U.S. Issues New and Revised Humanitarian General Licenses and Guidance on the Price Cap Policy for Russian-Origin Petroleum Products

U.S. Issues New and Revised Humanitarian General Licenses and Guidance on the Price Cap Policy for Russian-Origin Petroleum Products

January 4, 2023, Covington Alert

On December 21, 2022, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), in consultation with the U.S. Department of State, published two final rules (87 Fed. Reg. 78470 and 87 Fed. Reg. 78484) amending multiple regulations to add or revise certain general licenses (“GLs”) across a number of OFAC sanctions programs in an effort to ease the delivery of humanitarian aid, including in the agricultural and life sciences sectors. This action follows the United Nations Security Council’s recent adoption of Resolution 2664 (“UNSCR 2664”), which created a carve-out across United Nations (“UN”) sanctions programs to protect humanitarian assistance and other activities that support basic human needs.

Specifically, effective December 21, 2022, OFAC issued or amended GLs across a number of OFAC sanctions programs authorizing the following four categories of activities:

• Transactions for the conduct of official business of the U.S. government by employees, grantees, or contractors thereof;
• Transactions for the conduct of official business of certain international organizations and entities, such as the UN or the International Red Cross;
• Transactions ordinarily incident and necessary to certain activities of nongovernmental organizations (“NGOs”), such as humanitarian projects to meet basic human needs (e.g., disaster relief, health services), and activities to support democracy, education, environmental protection, and peacebuilding; and
• Transactions related to the provision of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices, and software updates for medical devices to individuals whose property and interests in property are blocked pursuant to the relevant sanctions programs, provided the items are in quantities consistent with personal, non-commercial use. As detailed below, these new or amended GLs do not alter the scope of the separate country/territory-based GLs covering the supply of qualified medicines, medical devices, and agricultural commodities to comprehensively sanctioned jurisdictions (Cuba, Iran, North Korea, Syria, and the sanctioned regions of Ukraine), Venezuela, or Russia, including in commercial quantities. Nor do the new or amended OFAC GLs alter the licensing requirements of other federal agencies, if applicable, such as the U.S. Commerce Department’s Bureau of Industry and Security.

Concurrently, OFAC issued four new Frequently Asked Questions (“FAQs”) to provide further guidance on the new authorizations.

Additionally, also effective December 21, 2022, OFAC updated a regulatory interpretation in several sanctions programs (87 Fed. Reg. 78470) to explain that the property and interests in property of an entity are blocked if one or more blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest in the entity, whether or not the entity itself is listed on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”). This explanation of the so-called “50 Percent Rule” is consistent with longstanding OFAC policy.

Finally, on December 30, 2022, OFAC issued preliminary guidance on the implementation of a price cap policy relating to the maritime transport of petroleum products of Russian Federation origin. Although the guidelines are not yet finalized, OFAC expects to take a similar approach toward Russian-origin petroleum products as it has done for crude oil of Russian Federation origin, once the price cap policy for Russian-origin petroleum products becomes effective on February 5, 2023.

New and Revised General Licenses

Official Business of the United States

OFAC amended its regulations across 25 different sanctions programs[1] to add or amend GLs authorizing transactions otherwise prohibited by the relevant sanctions programs that are for the conduct of the official business of the U.S. government by employees, grantees, or contractors thereof (the “USG GLs”). For sanctions programs that already included similar GLs (i.e., North Korea and Syria), such GLs have been updated to conform to current standards for OFAC GLs (e.g., by authorizing official conduct by employees, grantees, or contractors of the “United States government” rather than the “Federal Government” and by eliminating certain notification requirements for grantees and contractors).

Official Business of Certain International Organizations

OFAC also amended its regulations across 29 different sanctions programs[2] to add or amend GLs authorizing transactions for the conduct of the official business of certain international organizations and entities by employees, grantees, or contractors thereof (the “International Organizations GLs”).

In particular, subject to certain limitations in certain sanctions programs, the new or updated International Organizations GLs authorize all transactions otherwise prohibited by the relevant sanctions programs by employees, grantees, or contractors of certain international organizations and entities, such as, for example, the UN, including its Programmes, Funds, and Other Entities and Bodies, as well as its Specialized Agencies and Related Organizations;[3] the International Centre for the Settlement of Investment Disputes (“ICSID”) and the Multilateral Investment Guarantee Agency (“MIGA”); and the International Committee of the Red Cross and the International Federation of Red Cross and Red Crescent Societies. Based on the foreign policy considerations of each sanctions program, the GLs may list different sets of international organizations across different programs. Additionally, certain of these GLs exclude funds transfers made with knowledge or reason to know that they are intended for blocked persons, unless certain criteria are met.

