Anna Zanina’s column about how the SDN list reached the Russian legal market

The latest American sanctions have given Russian law firms a reason to switch to discussing their own risks of inclusion in the SDN list. The reason was the imposition of sanctions on KSK Group and KSK Audit LLC on September 14. This case did not immediately attract attention, but in recent days the degree of discussion began to go off scale.

Previously, Western sanctions were imposed, for example, on Cypriot companies providing secretarial and management services for Russian businesses, and among domestic firms, investment companies (Veles-Capital) were subject to restrictions. When Russian persons related to the legal market were included in the SDN list, this was explained, in particular, by connections with sanctioned persons, as in the case of Pavel Kuzmin (director of the legal service of the Tsargrad group of Konstantin Malofeev) or A1 (investment division of Alfa- groups”).

In the case of KSK, the reason is simply the provision of consulting services in financial audit, accounting, taxes and commercial management. This provoked a violent reaction in the community. Artem Kasumyan from Delcredere reminds that sanctions can also be imposed against persons operating in those sectors of the Russian economy that are determined by the US Treasury. In May 2022, OFAC included auditing, services for the establishment of legal entities, trusts and management consulting. That is, to impose sanctions, it is enough to work in this area.

In this regard, KSK became a pioneer. Lawyers I know admit that this is “a precedent that increases risks for all consultants.” At the same time, says Gleb Boyko from NSP, inclusion on the blacklist usually has other grounds besides those officially specified. According to one version, the reason for attention to KSK could be “work with government and system-forming organizations, participation in tenders related to state defense orders.” According to another version, this may be due to KSK employee Alexey Chubarov, who is also involved in international structuring, also included in the SDN list. “If these were, for example, services to change the structure of a business in order to avoid falling under restrictions, then OFAC could regard them as assistance in circumventing sanctions,” says a lawyer I know.

KSK Kommersant has already announced that they will submit “a request to OFAC to clarify the reasons for being included in the lists.” But the regulator is not obliged to disclose details and has already limited itself to a “sparse explanation” when including Russian banks in the SDN list, Gleb Boyko points out. In addition, if specific services or clients are cited as the reason, the firm may refuse them in order to remove the restrictions or deny their existence, which will require OFAC to provide compelling evidence that may not exist. All this makes it possible to challenge the sanctions, and the agency is unlikely to want to facilitate this.