutions and civil disputes.

Bill also has served as a member of the Criminal Justice Act Panel for the District Court for the Southern District of New York.

From 2003 to 2007, Bill served as an Assistant U.S....

212-969-3975
Kirsten Lapham FInancial Services Attorney Proskauer Rose Law Firm, United Kingdom
Partner

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution...

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