Trump Policies on Economic Sanctions Could Affect Many Nations and Compliance Officers– Part 4: Potential Lifting of U.S. Sanctions Against Russia May Create Compliance Challenges on Both Sides of the Pond

February 9, 2017
By: Anna Sayre, Legal Content Writer,

 In this series, we present the comments and assertions made by President Donald Trump and his top assistants concerning economic sanctions and export controls so that compliance professionals can make informed decisions as to the likely positions of the new U.S. administration in the next four years.

In this fourth part, we present a number of Trump’s comments on Russia, what changes could be affected with regard to U.S. sanctions against Russia, and how any discrepancy between U.S. and EU sanctions against Russia can create compliance challenges.

Current Sanctions Against Russia

In 2014, the US and other western powers imposed heavy sanctions on Russia due to its annexation of Crimea from Ukraine. These include several Executive Orders issued under the Obama administration targeting Russian and Ukrainian individuals and entities for violating the territorial integrity of Ukraine or for stealing the assets of the Ukrainian people. These sanctions affected individuals in Putin’s inner circle, and limited the provision of certain kinds of financing to several large Russian banks and energy companies.

The Obama Administration imposed its latest sanctions against Russia for alleged cyber hacking on December 29, 2016. Obama ordered the expulsion of 35 suspected Russian spies and placed sanctions on two Russian spy agencies.

Earlier U.S. sanctions against Russia include those passed by Congress by way of the 2012 Magnitsky Act. The Magnitsky sanctions target Russian human rights abusers, including those allegedly involved in the death of Sergei Magnitsky, a tax lawyer who died at the hands of Russian authorities after exposing a tax refund fraud scheme.

Trump’s Power to Undo or Change Sanctions

Many U.S. sanctions imposed on Russia, such as the sanctions designations on Putin’s inner circle, have been put in place by Executive Order. Trump could simply undo or change these U.S. sanctions against Russia with a subsequent Executive Order and, most importantly, without congressional approval.

On February 2, the Trump administration used its executive power to adjust certain cyber sanctions that were imposed on Russian intelligence agency FSB in 2016, creating a limited exception to the measures put in place by the Obama administration. Though these adjustments made by the Department of the Treasury were technical in nature and, according to Reuters expert Peter Harrell “likely in progress before President Trump took office”, they provide a good example of the President’s power to undo or limit sanctions previously imposed.

If sanctions have been imposed by Congress, such as the Magnitsky sanctions, the President has limited power to affect change. Unless a national security waiver is used,only Congress can lift these sanctions.

A New Bill

On January 22, 2017, New York Senator, Charles Schumer, told ABC News that he and a bipartisan group of senators would propose a bill that would limit President Trump’s ability to ease sanctions against Russia.

If it succeeds, the bill would require that any changes to sanctions against the country be put to a vote in Congress, restricting the president’s ability to act single handedly by Executive Order.

Trump’s Plans to Form ‘Friendly Relations’ with Russia

Whilst on the campaign trail in June 2016, Trump provided verbal evidence as to his stance on Russia, by:

  • calling Putin a “strong leader” on numerous occasions as well as “very smart” with regard to his ignoring of international sanctions against Russia;
  • suggesting many times that, if Putin was “nice” to him, that Trump would like to improve relations and possibly make a “deal” with Russia.
  • Saying that, if he is elected president, he would consider recognizing Crimea as Russian territory and lifting the sanctions against Russia.

Since winning the November election, President Trump has only further illustrated his plans to work together with Russia.

In a news conference in July 2016, Trump suggests he would be firm with Russia but nevertheless plans to form “friendly” relations. “I would treat Vladimir Putin firmly,” Trump says, “but there’s nothing I can think of that I’d rather do than have Russia friendly, as opposed to the way they are right now, so that we can go and knock out ISIS with other people”.

Making a ‘Deal’ with Russia

Most recently, Trump has stated his intentions to engage with Russia in negotiations. In an interview in January with the Wall Street Journal, Trump stated that he would keep intact recent sanctions imposed on Russia “at least for a period of time”, but went on to say that he would be open to negotiating an easing of these sanctions if a “deal” could be struck with Russia over fighting ISIS or a reduction of nuclear arms.

With regard to sanctions against Russia, Trump recently revealed his intentions to make a deal to the Times of London. “Let’s see if we can make some good deals with Russia”, he said. “For one thing, I think nuclear weapons should be way down and reduced very substantially, that’s part of it. But Russia’s hurting very badly right now because of sanctions, but I think something can happen that a lot of people are gonna benefit”.

Tillerson and Flynn

During his confirmation hearing in January, now confirmed Secretary of State, Rex Tillerson said he was in favor of current U.S. sanctions against Russia, but only some of them.

He stated that he would refuse to support the recently authorized cyber sanctions against the country.

