Analysis

Firms Struggle With Ethics Of Repping Sanctioned Russians

Years after the self-styled Donetsk People's Republic shot down Malaysian Airlines Flight 17, the family of Quinn Lucas Schansman, one of the passengers on board, sued a slew of financial companies that allegedly provided services to the Russian separatist group. The defendants included the Russian banks Sberbank and VTB Bank.

The U.S. imposed sanctions on both banks when Russia invaded Ukraine last month, and Sberbank's attorneys at White & Case LLP and Debevoise & Plimpton LLP acted swiftly.

Two weeks after the U.S. Department of the Treasury announced its sanctions, the lawyers notified U.S. District Judge Andrew Carter Jr., who is presiding over the Schansman case, that they were "ending their relationship and ... actively seeking substitute counsel to represent Sberbank in this action."

Although VTB Bank's counsel Latham & Watkins LLP is closing its Moscow office and has condemned "the violence in Ukraine and the needless human suffering taking place," it has filed no letter or motion indicating it will stop representing the bank, nor has it responded to White & Case and Debevoise's planned exit. The firm did not respond to a request for comment.

Both standing by and dropping a sanctioned client are perfectly legal options for attorneys, but they signal a divide within the legal community that has been growing since the Biden administration began announcing sanctions against Russian oligarchs and banks in February.

While attorneys cannot legally aid sanctioned clients in negotiations, financial transactions or tax restructuring schemes that may help them evade the penalties imposed by the U.S. Office of Foreign Assets Control, or OFAC, many other forms of legal representation are perfectly legal.

But firms still struggle with the questions raised by sudden changes in the international landscape. Should attorneys represent blocked individuals and companies in ongoing litigation? If an oligarch is subject to sanctions, do those extend to companies that built his wealth, but are not on the sanctions list? What are attorneys' obligations to the clients they drop?

Legally, these questions are relatively easy to answer, according to Charlie Steele, former chief counsel for OFAC and now a partner at Forensic Risk Alliance Ltd., where he does not personally represent any of the sanctioned Russian oligarchs or companies.

Even with full blocking sanctions, which include a prohibition on services, there is a "general license" or regulatory carveout that covers most legal services, including counseling on complying with U.S. law, and representation in regulatory proceedings and litigation.

"If a law firm represents Ivan Doe, and he then gets put on the OFAC list of blocking sanctions, presumptively then, unless there was an exemption or a license, a law firm couldn't provide services to the guy," Steele said. "But almost every [sanctions] program has a broad general license for legal services."

But legal ethicists, like UCLA School of Law professor Scott Cummings, say even when representation is legal, that doesn't mean it's right. And even if sanctions don't mandate that attorneys drop their clients, there are often clear grounds for a permissive withdrawal, which is "broadly and vaguely defined," Cummings said.

"When there are gray lines, it seems like law firms should err on the side of representing clients that have integrity," he said. "I know that seems probably like a really idealistic thing to say in the ruthless, competitive business of BigLaw, but the consequences of providing legal support and resources to these individuals and entities is now in full view, and it's not pretty."

Law firms' client lists aren't publicly available, but litigation can offer a peek at which firms have been hired by sanctioned companies and oligarchs. A Law360 review of dockets in ongoing cases involving these clients, as well as nonsanctioned business entities with close ties to Russian oligarchs, found firms are taking different approaches.

Some appear to be standing by their clients. Freshfields Bruckhaus Deringer LLP appears to be continuing its representation of the sanctioned bank VEB.RF in a federal suit brought by a centuries-old Jewish organization seeking to recover a manuscript collection that's still in Moscow — although there hasn't been much action in that case since an appeal to the D.C. Circuit was filed last year.

Freshfields has indicated in past statements it is acting "swiftly and responsibly" to remove "companies or individuals with close ties to the Russian state" from its client list; it did not respond to a comment request about its representation of VEB.

Meanwhile, White & Case and Debevoise are both seeking to drop Sberbank in two federal cases, the one concerning the Malaysian Airlines flight and another accusing the banks of "Russian corporate raiding" of a Russian company through a credit line investment scheme.

While representation in litigation is covered by a general license, there are still tripwires for firms that keep their sanctioned clients.

Attorneys must be careful a sanctioned client's legal fees don't come from within the U.S. or a third party. Attorneys must also submit annual reports about the payments they've received from blocked clients.

Firms also must guard against companies who are not on the sanctions list, but could be subject to OFAC's "50% rule," which automatically confers sanctioned status on any company if a majority of its ownership stake belongs to a sanctioned person or people.

It gets more complicated for companies that are run, but not owned, by oligarchs.

Case law would suggest such businesses are in the clear. Igor Sechin, who was placed under new sanctions in February, was also blocked following Russia's 2014 invasion and annexation of Crimea. Sechin was and is CEO of the Russian energy company Rosneft. And when he was the signatory on an oil development deal with Exxon Mobil Corp., the U.S. Treasury Department sought to fine Exxon $2 million for violating those sanctions.

But in 2020, a Texas federal court nixed the penalty, finding Exxon wasn't properly placed on notice that Sechin's involvement in the agreement between two nonsanctioned companies broke the law. U.S. District Judge Jane Boyle noted when the Obama administration announced its sanctions, it was explicitly targeting oligarchs' "personal assets, but not companies that they may manage on behalf of the Russian state."

This time around, the Biden administration has not included any such caveats, instead noting many oligarchs "are believed to participate in, or benefit from, the Russian regime's kleptocracy" and "serve in leadership roles of companies designated or identified today."

