News from Reeves & Dola, LLP
U.S. GOVERNMENT EXPANDS UKRAINE SANCTIONS TO INCLUDE RUSSIAN FIREARMS MANUFACTURER,
On June 20, 2017, the Department of the Treasury's Office of Foreign Assets Control (OFAC) announced expansion of sanctions imposed on persons and entities in Russia pursuant to Executive Orders President Obama issued in 2014. The 2014 sanctions were imposed because the Obama Administration determined the designated persons were contributing to the situation in Ukraine. Readers may recall that the 2014 sanctions named Kalashnikov Concern as one of the Specially Designated Nationals subject to the sanctions. Now, OFAC has
Molot-Oruzhie, OOO, to the list of sanctioned entities, stating that Kalashnikov Concern used the company to falsify invoices in order to circumvent U.S. and European Union sanctions. Molot-Oruzhie is a manufacturer of firearms and accessories, including the VEPR rifle.
Subsequent to the OFAC announcement, the Department of Commerce's Bureau of Industry and Security (BIS) published a notice in the June 22, 2017 Federal Register adding ten entities to the Entity List, including Molot-Oruzhie, OOO. The BIS
is consistent with the OFAC press release and indicates the sanctions imposed on Molot-Oruzhie are imposed in accordance with Executive Order 13661.
authorizes sanctions on any individual or entity that has been determined by the Secretary of the Treasury, in consultation with the Secretary of State, to be owned or controlled by, or that has provided material or other support to, persons operating in the arms or related materiel section in the Russian Federation and officials of the Government of the Russian Federation.
The impact of naming Molot-Oruzhie, OOO as a sanctioned entity is the blocking of any property or interest in property of Molot-Oruzhie, OOO, in the possession or control of U.S. persons or within the U.S. Transactions by U.S. persons involving Molot-Oruzhie, OOO are generally prohibited.
DESIGNATION OF MOLOT-ORUZHIE, OOO
The Department of Commerce Federal Register notice of new companies on the Entity List includes the following entry:
Molot-Oruzhie, OOO, a.k.a., the following one alias:
--Obshchestvo S Ogranichennoi Otvetstvennostyu 'Molot-Oruzhie' (f.k.a., Obshchestvo S Ogranichennoi Otvetstvennostu Proizvodstvenno Instrument Kachestvo), 135 ul. Lenina, Vyatskie Polyany, Kirov Obl. 612960, Russia;:
MOLOT-ORUZHIE, OOO (a.k.a. OBSHCHESTVO S OGRANICHENNOI OTVETSTVENNOSTYU 'MOLOT-ORUZHIE'; f.k.a. OBSHCHESTVO S OGRANICHENNOI OTVETSTVENNOSTYU PROIZVODSTVENNO
INSTRUMENT KACHESTVO), 135 ul. Lenina, Vyatskie Polyany, Kirov Obl. 612960, Russia; Registration ID 1094307000633 (Russia); Tax ID No. 4307012765 (Russia); Government Gazette Number 60615883 (Russia) [UKRAINE-EO13661] (Linked To:
WHAT IS A SPECIALLY DESIGNATED NATIONAL (SDN)?
SDNs include individuals and entities located anywhere in the world that are owned or controlled by, or that act for or on behalf of the government of a sanctioned country. SDNs also include certain individuals and entities designated as terrorists and narcotics traffickers under sanctions programs that are not country-specific. All property and interests in property of a SDN that comes under U.S. jurisdiction is blocked or frozen. Blocking immediately imposes an across-the-board prohibition against transfers or transactions of any kind involving the property. When a corporation, including a bank, blocks a prohibited payment, it must report the action to OFAC within 10 days.
OFAC JURISDICTION AND PENALTIES
OFAC has sweeping jurisdiction over U.S. persons and other persons subject to U.S. jurisdiction. This includes U.S. citizens and permanent resident aliens ("green card" holders) whether in the U.S. or abroad, companies organized and formed under U.S. law, and any individual or organization physically located in the U.S. at the time of the activity, regardless of nationality. In addition to these controls, OFAC sanctions also prohibit facilitation of foreign trade with targets of U.S. sanctions. This prevents U.S. persons from undermining sanctions through indirect support and applies to approving, financing, guaranteeing, or otherwise assisting foreign trade with a sanctioned target, changing policies or procedures to permit foreign affiliates to engage in activities with a sanctioned target that previously required U.S. approval, and referring declined business opportunities to a foreign party.
Penalties for violating OFAC sanctions are substantial. Pursuant to the International Emergency Economic Powers Act (IEEPA), the statute authorizing the Ukraine sanctions, any person who causes a violation of the sanctions may be held liable for civil and criminal penalties. Civil penalties may be up to $250,000 per violation or twice the transaction value, whichever is greater. Criminal penalties may be up to $1 million per violation or twice the transaction value, which is greater, in addition to up to 20 years imprisonment. OFAC violations may also lead to denial or debarment of export privileges under the International Traffic in Arms Regulations.
