Update: US Sanctions on Russia Have Extraterritorial Implications

In connection with recent Russia-related sanctions issued by the US government, organizations face a variety of issues when navigating the questions of who and what transactions may be subject to the reach of these sanctions. Economic sanctions administrated by the US Department of Treasury’s Office of Foreign Asset Control (OFAC) are often intended to have extraterritorial effect, and therefore can impose significant compliance costs and penalties on US subsidiaries as well as their non-US affiliates or parent entities.

The situation relating to Russia’s operations in Ukraine remains fluid and dynamic, with US allies and partners, including the United Kingdom and EU member states, adopting similar Russia-related restrictions on a daily basis, although the precise contours of the sanctions’ terms and their extraterritorial reach may vary. This LawFlash focuses on the extraterritorial reach of US sanctions.

Background

Following US President Joseph Biden’s announcement of plans to sanction Russia, OFAC issued Russia-related Directive 1A under Executive Order on Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation (EO 14024) on February 22, 2022.

EO 14024 was originally promulgated on April 19, 2021, setting a new bar as a sweeping sanctions tool aimed at countering a wide range of Russian government–backed problematic activities. Pursuant to EO 14024, OFAC subsequently issued additional Russia-related sanctions Directive 2 and Directive 3 on February 24, 2022, and Directive 4 on February 28, 2022.

At a high level, the Russia-related Directives prohibit, as of the time of this writing, at least the following:

• Participation in the primary market for ruble or non-ruble denominated bonds to certain Russian entities, the lending of ruble or non-ruble denominated funds to such entities, and participation in the secondary market for ruble or non-ruble denominated bonds by such entities (Directive 1A).
• The opening or maintaining of a correspondent account or payable-through account for or on behalf of certain foreign financial institutions, or the processing of a transaction involving such entities (Directive 2).
• All transactions in, provision of financing for, and other dealings in new debt of issued by certain foreign entities (Directive 3).
• All transactions involving certain major Russian banks, including any transfer of assets to such entities or any foreign exchange transactions for or on behalf of such entities (Directive 4)

The sanctions extend to parties subject to US jurisdiction wherever located—such as foreign companies that (1) have a branch in the United States; (2) have a subsidiary in the United States; or (3) do business in the United States. In addition, the sanctions could reach parties not located in the United States—such as foreign entities processing payments in US dollars through US banks. This extraterritorial reach, however, can be limited or recast through OFAC’s issuance of general licenses authorizing otherwise prohibited activities, new or expanded definitions, and interpretive guidance found in frequently asked questions posted on the OFAC website.

Relevant Definitions

As foreign policy and national security tools, sanctions regulations, licenses, or interpretations provide the US government a broad range of interpretive flexibility, which makes compliance a more challenging process. To help the general public understand the contour of sanctions, the US government often includes definitions related to prohibited activities and industry descriptions, in conjunction with actual sanctions regulations; for example, the general license for the energy sector permitted certain activities for a period of time and includes a definition of the energy industry.

The scope of US sanctions is also framed within the context of the executive order from which the rules, policies, and guidance are derived (i.e., EO 14024); the jurisdictional reach of the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act (NEA); and the circumstances under which OFAC has discretionary authority to exercise jurisdiction over an individual or entity (such as when a foreign entity subjects itself to US jurisdiction through certain transactions or activities subject to OFAC’s jurisdiction). Independently and collectively, these sources support the reach of US sanctions laws and regulations to parties outside the United States.

For example, Section 6(d) of EO 14024 defines “person” as “an individual or entity,” and an “entity” is defined in Section 6(a) to mean “a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization.” Accordingly, a person can be an individual or any form of corporate entity. Section 3(e) defines “United States person” to mean “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”

EO 14024, however, does not contain any geographic limitation on its application. Rather, in the context of EO 14024, the text of IEEPA gives the president authority to deal with the threat resulting from extraterritorial activities resulting from, among other things, “efforts to undermine the conduct of free and fair democratic elections and democratic institutions in the United States and its allies and partners” and the violation of “well-established principles of international law, including respect for the territorial integrity of states.” Accordingly, OFAC likely can exercise its jurisdiction hook liberally and extraterritorially.

IEEPA and NEA

Additionally, OFAC, through the authorities granted under IEEPA and NEA, consistently extends its jurisdiction to foreign parties such as financial institutions located outside the United States. Both IEEPA and NEA have become important tools for US presidents to impose economic-based sanctions targeting foreign states or their governments, non-state individuals and groups, and business entities. As the primary source of the president’s power under EO 14024, IEEPA authorizes the president to regulate foreign economic transactions when the president declares a national emergency to deal with any unusual and extraordinary threat to the United States that has a foreign source.

By its terms, IEEPA vests the president with authority over “transactions” that involve a “person . . . subject to the jurisdiction of the United States,” and does not specifically require that the transaction itself occur within the United States. Most US statutes and their implementing regulations are silent on their geographical scope, including IEEPA, but federal courts have supported the expansive interpretation of extraterritorial reach of the IEEPA.

