Fertiliser sanctions furore over Belaruskali’s alleged intent to export potash to the US

News | 14 April 2015

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While most would agree that the US approach to enforcing sanctions restrictions is more draconian than that of the EU, one particular loophole that is causing a bad smell in the fertiliser industry has been brought to the attention of US regulators.   
 
Concerns have been raised about how Belaruskali, the Belarusian state-owned potash producer, are poised to export potash to the US, despite this being, on the face of it, a violation of US sanctions.
 
In a memo to its members dated 22 January 2015, the Fertilizer Institute (TFI) has summarised the sanctions regime and “while not opining or advising TFI or its members on whether any company should or should not engage in any transactions”, recommends that members beware and act with great caution.
 
It reminds its members that failure to comply with the prohibitions exposes them to “possible civil and/or criminal penalties” and spells these out. “Administrative violations can result in a fine of up to the greater of US$250,000 or twice the value of the transaction per violation in most administrative cases, and temporary or permanent denial of export privileges. Criminal violations involving willful failure to comply with the EAR or OFAC regulations may result in up to US$1m in fines and/or up to 20 years in prison per violation”.
 

Background

 
In 2006, the US government imposed sanctions against entities and individuals in Belarus for human rights abuses, public corruption, and steps to undermine democratic processes undertaken by President Lukashenko and his close associates. The sanctions do not apply to the entire country but rather to companies and individuals listed as Specially Designated Nationals (SDNs), the method by which the US government sanctions individuals and entities.
 
Belneftekhim Concern, a large state-owned consortium of companies in the petrochemical and chemical business, was listed as an SDN. It remains listed today.
 
One company within the Belneftekhim Concern was Belaruskali, the state-owned potash company. Under the OFAC rules, companies owned or controlled by an SDN are caught by US sanctions, and so would include firms in which Belneftekhim has a 50% or greater interest such as Belaruskali and its export subsidiary, the Belarus Potash Company (BPC). For this reason, Belaruskali stopped exporting to the US after the sanctions were implemented.  
 
On 28 February 2014, the Belarus government passed Resolution 177, separating Belaruskali from Belneftekhim. The TFI notes that that Belaruskali is taking advantage of this to begin exporting to the US, a step that would be prohibited for a sanctioned entity.   
 
During the past few weeks, twelve members of the US Senate and House of Representatives have raised concerns, questions, and issues about the import of Belarusian potash and have asked the Treasury Department and Department of State to investigate. Many have also specifically asked the Treasury Department to name the state-owned potash company, Belaruskali, and its trading arm, Belarusian Potash Company (BPC), as SDNs, to maintain the same trading status as before Belneftekhim’s corporate reorganisation.
 
For example, Senator Cory Gardiner commented in a letter to Treasury secretary of state Jacob Lew, “If this act by the Belarussian regime is designed to blatantly disrespect US law and is allowed to go ahead without punishment, it would set a dangerous precedent for the United States. I urge you to investigate this incident swiftly and take necessary actions, including immediately designating Belaruskali itself as an SDN while you investigate this matter, to ensure that Belarus is not skirting the law.”
 
Congress member Michael Coffman makes the point in his letter to Lew (19 February 2015) that the Belneftekhim Concern restructure was “conducted purely for show, as a way to evade sanctions” and that SDN listed Lukashenko “oversees the directorship of Belaruskali” having been appointed its director general in November 2014.

Wait and see

 

Hogan Lovells partner Robert Kyle sought clarification from the Office of Economic Sanctions Policy and Implementation as to the state department’s position on whether BPC is subject to US sanctions – or not. The response, dated 23 March 2015, refers the matter to OFAC “for further information”.
 
In view of what the TFI calls the “somewhat non-transparent nature of OFAC’s administration and enforcement”, and the potential for substantial penalties that may apply for violating regulations (even inadvertently), consistent with OFAC’s guidance, TFI members are advised to “act with caution” in proceeding with any transaction and ensure they do “an appropriate level of due diligence review”.
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