OFAC Publishes Eleven New Russia-Related FAQs

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On June 9, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued eleven new Frequently Asked Questions (“FAQs”), clarifying which activities related to accounting, corporate formation, and management consulting services are prohibited to U.S. persons under the Russian Harmful Foreign Activities Sanctions Regulations (“RuHSR”).

The newly added FAQs provide guidance with respect to the determination issued on May 8, 2022 by the Director of OFAC, in consultation with the U.S. Department of State, pursuant to Section 1(a)(ii) of Executive Order (“E.O.”) 14071 of April 6, 2022 (the “E.O. 14071 Determination” or “Determination”). The E.O. 14071 Determination took effect on June 7, 2022, and prohibits U.S. persons from providing, “directly or indirectly,” certain accounting, trust and corporate formation, and management consulting services to any person located in the Russian Federation.

Scope of OFAC Prohibitions Imposed by E.O. 14071 Determination

• FAQ No. 1058 states that, for purposes of Section 1(a)(ii) of E.O. 14071, OFAC interprets “a person located in [Russia]” to include: (1) people in Russia; (2) individuals ordinarily resident in Russia; and (3) entities incorporated or organized under the laws of Russia or any jurisdiction within Russia.

• FAQ No. 1059 clarifies that the E.O. 14071 Determination does not prohibit U.S. persons from providing services to persons located outside of Russia that are “owned or controlled” by persons located in Russia, “provided that the provision of services is not an indirect export to a person located in [Russia].” OFAC defines the “indirect” provision of the prohibited services to include “when the benefit of the services is ultimately received by a person located in [Russia].” FAQ No. 1059 goes on to say that OFAC “would not consider to be prohibited the provision of services to a non-Russian company that has a physical presence and operations outside of [Russia], including such a company owned or controlled by persons located in [Russia],” provided that the services will not be further exported or reexported to persons located in Russia.
  • The following two scenarios described in the FAQ exemplify services to a non-Russian subsidiary of a Russian company (i.e., a company located in Russia) that would not be prohibited under the E.O. 14071 Determination:
    • A U.S. accounting firm provides tax advisory and preparation services to the U.S. subsidiary of a Russian company. The U.S. subsidiary has an office and employees in the United States and conducts business in the United States, and the services will not be exported or reexported to the Russian parent company.
    • A U.S. management consulting firm provides strategic business advice to the subsidiary of a Russian company located in a third country. The subsidiary has an office and employees in the third country and conducts business in this third country, and the services will not be reexported to the Russian parent company.

• FAQ No. 1059 also describes two scenarios in which services would be prohibited under the Determination:
  • A U.S. corporate service provider administers a trust established under the laws of a U.S. state, where the trust exists predominantly to hold, sell, or purchase assets on behalf of a settlor, trustor, or beneficiary who is an individual ordinarily resident in Russia.
  • A U.S. corporate service provider registers a limited liability company in a third country on behalf of an individual ordinarily resident in Russia for the purpose of holding real estate assets, and this company has no other physical presence or operations in the third country.
• FAQ No. 1061 provides that OFAC’s restrictions do not “necessarily” prohibit U.S. persons from working as employees of entities located in Russia. OFAC explains that, while a U.S. person employed by a Russian company may not provide the company with the prohibited services, the E.O. 14071 Determination “does not prohibit U.S. persons from providing other services not covered by this determination as part of their employment by Russian companies.”

• FAQ No. 1062 explains that the prohibitions imposed by the Determination apply to services provided to a Russian company by any U.S. person, including the Russian company’s own U.S. subsidiary.

• FAQ No. 1066 asserts that the “provision of educational services, such as online university courses, on the subjects of accounting, management consulting, or trust and corporate formation” to persons located in Russia are permitted, provided that “such services do not evade or avoid the prohibition on providing the underlying services to persons located in [Russia].”

• FAQ No. 1067 illustrates that the E.O. 14071 Determination “does not prohibit U.S. persons from exporting, reexporting, selling, or supplying, directly or indirectly, software to [Russia], nor does the determination prohibit U.S. persons from providing services associated with the export of such software, such as software design and engineering,” provided that such associated services do not fall within the restricted sectors. This FAQ also provides scenarios that shed further light on the activities prohibited under the Determination.
  • The following scenario describes business operations that would not be prohibited under the Determination:
    • A U.S. software company signs a contract with a Russian company for design, engineering, licensing, and delivery of software that the Russian company uses to perform its internal accounting. As part of the contract, the U.S. company provides continuing updates and technical support services related to the software (setting up new users, troubleshooting errors, etc.).
  • The next fact pattern describes activities that would be prohibited under the Determination:
    • A U.S. management consulting company signs a contract with a Russian company to assist the Russian company in selecting new enterprise application software. The contract includes assessing the needs of the Russian company, providing a list of possible software choices to the company, and providing continuing advisory services on the implementation and use of the software to optimize the Russian company’s profits.

Restrictions on Provision of Accounting Services

• FAQ No. 1068 states that the restrictions on accounting services imposed pursuant to the E.O. 14071 Determination extend to tax preparation and filing services. That notwithstanding, these restrictions do not apply to exports of “tax preparation-related software” to Russia, which are distinct from prohibited tax preparation and filing services.

Restrictions on Provision of Trust and Corporate Formation Services

• FAQ No. 1060 explains that OFAC’s corporate formation restrictions do not prohibit a U.S. person from serving on the board of directors of a company located in Russia, but they do prevent “providing nominee officer or director services in which a U.S. person is contracted to serve as a nominee officer, director, shareholder, or signatory of a legal person on behalf of a person located” in Russia.
• FAQ No. 1063 states that OFAC’s restrictions do not “distinguish between new and existing trusts and companies.” Those activities are prohibited “regardless of whether the services are performed as part of the formation of a new trust or company, or as part of the administration or maintenance of an existing trust or company.”
• FAQ No. 1065 clarifies that the prohibitions prevent U.S. persons from serving as voting trustees on behalf of people located in Russia and apply to U.S. subsidiaries of Russian companies.

Restrictions on Provision of Management Consulting Services

• FAQ No. 1064 clarifies that executive search and vetting services are included in the prohibition on management consulting services imposed by the E.O. 14071 Determination. For purposes of the Determination, OFAC interprets management consulting services to include the following: (1) services related to strategic business advice; (2) organizational and system planning, evaluation, and selection; (3) development or evaluation of marketing programs or implementation; (4) mergers, acquisitions, and organizational structure; (5) staff augmentation and human resources policies and practices; and (6) brand management.

Curtis continues to monitor developments in this rapidly changing area.