Treasury Sanctions Russian Energy Giants; IRS Corrects Expatriate Data

Treasury Escalates Pressure: Rosneft and Lukoil Targeted

The Treasury Department, through the Office of Foreign Assets Control (OFAC), has significantly escalated pressure on the Russian energy sector. In a recent notice, Treasury designated major Russian oil companies Rosneft and Lukoil under Executive Order 14024. This order, specifically section 1(a)(i), grants the Secretary of the Treasury authority to block the property and interests in property of persons determined to operate in the energy sector of the Russian Federation's economy. This represents a hardening stance compared to prior directives, potentially impacting entities dealing with these newly sanctioned companies.

The Kill List: Entities and Directives

Following the designation of Rosneft and Lukoil under Executive Order 14024, the Treasury Department has released a detailed list of affiliated entities now subject to sanctions. The following entities have been added to the Specially Designated Nationals and Blocked Persons List (SDN List), pursuant to section 1(a)(i) of E.O. 14024 for operating or having operated in the energy sector of the Russian Federation:

• JSC RN NYAGANNEFTEGAZ (a.k.a. AO RN NYAGANNEFTEGAZ)
• KHARAMPURNEFTEGAZ
• LIMITED LIABILITY COMPANY BASHNEFT POLUS (a.k.a. OOO BASHNEFT POLUS)
• LIMITED LIABILITY COMPANY KYNSKO CHASELSKOE NEFTEGAZ
• PUBLICHNOE AKTSIONERNOE OBSCHESTVO UDMURTNEFT IMENI VI KUDINOVA
• RN–YUGANSKNEFTEGAZ LLC (a.k.a. RN–YUGANSKNEFTEGAZ OOO; a.k.a. YUGANSKNEFTEGAZ)
• TAAS YURYAKH NEFTEGAZODOBYCHA LLC
• OPEN JOINT–STOCK COMPANY ROSNEFT OIL COMPANY (a.k.a. OAO ROSNEFT OIL COMPANY; a.k.a. OIL COMPANY ROSNEFT; a.k.a. OJSC ROSNEFT OIL COMPANY; a.k.a. ROSNEFT; a.k.a. ROSNEFT OIL COMPANY)
• LUKOIL OAO (a.k.a. LUKOIL (Cyrillic: KERJQK); a.k.a. LUKOIL OIL COMPANY; a.k.a. NEFTYANAYA KOMPANIYA LUKOIL OOO; a.k.a. NK LUKOIL OAO; a.k.a. PUBLIC JOINT– STOCK COMPANY OIL COMPANY LUKOIL (Cyrillic: GE<KBXYJT FRWBJYTHYJT J<OTCNDJ YTANZYFZ RJVGFYBZ KERJQK))

The designations of RN-Yuganskneftegaz, Rosneft, and Lukoil also include a determination under Executive Order 13662. E.O. 13662, issued in response to the situation in Ukraine, imposes sanctions on persons contributing to the crisis. Specifically, Rosneft and RN-Yuganskneftegaz are subject to either Directive 2 or Directive 4 under E.O. 13662, while Lukoil is subject only to Directive 4.

• Directive 2 targets Russian state-controlled energy firms, restricting U.S. persons from dealing in new debt of these entities with a maturity exceeding 60 days. This focuses on the tenor of debt, not blocking all transactions, but limiting access to longer-term financing.
• Directive 4 prohibits the provision of goods, services, or technology (but not financial services) for specific oil exploration and production projects, specifically deepwater, Arctic offshore, or shale projects with the potential to produce oil.

The inclusion of "Secondary sanctions risk" alongside these listings is significant. These warnings refer to 31 CFR § 589.201, which implements the Ukraine-/Russia-Related Sanctions Regulations (URSR). Under § 589.201, the Treasury Department can impose sanctions on foreign persons (non-U.S. entities) who knowingly facilitate significant transactions for or on behalf of sanctioned Russian entities. This creates substantial compliance pressure, particularly for foreign financial institutions (FFIs), who risk losing access to the U.S. financial system if they engage in prohibited transactions.

IRS Housekeeping: Expatriate List Correction

As international sanctions enforcement intensifies, the IRS also handles routine, but crucial, administrative matters. The IRS has issued a correction to the Quarterly Publication of Individuals Who Have Chosen To Expatriate for the fourth quarter of 2023. This publication is mandated by Section 6039G of the Internal Revenue Code (IRC), which was enacted as part of the Health Insurance Portability and Accountability Act (HIPAA) of 1996. Section 6039G requires the IRS to publish a list of individuals who have lost their U.S. citizenship or long-term residency (i.e., "expatriated") and are therefore subject to specific tax rules outlined in IRC Sections 877 and 877A.

The correction addresses an error in the Federal Register publication from January 29, 2024. Specifically, the name "SRINIVASAN" was misprinted. The corrected listing appears on page 5619 of the original publication, in the first column, eighth line from the top. Taxpayers should note that the penalties for failing to comply with Section 6039G—namely, for failing to file Form 8854, the Initial and Annual Expatriation Information Statement—can reach $10,000 under Section 6039G(c). The IRS has increased scrutiny in this area following the Farhy case (D.C. Circuit Court of Appeals), which confirmed the IRS's power to assess these information penalties without needing a deficiency notice.

Industry Impact & Compliance Takeaways

Following the expatriate list correction and heightened sanctions enforcement, the impact on the energy sector and the compliance burden for U.S. persons have increased significantly. Here's a breakdown of the winners and losers:

• Losers: The Energy Sector. Specifically, companies dealing with Rosneft, Lukoil, and their subsidiaries now face heightened scrutiny and potential sanctions exposure. Executive Order (E.O.) 14024 authorizes sanctions against those operating in the energy sector of the Russian economy. The additions of these entities to the Specially Designated Nationals and Blocked Persons List (SDN List) effectively cuts them off from most international financial systems, with potentially cascading effects on their partners. Furthermore, Executive Order 13662 can restrict dealings in new debt or the provision of goods, services, or technology for specific project types.

• Losers: U.S. Persons Dealing with Sanctioned Entities. U.S. persons (including citizens, residents, and entities organized in the U.S.) are generally prohibited from engaging in transactions with SDNs. This includes not only direct transactions but also indirect dealings that benefit sanctioned entities. Violations can result in substantial civil and criminal penalties. These individuals must diligently update their compliance programs to reflect these changes. This involves:

  • Screening all transactions against the SDN List.
  • Conducting enhanced due diligence on counterparties.
  • Implementing robust internal controls to prevent sanctions violations.

• Increased Compliance Burden: Taxpayers should remember that they must still meet their obligations under Section 6039G, which mandates information reporting for individuals who lose U.S. citizenship or long-term residency (expatriates), by filing Form 8854. Failure to accurately report worldwide income, assets, and liabilities can result in a $10,000 penalty under Section 6039G(c). Given the D.C. Circuit's holding in Farhy v. Commissioner, the IRS has the authority to assess these penalties without needing a deficiency notice.

Taxpayers and practitioners must navigate dual regulatory updates: sanctions compliance enforced by the Office of Foreign Assets Control (OFAC) and expatriate reporting requirements enforced by the IRS. Close coordination between legal and tax advisors is crucial to ensure full compliance and mitigate potential penalties.