Sudan: New OFAC Guidance: Sudan Embargo Will Not Apply To The New State Of Southern Sudan

On April 12, 2011, the Office of Foreign Assets Control (OFAC), US Department of the Treasury, issued guidance stating that the Sudanese Sanctions Regulations, 31 C.F.R. Part 538 (SSR), will not apply to the new state to be formed by the secession of Southern Sudan.  In January 2011, the people of Southern Sudan voted to secede from the Republic of Sudan (Sudan) and become an independent nation.  It is anticipated that Southern Sudan will formally come into existence as a separate state in July 2011. 

Although sanctions will not apply to Southern Sudan, continuing restrictions on Sudan mean that companies may not engage in unlicensed transactions in the new country where doing so would:

• Benefit the Government of Sudan, its agents or its instrumentalities

• Involve an entity included on OFAC's Specially Designated Nationals List

• Entail the transit of goods or services through most of Sudan 

Although the inapplicability of the SSR to Southern Sudan may present certain opportunities for US companies, the extensive economic and infrastructural linkages between Sudan and Southern Sudan mean that the SSR's continuing restrictions may pose significant obstacles, particularly in the petroleum sector.  In light of US policy to support the development of Southern Sudan, however, certain opportunities to obtain licenses for otherwise restricted activities may be possible.  As ever, consultation with OFAC prior to seeking any such license is advisable.

Background

The United States has maintained a comprehensive embargo on the Republic of Sudan since 1997, which is administered by OFAC through the SSR.  The SSR's prohibitions are primarily aimed at US Persons,¹ who are subject to a wide range of restrictions on exporting goods, services, or technology to Sudan, and also on investments, financial transactions, contracting, brokering, and related business dealings.  The SSR also block dealings in any property in which the Government of Sudan has an "interest." 

To date, OFAC has enforced prohibitions targeting the petroleum and petrochemical sector of Sudan regardless of location (including in Southern Sudan and other "Specified Areas of Sudan" largely exempt from US sanctions).  Financial transactions with Southern Sudan may not involve any transfers through financial institutions in Sudan or any interest of the Government of Sudan. 

In addition, numerous Sudanese nationals and entities, some of whom may be resident in Southern Sudan, are listed as Specially Designated Nationals (SDNs) with whom US persons may not deal or transact absent a license from OFAC.²   Other Sudanese entities may be listed for reasons of terrorism or nonproliferation. 

Existing Exceptions in the SSR for Southern Sudan

The SSR currently contain exceptions for "Specified Areas" of Sudan, including what is now the region of Southern Sudan.³  Under these carve-outs, US persons may, subject to certain restrictions, export or reexport goods and services, perform contracts, deal in property, make investments, and facilitate transactions to or in those areas.⁴  In addition, US persons can conduct business with the interim Government of Southern Sudan, since this entity is excluded from the definition of the "Government of Sudan" for purposes of the SSR and is not blocked.⁵  (For a general overview of the SSR's exceptions for these areas, see our previous advisory). 

Notably, however, the exemptions for the current region of Southern Sudan are inapplicable to the petroleum or petrochemical industries, including oilfields and pipelines (as well as certain financial transactions and transfers).⁶  Because Southern Sudan accounts for some 75% of Sudan's current oil production and is believed to contain substantial untapped reserves, this restriction inhibits potential investment in that region.⁷ 

Opportunities and Compliance Challenges

When Southern Sudan is a separate state, US persons may identify potential business opportunities. Yet because of continuing restrictions on dealings with Sudanese entities and the Government of Sudan, and the close relationship expected to exist between Southern Sudanese and Sudanese petroleum companies in particular, US persons interested in conducting business in Southern Sudan will continue to confront significant compliance challenges.

Perhaps most importantly, US persons will continue to be prohibited from dealing in property in which the Government of Sudan has an interest, and from performing services or from providing goods or technology that benefit Sudan or its (central) government.  Given Sudanese government control or involvement in almost all aspects of that country's petroleum industry, compliance challenges in this sector will be particularly acute.  OFAC's broadly worded guidance, for instance, warns that the SSR will continue to prohibit US companies from "providing services to the petroleum industry in the new state if those services would ... relate to the petroleum industry in Sudan...."  In light of recent reports that Southern Sudan and Sudan may swap shares in each other's oil companies following independence,⁸ this limitation would appear particularly restrictive.

Similarly, the guidance provides that if the new state of Southern Sudan enters into an arrangement under which it makes payments to Sudan from the sale or transit of Southern Sudanese petroleum, as is currently being negotiated since Southern Sudan has virtually no other oil export routes, a US company could be restricted in transacting business with any Southern Sudanese petroleum entities without an OFAC license, as such dealings would presumably benefit the Government of Sudan.

In addition, and in keeping with the SSR, OFAC's guidance notes that goods or services destined for or imported from Southern Sudan may not be routed, transshipped, or transited through Sudan⁹  (though potentially they could pass through other "Specified Areas" of the country as defined in the SSR).  Because landlocked Southern Sudan has limited linkages to the outside world aside from its northern neighbor—Kenya and Uganda being possible but complicated alternatives—logistical obstacles may arise for companies seeking to export to or import from Southern Sudan.

The continuing restrictions on Sudanese SDNs may also pose complications.  Even if units of such Sudanese entities become nationals of the new Southern Sudanese state, e.g., branches of the Central Bank of Sudan or subsidiaries of the Sudanese state oil company, they may still be considered to be SDNs requiring a license for any transaction or engagement.

The EAR and ITAR Still Apply As Is to Southern Sudan

It is further worth noting that the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) do not contain a similar carve-out for Southern Sudan, nor have the State Department's Directorate of Defense Trade Controls (DDTC) or the Commerce Department's Bureau of Industry and Security (BIS) yet issued similar guidance.  Until such time, parties wishing to export or reexport items included on the US Military List or the Commerce Control List to Southern Sudan must still obtain a license from DDTC or BIS, which may adopt a policy of denial towards such items. 

Footnotes

1. The SSR define US persons as: (1) US citizens or permanent residents (wherever located), (2) US legal entities and their overseas branch offices; or (3) persons physically present in the United States.  31 C.F.R. 538.315.

2. See, e.g., Executive Order 13400 (April 26, 2006) (blocking the property of certain listed persons in connection with the conflict in Sudan's Darfur region).

3. 31 C.F.R. § 538.212(g). Other such areas are: Southern Kordofan/Nuba, Mountains State, Blue Nile State, Abyei, Darfur, and "marginalized areas in and around Khartoum." 31 C.F.R. 538.320.

4. 31 C.F.R. 538.212(g).

5.   31 C.F.R. § 538.305(b). 

6. 31 C.F.R. 538.210(a).

7. Maher Chmaytelli and Maram Mazen, Southern Sudan May Pay North 30% of Oil Revenue For Shipping Crude Exports, http://www.bloomberg.com/news/2011-03-23/south-sudan-may-agree-to-cede-30-of-oil-revenue-wakoson-says.html (Mar. 23, 2011).

8. Chris Kay, Northern, Southern Sudan May Swap Oil Stakes After South's Independence, http://www.bloomberg.com/news/2011-04-05/northern-southern-sudan-may-swap-oil-stakes-after-south-s-independence.html (Apr. 5, 2011).

9. 31 C.F.R. 538.417.  There is an exception to this limitation for humanitarian shipments destined for Southern Sudan and and Darfur. 31 C.F.R. 538.532.

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