Mr. Tillerson’s opinions are important, because U.S. State Department, arguably has the greatest influence of any U.S. department over the implementation of US sanctions policy.

Previously, while CEO of Exxon, Tillerson criticized sanctions against Russia at his company’s annual meeting in 2014: “We do not support sanctions, generally, because we don’t find them to be effective unless they are very well implemented comprehensibly, and that’s a very hard thing to do. So, we always encourage the people who are making those decisions to consider the very broad collateral damage of who are they really harming.”

Trump’s pick for National Security Advisor, Michael Flynn has also been shown to have a pro-Russia leaning, at least in relation to defeating terror. According to the New York Times, Flynn has said that building ties with Moscow is a strategic necessity to win what he considers a “world war” against Islamic militants.

UN Ambassador, Nikki Haley

Despite the pro-Russian assertions of both President Trump and his Cabinet members, last week the newly instated U.S. ambassador to the United Nations, Nikki Haley, made it clear that sanctions against Russia over annexing Crimea from the Ukraine would remain in place.

“We do want to better our relations with Russia, however, the dire situation in eastern Ukraine is one that demands clear and strong condemnation of Russian actions”. Haley concluded by saying, “Crimea is a part of Ukraine. Our Crimea-related sanctions will remain in place until Russia returns control over the peninsula to Ukraine.”

Nevertheless, some believe that Haley’s comments regarding Russian sanctions do not pertain necessarily to all sanctions currently imposed. In an article by Kenneth Rapoza of Forbes, it is suggested that so-called ‘sectoral sanctions’, namely those that target major Russian banks and oil and gas companies, were not taken into account in Haley’s UN speech.Rapoza quotes Joseph Dayan, head of markets at BCS Global Markets in London, who claims,  “Haley’s comments did not pertain to the major sanctions everyone wants removed. She was very clear about that.”

Challenges for Compliance Officers

Those doing business with Russia should take into consideration the divergences that may be on the horizon for U.S. and E.U. sanctions targeting Russia.

Currently, U.S. sanctions against Russia largely overlap with E.U. sanctions. A potential loosening of U.S. sanctions against Russia under the Trump administration, while E.U. sanctions on the country remain in place, will create challenges for multi-national firms and financial institutions.

“The U.S. relaxing of restrictions on Russia while our allies continue sanctions will cause some challenges from an operational and risk management perspective,” says Debra Geister, Managing Director of AML Advisory Services at compliance consultancy firm, Matrix IFS.

Comparison with Iran Sanctions

Assistance in dealing with any potential discrepancies can be gleaned from the effects of the latest global agreement regarding Iranian sanctions, called the Joint Comprehensive Plan of Action (JCPOA). This recent agreement to gradually lift Iranian sanctions has currently served to lift several E.U. sanctions whilst most U.S. sanctions remain in place.

“Actually, this would be easier than the other way around, like with Iran, where U.S. primary sanctions still are in force. Compliance officers will have to make clear distinctions between what is allowed or not under the two regimes,” says Gert Demmink from Dutch Advisory Service, Philip Sydney.

“However, for Russia the U.S. export controls will stay in place, including the complicated new dual-use and military items regime under the EAR & ITAR. For EU corporates (exporters) and financial institutions (trade finance, payments, transport insurance), it is therefore important to still keep a sharp eye on any potential U.S. nexus. Lifting of sanctions may not be mistaken for export controls remaining in operation,” adds Mr.Demmink.

Compliance Head Scratchers

Further compliance head scratchers may arise when one company has a presence in many countries around the globe. We asked Nadiya Nychay, Partner at the Brussels office of Dentons law firm, to imagine a situation where this could happen and if the resulting issues could be overcome.

“I could think of a situation where a U.S. subsidiary of an EU parent company enters into a transaction with a target of EU financial sanctions in Russia, and the EU parent takes some action to facilitate the transaction,”says Nychay.“For example, if the EU parent provides administrative support for the deal, generally, the non-EU subsidiary would not be subject to compliance with EU sanctions and it would not be violating the EU sanctions by dealing with the Russian target. Nevertheless, the EU parent could be deemed to be circumventing the sanctions against Russia,” Mrs. Nychay explains.

“Finally, looking at the issue from a policy perspective, international sanctions have the most effect through the concerted effort of the international community.  Naturally, if the U.S. loosens its sanctions on Russia, the effect of the European sanctions would diminish,” Mrs. Nychay concludes.

Dual process?

Debra Geister, Managing Director of AML Advisory Services at compliance consultancy firm, Matrix IFS, takes a more risk-averse view.

“If I were looking at this from an operational and compliance perspective, I would work to my most restrictive standard.  The risk and work required to create a dual process would be challenging. From a risk perspective, I would be looking to see if the pendulum swings the other way before I started changing my controls.  It will be interesting to see if the rest of the world follows the lead of the U.S. in this issue. Typically, that is the trend,” says Ms. Geister.

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