For example, the US District Court for the Southern District of New York rejected the defendants’ argument that IEEPA could not reach business transactions conducted overseas between a foreign national and Iran. United States v. Zarrab, 15-867-RMB, 2016 WL 6820737 (S.D.N.Y. Oct. 17, 2016) (dismissing defendant’s motion to dismiss, which argued that IEEPA did not apply to foreign nationals; the defendant did not dispute that he had conducted business with US nationals). The district court noted that the plain language of the statute makes clear that IEEPA “is not limited to individuals (such as U.S. citizens) who are subject to the jurisdiction of the United States, indicating that Congress intended the statute to be applied extraterritorially.” Id. at *9.

Similarly, in another case, the US District Court for the District of Columbia held that IEEPA applies to foreign nationals, stating that the “plain language of several provisions of the IEEPA unambiguously indicate that the IEEPA applies extraterritorially.” United States v. Tajideen, 319 F. Supp. 3d 445, 457 (D.D.C. 2018).

Other Relevant Statutory Provisions

Other US sanctions regimes also define the terms relating to the jurisdictional reach. Although those definitions do not apply directly to implementation of this executive order, they are helpful for providing context for the potential scope of the rules implementing EO 14024:

• Section 515.329 of Title 31 in the Code of Federal Regulations defines “person subject to the jurisdiction of the United States” to include (1) any individual, wherever located, who is a citizen or resident of the United States; (2) any person within the United States (including US residents wherever they are located); (3) any corporation, partnership, association, or other organization organized under the laws of the United States or any state, territory, possession, or district of the United States; and (4) any corporation, partnership, association, or other organization (wherever organized or doing business) that is owned or controlled by a US citizen or resident, person located in the United States, or entity formed under US law.
• Section 515.313 of Title 31 defines “property subject to the jurisdiction of the United States” to include, without limitation, “securities, whether registered or bearer, issued by: (1) the United States or any State, district, territory, possession, county, municipality or any other subdivision or agency or instrumentality thereof; or (2) any person within the United States whether the certificate evidences such property or interest is physically located within or outside the United States.” The phrase also includes “without limitation, securities, whether registered or bearer, by whomsoever issued, if the instrument evidencing such property or interest is physically located within the United States.”

Key Takeaways

The reach of laws and regulations helps entities manage their compliance obligations, as being subject to US jurisdiction helps frame what requirements apply. As discussed, “subject to US jurisdiction” can be, and frequently is, broadly construed in the foreign policy and national security contexts to reach a non-US “person” and “entity” in a number of ways:

• Through the type of transaction parties involved (i.e., one of the parties to the transaction is a US person or otherwise subject to US jurisdiction by agreement or through property it has acquired or that is involved in the transaction).
• Through a transaction that happens on US soil, including the movement of funds (such as clearance activity) and transactions handled by service provided by US servers.
• Through the goods, technology, software, materials, or equipment involved in the transaction or activity. Generally speaking, these can be items that qualify as being of US origin in some manner, whether defined by the Customs and Border Protection process of substantial transformation, the Export Administration Regulations (under the de minimis or Foreign Direct Product rules), the International Traffic in Arms Regulations (where there is neither a de minimis or foreign direct product rule), or other similar statutes.
• Through financial transactions such as availing oneself of the US financial system for transactions or activities.
• By express agreement (e.g., contracts, supply agreements, and other business transactions language that designates US jurisdiction). For example, a foreign entity may agree to be subject to US jurisdiction. This often occurs through contracts that expressly state where jurisdiction resides, interpretation of contract terms occurs, or resolution of dispute happens; through litigation where foreign parties either avail themselves of the US judicial system or participate in the litigation process; or through a pattern of consistent conduct where a foreign party avails itself of the rights afforded under US laws and regulations.
• By the nature of stock ownership or control by US persons, including, for example, through an entity’s exchanging American depositary receipts or similar instruments in the United States.

While these and other regulations provide guidance on how the US government may interpret “subject to US jurisdiction,” we look primarily to the cases that interpret IEEPA and NEA writ large for the framework. Consequently, the question of whether one is “subject to US jurisdiction” or subject to EO 14024 and corresponding sanctions is always a fact-specific inquiry that will depend on the facts of each circumstance.

We also note that while the United States, the United Kingdom, and EU member states have adopted similar sanctions on Russia, the question of extraterritorial application can differ among the countries and hence require a jurisdiction-by-jurisdiction analysis. The situation can be further complicated by Russia’s countermeasures, including, for example, the decree, “On Special Economic Measures in connection with the Unfriendly Actions of the United States of America and Other Foreign Countries” of February 28, 2022. Please refer to our LawFlash regarding Russia’s special decree and its implications.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Task Force
Giovanna M. Cinelli
Joanna Christoforou
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Christina Renner
Vasilisa Strizh
Carl A. Valenstein
Alexey Chertov
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Christian Kozlowski
Eli Rymland-Kelly