New York Law Journal: State Sanctions Targeting Russia Present Complicated Questions for Companies, Regulators
New York and New Jersey now require companies to submit certifications relating to activities in Russia as part of the procurement process. New Jersey also created its own sanctions list comprised of companies that the New Jersey Treasury Department believes are engaged in prohibited activities in Russia and Belarus.
Within a week of Russia’s invasion of the Ukraine in late-February 2022, federal and state authorities started to take steps to show solidarity with the Ukrainian people. At the federal level, the Treasury Department and the Commerce Department joined regulators in the European Union, the United Kingdom, and elsewhere by imposing economic sanctions targeting individuals, companies, and sectors of the Russian economy that were viewed as central to the conflict. Shortly thereafter, the Department of Justice established Task Force KleptoCapture, a law enforcement task force dedicated to enforcing Russia-related sanctions, export restrictions, and economic countermeasures.
At the state level, beginning in March 2022, New York, New Jersey, and many other states passed laws and issued executive orders intended to back Ukraine and limit the use of public funds to support Russia’s war. New York and New Jersey now require companies to submit certifications relating to activities in Russia as part of the procurement process. New Jersey also created its own sanctions list comprised of companies that the New Jersey Treasury Department believes are engaged in prohibited activities in Russia and Belarus.
These well-intentioned efforts present state and local regulators with complicated tasks that may require them to apply federal law and make decisions with foreign policy implications. Due to these complications and the lack of precedent in this emerging field, the private companies seeking to navigate varying state requirements also face tough decisions. To illustrate some of the challenges and risks for companies pursuing economic development benefits or public contracts, this article uses New York and New Jersey as examples of the different approaches states have taken to Russia’s invasion.
New York’s Executive Order 16
On March 17, 2022, New York Gov. Kathy Hochul issued Executive Order No. 16, which generally prohibits New York agencies from entering into or renewing contracts with vendors “conducting business operations in Russia.” The term is defined to include not only commercial activities by the vendor in Russia, but also commerce with Russia-based companies and the Russian government.
Vendors seeking to contract with New York are required to submit a certification of compliance with Executive Order No. 16. New York’s Office of General Services has clarified in written guidelines that the phrase “vendor” in the certification is “not intended to encompass the operations of affiliates of the [vendor].”
New York agencies are not necessarily foreclosed from contracting with vendors conducting business operations in Russia. Under Executive Order No. 16, New York agencies can contract with a vendor doing business in Russia or Belarus if the agency concludes in writing that the contract is necessary to the agency’s function and no suitable alternative exists. The certification contains two additional exceptions. First, a New York agency may contract with vendors that are “in the process of winding down business operations in Russia.” Second, a contract is permissible under Executive Order No. 16 if the vendor is providing services “necessary to provide vital health and safety services within Russia or to comply with federal law, regulations, executive orders, or directives.”
A vendor seeking to rely upon either of the certification’s two exceptions must submit a “detailed description” of its activities to the agency in question. In order to proceed with a contract in reliance on these exceptions, the agency must determine that the vendor has made “good faith efforts to limit its business operations in Russia to the extent practicable” and is “not contributing in any significant way” to the war in the Ukraine.
New Jersey’s S-1889
On March 9, 2022, the New Jersey legislature passed S-1889, which “prohibits government dealings with businesses associated with Belarus or Russia.” Under S-1889, prohibited activities include providing services to the governments of Russia or Belarus, maintaining headquarters or a principal place of business in Russia or Belarus, and maintaining or receiving investments from the governments of Russia or Belarus.
S-1889 directed New Jersey’s Treasury Department to compile a list of entities determined to be engaged in prohibited activities. Entries on New Jersey’s sanctions list are based on “credible information available to the public.” Notice and an opportunity to respond in writing is required before an entity is added to the list. The most recent version of the list was issued on March 1, 2023, and it includes more than 275 entities. Some of those entities are subject to federal Russia-related sanctions; others are not.
S-1889 also bars entities on New Jersey’s sanctions list or otherwise engaged in prohibited activities from receiving certain benefits in New Jersey, including public contracts, economic development subsidies, and tax clearance certificates. State and local entities are required to seek certifications of compliance with S-1889 from vendors. The certification incorporates a broad legislative definition of “vendor,” which, unlike New York, includes subsidiaries and entities under common ownership. The New Jersey certification requires vendors to disclose whether the company or its affiliates are engaged in “prohibited activities.” If so, the certification calls for a “detailed, accurate and precise description” of the activities in question, as well as a “detailed description” of how those activities are “consistent with federal law.”
The enforcement of initiatives like Executive Order No. 16 and S-1889 may require state and local authorities to engage in a complicated analysis regarding the scope and application of federal sanctions, whether companies’ activities in Russia support the Russian war effort, and whether contracting with companies that maintain connections to Russia is sufficiently important to the agency’s function to override existing prohibitions.
As a result, private actors seeking to navigate state-law requirements relating to the Russian invasion face tough decisions in an uncertain environment. For example, companies may be required to submit sensitive information to state agencies regarding business strategy and offshore operations. In New Jersey, S-1889 and the related certification go further still by mandating disclosures relating to companies’ affiliates—even if the affiliates are involved in separate business and not based in the state. Under that law, a company seeking the privilege of doing business in New Jersey could end up on the state’s public sanctions list with only limited opportunities to challenge the conclusion.
The certification process can also lead to heightened criminal and regulatory exposure. Both New York and New Jersey require that certifications be submitted under penalty of perjury. There is also a looming risk of referrals by state officials to law enforcement and regulators, including at the federal level. It is not difficult to imagine a New York agency consulting federal law enforcement or the Treasury Department for help in determining whether particular business activities disclosed on a certification pursuant to Executive Order No. 16 are “contributing in any significant way to the unjustified war in the Ukraine by Russia.” Nor is it a stretch to be concerned that a New Jersey official might discuss a vendor’s Russia-related business disclosures with someone at the Office of Foreign Assets Control while considering whether, under S-1889, the vendor’s activities are “consistent with federal law.” In either case, submitting certifications to state authorities could lead to follow-on inquiries and investigations. Completing these certifications can also present reputational and anti-competitive concerns. While it is not entirely clear how states handle the information in required disclosures, there is at least some risk that companies’ certification-related submissions could be released through, for example, public records requests. Including by competitors. In this regard, New York’s guidelines for Executive Order No. 16 instruct that certifications and related written submissions should be made a part of the procurement record.
For all of these reasons, companies seeking state contracts or other public benefits should evaluate potentially applicable laws and regulations relating to Russia’s war in the Ukraine, and those companies must balance the anticipated commercial benefits of that business against the risks associated with developing state and local processes related to these issues.
Reprinted with permission from the April 4, 2023 issue of the New York Law Journal. © 2023. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.