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April 22, 2022

Stroock Client Alert

By: Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci

On April 20, the Department of Treasury’s Office of Foreign Assets Control (OFAC) (i) identified Russian commercial bank Transkapitalbank as a Specially Designated National (SDN) subject to U.S. sanctions, (ii) re-designated oligarch Konstantin Malofeyev and 40 individuals and entities (including one in Singapore and several in Moldova) that work with him to facilitate sanctions evasion, and (iii) designated, for the first time, a virtual currency mining company for its role in helping to undermine sanctions.   With these developments, OFAC appears to be taking sanctions to a new level, focusing on  individuals and entities, wherever located, that facilitate evasion.  As a result of this aggressive approach, it is more important than ever that U.S. companies conduct thorough due diligence on all of their business partners to ensure that they are not being used, wittingly or unwittingly, to evade sanctions.      

Transkapitalbank

Public Joint Stock Company Transkapitalbank (TKB) is a privately owned Russian bank that, according to OFAC, helps clients to evade international sanctions.[1]  According to OFAC, TKB maintains its own internet-based banking system, TKB Business, an alternative to the SWIFT network.  By using TKB Business, TKB clients are able to avoid scrutiny and evade sanctions and other internationally imposed restrictions.  In addition, TKB representatives have “offered services to several banks in Asia, including within China, and the Middle East, and suggested options to evade international sanctions.”[2]  OFAC also designated TKB subsidiary Joint Stock Company Investtradebank and issued General License (GL) 29 authorizing the wind down of transactions involving TKB through May 20, 2022[3] and GL 28 authorizing certain transactions involving TKB and Afghanistan through October 20, 2022.[4]

Konstantin Malofeyev/Malofeyev Network

OFAC also re-designated Konstantin Malofeyev, an oligarch who was originally designated in 2014 for financing separatist activities in Eastern Ukraine and Crimea,[5] and who was indicted by the Department of Justice on April 6, 2022 for sanctions evasion in connection with, inter alia, his transfer of his $10 million investment in a Texas company to a Greek business associate.[6] 

According to OFAC, Malofeyev relies on “a vast global network of cut-outs and proxies to evade sanctions and conduct malign influence activities.”[7]  To that end, OFAC sanctioned the following entities in his evasion network:[8]

The Autonomous Noncommercial Organization for the Study and Development of International Cooperation in the Economic Sphere International Agency of Sovereign Development (IASD):

  • a Moscow-based NGO that works closely with the Russian government to facilitate business opportunities for sanctioned Russian companies while presenting itself as a financial advisory firm that offers debt restructuring services to African governments.  

Four Moldovan companies that operate at the direction of IASD:

  • Agent de Asigurare Lider Asig Societate cu Raspundere Limitata (Lider Asig) (a financial services company);
  • Organizatia de Creditare Nebancara Lider Leasing SRL (Lider Leasing) (a financial company);
  • OKAF Trading Societatea cu Raspundere Limitata (OKAF Trading) (a company which operates in a number of fields including the provision of civil and non-offensive military equipment);
  • Societatea cu Raspundere Limitata Project Invest Company (Project Invest) (a property company).

MGI PTE Ltd:

  • a Singapore-based management consultancy that facilitated IASD’s activities in Cuba.

Joint Stock Company Marshal.Global (MarGlo):

  • a Moscow-based financial company that provides a wide range of financial services to sanctioned Russian companies to help them evade sanctions, including through the use of digital currencies.

Tsargrad OOO (Tsargrad):

  • a Russia-based company which, according to OFAC “spreads pro-Kremlin propaganda and disinformation that is amplified by the GoR” and which “served as an intermediary organization between pro-Russian European politicians and GoR officials” and recently pledged $10 million to support Russia’s war in Ukraine.[9]  

Analiticheski Tsentr Katekhon OOO (Katekhon:

  • a Moscow-based center that, according to OFAC, “presents itself as a think tank but is in fact a proliferator of anti-Western and pro-Kremlin disinformation and propaganda.”[10]

All-Russian Public Organization Society for the Promotion of Russian Historical Tsargrad Society

  • a Russia-based organization that advocates for the return of the Russian monarchy and that has been accused of involvement in espionage. 

