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Ten things the Rotenberg case tells us about sanctions

Ivan Tkachev on Boris Rotenberg losing a discrimination lawsuit against European banks and what it means for other Russian oligarchs

On January 13, the Helsinki District Court ruled on Russian oligarch Boris Rotenberg’s lawsuit against four Nordic banks. These banks had refused to process his payments in 2017 due to American sanctions. Rotenberg and his brother are associates of President Vladimir Putin, and have been blacklisted under the Ukraine/Russia-related sanctions program. Being a dual citizen of both Russia and Finland, Rotenberg filed a lawsuit in the EU country, where he owns real estate. Some of the rejected payments had to do with related bills he needed to pay.

The ruling is much more than a single case. It has systemic and far-reaching consequences for the sanctions regime against the wealthiest Russian businessmen. Here are ten reasons this case matters:

1. The Helsinki District Court confirmed that the risk of US secondary sanctions — as in, sanctions against non-US companies and banks — gives these companies a legitimate reason to refuse to provide services to Russians who are on the SDN (Specially Designated Nationals) list. In this case, European banks refused to process Rotenberg’s payments.

The decision echoes the September ruling by the High Court of England and Wales, which ruled that a British bank had lawfully ceased to pay interest on a loan from a company indirectly owned by Viktor Vekselberg (also blacklisted under US sanctions). A provision in the agreement, the court found, meant that Cynergy Bank (the British company) could refrain from such payments in order to comply with the legislation of any country. According to CAATSA, passed in August 2017, the US president is obliged to impose sanctions on any foreign bank involved in ‘significant financial transactions’ with sanctioned persons such as Rotenberg or Vekselberg. The High Court of Justice ruled that payment of interest to Vekselberg could be qualified by the US sanctions authority (OFAC) as a significant financial transaction, putting the borrower at risk of secondary sanctions.

The Finnish court relied on the national Act on Credit Institutions, which prohibits Finnish banks from taking risks that endanger their financial standing. The prospect of being cut off from the US financial system and the US dollar market as a consequence of transactions on behalf of Rotenberg forms such a risk. There is no doubt that other countries have similar rules. So it is safe to assume that the Helsinki court’s approach will be applicable to banks in most countries.

2. It turns out that Russian oligarchs blacklisted under the US sanctions regime are cut off from the entire Western financial system, not just the American one. There are many examples of this ‘toxic’ extraterritorial effect of US secondary sanctions. For instance, Vekselberg’s and Oleg Deripaska’s frozen bank accounts in Cyprus; frozen dividends on Bank of Cyprus shares owned by Vekselberg; forced sales of private jets by the Rotenberg brothers and Deripaska. If we take into account that Chinese banks (despite the mythologised Russian-Chinese friendship) are extremely cautious about working with blacklisted Russians (as representatives of Russia’s Central Bank admitted in late 2018), it turns out that Russian oligarchs blacklisted under US sanctions are isolated from virtually the entire global financial system.

3. Moreover, the risk of secondary sanctions does not depend on the currency in which payments to or from SDNs are made; in the context of primary sanctions US dollar payments are a decisive factor, but secondary sanctions can be imposed regardless of the currency. In the case of Rotenberg, attempts were made to transfer payments in euros but the banks refused to execute the transactions.

4. The banks resorted to the ‘heavy artillery’ of sanctions analysis in their dispute with Rotenberg. Perhaps for the first time, the defendants were supported in court by a former director of the Treasury Department’s Office of Foreign Assets Control (OFAC), who only recently left his position. John E. Smith worked for OFAC for 11 years until May 2018 and was directly involved in the development and implementation of sanctions against Russia, including the Rotenberg brothers.

Smith testified as an expert for Nordea, arguing that the banks would indeed be exposed to serious risk if they processed Rotenberg’s transactions. Smith’s analysis reflects his first-hand experience in interpreting sanctions provisions (Rotenberg’s attempted payments date back to 2017-2018). Moreover, court records show Smith disclosed information which he had probably obtained as OFAC’s director: that Rotenberg’s lawyers had personally notified the OFAC about these payments (probably to explain in advance that these were day-to-day, unsuspicious transactions).

