In this episode of the Above Board podcast, Morrison & Foerster partner and host Dave Lynn speaks with John E. Smith, Washington, D.C.-based co-head of Morrison & Foerster’s National Security practice and former Director of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), about what boards of directors and companies should be focused on as the U.S. and other nations announce Russian sanctions in response to the war in Ukraine. Practical guidance is provided on issues such as how companies can keep track of these sanctions and the extent to which their business can be impacted.
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Speaker: Welcome to MoFo Perspectives, a podcast by Morrison & Foerster, where we share the perspectives of our clients, colleagues, subject matter experts, and lawyers.
Dave Lynn: Welcome to the Above Board podcast. I’m Dave Lynn, a partner at Morrison & Foerster, and I’m very pleased to be joined today by my colleague, John Smith, who’s a partner at Morrison and Foerster, and is the former director of the U.S. Treasury Department’s Office of Foreign Assets Control, which is often referred to as OFAC and is now co-head of Morrison & Forester’s National Security practice. John served for 11 years as a top official at OFAC and three years as its director. OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals. John advises clients on the complexities and risks of U.S. and multilateral sanctions. John, the war in Ukraine is a significant focus of attention right now. And in addition to the war situation, many Western nations have imposed significant sanctions. What should boards of directors and companies be focused on as the U.S. and other nations announce sanctions in response to the conflict?
John Smith: Dave, that’s a terrific question. It should be one of the top priorities these days. The sanctions that we’re seeing imposed over the last few weeks by the U.S, the European Union, the United Kingdom go far beyond anything that we’ve ever seen in our lifetimes. It’s incredible. Sanctions on the Central Bank of Russia, pushing a number of banks off the SWIFT network. Other types of extraordinary sanctions in export controls have really never been imposed against a country with the size of an economy as Russia. And so for companies and their boards, they should be focused on their exposure to Russia, how much Russian business, both in and out that they’ve been doing, Russian employees, Russian operations, and how they’re going to be able to continue it if they want to continue it into the future. So the first part they really want to think about is their legal exposure.
John Smith: What have the sanctions and export controls that have been put in place over the past few weeks meant for their operations involving in, or with, Russia or Ukraine, or Belarus, other jurisdictions that are part of this conflict and part of the sanctions packages being rolled out, how do they affect those companies legally, but also reputationally? What will be the exposure for companies that continue to do business in Russia while folks are seeing on their nightly news the invasion of Ukraine and the casualties and the bloodshed that we’re all witnessing in real time these days? So a number of considerations for companies and their boards of directors to be thinking about.
Dave Lynn: And when we hear the term “sanctions,” it’s a very broad concept. What are the types of sanctions that we’re seeing being imposed right now and to whom or to what do these sanctions apply?
John Smith: Terrific question, again, because sanctions are used in such a broad concept and they may also have very narrow defined terms. Bluntly, a sanction is generally an economic measure that is posed on a country, on a regime, or on individuals or entities. And it is in some ways a restriction on doing business or engaging in any type of activity with those that have been named as subject to the sanctions. And so we've seen a broad range of sanctions, including stopping the Central Bank of Russia from using any of its assets or foreign reserves that are held in a number of central banks around the world. Those have been restricted so that the Russians cannot use that money to fund their own war effort or to prop up their economy during this extraordinary period. We've also seen a number of banks removed from the SWIFT network, which is basically the financial payment messaging system that is the backbone of international commerce.
John Smith: It’s how banks talk to each other and ensure that the transactions that they’re engaging with each other are safe and secure and reliable. And so a number of Russian banks have been kicked off that network, meaning that they generally won’t be able to transact with the international economy once those sanctions go into effect next week. And then there are a number of other sanctions that have been imposed by the U.S., the European Union, and the United Kingdom, which also are what are called either traditional blocking sanctions or corresponding account sanctions or other limitations on financing. Without being too much of a sanctions nerd for this group, I can say blocking sanctions are really when someone becomes radioactive. U.S. companies are generally not allowed to deal with them whatsoever. And that’s happening to a number of Russian banks and companies in other industry sectors within Russia, as well as Belarus.
John Smith: When you have a lesser correspondent account sanctioned, it means the number of Russian banks have been cut off from dealing with U.S. banks in terms of dollarizing transactions, which also places a hit on their operations and causes them to lose money and the ability to trade. And then the last point that companies need to be aware of in terms of types of sanctions would be what are called debt and equity restrictions. So there’s a lesser list of Russian entities. And it basically, if you’re on that list, it means that U.S. companies are limited in terms of the investment or financing that they can place on those Russian companies. You may wonder why are there all these different types of sanctions? Why not just impose one type instead of the complexity? And the reason is the U.S. is trying to carefully calibrate the sanctions imposed so as not to create too much shockwaves on U.S. and third-country business, as well as too much harm on the people of Russia.
