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OFAC Energy Sector Sanctions Compliance

The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions against foreign countries, entities, and individuals. OFAC has imposed extensive sanctions on Russia’s energy sector in response to Russia’s invasion of Ukraine.

Companies involved in the energy sector, such as oil and gas companies, need to ensure they are complying with OFAC’s Russia-related sanctions. This can be a complex task given the wide range of restrictions and evolving guidance. Let’s break down what energy companies need to know.

Overview of OFAC Energy Sector Sanctions on Russia

OFAC has issued several Executive Orders authorizing sanctions on Russia’s energy sector. Key aspects include:

• Ban on new investment in Russia’s energy sector
• Limitations on exports of goods, services, and technologies to Russia’s energy industry
• Blocking sanctions on certain Russian energy companies and entities
• Restrictions on transactions/dealings with sanctioned Russian energy entities

The restrictions apply globally to U.S. persons as well as non-U.S. entities owned or controlled by U.S. persons. Certain authorizations allow for limited transactions related to energy, such as those necessary for safety or environmental remediation.

Conducting Due Diligence on Russian Energy Partners

A key compliance step is conducting due diligence on current and potential Russian business partners in the energy sector. Companies need to check OFAC’s Specially Designated Nationals (SDN) list and other sanctions lists to determine if a Russian counterparty is designated or sanctioned.

Some tips on conducting due diligence:

• Screen names/entities against OFAC’s sanctions lists, including alternate spellings
• Research ownership structure and determine if owned/controlled by sanctioned parties
• Review details on procurement contracts and financing
• Consult OFAC’s published guidance and FAQs
• Consider using third-party screening software and services

If a potential business partner appears on the SDN list or is owned by a sanctioned entity, any transactions would likely be prohibited.

Halting Transactions with Sanctioned Entities

If an energy company determines they are transacting with a sanctioned Russian entity, whether directly or indirectly, they need to immediately halt business dealings.

Steps to take include:

• Stop outstanding transactions/payments
• Cancel or refrain from entering new contracts
• Block or freeze assets/property of sanctioned entities
• Sever other financial dealings and arrangements

Companies should document these actions and retain records in the event of an OFAC audit. Failing to cease business with SDNs could result in significant penalties.

Limiting Exports to Russia’s Energy Sector

OFAC prohibits the export, re-export, sale or supply of goods, services, and technology in support of Russian deepwater, Arctic offshore, or shale oil projects. There are also restrictions on exports to state-owned Russian energy firms such as Gazprom, Lukoil, and Rosneft.

Companies need robust procedures to screen export transactions and prevent prohibited shipments. Compliance steps include:

• Review product specifications and end-use
• Screen parties involved against sanctions lists
• Obtain certifications from customers on intended use
• Train staff on export control compliance

Firms should be aware that OFAC may impose secondary sanctions on non-U.S. entities that materially assist sanctioned Russian energy projects.

Seeking OFAC Licenses

In some circumstances, an energy company may seek special permission from OFAC for transactions with sanctioned entities or activities. This requires applying for a specific license.

Examples where licenses may be issued include:

• Activities necessary for safety, environmental remediation, or humanitarian reasons
• Transactions to facilitate winding down of dealings
• Payments for goods/services delivered prior to sanctions

The licensing process can be complex, with lengthy review periods and no guarantee of approval. Companies should consult counsel before pursuing this option.

Designing and Implementing a Sanctions Compliance Program

To mitigate sanctions risks, energy firms should develop and implement a customized sanctions compliance program. Key elements include:

• Management commitment and accountability
• Risk assessment of potential exposure to sanctioned entities
• Written policies and procedures
• Training programs for staff
• Due diligence processes before engaging new partners
• Screening mechanisms for transactions and exports
• Recordkeeping and auditing
• Escalation protocols for potential issues

The program should be tailored to a company’s operations, customers, and geographic footprint. Staff across the organization should understand sanctions compliance responsibilities.

Consequences of OFAC Violations

Failure to comply with OFAC’s Russia sanctions can lead to significant enforcement actions including:

• Civil monetary penalties up to $295,141 per violation
• Criminal fines up to $1 million for organizations
• Revocation of export privileges
• Reputational damage

Penalties may be applied even for non-willful violations. OFAC will consider the adequacy of a company’s compliance program when assessing penalties.

Staying Up to Date on Sanctions

With frequent changes to Russian sanctions, energy companies need to regularly monitor OFAC’s website and guidance. Steps to stay current include:

• Sign up for OFAC email updates on new sanctions announcements
• Review OFAC’s Recent Actions page for new designations
• Carefully read any new Executive Orders on Russia sanctions
• Consult OFAC’s frequently asked questions (FAQs) for clarifications
• Follow OFAC on social media for real-time updates

Changes to the SDN list and new export control restrictions should be incorporated into screening processes and due diligence procedures. Consulting sanctions attorneys or advisory firms can also help interpret shifting requirements.