ArentFox Schiff LLP attorney Matthew Tuchband, who spent 21 years at OFAC's Office of the Chief Counsel, said in spite of Exxon's win, it's now clear OFAC considers it a violation to sign a contract with a blocked person, even if in a nonpersonal capacity. That could make new relationships with companies run by blocked individuals slightly more complicated for law firms. They'll have to be careful about who signs their retainer agreements and whether their role enriches a sanctioned person, Tuchband said.

"If a company is not blocked, typically you can continue to do business with that company. But you can't do business with that company if that business involves specifically the blocked person or benefits that blocked person," he said. "So you need to be careful and thoughtful about it."

If a blocked person were involved in the coordination of ongoing litigation, a law firm could apply for a license seeking permission from OFAC to continue with work that might not be covered by its general license for legal services, according to Erich Ferrari, whose firm, Ferrari & Associates PC, focuses on economic and trade sanctions, and who himself represents some Russian clients that were subject to the February round of sanctions.

"You would apply for specific license and say, either 'Hey, we're engaged in this litigation on behalf of a nonsanctioned entity, but we're coordinating with a person who is now blocked, so please give us a license to be able to provide those services,' or 'Give us a license to at least have some time to wind down that relationship so we can identify a new person in the company to coordinate with,'" he said.

But these considerations could be a reason some BigLaw firms are dropping sanctioned clients.

"A lot of the firms who have announced this are bigger firms that also do corporate work or lobbying work, and they might have a broader suite of services that they're providing to these clients that is no longer permissible, and maybe they don't want to go through the trouble of getting licenses," Ferrari said. "Maybe it's too much of a compliance headache for them. Perhaps it's reputational, such that they have a stable of clients that might feel uncomfortable, given the current geopolitical situation, if their lawyers are representing parties who've been sanctioned."

Cummings, the UCLA professor, said those considerations shouldn't drive firms' representation decisions and they ought to drop Kremlin-tied clients because it's the right thing to do.

"Representing such clients would, effectively, be prejudicial to the administration of justice writ large because you have been providing legal resources and support to entities that were effectively financially supporting the Putin regime," he said. "Even though you wouldn't be representing them in conduct that is per se illegal, you would be representing them in a context in which doing so is contrary to your obligation to uphold the rule of law."

Firms have scrambled to condemn the invasion of Ukraine in public statements, but those statements can reveal a firm's level of commitment, according to a group of academics from Harvard, Yale and Stanford who are tracking firms' public statements and ranking them on a website.

"Some law firms are splitting hairs about which clients they will avoid. Some firms say they will no longer represent clients with 'known ties to Russia's war effort' or that 'don't share our values,' leaving plenty of room for serving the interests of Putin's supporters," the website says.

By those standards, the professors say, only Gowling WLG and Morrison & Foerster LLP have made ironclad commitments not to represent any client with ties to the Kremlin.

The professors have also dismissed firms closing their Russian offices as "modest and possibly misleading," noting lawyers can still serve Russian clients from afar, and that "when McDonald's shuts its doors in Moscow, it does not mail burgers from London."

But just as representing sanctioned clients can create a compliance and ethical headache for law firms, getting choosy about clients is no easy feat either.

The American Bar Association's Model Rules of Professional Conduct may help lawyers seeking to leave clients, according to Stanford Law School professor Nora Freeman Engstrom.

"A lawyer can't just drop a client like a hot potato. But a lawyer is entitled to terminate representation in certain instances," she said. "The [ABA] rules compel lawyers to withdraw from any representation that involves 'conduct that is prejudicial to the administration of justice.' That's a broad category, and, applied here, it gives lawyers a lot of leeway."

She noted the ABA's rules also authorize withdrawal if a client "insists upon taking action that the lawyer considers repugnant" or takes action with which the "lawyer has a fundamental disagreement," and when other "good cause exists."

"Applied here, those standards give U.S. lawyers who want to cut ties with Putin and his enablers plenty of room to do so," Engstrom said.

That may be harder for attorneys representing clients in ongoing litigation, since they will have to file a motion to withdraw and get approval from a judge to drop their client. The ABA instructs lawyers to give clients "reasonable notice" of their withdrawal, without specifying what that means.

Firms are likely eyeing their client lists to see not only who is already blocked, but also who could be next. The Treasury Department has been doling out sanctions in tranches — most recently, adding more than 300 members of Russia's legislative branch last week — and there could be more to come.

ArentFox's Tuchband said firms should be beefing up their compliance programs now and sign up for regular OFAC updates to check the latest sanctions against their client lists.

"If their client is a company, they ought to be determining who's the ultimate beneficial owner and the steps in between to make sure there's no one who's blocked who owns 50% or more," he said.

Cummings said firms should be less surgical, and that all attorneys should err on the side of dropping blocked clients and those with relationships with sanctioned individuals. He acknowledged this could mean litigation against those entities would halt, but said "the counterbalance against this is the overarching, really unprecedented in our lifetime challenge to the international system and the rule of law that I think makes potentially choking off their legal access to the U.S. system something that might be a necessary evil."

"I don't think the normal rules of the game apply," he added.

Sanctions lawyers balked at that notion.

"To tell a lawyer you should be ethically prohibited from representing a client when OFAC is OK with it and licenses it seems like too broad a reading of the ethics rules to me," FRA's Steele said.

Tuchband said cutting off legal representation would also run afoul of the purpose of sanctions.

"They're meant to change behavior, not just to punish, though punishment sometimes is a way of encouraging future behavior to be different," he said. "The idea of sanctions is that they're supposed to work and go away."

--Editing by Brian Baresch and Lakshna Mehta.

Correction: An earlier version of this article misstated the name of Freshfields' client as well as the nationality of the plaintiff accusing Sberbank of corporate raiding. The errors have been corrected. 


For a reprint of this article, please contact reprints@law360.com.

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