Anton Imennov: ‘Sanctions vs Inheritance – Is the Son Responsible for the Father?’ ‘Echo Moskvy’, 22 November 2018
The sanctions era enters its rights, and sanctions become an integral part of the daily news. Thus, just yesterday, the US Treasury Department imposed restrictive measures against two Russian companies and one individual. At this time, the cause was neither Ukraine nor the poisoning in Salisbury, but the alleged supply of oil products to Syria, bypassing the Washington ban. Therefore, today almost 700 Russian persons and companies are on the US sanctions web.
Since school years, all those born in the USSR have known the phrase ‘Son is not responsible for the father’, which is attributed to Stalin. Thanks to the sanctions or restrictions as the Ministry of Foreign Affairs put it through the mouth of Maria Zakharova, which have become ingrained in our everyday lives, this phrase has played out with fresh colors. And now it is time to ask whether the sanctions do not open the forgotten page of the law history, devoted to collective responsibility.
The sanctions list of the United States includes citizens possessing significant capital, which is frozen abroad forever to the same significant extent. At least seventy-eight people from this list have children or future heirs. Yes – the hands of time are inexorable, and eternity is the sanction pendulum, which, swinging in the grave silence, tirelessly repeats only two words, ‘Always, never! Never, always’ (C). If the author of these words after two centuries would have looked in our time, he would agree that eternity is the American sanctions too, which are static and persist even when people turn into dust, and only memories and heirs remain.
One would think, what does it have to do with heirs? After all, when viewed from a formal legal point of view, children should not be included in the sanction list (SDN), the risks of being there are minimal. But they have the legal right by birth to inherit the foreign assets of their parents, where they will inevitably face difficulties in exercising these rights. First of all, this concerns the release of frozen property in the United States and the inheritance of immovable property located under the stars and stripes. Thus, the heirs (or children) are actually responsible for their parents.
Of course, now the question of the inheritance of sanctions, as well as of property of the sanctioned persons, is not investigated and it is clear why – because holy Korsun in Crimea was discovered recently, and sanctions against Russian citizens after this discovery began to be introduced relatively recently, since 2014. The realization that sanctions can affect not only the business or business partners of a particular person, i.e. a businessman or a politician, but also their personal property and their heirs does not come quickly, as the slogan ‘Don't make my Iskander laugh’ becomes less and less popular.
The first thing transboundary testators and owners of trusts should pay attention to is that there are no dynasties in the SDN-list. You will not see the list of wives or children of the Russian oligarchs or government officials in the sanctions list. There is no, for example, a character of the ‘Tatler’ Karina Rotenberg, who was expected to be subject to the same claims as for Suleiman Karimov in the French department of the Maritime Alps. One can argue and cite as an example Igor Rotenberg. However, he is already an accomplished and independent businessman of our muddy time.
Surely, you can entertain the thought that the old Europe is still humane and remembers basic legal postulates, and that in 2012, the EU Court prohibited the sanctions authorities to include in the sanctions lists on the grounds of the relationship with sanctioned persons, if the relative was not found to be involved in the cases subjected to the sanctions. If it were not for a significant ‘but’, i.e. the extension of the sanctions regime to the family and relatives of the sanctioned persons may be beneficial for the USA Especially in cases when assets that fell under sanctions are frozen in America, for example, real estate, yachts, or bank accounts.
The direct question, whether sanctions are to be inherited shall be answered ‘no’, the sanction legislation does not directly provide for this. Do children inherit sanctions? If this is a 50% share in the authorized capital of the Russian ‘Romashka’ Limited Liability Company, then there is none either. If this is En+ involved in the global financial system, then there will be some tangible consequences.
This will not prevent the terrible OFAC, as it does not stand with a baton behind the testator. The effectiveness of sanctions is ensured, in particular, by banks, other institutions, authorities, and officials of foreign states. A bank or a notary somewhere in Geneva, one of the many Cypriot firms that provides secretarial services to offshore companies, will actually make it difficult for the testator to fulfill the will and will continue to introduce and extend the sanctions right.
Recently, we accompanied the sale of a mansion in France, and you know what? We were performing ‘due diligence’ from May through November, although the post-Soviet seller and buyer was ready to strike a bargain and still stroke in the mid-July. But nothing happened. Beating around the bush continued that involved the French-Swiss banks. Compliance departments found sanctions ‘skeletons in the closet’ with both banks. The seller’s bank found a link between the buyer and unrecognized republics of Donbass, and the buyer’s bank in some inexplicable way got photos depicting the seller together with top RF politicians under sanctioned since 2014.
