- The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is prohibiting the provision of accounting, trust and corporate formation, and management services to any person in the Russian Federation.
- The Delaware Secretary of State is currently blocking entities formed in Delaware that have a director and/or officer with an address in the Russian Federation, which precludes entities from making any filings with the Delaware Division of Corporations, to include paying their franchise tax and filing annual reports.
OFAC’s Service Prohibition
On May 8, 2022, OFAC issued a Determination (May 8 Determination) pursuant to Executive Order (E.O.) 14071 of April 6, 2022 (Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression) and 31 CFR § 587.802 that certain accounting, trust and corporate formation, and management consulting services are prohibited to any person located in the Russian Federation. Specifically, the May 8 Determination states that “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of accounting, trust and corporate formation, or management consulting services to any person located in the Russian Federation” is prohibited. OFAC stated that a “person located in the Russian Federation” includes individuals ordinarily resident in the Russian Federation and entities incorporated or organized under the laws of the Russian Federation or any of its jurisdictions. Below please find a summary of some additional key aspects of this prohibition.
- The prohibition excludes entities in Russia that are owned or controlled by a U.S. person as well as the provision of the services in connection with the winding down of an entity in Russia or one controlled by a Russian person. The prohibition further excludes the provision of services to a non-Russian company that has a physical presence and/or operations outside the Russian Federation, including a company owned or controlled by persons located in Russia, as long as the services are not further exported or reexported to persons located in the Russian Federation.
- The prohibition went into effect on June 7.
- OFAC has defined “trust and corporate formation services” to include services related to “assisting persons in forming or structuring legal persons, such as trusts and corporations; acting or arranging for other persons to act as directors, secretaries, administrative trustees, trust fiduciaries, registered agents, or nominee shareholders of legal persons; providing a registered office, business address, correspondence address, or administrative address for legal persons; and providing administrative services for trusts.”
- OFAC has defined “management consulting services” to include services related to “strategic business advice; organizational and systems planning, evaluation, and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.”
- This prohibition includes the provision of services to persons located in the Russian Federation, “irrespective of whether the services are performed as part of the formation of a new trust or company, or as part of the administration or maintenance of an existing trust or company.” It also prohibits “U.S. persons from providing nominee officer or director services in which a U.S. person is contracted to serve as a nominee officer, director, shareholder, or signatory of a legal person on behalf of a person located in the Russian Federation.”
- Thus, any such services are prohibited unless an OFAC specific license is obtained.
Blocking by State of Delaware Secretary of State
As a result of the noted services prohibition, the Delaware Secretary of State’s Office of Corporations is “blocking” any entity incorporated in Delaware that has an officer or director in Russia. This blocking includes, but is not limited to, a bar on submitting filings with Delaware relating to the company, and a finding that the entity is no longer in good standing, potentially impacting these businesses as follows:
- Loss of an entity’s right to use its name in the state, and so long as the loss of good standing continues, possibly allowing a different company to acquire rights to that name within the state;
- Inability to raise capital if new shares need to be authorized through a charter amendment filed with the Delaware Division of Corporations;
- Inability to consummate a merger that requires a certificate of merger be filed with the Delaware Division of Corporations;
- Potentially having the entity’s registered agent for service of process required by Delaware resign without ability to replace it; which can lead to the entity becoming “forfeited”;
- Inability to file annual reports and pay franchise fees, and following one year of unpaid taxes, the charter of the corporation will become void, and all powers conferred by law upon the corporation will be inoperative unless status is subsequently restored.
Pursuant to a September 2020 Memorandum of Understanding between OFAC and the State of Delaware’s Department of Justice, OFAC and Delaware are working collectively to ensure that Delaware does not provide any services in violation of the May 8 Determination, and as such, that Delaware has blocked and is blocking entities which have filed records with the state that indicate the entity has an officer or director in the Russian Federation.
To resolve the unblocking, companies must provide Delaware with the below information and Delaware will, in turn, submit the information to OFAC for a finding as to whether blocking is required. Delaware’s Division of Corporations personnel indicated that the OFAC review takes a minimum of two weeks and the block remains in place during the review. The information required by OFAC consist of the following:
- Submission by an officer or director of the blocked entity;
- Contact information, including name, telephone, e-mail, and physical address;
- Company name and file number;
- Explanation of the reason for changing or removing the Russian address, including citations to the statute, regulation, policy, guidance, or presidential executive orders, which supports the position that the blocking was in error; and
- Supporting documentation accompanied by a notarized affidavit stating that the documents are true and correct copies.
The impact of the sanctions on the Russian Federation continue to have far-reaching implications with secondary and tertiary effects. If your entity has any ties to Russia, or Russian nationals or residents, it may be impacted by the OFAC prohibition in a number of ways.