John Smith: And so for many of the most major companies, the biggest banks, the biggest energy companies, you might put a lesser type of sanction to avoid an undo impact. The last thing I should mention is it’s not technically a sanction, but I think it’s part of what folks are thinking about: are the restrictions on use of airspace and the number of jurisdictions have talked about preventing the Russians from flying over their territory, the EU, the U.S., the UK, Canada, and others. So that causes Russian flights to not be able to land or take off from those jurisdictions. And it also means that Russian aviation companies spend a lot more money because they have to fly around those jurisdictions instead of over them. And I said last, but I’m going to give one more last, last type of sanction because I should have mentioned energy sanctions. Restrictions on the import of Russian energy is a top item under consideration these days.
John Smith: It hasn’t been among the first wave of sanctions because of the use of Europe and European dependence on Russian oil and gas. And it’s still a cold winter in Europe and politicians and leaders of governments are worried about the ability for ordinary people to heat their homes in this cold winter. So it’s still something among the top topics of conversation. For example, in the United States, actively debating whether to restrict Russian energy from coming in, Canada’s already done it. The European Union is discussing it this week while the Germans have come out opposed to a broad energy ban, you may see some of those restrictions. So that’s a long answer to what sanctions are and what we’ve seen imposed so far.
Dave Lynn: As you mentioned, it’s really an unprecedented situation in terms of the breadth of these sanctions. How can come companies keep track of these sanctions and the extent to which they might impact their business?
John Smith: This is where companies really have to rely on their legal and compliance teams to follow this. It takes so much effort. My team and I work globally across all of our offices to try to keep track of U.S., EU, UK, Japanese, and other sanctions that are being imposed. And it really is almost a full-time job. So you really have to rely on your compliance and legal teams to follow it as much as possible. And then obviously that’s often a time that you come to an outside counsel like me to help you keep track of it. One way also is to follow the literature we among others have been putting out: client alerts, podcasts, webinars, and others to help follow it. So your experts really do need to be expert in this area because there’s such complexity here of a type that I’ve never seen in my decades of work on economic sanctions. So you really have to stay on top of everything.
Dave Lynn: What sort of questions can boards of directors ask of their management to learn more about the company’s response to these sanctions?
John Smith: There are several things that I think boards should be asking of management, and there should be frank discussions. The first would be what’s the exposure of our company to Russia or Belarus or the separatist regions of Ukraine, particularly Russia, with the size of its economy. What’s our exposure? How much business are we doing with Russia or involving Russia, and how do the sanctions impact us? I think that’s the first and primary question that companies are asking these days. A follow‑up question is often, how can we be affected in the future? Understanding that maybe we have our handle on what the U.S., the European Union, the United Kingdom has done so far and how our company can comply with the rules. Then what are we doing to insulate ourselves for future rounds of sanctions? And you can bet that if you see more bloodshed on your TV screens on the nightly news, then that means more sanctions are coming and you have to be ready and willing and able to implement those sanctions on a dime. When the governments impose them, they expect you to comply immediately.
John Smith: And so that second question is really, what are we doing to insulate the company for future rounds of sanctions? How exposed are we? And then the third, but by no means the last, and in some ways it’s the most critical question that companies are dealing with these days is safety and security of operations and personnel in Russia. If you have Russian employees, how do you prevent them from becoming a casualty in this current environment? And when I say casualty, I don’t mean it a necessarily just in the harshest term of that, but how do you ensure that your employees that may be based in Russia can continue to safely and securely maintain their positions? So making sure that they understand the ramifications, they understand the legal restrictions, and they also understand the risks. We’ve seen on the news recently of certain Americans being detained, trying to leave Russia.
John Smith: We’ve seen that in the past with other jurisdictions, and you need to make sure the top of mind that your employees and personnel that are based in Russia are secure. I think you also need to make sure that any operations are secure there and that you understand as you may have to limit engagement, how that’s going to impact your Russian operations or any of your trade enter with Russia. And finally, I think the last consideration that I mentioned is reputational. If Russian business continues, as it will for many global corporations, as long as it’s still allowed, what are the reputational considerations of continuing to deal with Russia? Those should be something considered hand in hand with your legal exposure because reputational exposure can also be as significant as shareholders, as public criticism, as members of Congress, and others may in the future start to line up against companies that continue to do business with Russia as a war rages on that is increasingly violent in Ukraine. A company should be aware of and boards should be asking management about the reputational considerations that the company is undertaking and the results of any analysis on that front.
Dave Lynn: Great, John, thank you for all the insights today and thank you for all the assistance you’re providing to our clients in this very unprecedented time.
John Smith: No worries. It’s a privilege in this unprecedented time to be in a position to be able to help if we can. So thanks for having me do this podcast with you, Dave, and thanks to any clients that we can help in this very extraordinary and difficult time.
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