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8 steps to follow OFAC sanctions

Dec 11, 2019
How do OFAC Global Magnitsky Sanctions Regulations work? Eversheds Sutherland Bitans has prepared answers to 8 important questions on this issue concerning foreign political and economic sanctions relevant to Latvian residents. Please find below a brief summary of the applicable rules:

1. OFAC Global Magnitsky Sanctions Regulations

Further explanations to the Office of Foreign Assets Control (OFAC) of the Department of the Treasury of the United States (US) Global Magnitsky Sanctions Regulations are available here.

2. The Application in Latvia of Sanctions Imposed by NATO Member States and OFAC

Section 2, Paragraph 1, of the Law on International Sanctions and National Sanctions of the Republic of Latvia (Sanctions Law) provides: "The purpose of this law is to ensure peace, security and rule of law in accordance with the international obligations and national interests of Latvia, when introducing international sanctions or imposing national sanctions, or in the cases specified in this Law when the sanctions imposed by the European Union or North Atlantic Treaty Organization (NATO) are being imposed."

Thus, according to the legislator of Latvia, in certain cases provided for in the Sanctions Law, the sanctions imposed by NATO member states and, by extension, the sanctions imposed by the OFAC, should apply in Latvia.

3. US Citizens and US Resident Aliens

Under the OFAC Regulations, any US citizen, permanent resident alien, regardless of their location, US incorporated entity (including their foreign branches), or any person in the United States is prohibited from cooperating with subjects included in the OFAC sanctions list.

In some cases, the prohibition also applies to foreign entities that are subsidiaries controlled by US companies. In certain instances, the obligation to comply applies to foreign persons in possession of US - origin goods.

4. Participants of Financial and Capital Markets

Under Section 13, Paragraph 4, Subparagraphs 4 and 5 of the Sanctions Law, the Financial and Capital Market Commission of Latvia (FCMC), as the competent authority, shall determine criteria applicable to the participants of the financial and capital market to determine whether OFAC sanctions significantly affect the interests of participants of the financial and capital market or the financial and capital market itself.

In addition, FCMC shall determine requirements for the participants of the financial and capital market in relation to imposition of financial restrictions, to the extent such restrictions result from OFAC sanctions and significantly affect the interests of participants of the financial and capital market or the financial and capital market itself.

5. Subjects of Public Law

Under Section 113 of the Sanctions Law, OFAC sanctions apply whenever subjects of public law enter into contracts in the fields of public or private law and make payments.

Expressed another way, the subjects of public law are prohibited to enter into contracts in the fields of public or private law subject to imposition of OFAC sanctions affecting performance of contracts or significant interests of the financial and capital market. Moreover, subjects of public law are also prohibited from making payments to persons or entities sanctioned by OFAC whenever significant interest of the financial and capital market is involved.

6. Public Procurement and Public-Private Partnership

Under Section 111 of the Sanctions Law, OFAC sanctions apply in the fields of public procurement and public-private partnership.

The following persons cannot be listed on a sanction list: (1) the tenderer itself, (1.1) a member of its Management Board or Supervisory Board, (1.2) its beneficial owner, (1.3) a person having the right of representation or procurator, or a person who is authorized to represent the tenderer in activities related to a branch, or member of a partnership, or member of the Management Board or Supervisory Board, its beneficial owner, a person having the right of representation or procurator, if the tenderer is a partnership. The same applies to: (2) subcontractor indicated by the tenderer, (2.1) a member of its Management Board or Supervisory Board, (2.2) its beneficial owner, (2.3) a person having the right of representation or procurator, or a person who is authorized to represent the subcontractor in activities related to a branch, or member of a partnership, or member of the Management Board or Supervisory Board, its beneficial owner, a person having the right of representation or procurator, if the subcontractor is a partnership.

7. European Union Funds and Other Foreign Financial Assistance

Under Section 112 of the Sanctions Law, OFAC sanctions apply in the fields of European Union funding programs and other foreign financial assistance.

Expressed differently, the liaison body, intermediary body or manager of the European Union funds or other foreign financial assistance, or another authority designated according to laws or regulations to manage the European Union funds or grant foreign financial assistance (Responsible Authority) shall verify whether the promoter of the project is subject to OFAC sanctions, the project application for which is subject to approval or the contract on the project implementation shall be entered in accordance with the procedures specified in the laws and regulations relevant to the respective European Union fund or other foreign financial assistance, a member of its Management Board or Supervisory Board, beneficial owner, person having the right of representation or procurator, or person authorized to represent the project promoter in activities related to a branch.

8. Risk of Secondary Sanctions/Countermeasures

The Ministry of Foreign Affairs has stated that OFAC sanctions have to be complied with in order to prevent the risk of imposition by the US of secondary sanctions or other countermeasures against the company, its owners or officials.

The US has issued a special warning to the effect that any person making payments to persons subject to sanctions can also be made subject to OFAC sanctions.

Failure to comply with OFAC sanctions is capable of affecting the possibility to cooperate with US companies and banks.

In relation to announcements of public procurement, compliance with OFAC sanctions is in the best interests of the affected financial institutions, businesses and public entities alike.

Failure to comply with OFAC sanctions may result in denial of access to transactions in USD, as well as suspension of transactions, thus, impeding the possibility to perform the necessary payments. This, in turn, can result in reputational damages for the affected company or bank and create other adverse effects.

The Ministry of Foreign Affairs has referred to cases where Latvian businessmen doing business with persons subject to OFAC sanctions were refused travel documents permitting entry to the US (ESTA), or denied entry to the US, or were unable to perform their obligations under a contract.

A certain limited liability company registered in Latvia was previously included in the OFAC sanctions list as a result of continued cooperation by such company with a person subject to OFAC sanctions. According to OFAC recommendations, whenever doubts exist regarding interpretation of limitations arising in the consequence of sanctions, that is, whenever a company is in doubt as to whether cooperation with a particular entity is acceptable, it can contact OFAC directly and request a clarification.

We recommend that you continue following updates on Latvia's political stance in matters involving foreign political and economic sanctions to stay abreast of development. It is likely that other clarifications or guidelines by the Ministry of Foreign Affairs of Latvia or other state institutions will follow.

About Eversheds Sutherland Bitāns

Eversheds Sutherland is the only global law firm of its size which currently has a direct presence in Latvia and the Baltics. At Eversheds Sutherland Bitāns, 28 lawyers practice in specialized teams led by experienced attorneys and legal advisers. Eversheds Sutherland Bitāns provides services on the entire range of legal and businesses issues, with core practices in banking, project finance, mergers and acquisitions, commercial matters, dispute resolution, real estate, intellectual property and employment. 

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