Other Entities, Individuals and Family Members

  • OFAC also designated a number of other entities and individuals in Malofeyev’s evasion and disinformation network, including his son, Kirill Malofeyev.  A complete list of those individuals and entities sanctioned because of their connection to Malofeyev can be found here: https://home.treasury.gov/news/press-releases/jy0731

Virtual Currency Mining/BitRiver

OFAC also announced an initiative against Russia’s virtual currency mining industry, explaining that:

By operating vast server farms that sell virtual currency mining capacity internationally, these companies help Russia monetize its natural resources.  Russia has a comparative advantage in crypto mining due to energy resources and a cold climate.  However, mining companies rely on imported computer equipment and fiat payments, which makes them vulnerable to sanctions.[11]

To this end, OFAC designated BitRiver AG, a Swiss holding company that began as a virtual currency mining company, BitRiver, in Russia in 2017 and that now operates out of three offices across Russia and that helps Russia monetize its natural resources.  OFAC also designated 10 Russia-based subsidiaries of BitRiver AG.  A full list of the designated subsidiaries can be found here: https://home.treasury.gov/news/press-releases/jy0731.

Conclusion

OFAC’s new, aggressive approach makes business partner due diligence more important than ever.  It is not sufficient to make sure that a counterparty is not sanctioned.  Businesses need to look beyond the counterparty’s nominal ownership structure, to identify the ultimate beneficial owner (UBO), and to understand the full range of its operations to obtain assurance that it is not facilitating sanctions by third parties.  There is another important lesson:  Ever since the United States first sanctioned foreign adversaries, various entities have come forward to claim that they have found workarounds.  In fact, there are no “workarounds.”  Transactions that are designed to bypass trade sanctions can and will be prosecuted as evasion.  “Facilitation” of trade with sanctioned countries is illegal under U.S. law – even if the transaction is legal where it happens. 

Sales and marketing staffs are routinely pitched proposals that falsely claim to thread the needle – proposals that can result in significant penalties for their companies.  For all of these reasons, it is critical to establish and maintain strong compliance programs and set a “tone from the top” that makes clear that compliance is expected of all personnel, including sales representatives in foreign countries.


[1] https://home.treasury.gov/news/press-releases/jy0731

[2] https://home.treasury.gov/news/press-releases/jy0731

[3] https://home.treasury.gov/system/files/126/russia_gl29_0.pdf

[4] https://home.treasury.gov/system/files/126/russia_gl28.pdf

[5] https://home.treasury.gov/news/press-releases/jl9729

[6] https://www.justice.gov/opa/pr/russian-oligarch-charged-violating-us-sanctions

[7] https://home.treasury.gov/news/press-releases/jy0731

[8] https://home.treasury.gov/news/press-releases/jy0731

[9] https://home.treasury.gov/news/press-releases/jy0731

[10] https://home.treasury.gov/news/press-releases/jy0731

[11] https://home.treasury.gov/news/press-releases/jy0731

April 22, 2022

Stroock Client Alert

By: Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci

On April 20, the Department of Treasury’s Office of Foreign Assets Control (OFAC) (i) identified Russian commercial bank Transkapitalbank as a Specially Designated National (SDN) subject to U.S. sanctions, (ii) re-designated oligarch Konstantin Malofeyev and 40 individuals and entities (including one in Singapore and several in Moldova) that work with him to facilitate sanctions evasion, and (iii) designated, for the first time, a virtual currency mining company for its role in helping to undermine sanctions.   With these developments, OFAC appears to be taking sanctions to a new level, focusing on  individuals and entities, wherever located, that facilitate evasion.  As a result of this aggressive approach, it is more important than ever that U.S. companies conduct thorough due diligence on all of their business partners to ensure that they are not being used, wittingly or unwittingly, to evade sanctions.      

Transkapitalbank

Public Joint Stock Company Transkapitalbank (TKB) is a privately owned Russian bank that, according to OFAC, helps clients to evade international sanctions.[1]  According to OFAC, TKB maintains its own internet-based banking system, TKB Business, an alternative to the SWIFT network.  By using TKB Business, TKB clients are able to avoid scrutiny and evade sanctions and other internationally imposed restrictions.  In addition, TKB representatives have “offered services to several banks in Asia, including within China, and the Middle East, and suggested options to evade international sanctions.”[2]  OFAC also designated TKB subsidiary Joint Stock Company Investtradebank and issued General License (GL) 29 authorizing the wind down of transactions involving TKB through May 20, 2022[3] and GL 28 authorizing certain transactions involving TKB and Afghanistan through October 20, 2022.[4]

Konstantin Malofeyev/Malofeyev Network

OFAC also re-designated Konstantin Malofeyev, an oligarch who was originally designated in 2014 for financing separatist activities in Eastern Ukraine and Crimea,[5] and who was indicted by the Department of Justice on April 6, 2022 for sanctions evasion in connection with, inter alia, his transfer of his $10 million investment in a Texas company to a Greek business associate.[6] 

According to OFAC, Malofeyev relies on “a vast global network of cut-outs and proxies to evade sanctions and conduct malign influence activities.”[7]  To that end, OFAC sanctioned the following entities in his evasion network:[8]

The Autonomous Noncommercial Organization for the Study and Development of International Cooperation in the Economic Sphere International Agency of Sovereign Development (IASD):

  • a Moscow-based NGO that works closely with the Russian government to facilitate business opportunities for sanctioned Russian companies while presenting itself as a financial advisory firm that offers debt restructuring services to African governments.  