5. In fact, this third party, the former OFAC director, acted in the interests of the defendant. Did this violate the principles of competition and equality of parties? I wonder whether Rotenberg will question Smith’s involvement on the side of his opponents if he appeals. Smith’s expert opinion definitely gave the banks an advantage in the litigation. In practice, OFAC need not necessarily classify Rotenberg’s bank transfers as ‘significant transactions’. Rotenberg did not receive any clear benefits from paying Finnish tolls or waste collection bills. Yet Smith, as former head of OFAC, could have an interest in overestimating the likelihood of secondary sanctions.

6. The former OFAC director revealed some details of the interpretation in favour of sanctions. These had not attracted attention before: he said that even before the adoption of the CAATSA provisions on secondary sanctions in 2017, the US administration already had a legal tool to punish foreign entities that cooperated with blacklisted Russians. Barack Obama’s Executive Order 13661 imposes sanctions against any persons who ‘have materially assisted/ sponsored’ Russian SDNs. According to Smith, Nordea could be blacklisted if OFAC qualifies transfers in Rotenberg’s interests as ‘material assistance’.

If Nordea processed Rotenberg’s payments in dollars (albeit within the EU), this could be treated as the European bank unintentionally causing an American bank to violate the sanctions regime, since the overwhelming majority of dollar transactions are made through a correspondent bank in the US.

7. In principle, only ‘significant’ transactions with blacklisted Russians are punished under CAATSA. Smith explained in the court in Finland that OFAC has extremely broad discretionary powers to determine the ‘significance’ of transactions. OFAC relies on seven vague public criteria, including the size, number, and frequency of the transactions; the nature of the transactions; the level of awareness of management, etc. Smith made it clear that OFAC could qualify transactions in the Rotenberg case as significant even though they were mainly payments to vendors for basics such as electricity bills, tolls and loan payments.

Interestingly, according to the public ruling, Rotenberg didn’t resort to a line of defense that could possibly support the interpretation that most transactions in question should be treated as exempt transactions, i.e. non-significant by virtue of OFAC rules. The OFAC earlier guidance stated that a transaction should not be regarded as significant if a US bank (had it been in the same situation as the European one) would not need to obtain a special license to process a transaction. Further, the regulations governing the Ukraine/Russia-related sanctions (Rotenberg’s case) stipulate that no special license is needed to write off amounts from the SDN’s blocked account for paying ‘normal service charges’ such as telephone bills, postal fees, Internet bills, notary fees etc. Rotenberg’s lawyers could have tried to prove that at least some of the payments to Finnish authorities or public utilities are functionally equal to ‘normal service charges’.

8. In my previous article for Riddle I wrote that CAATSA is not being implemented as rigorously as it could be. The same goes for the deals with the Russian defence sector (the author of a different article available on the website draws a similar conclusion). But other provisions on secondary sanctions under CAATSA (Sections 226 and 228), mainly targeted at Russian oligarchs and their companies, are implemented much more effectively; they do prevent cooperation between foreign entities and sanctioned oligarchs, and practically isolate the latter from the outside world. Remember Deripaska, who complained to the US court that Western lawyers refused to defend him during a trial in London out of fear of secondary sanctions. Consequently, the English court issued a worldwide freezing order.

9. Rotenberg’s EU citizenship played no role in the Finnish court’s decision: European banks refused to provide services to an EU citizen. The court did not consider this discrimination. The Helsinki District Court was aware that Rotenberg also had real estate in France, Switzerland, and Monaco, as well as accounts in other foreign banks. It learned he had tried to transfer the money from those accounts to Handelsbanken. Does this mean banks in other jurisdictions are continuing to process his payments since we haven’t heard of similar lawsuits elsewhere?

10. The irony is that the court ordered Rotenberg to pay the banks’ legal costs, amounting to EUR 530,000. But wouldn’t the risk of secondary sanctions apply to such a transaction as well? Referring to the OFAC rule described in point 7, it should be noted that reimbursement of banks’ legal fees is not on the list of SDN’s customarily permitted transactions. In other words, the Nordic banks will probably have to apply for an OFAC special license to be reimbursed by Rotenberg to protect themselves from the risk of sanctions.

Photo: Scanpix