Notably, OFAC added International Organizations GLs to the Burma Sanctions Regulations, incorporating Burma General License No. 2 (previously issued on OFAC’s website on March 25, 2021), and the Venezuela Sanctions Regulations, incorporating Venezuela General License No. 20B (previously issued on OFAC’s website on January 21, 2020). Moreover, OFAC added an International Organizations GL to the Global Terrorism Sanctions Regulations and the Foreign Terrorist Organizations Sanctions Regulations, incorporating and expanding the authorization found in Counter Terrorism General License No. 1 (previously issued on OFAC’s website on April 12, 2006). These web licenses were removed from OFAC’s website upon publication of the relevant final rule on December 21, 2022.

For sanctions programs that already included similar GLs (i.e., North Korea, Somalia, Yemen, and the Iranian Transactions and Sanctions Regulations), such GLs have been updated to conform to current standards for OFAC GLs (e.g., by expanding the list of qualifying international organizations beyond the UN and its Specialized Agencies, Programmes, Funds, and Related Organizations and by eliminating certain limitations on the scope of the authorization granted by the relevant GL).

Activities of NGOs

OFAC amended its regulations across 29 different sanctions programs[4] to generally license certain transactions that are ordinarily incident and necessary to certain activities of NGOs (the “NGO GLs”).

In particular, the NGO GLs authorize all transactions otherwise prohibited by the relevant sanctions program that are ordinarily incident and necessary to certain activities of NGOs, provided that the NGO is not a person whose property or interests in property are blocked pursuant to the relevant sanctions program. Covered NGO activities are non-commercial activities designed to directly benefit the civilian population that fall into one of the following categories:

• Activities to support humanitarian projects to meet basic human needs, including disaster, drought, or flood relief; food, nutrition, or medicine distribution; the provision of health services; assistance for vulnerable or displaced populations, including individuals with disabilities and the elderly; and environmental programs;
• Activities to support democracy building, including activities to support rule of law, citizen participation, government accountability and transparency, human rights and fundamental freedoms, access to information, and civil society development projects;
• Activities to support education, including combatting illiteracy, increasing access to education, international exchanges, and assisting education reform projects;
• Activities to support non-commercial development projects directly benefitting civilians, including those related to health, food security, and water and sanitation;
• Activities to support environmental and natural resource protection, including the preservation and protection of threatened or endangered species, responsible and transparent management of natural resources, and the remediation of pollution or other environmental damage; and
• Activities to support disarmament, demobilization, and reintegration (“DDR”) programs and peacebuilding, conflict prevention, and conflict resolution programs.

The NGO GLs exclude funds transfers initiated or processed with knowledge or reason to know that the intended beneficiary of such transfers is a blocked person, other than for the purpose of effecting the payment of taxes, fees, or import duties, or the purchase or receipt of permits, licenses, or public utility services. The new rule also indicates that specific licenses may be issued on a case-by-case basis to authorize NGOs or other entities to engage in other activities designed to directly benefit the civilian population, including support for the removal of landmines and economic development projects directly benefitting the civilian population.

The new NGO GLs are similar in scope to GLs issued previously under other sanctions programs—e.g., Cuba, Crimea, the Donetsk and Luhansk regions of Ukraine, Iran, Syria, Russia, Afghanistan, and Venezuela—though certain of the previously-issued GLs contain certain restrictions and limitations that are not included in the new NGO GLs, and vice versa. Moreover, the previously-issued GLs largely did not include a provision authorizing activities to support DDR programs and peacebuilding, conflict prevention, and conflict resolution programs, which has been incorporated into the new NGO GLs.

Agricultural Commodities, Medicine, and Medical Devices for Personal Use

OFAC amended 29 of its regulations—the same regulations covered by the new NGO GLs described immediately above—to add GLs authorizing transactions related to the provision of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices, and software updates for medical devices to individuals whose property and interests in property are blocked pursuant to the relevant regulations, provided the items are in quantities consistent with personal, non-commercial use.

Notably, these new GLs do not alter the scope of the separate country/territory-based GLs covering the supply of qualified medicines, medical devices, and agricultural commodities to comprehensively sanctioned jurisdictions (Cuba, Iran, North Korea, Syria, or the sanctioned regions of Ukraine), Venezuela, or Russia, including in commercial quantities. Those previously-issued GLs remain in place unchanged, including, notably, their restrictions on marketing and promotional support. Nor do the new or amended OFAC GLs alter the licensing requirements of other federal agencies, if applicable, such as the U.S. Commerce Department’s Bureau of Industry and Security.

Accompanying these amendments to the regulations are new FAQs issued by OFAC relevant to the new and revised humanitarian GLs described above, as well as new guidance on OFAC’s 50 Percent Rule.