Four Moldovan companies that operate at the direction of IASD:

  • Agent de Asigurare Lider Asig Societate cu Raspundere Limitata (Lider Asig) (a financial services company);
  • Organizatia de Creditare Nebancara Lider Leasing SRL (Lider Leasing) (a financial company);
  • OKAF Trading Societatea cu Raspundere Limitata (OKAF Trading) (a company which operates in a number of fields including the provision of civil and non-offensive military equipment);
  • Societatea cu Raspundere Limitata Project Invest Company (Project Invest) (a property company).

MGI PTE Ltd:

  • a Singapore-based management consultancy that facilitated IASD’s activities in Cuba.

Joint Stock Company Marshal.Global (MarGlo):

  • a Moscow-based financial company that provides a wide range of financial services to sanctioned Russian companies to help them evade sanctions, including through the use of digital currencies.

Tsargrad OOO (Tsargrad):

  • a Russia-based company which, according to OFAC “spreads pro-Kremlin propaganda and disinformation that is amplified by the GoR” and which “served as an intermediary organization between pro-Russian European politicians and GoR officials” and recently pledged $10 million to support Russia’s war in Ukraine.[9]  

Analiticheski Tsentr Katekhon OOO (Katekhon:

  • a Moscow-based center that, according to OFAC, “presents itself as a think tank but is in fact a proliferator of anti-Western and pro-Kremlin disinformation and propaganda.”[10]

All-Russian Public Organization Society for the Promotion of Russian Historical Tsargrad Society

  • a Russia-based organization that advocates for the return of the Russian monarchy and that has been accused of involvement in espionage. 

Other Entities, Individuals and Family Members

  • OFAC also designated a number of other entities and individuals in Malofeyev’s evasion and disinformation network, including his son, Kirill Malofeyev.  A complete list of those individuals and entities sanctioned because of their connection to Malofeyev can be found here: https://home.treasury.gov/news/press-releases/jy0731

Virtual Currency Mining/BitRiver

OFAC also announced an initiative against Russia’s virtual currency mining industry, explaining that:

By operating vast server farms that sell virtual currency mining capacity internationally, these companies help Russia monetize its natural resources.  Russia has a comparative advantage in crypto mining due to energy resources and a cold climate.  However, mining companies rely on imported computer equipment and fiat payments, which makes them vulnerable to sanctions.[11]

To this end, OFAC designated BitRiver AG, a Swiss holding company that began as a virtual currency mining company, BitRiver, in Russia in 2017 and that now operates out of three offices across Russia and that helps Russia monetize its natural resources.  OFAC also designated 10 Russia-based subsidiaries of BitRiver AG.  A full list of the designated subsidiaries can be found here: https://home.treasury.gov/news/press-releases/jy0731.

Conclusion

OFAC’s new, aggressive approach makes business partner due diligence more important than ever.  It is not sufficient to make sure that a counterparty is not sanctioned.  Businesses need to look beyond the counterparty’s nominal ownership structure, to identify the ultimate beneficial owner (UBO), and to understand the full range of its operations to obtain assurance that it is not facilitating sanctions by third parties.  There is another important lesson:  Ever since the United States first sanctioned foreign adversaries, various entities have come forward to claim that they have found workarounds.  In fact, there are no “workarounds.”  Transactions that are designed to bypass trade sanctions can and will be prosecuted as evasion.  “Facilitation” of trade with sanctioned countries is illegal under U.S. law – even if the transaction is legal where it happens. 

Sales and marketing staffs are routinely pitched proposals that falsely claim to thread the needle – proposals that can result in significant penalties for their companies.  For all of these reasons, it is critical to establish and maintain strong compliance programs and set a “tone from the top” that makes clear that compliance is expected of all personnel, including sales representatives in foreign countries.


[1] https://home.treasury.gov/news/press-releases/jy0731

[2] https://home.treasury.gov/news/press-releases/jy0731

[3] https://home.treasury.gov/system/files/126/russia_gl29_0.pdf

[4] https://home.treasury.gov/system/files/126/russia_gl28.pdf

[5] https://home.treasury.gov/news/press-releases/jl9729

[6] https://www.justice.gov/opa/pr/russian-oligarch-charged-violating-us-sanctions

[7] https://home.treasury.gov/news/press-releases/jy0731

[8] https://home.treasury.gov/news/press-releases/jy0731

[9] https://home.treasury.gov/news/press-releases/jy0731

[10] https://home.treasury.gov/news/press-releases/jy0731

[11] https://home.treasury.gov/news/press-releases/jy0731