Nevertheless, America will not remain uninvolved, after all, it is not a secret that a considerable number of large Russian businessmen own real estate across the sea. When such persons hit the SDN-list, their American assets, of course, will be frozen. There is no need to go far to provide an example. Oleg Deripaska experienced the effect of the sanctions regime in relation to his apartment in Manhattan. Therefore, the mother of all questions is whether it is possible to inherit the frozen foreign assets of a sanctioned person?
And to answer it, it is important to understand whether the transfer of rights to frozen assets is possible. Upon thorough review of the provisions of the Decrees of the President of the United States and the US Treasury Acts regarding freezing the property of persons named in the sanctions list, we can see that there is an open list of prohibited transactions with frozen assets.
The magic phrase that turns all the happiness earned by sweat of one’s brow into bitterness sounds like this, ‘All property and rights to property located in the US will be frozen (if you do not like this term, you can use an expression from the Civil Code of the Russian Federation – ‘a ban on transactions with...’) and cannot be transferred, paid for, exported, withdrawn or otherwise disposed of. The conclusion is simple – the rights to sanctioned persons’ property located in the United States cannot be transferred, since the transactions outlining such a transfer are prohibited.
However, the Anglo-American legal system would not be its own self unless it did not provide for an outside possibility for redressing violated rights and – even despite the lack of a procedure for release of the property frozen on the territory of the United States of the persons named in the sanctions list, there is such an opportunity. A glimpse at the official website of the US Treasury would be enough.
There are some examples of situations that can serve as a basis for delisting (exclusion from the sanctions list), in particular: a positive change in the behavior of a listed person, the death of such a person, a reason for including a person in the list no longer exists, the listing is based on erroneous identification. Thus, the death of a person enlisted may (not always) become the basis for the OFAC decision to exclude such a person from the list. We know the entire procedure thoroughly and without describing it in detail, we can just say that it will take at least 90 days and will be very interactive.
After the verification of the application, OFAC will provide a written decision to the person who wishes to exclude a sanctioned person from the list and release his or her property. Or will not provide. But it is important that such an application can be filed repeatedly.
In a real case scenario, the delisting procedure takes a very long time. The terrorist Shamil Basaev was on the sanctions list for another five years after his death from the explosion of the explosive-laden KamAZ. This happens because if a person is excluded from the sanctions list due to death, his assets will be released. Consequently, such assets may be transferred in the order of inheritance, but the heirs may also be involved in activities against the United States, so the Americans believe that they should not be allowed to the assets. To be on the safe side, as they say. For example, the Cubans included in the list in the 80s of the last century and long dead, were excluded by the OFAC only in 2015.
The United States is generally a conservative country as well as the Americans, so their approach is quite pragmatic: the death of a person on the SDN list will not, as a general rule, exclude him from the sanction list, because the OFAC’s goal is to stop the flow of money. And the assets may well remain on the names of those listed even after their death.
The very exclusion of a person from the sanctions list sometimes takes years because a sanctions expert has to develop the evidence that will be difficult to refute in court if such a case is appealed. Therefore, the process of administrative exclusion from the sanctions list takes on average from one to two years, and sometimes it may extend for 4-5 years. The delisting procedure itself is complicated since the OFAC applies a high standard and thoroughly examines the facts of each case using complex questionnaires and correspondence.
In a word, until a person is excluded from the sanctions list, his or her foreign property will not be unfrozen, which undoubtedly is a ‘headache’ for the heirs. Severe OFAC is likely to become their administrative interlocutor for many years, with unpredictable results, because the refusal substantiated by the wording ‘there are no sufficient grounds for this’ is more than possible. To challenge such a decision in court is even a more complicated and costly process.
What to do? At the very least, we should start thinking about this problem right now, so that the phrase ‘inheritance is a helping hand that parents lend to their children from the grave’ (C) becomes a reality.
However, just thinking is insufficient, we must also make plans for the future. And the problem of almost all Russian businessmen is the lack of a comprehensive strategy dealing with risks, especially sanctions ones. I do not mean the conditional first numbers of the Forbes list, as they have already missed the boat of preventive planning. It is more about the following ‘victims’ of sanctions, which can attain salvation only employing the correct approach, instead of the usual ‘on a napkin’. After all, there is already an algorithm for assessing the possibility of a Russian businessman entering the US sanctions list. It can be reduced to three steps:
1. Drawing up a press portrait to indicate weak points in the planning of its activities (if necessary, considering triggers such as denial of a visa).
2. Adjustment of behavior and lifestyle due to US sanctions requirements (for example, the impact of the sanctions background (environment) on a person, his or her family and the closest circle of contacts, that is friends, business partners, etc.).
3. Development of a medium-term strategy for leveling or minimizing sanctions risks.
It is only necessary to find the courage to admit that the problem does exists, and then a solution will always be found. The rest is paperwork.
Anton Imennov, advocate, Pen & Paper Moscow office managing partner