A NEW BILL HAS BEEN SIGNED INTO US LAW, IMPOSING ASSET-FREEZING REQUIREMENTS ON US FINANCIAL INSTITUTIONS

27 Dec 2012

On 6 December 2012, the US Senate passed the Sergei Magnitsky Rule of Law Accountability Act (the “Act”). The measure had earlier passed the US House of Representatives on 16 November. The bill was presented to President Obama for his review on 7 December, and signed into law on 14 December.

The Act imposes visa bans on Russian officials allegedly involved in the death of a 37-year-old Russian lawyer named Sergei Magnitsky. It further prohibits “all transactions in property and interest in property” and requires US financial institutions (including foreign branches) to freeze any assets in their possession or control belonging to those individuals. These sanctions are of special interest to US correspondent banks and other financial institutions that provide services to the customers of foreign banks and other entities.

While the law has been criticized in Russia as a purely political act on the part of the US government, its impact for bankers everywhere remains significant from a legal perspective.

Background

While representing Hermitage Capital Management in 2007-2008, Sergei Magnitsky accused certain Russian officials of stealing Hermitage Fund companies and fraudulently obtaining a multi-million tax refund. He was subsequently arrested, charged with tax evasion and imprisoned. He died on 16 November 2009, after 11 months in custody.

The Act was passed as part of a broader trade bill (H.R. 6156) aimed at normalizing US trade relations with the Russian Federation (and Moldova) by repealing the Jackson-Vanik Amendment of 1974, which imposed trade restrictions on the former Soviet Union based on restrictions it imposed on the emigration of Soviet Jews and other minorities during the Cold War. While the Jackson-Vanik restrictions were frequently waived over the years, they had to be abolished in the wake of the Russian Federation’s admission to the World Trade Organization (WTO) in August 2012 in order for American businesses to enjoy “normal trade relations” with the Russian Federation (and Moldova) consistent with WTO rules.

Despite White House preference for a “clean trade bill,” and concern over how the Act might affect relations with Russia, the two bills were subsequently combined into a single measure as part of a political compromise engineered to ensure passage of both pieces of legislation.

The list

The Act makes any person identified by President Obama as having been directly or indirectly involved in the so-called “Magnitsky incident” – including those who might have “financially benefitted” from the fraud alleged by Magnitsky – ineligible to enter the United States. See Title IV, § 405(a) (“Ineligibility For Visas”) and § 405(b) (“Current Visas Revoked”).

The President has 120 days from the date of the law’s enactment in which to compile a list of such persons based on “credible information” (the “List”). See Title IV, § 404(a). Press reports indicate that a draft version of the List contains 60 names.

Financial measures

Prohibited Transactions and Freezing of Assets

The Act further empowers the Executive branch “to freeze and prohibit all transactions in all property and interests in property of a person who is on the list” to the extent “such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person.” See Title IV, § 406(a) (“Freezing of Assets”).

The law defines a “United States person” to include “an entity organized under the laws of the United States or of any jurisdiction within the United States, including a foreign branch of such an entity.” See Title IV, § 403(4)(B) (emphasis added).

A financial institution meeting this definition (including a US correspondent bank for a foreign bank) is (a) prohibited from conducting any transactions in property or interests in property on behalf of persons on the List, and (b) required to freeze any assets belonging to those individuals that come within its “possession or control,” including persons who might have “financially benefitted” – by mondey laundering, receipt of proceed, or otherwise – any alleged underlying fraud related to the so-called “Magnitsky incident”.

The Act reaches only assets owned by the persons on the List that “are or come within” either the US or “the possession or control of a United States person”. Assets held outside the US by a financial institution that is not a United States person for persons included on the List are otherwise not subject to freezing.

Reporting Requirements for Financial Institutions

The Act will require every “financial institution that is a United States person” (as defined above)with “possession or control” over “assets that are property or interests in property” of persons included on the List to notify the Secretary of the Treasury (pursuant to regulations to be promulgated by the Department of the Treasury within 120 days of the law’s enactment) “that, to the best of the knowledge of the financial institution, [it] has frozen all assets within the possession or control of the financial institution that are required to be frozen.” See Title IV, § 406(c)(2) (“Requirements for Financial Institutions”).

Violation of the law, including failure to certify that assets have been duly frozen, is subject to civil and criminal penalties under § 206(b) and (c) of the International Emergency Economic Powers Act, ranging from fines twice the amount of the transaction up to $250,000 for civil violations to a fine of $1,000,000 and up to 20 years in prison for criminal violations. See Title IV, § 406(c)(1) (“Enforcement – Penalties”).

Conclusion

The Act has significant implications for US correspondent banks and other financial institutions providing services for customers of foreign banks. It will require them to identify and avoid prohibited transactions on behalf of individuals included on the List and to freeze any related assets over which they might have possession or control.