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Key Takeaways from Oleg Deripaska’s Lost Battle With OFAC

Author: Joshua L. Ray  17 August 2021
5 min read

Joshua Ray of Rahman Ravelli details the Russian oligarch’s unsuccessful attempt to have US sanctions against him removed

It appears that Oleg Deripaska, the Russian billionaire and close Putin ally, will not be seeing his name removed from the Office of Foreign Assets Control’s (OFAC’s) Specially Designated Nationals (SDN) list any time soon.  A June ruling from Washington DC District Court Judge Amit Mehta saw Deripaska’s bid to challenge his SDN designation come up well short.  

In rejecting each of Deripaska’s arguments as to why OFAC’s action was arbitrary and capricious and violating his Fifth Amendment rights, Judge Mehta’s decision provides some key takeaways for others who find themselves on the wrong side of American sanctions.   

Background

In a move widely condemned as a gross violation of international law, Russia annexed the Crimean Peninsula from Ukraine in March 2014.  Shortly afterwards, President Obama exercised his authority under the International Emergency Economic Powers Act (IEEPA) to issue a series of Executive Orders designed to inflict financial pain on individuals and entities deemed responsible for, or complicit in, the Russian takeover.  While Deripaska escaped OFAC’s first wave of SDN designations in response to Obama’s directive, Congress expanded the net with the Countering America’s Adversaries Through Sanctions Act (CAATSA) in August 2017.  

CAATSA imposed fresh sanctions on Iran, Russia, and North Korea and included a provision—Section 241—requiring the Treasury Secretary to produce a detailed report to Congressional intelligence committees on “senior foreign political figures and oligarchs in the Russian Federation.”  In January 2018, then-Secretary Mnuchin issued the Section 241 Report, which compiled a list of individuals identified through two objective criteria: their official position in government or a net worth in excess of $1 billion.  The list, which predictably included Deripaska given his wealth and prominence, was not itself an indication of who should be targeted for sanctions.  The Section 241 Report expressly stated that it was “not a sanctions list, and the inclusion of individuals or entities in this report . . . does not and in no way should be interpreted to impose sanctions on those individuals or entities.”

Months later, OFAC announced that Deripaska would be sanctioned because he met the criteria set forth in two of Obama’s Executive Orders, specifically:

  • EO 13661, which targeted anyone “owned or controlled” by, or who acted on behalf of, any senior Russian official; and
  • EO 13662, which targeted anyone who operated in the Russian “financial services, energy, metals and mining, engineering, and defense” industries.  

Several of Deripaska’s industrial entities were also sanctioned under OFAC’s “50% Rule,” which extends sanctions to any entity majority-owned by a sanctioned party.  In support of these designations, OFAC produced an Evidentiary Memorandum detailing the facts underlying its decision.  Much of the Memorandum was classified and heavily redacted, but OFAC provided Deripaska with an unclassified summary.  

Negotiations and Legal Action 

Deripaska seems to have engaged OFAC in negotiations soon after being named an SDN.  By December 2018, these negotiations resulted in a Terms of Removal Agreement, in which OFAC agreed to delist three of Deripaska’s entities in exchange for Deripaska reducing his ownership and control.  Deripaska’s efforts to get himself removed were not successful, however, and in March 2019 he sued OFAC, the Treasury Department, and senior officials in federal court.

Following subsequent negotiations and a continued refusal from the government to reconsider Deripaska’s designation, defendants made a motion to dismiss the complaint, or in the alternative, for summary judgment, in 2020.  Deripaska then cross-moved for summary judgment and the matter was put before District Judge Mehta.  

Judge Mehta’s Decision

On June 13, 2021, Judge Mehta granted the defendants’ motion after systematically rejecting each of Deripaska’s four primary arguments:

Argument 1: OFAC’s press release announcing his listing revealed that it exceeded its statutory authority by sanctioning him in response to “Russia’s worldwide malign activities” in general rather than the grounds specified in the relevant EOs.  

Finding: The Evidentiary Memorandum showed that OFAC sanctioned Deripaska pursuant to the factual criteria in the EOs and not on the basis of generic “malign activities.”  Statements in a press release do not supplant OFAC’s officially stated reasons.  

Argument 2: OFAC’s designation under EO 13661 was arbitrary and capricious under the Administrative Procedure Act (APA) because the facts on which OFAC relied were insufficient to establish a principal-agent relationship between Deripaska and any senior Russian officials.

Finding: EO 13661 does not require an agency relationship, and Deripaska’s reliance on definitional terms used in other OFAC sanctions regimes suggesting to the contrary were irrelevant.  Even if an agency relationship was required, the Evidentiary Memorandum established one by showing that Deripaska acted on Putin’s behalf on a number of occasions.  That these activities occurred prior to the EO did not make OFAC’s decision improper.    

Argument 3: OFAC’s denial of Deripaska’s petition for delisting under EO 13662 was arbitrary and capricious because OFAC erroneously (i) equated Deripaska’s involvement in World Economic Forum projects with participation in Russia’s energy sector, (ii) defined Russia’s energy sector to include electricity production, and (iii) continued to designate him an SDN even after he reduced his ownership stake in certain entities in the energy sector.   

Finding: Deripaska’s arguments amounted to asking the court to second guess OFAC in an area where its expertise, and thus its authority, is “at its zenith.”  Moreover, OFAC’s determination that Deripaska operated in Russia’s energy sector was supported by the facts detailed in the Evidentiary Memorandum.

Argument 4: OFAC violated Deripaska’s rights under the Fifth Amendment’s Due Process Clause by relying on undisclosed classified information and failing to provide him with adequately detailed unclassified summaries.  

Finding: As a non-resident alien without “substantial connections” with the US, Deripaska has no Fifth Amendment rights and therefore has no standing to make this objection.  With respect to Deripaska’s claims that his purportedly extensive business interests in the US gave him standing, the Court held that Deripaska failed to provide any evidential support beyond the allegations in the complaint, and therefore rejected them out of hand.  

Takeaways

Challenging an OFAC sanctions designation is an inherently uphill battle with only a slim chance of success.  Deripaska’s challenge in this case was creative but ultimately was dismissed without much effort from Judge Mehta.  For other existing or potential members of the SDN list, the court’s decision holds some important takeaways:  

  • OFAC will generally be amenable to removing entities who are sanctioned under the “50% Rule” if they agree to meaningful changes in their ownership structure. 
  • The standard for judicial review of an OFAC sanction determination is extremely deferential in favor of upholding a challenged action.  This will be especially so since such determinations implicate national security and foreign policy considerations, a core part of OFAC’s remit as part of the executive branch. 
  • OFAC’s evaluation of facts relevant to its sanction designations will be presumed to have been done in good faith, if there is no evidence to the contrary. 
  • Interpretations of Executive Orders made pursuant to one sanctions regime will not necessarily translate to other regimes.  Rather, differing statutory authority and foreign policy and national security contexts may result in differing interpretations of similar language among various OFAC sanctions regimes. 
  • OFAC can, and will, consider conduct occurring before a sanctions regime is put in place when making SDN determinations. 
  • Non-resident aliens generally will not have standing to raise due process claims unless they have a substantial connection to the US.  To establish such a connection, SDN designees will need to marshal evidence of specific facts showing property ownership or some other material presence in the US.   
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Joshua L. Ray

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Joshua Ray represents individuals and corporates in complex investigations, prosecutions and regulatory actions regarding market manipulation and multijurisdictional matters involving fraud, bribery and money laundering.

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