It is also important to note that OFAC violations are subject to strict liability. This means that OFAC must prove only that a violation occurred to impose a penalty. There is no requirement that OFAC prove the U.S. person intentionally or knowingly violated the sanctions.
ADDITIONAL GUIDANCE FROM OFAC
OFAC defines property in broad terms to include anything of value. This includes money, checks, drafts, debts, obligations, notes, warehouse receipts, bills of sale, evidence of title, negotiable instruments, trade acceptance, goods, wares, merchandise, and anything else real, personal or mixed, intellectual property and intangible assets. The term "property interest" is defined as any interest whatsoever, direct or indirect. OFAC publishes an industry brochure titled "OFAC Regulations for Exporters and Importers" with additional guidance.
IMPACT OF MOLOT-ORUZHIE SANCTIONS
Neither OFAC nor the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) have provided specific guidance on the designation of Molot-Oruzhie, OOO as a SDN. We have requested guidance and will supplement this Alert when it is received.
Given OFAC's linking of Molot-Oruzhie with Kalashnikov Concern, it is likely the sanctions will be consistent with those imposed on Kalashnikov in 2014. In this regard, OFAC published two questions and answers providing guidance on the Kalashnikov sanctions which we reprint below:
374. If I own a Kalashnikov product, is that product blocked by sanctions? Am I able to resell a Kalashnikov product at a gun show or other secondary market?
If a U.S. person is in possession of a Kalashnikov Concern product that was bought and fully paid for prior to the date of designation (i.e., no payment remains due to Kalashnikov Concern), then that product is not blocked and OFAC sanctions would not prohibit the U.S. person from keeping or selling the product in the secondary market, so long as Kalashnikov Concern has no interest in the transaction. New transactions by U.S. persons with Kalashnikov Concern are prohibited, however, and any property in which Kalashnikov Concern has an interest is blocked pursuant to OFAC's designation of Kalashnikov Concern on July 16, 2014. If a U.S. person has an inventory of Kalashnikov Concern products in which Kalashnikov Concern has an interest (for example, the products are not fully paid for or are being sold on consignment), we advise that U.S. person to contact OFAC for further guidance on handling of the inventory. [7-16-2014]
375. If I have Kalashnikov products in my inventory, can I sell them?
If a U.S. person has an inventory of Kalashnikov Concern products in which Kalashnikov Concern has an interest (for example, the products are not fully paid for or are being sold on consignment), we advise that U.S. person to contact OFAC for further guidance on handling of the inventory. [7-16-2014]
Based on this OFAC guidance, the impact of the sanctions on firearms importers and dealers should be consistent with that of the Kalashnikov sanctions:
- Firearms in inventory. According to the OFAC guidance above, if Molot-Oruzhie has no interest in the firearms, then importers and dealers with Molot-Oruzhie firearms in inventory may continue to dispose of them. In other words, if there is no payment due to Molot-Oruzhie for the firearm, then the product is not blocked and U.S. persons may lawfully sell the product. Conversely, firearms for which importers and dealers owe Molot-Oruzhie money are blocked and may not lawfully be transferred. Importers and dealers in this situation should contact OFAC and legal counsel for guidance.
- New contracts for purchase of Molot-Oruzhie firearms. Question #374 makes it clear that U.S. persons are prohibited from negotiating new contracts for the purchase of Molot-Oruzhie firearms after the sanctions were announced on June 20, 2017. Importers or dealers who have already entered into such contracts should contact OFAC and legal counsel for guidance.
- Firearms on order or in the process of shipment or delivery. OFAC guidance is unclear on the impact of the sanctions on firearms ordered from Molot-Oruzhie or a third party not yet within the U.S. Potential impact likely will depend on whether Molot-Oruzhie has an interest in the firearms (e.g., whether any payment is still due to Molot-Oruzhie). Importers or dealers in this situation should contact OFAC and legal counsel for guidance.
AUTHORITY UNDER THE ARMS EXPORT CONTROL ACT
The President has broad authority under the Arms Export Control Act (AECA) to impose restrictions, including embargoes, on the importation of firearms into the United States. Although VEPR rifles manufactured by Molot-Oruzhie are specifically authorized for importation from Russia (see 27 C.F.R.
447.52(b)(1)(i)(BB)), the President could impose an embargo on the importation of firearms manufactured by Molot-Oruzhie to implement the OFAC sanctions. This was the course of action taken by the Administration in 2014 to implement the sanctions on Kalashnikov Concern. On August 13, 2014, ATF announced suspension of import permits involving Kalashnikov Concern based on guidance the agency received from the Department of State. ATF posted questions and answers on the suspension on its website, which can be accessed
We will keep you apprised as we obtain additional information on the issues addressed in this Alert, including ATF's implementation of the sanctions.
The above alert is for informational purposes only and is not intended to be construed or used as legal advice. Receipt of this alert does not establish, in and of itself, an attorney-client relationship.
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