You might recall that the Iran Threat Reduction and Syria Human Rights Act added Section 13(r) to the Exchange Act, which requires public reporting companies that knowingly engaged (directly or through affiliates) in certain transactions or dealings with Iran to report those transactions or dealings in their periodic reports and through separate filings with the SEC. But some sections of the statute are not necessarily limited to Iran. In fact, following the imposition on Russia of sanctions by the State Department in March, those disclosure and filing requirements could apply to dealings with certain Russian agencies and persons.
Under one provision of Exchange Act Section 13(r), if a public company or its affiliates “knowingly conducted any transaction or dealing with…any person the property and interests in property of which are blocked pursuant to Executive Order No. 13382” (“Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters”), the company must provide specified disclosure in its periodic reports and file a notice with the SEC. As discussed on thecorporatecounsel.net blog, this fact sheet from the State Department, U.S. Sanctions and Other Measures Imposed on Russia in Response to Russia’s Use of Chemical Weapons, indicates that the Secretary of State has determined that the Russian Government has used a chemical weapon against its own nationals in violation of the Chemical Weapons Convention and that the State Department has imposed sanctions as a result. Among other sanctions, the Department of State has “designated” the FSB (the Russian federal security service), the GRU (Russia’s Intelligence Directorate) and specified other Russian entities and persons under Section 1(a)(ii) of E.O. 13382. According to the State Department, these entities and persons have been designated for
“having engaged, or attempted to engage, in activities or transactions that have materially contributed to, or pose a risk of materially contributing to, the proliferation of weapons of mass destruction or their means of delivery (including missiles capable of delivering such weapons), including any efforts to manufacture, acquire, possess, develop, transport, transfer or use such items, by Russia….The FSB was involved in the August 2020 poisoning of Aleksey Navalny with a chemical weapon, specifically a nerve agent known as ‘Novichok.’ The FSB is being designated for its role in the Navalny poisoning and for possessing a Novichok chemical weapon.”
In addition, the GRU and related individuals “have engaged in activities that materially contribute to the possession, transport, and use of WMD by Russia, namely the chemical weapon Novichok,” including “a poisoning using a Novichok nerve agent in the United Kingdom in 2018.”
But who has dealings with the FSB? According to thecorporatecounsel.net post, the FSB is an important player in connection with information technology, including notification to or approval for the importation into Russia of various tech products, especially those using encryption. The post indicates that while some activities with the FSB may be permitted by the Office of Foreign Assets Control of the Treasury Department—which administers and enforces economic and trade sanctions—under General License IB, that license does not exempt companies from the disclosure requirements under Section 13(r) of the Exchange Act.
Section 13(r) requires the company to disclose in a periodic report a detailed description of each activity knowingly conducted with a designated person or entity, including the nature and extent of the activity; the gross revenues and net profits, if any, attributable to the activity; and whether the company or affiliate of the company intends to continue the activity. In addition, the company is require to separately file with the SEC, concurrently with the periodic report, a notice that disclosure of the activity has been included in the periodic report identifying the company and containing the information above. The SEC is required to promptly transmit the report to the President and to specified congressional committees and to publicly post the information on the SEC’s website. The President is then required to initiate an investigation and determine if sanctions would be appropriate.