Seeking Guidance from OFAC

If questions arise on sanctions compliance, companies can reach out directly to OFAC for guidance. Resources include:

• OFAC hotline: +1-202-622-2490
• Email: ofac_feedback@treasury.gov
• OFAC compliance FAQs and brochures

Firms should also review recent OFAC enforcements actions and agreements, which provide insights into OFAC’s compliance expectations.

Using Sanctions Compliance Software

Specialized software tools can streamline sanctions compliance activities such as:

• Screening customers and transactions against sanctions lists
• Monitoring media for new designations
• Risk rating partners and vendors
• Tracking license authorizations and trade control classifications
• Archiving compliance records and audit trails

Selecting the right solution depends on factors like company size, industry, risk profile, and budget. Some key features to look for include:

• Comprehensive coverage of global sanctions lists from OFAC, UN, EU, UK, etc.
• Flexible matching algorithms to catch sanctioned entities
• Real-time alerts on new designations
• Integration with internal transaction systems
• Reporting tools to demonstrate compliance
• Scalable to grow with evolving needs

Leveraging automation can significantly enhance sanctions screening, monitoring, and auditing capabilities. However, companies need to validate system performance and augment tools with human oversight and expertise.

Training Employees on Sanctions Compliance

An effective sanctions compliance program requires extensive employee training across departments. Key training elements include:

• Overview of applicable sanctions programs
• How to check parties against sanctions lists
• Protocols for escalating potential issues
• Consequences of non-compliance
• New hire and refresher training

Training should be role-specific, focusing on day-to-day sanctions issues employees may encounter. Assessments can gauge understanding and supplement in-person or online instruction.

Some best practices for employee training include:

• Conduct training needs assessments to identify gaps
• Tailor training to different roles like compliance, sales, procurement
• Use real-life scenarios and case studies
• Have regular refreshers as regulations change
• Make training interactive with quizzes, exercises, role plays
• Verify comprehension through exams
• Provide quick reference materials for day-to-day guidance
• Have employees affirm commitment to compliance program

Training should not just cover regulations but instill a culture of compliance across the organization. Evaluations can help assess effectiveness and identify areas for improvement.

Auditing and Monitoring for Sanctions Compliance

Companies need robust audits and monitoring to verify sanctions compliance controls are working as intended. This includes periodic reviews of:

• Screening systems and restricted party due diligence
• Export classification processes
• Training completion and employee comprehension
• Recordkeeping procedures
• Escalation protocols for potential issues

Internal audits should be supplemented by independent external assessments. Audit findings can point to enhancements for the sanctions compliance program.

Conducting Internal Audits

Regular internal audits by a company’s compliance team are essential to evaluate effectiveness of the sanctions program. Internal audits should:

• Review screening and due diligence procedures
• Assess employee training completion rates
• Sample export classification and licensing processes
• Verify record retention and documentation
• Check that audit trails capture reviews and approvals

Internal audits can identify gaps in compliance policies, procedures, and controls. Deficiencies need to be remediated through corrective action plans.

Getting an External Audit

An objective third-party audit provides an independent assessment of sanctions compliance. External audits should:

• Use sampling to evaluate effectiveness of controls
• Interview staff on understanding of requirements
• Review compliance program governance
• Assess response to prior audit findings
• Benchmark against regulations and industry best practices

Audit results may point to enhancements around risk assessments, training, and use of technology. External audits are an OFAC compliance program requirement.

Reporting Audit Results

Audit findings should be conveyed to senior management and the board. Reports should:

• Outline deficiencies identified
• Assign severity/risk ratings
• Set deadlines for corrective actions
• Track remediation progress
• Update recommendations from prior audits

Transparent reporting ensures audit issues get appropriate attention and resources. Audit results may also inform risk assessments and future audit plans.

Remediating Audit Findings

Once audit issues are identified, companies need to develop corrective action plans to remediate deficiencies. Steps in the remediation process include:

• Assigning owners to address each finding
• Conducting root cause analyses
• Setting target dates for implementing corrective actions
• Allocating resources to fix deficiencies
• Following up to confirm remediation

Common sanctions audit findings relate to screening, training, and recordkeeping. Findings should be prioritized based on potential compliance impact. Tracking remediation helps hold teams accountable.

Informing Future Compliance Activities

In addition to addressing specific findings, audit results provide insights to strengthen ongoing compliance activities including:

• Enhancing risk assessments and monitoring
• Identifying training gaps
• Updating policies and procedures
• Investing in sanctions management tools
• Increasing compliance team resources

Lessons from audits feed into compliance program reviews and continuous improvement efforts. Audit findings may also shape the scope and schedule of future audits.

Maintaining Audit Documentation

All materials related to sanctions audits should be maintained as records. These include:

• Audit reports and findings
• Corrective action plans
• Evidence of audit issue remediation
• Communications with auditors

Proper documentation demonstrates the rigor of compliance evaluations over time. Audit records should be retained based on organizational policies and legal requirements.