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The Congressional and Executive Response to the Ukrainian Crisis and the Growing U.S. Impatience with Official Corruption

March 18, 2014

The likely reaction of most lawyers and diplomats to President Obama's first Executive Order in response to the Ukrainian crisis was that it was an Order without consequences. (See E.O. 13660 of March 6, 2014.)   It recited a list of sanctions to be imposed on those "determined by the Secretary of Treasury in consultation with the Secretary of State" to have engaged in designated acts which undermined Ukrainian democracy, but the Order itself identified no such persons.

This was not an oversight.  It was clearly designed to give the President some flexibility.  If the Russian government retreated from its incursion into Ukraine, the President need not act and the Order had no practical adverse effect.  If the Russian government continued its assault on democracy in Ukraine, the President had authority to proceed against the offending persons or institutions by simply issuing a supplemental Blocking Order.

The Russian-orchestrated Crimea cessation vote of March 16, 2014 virtually required the President to act, and he did.  On March 17, 2014, the day after the vote of secession, the President, invoking the authority granted to him under, among other things, EO 13660 and the International Emergency Economic Powers Act, blocked the assets of seven Russian nationals, all of whom had positions of high authority in the Russian government, and four Ukrainian Crimean-based separatist leaders who supported Russian activities in Ukraine.  The March 17 Order abandoned the restraint that accompanied the earlier Order, because two of the named Russian officials were identified by means of their relationship to President Putin.  The Order sanctioned Vladislav Surkov "for his status as a Presidential Aide to Russian President Vladimir Putin" and Sergey Glazyev "for his status as Presidential Adviser to Russian President Vladimir Putin."    The restraint demonstrated in the March 6 Blocking Order was converted into a March 17 diplomatic poke in the eye.

The "financial bell jar" of a blocking order

The purpose of a Blocking Order is to economically separate, fully and completely, the target from the American economic system.  The sanctioned party cannot move any property out of or into the United States.  It cannot deposit money into U.S. bank accounts or withdraw such money.  It cannot purchase from American businesses.  It cannot board a U.S. airliner.  It cannot obtain a U.S. visa.  It cannot accept money or any other form of assistance from any U.S. citizen.  It cannot do business with any corporation organized under the laws of the United States, including branches of such businesses operating outside the United States.  In short, the target is economically isolated from the U.S. and all of its citizens and institutions.

Arms and Materiel Producers

Beyond the identification of the eleven blocked individuals, the March 17 Order sets the stage for the identification of further classes of individuals, in particular any person who operates in "the arms or related materiel sector in the Russian Federation."  The language of this section appears to be broad enough to reach citizens of third countries who may be doing business in Russian arms.  It further allows the President to block additional persons who are designated by the Secretary of the Treasury, after consultation with the Secretary of State, to be "an official of the Government of the Russian Federation", thereby authorizing further action against a larger class of Russian bureaucrats.  The question raised by both Executive Orders is whether the targeted individuals have connections with the U.S. economy sufficient enough to be adversely effected by them. If they have no such connections, then the March 17 Order, as a practical matter, would be ineffective.

The Congressional Response

While the Executive Orders sought to identify persons who participated in assaults on Ukrainian democratic institutions, the Congress focused on aid to help restore those institutions.  On March 12, 2014 Senator Robert Menendez introduced S 2124, entitled "Support for The Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014."  The Bill contained a long list of policy objectives, but had as its real goal the provision of non-military assistance.  Indeed, it established as U.S. policy "to use all appropriate economic elements of the United States national power, in coordination with United States allies, to protect the independence sovereignty and territorial and economic integrity of Ukraine."  At least under this Act, direct military assistance seems to be excluded.

The Congressional measure authorizes the provision of loan guarantees; assistance in the recovery of Ukrainian assets stolen by former President Viktor Yanukovych and his family; governance assistance and security cooperation; and sanctions against persons, not unlike the March 17, Executive Order.  The full machinery of U.S. economic power and assistance has been directed toward the Ukraine.

The Special Importance of Section 9 and the End of the Free Pass for Corrupt Russian Government Officials

Lawyers who practice international criminal jurisprudence should take special note of section nine of S 2124, because it expresses a legal notion that marks a significant departure from existing U.S. law.  This provision authorizes the President to impose sanctions on "any official of the Government of the Russian Federation…" who is responsible for, among other things "the expropriation of private or public assets for personal gain, corruption related to government contracts or the extraction of natural resources, bribery or the facilitation or transfer of the proceeds of corruption to foreign jurisdictions."

As most criminal defense and international trade lawyers know, when the Congress enacted the Foreign Corrupt Practices Act (FCPA) of 1977, it excluded from the jurisdiction of the Act, those foreign government officials who received the corrupt payments which allowed the bribing companies to "obtain or retain business."  The onus of the law fell squarely on the bribe payer and not the foreign corrupt official receiving the bribe. The Congress was not sanctioning the conduct of the corrupt foreign official when it wrote the law as it did.  It simply was not willing to open the door to the virtually limitless diplomatic incidents which would arise from indicting foreign officials, even corrupt ones.

In 2012 the Congress created its first exception to the pass afforded corrupt foreign officials.  It passed the Sergei Magnitsky Rule of Law Accountability Act of 2012 and allowed certain Russian foreign officials who participated in a massive fraud (and the murder of Mr. Magnitsky who publicized the fraud) to be the subject of Blocking Orders.  In effect, it treated certain foreign government officials who were massive fraud perpetrators as threats to National Security.  We have written about this law elsewhere. [1] Section nine of this Act does precisely the same as the Magnitsky measure.  It allows the President to identify "official[s] of the Russian Federation" who have engaged in specified corrupt activities, and permits them to be blocked.  And while it targets corrupt Russian foreign officials, it makes no reference to the Ukrainian incidents that prompted this legislation. Whereas the FCPA excluded persons from prosecution by virtue of their foreign government status, this bill, like the 2012 Magnitsky based legislation, specifically invokes blocking authority because of one's status as a corrupt foreign government official.  In fact, this bill is even less forgiving than the 2012 measure, because under the Magnitsky bill a targeted foreign official could be removed from the Blocking Order if the official demonstrated that he did not engage in the complained of conduct; was criminally prosecuted for those offenses; or "clearly demonstrated a change in behavior."  No such excepting language is included in S 2124.  The complete lack of tolerance by the Congress with Russian corruption and its seriously destabilizing effects, is obvious. The question for future consideration is whether this lack of tolerance will extend to corrupt foreign officials in third countries, and whether the lack of tolerance will work its way into amendments in the FCPA.  Most trade and white collar lawyers will quickly note the unique features of this section of the bill.

[1] See, Donohue, The International Emergency Economic Powers Act and the Sergei Magnitsky Rule of Law Accountability Act of 2012: Has a Visible Fissure Appeared in the Once-Impenetrable Wall Protecting the Foreign Official Bribe Taker Under the FCPA? Financial Fraud Law Report, March 2013

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