Among the new FAQs, FAQ 1106 clarifies that U.S. financial institutions are permitted to operate accounts, including processing funds transfers, for persons engaging in activities authorized by the above-described GLs. The FAQ states that, in assessing whether a particular transaction is in compliance with such GLs, financial institutions may reasonably rely upon the information available to them in the ordinary course of business, provided that the financial institution does not know or have reason to know that the transaction is outside the scope of the applicable GL. This FAQ also explains that non-U.S. persons (including NGOs and foreign financial institutions) do not risk exposure to U.S. sanctions for engaging in or facilitating humanitarian transactions that are otherwise exempt or authorized for U.S. persons pursuant to the above-described GLs.

FAQ 1108 clarifies that the new GLs do not restrict the scope of any existing exemptions or OFAC authorizations for humanitarian activities, including existing GLs authorizing certain NGO activities in sanctioned jurisdictions such as Cuba, the Crimea region of Ukraine, Iran, and Syria, which have not been amended by this OFAC action, and pre-existing general licenses published on the OFAC web site that have been incorporated into the relevant program regulations, such as Venezuela GL 20B.

In tandem with the issuance of the new GLs and related FAQs, OFAC updated an interpretation in several of its regulations to explain that the property and interests in property of an entity are blocked if one or more blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest in the entity, whether or not the entity itself is identified on the SDN List. This interpretation of the so-called “50 Percent Rule” conforms with longstanding OFAC guidance.

On December 30, 2022, OFAC issued preliminary guidance on the implementation of a price cap policy relating to the maritime transport of petroleum products of Russian Federation origin.

To implement the policy, the Secretary of the Treasury intends to issue a determination pursuant to Executive Order 14071 that will take effect on February 5, 2023, and that is expected to prohibit U.S. persons from providing or facilitating certain services to any person located in Russia related to the maritime transport of Russian-origin petroleum products when the price of such petroleum products exceeds the relevant price cap. The OFAC preliminary guidance indicates that, for purposes of the determination, “petroleum products” will mean articles defined at Harmonized Tariff Schedule of the United States (“HTSUS”) heading 2710. OFAC anticipates supplementing this preliminary guidance with final guidance prior to February 5, 2023.

OFAC’s preliminary guidance states that the price cap will apply from the embarkment of maritime transport of Russian-origin petroleum products (e.g., when the Russian-origin petroleum products are sold by a Russian entity for maritime transport) through the first landed sale in a jurisdiction other than the Russian Federation (i.e., through customs clearance). Once the Russian-origin petroleum products have cleared customs in a jurisdiction other than the Russian Federation, the price cap will not apply to any further onshore sale of such products.

OFAC anticipates that Russian-origin petroleum products loaded onto a vessel at the port of loading prior to 12:01 a.m. eastern standard time, February 5, 2023, and unloaded at the port of destination prior to 12:01 a.m. eastern daylight time, April 1, 2023, will not be subject to the price cap, such that U.S. persons will not be prohibited from providing covered services in relation to such petroleum products even where such products are sold above the price cap.

The OFAC guidance also indicates that U.S. persons may reasonably rely upon a certificate of origin in assessing whether petroleum products are of Russian origin, but should exercise caution if they have reason to believe that such certificate has been falsified or is otherwise erroneous.

The price cap will not apply to Russian-origin petroleum products substantially transformed in a jurisdiction other than the Russian Federation. It will continue to apply however, if the Russian-origin products are taken back on the water after clearing customs without being substantially transformed. Refining processes which are considered to result in a substantial transformation include: distillation (crude–atmospheric, crude–vacuum), thermal processes (delayed coking, fluid coking including flexicoking, visbreaking), catalytic cracking (hydrocracking, fluid catalytic cracking), catalytic reforming, catalytic hydrotreating (desulfurization), alkylation, isomerization, solvent extraction (de-asphaltizing, lube solvent extraction), de-waxing, or other refinery processes involving chemical transformation, separation, conversion, or treatment. By contrast, OFAC does not consider blending operations (including gasoline blending, distillate blending, crude blending, residual fuel oil blending, or other simple blending operations) to result in a substantial transformation. Consistent with the OFAC guidance on the Russian oil price cap, OFAC would not consider petroleum products to be of Russian origin solely because they contain a de minimis amount of Russian petroleum products left over from a container or tank (e.g., a “tank heel” or an unpumpable quantity of substance that cannot be removed without causing damage to the container).

Notably, on December 27, 2022, Russian Federation President Vladimir Putin reportedly issued an executive order implementing countermeasures against countries imposing the price cap (i.e., the G7, EU member states and Australia).

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If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls practice group.