Introduction

As of November 2, 2023, the SPB Exchange found itself on the OFAC SDN List . This listing translates to a freezing of SPB Exchange assets under the control of any US organization or individual. Moreover, it enforces a comprehensive ban on any future USD transactions involving this organization. As is often the case in situations involving entities on the OFAC sanctions list, almost all foreign counterparts severed ties with the SPB Exchange. This is because violating or attempting to bypass the US sanctions regime can lead to the imposition of secondary US sanctions on implicated companies. In some cases, the violator might find themselves added to the OFAC sanctions list.

SPB Exchange Strategy to Negotiate with OFAC

The SPB Exchange has recently outlined its strategy to unfreeze the blocked funds . This strategy comprises four key points:

1. Withdrawal of SPB Bank from under the control of the sanctioned SPB Exchange. This involves reducing the Exchange’s stake in the Bank’s authorized capital.
2. Clarification of General License No. 76A. The aim is to extend the scope of this license to include trading participants’ clients and extend the license validity.
3. Issuance of a specific OFAC license to unlock the assets of trading participants’ clients.
4. Issuance of a new OFAC general license. This new license is supposed to facilitate unlocking the assets of trading participants’ clients.

Let’s go through these points in order:

1. It is quite understandable that there is an intention to decrease the shares owned by the SPB Exchange in the shareholder capital of SPB Bank. According to the 50% rule , any company in which 50% or more is owned by a natural person or entity subject to US sanctions automatically falls under the sanctions. Therefore, theoretically, if the SPB Exchange’s share in the authorized capital of SPB Bank decreases below 50%, it will not be considered on the sanctions list.

However, this is in theory only. In practice, things are different. Since SPB Bank is already on the US sanctions list, simply reducing the share of the SPB Exchange in its capital will likely be insufficient for it to resume operations in a pre-sanctioned mode. All foreign counterparts of the bank are unlikely to resume any relations with it until OFAC grants permission for this.

2. The intention to “clarify” OFAC General License No. 76A and “extend the scope of this license to include trading participants’ clients…” prompts some confusion. Firstly, General License No. 76A already applies to the actions of trading participants’ clients who wish to terminate their relations with the SPB Exchange and withdraw their funds. True, it turns out it does not work as it should. However, this is not because General License No. 76A is “not clear enough.” Even under a general license, most banks and other financial institutions refuse to carry out transactions with a sanctioned entity, fearing fines and secondary sanctions from OFAC. Therefore, they often insist on obtaining a specific OFAC license to protect themselves.

Secondly, OFAC intentionally sets short deadlines for winding down all relations with sanctioned entities and withdrawing funds. Extending these deadlines within the confines of the same general license is uncommon, particularly when the initiator is not OFAC itself.

3. The intention to issue a specific OFAC license enabling the unlocking of assets for trading participants’ clients appears even more questionable. Here is why.

OFAC licenses come in two forms: general and specific. A general OFAC license grants permission to undertake certain actions in a particular case within a specific timeframe that would otherwise be prohibited. Importantly, the scope of a general license extends to all potential participants in the given case or scenario. OFAC initiates the issuance of general licenses as part of its functions in implementing US sanction policies.

On the other hand, a specific OFAC license may be granted to an individual or entity for specific actions that would be prohibited without such a license. This license is issued after OFAC reviews an application from the concerned party and makes a positive decision. The individual or entity initiating the petition for a specific license is typically the one whose funds are blocked due to OFAC sanctions.

Returning to point 3 of the SPB Exchange’s strategy, it seems that the exchange aims to obtain a special OFAC license that, in essence, would function as a general license. In other words, it would apply to the applicant and all other trading participants’ clients. Such a scenario is unprecedented.

4. The intent of the SPB Exchange to issue a new general OFAC license also raises certain questions. Firstly, as previously noted, general OFAC licenses are issued at the OFAC’s initiative, not in response to an applicant’s request. Secondly, OFAC has already issued a general license specifically pertaining to this case – No. 76A – and, even earlier, another general license, No. 50 , regulating all other similar cases.

Moreover, if foreign counterparts of the SPB Exchange are unwilling to conduct transactions and release frozen funds based on General License No. 76A, it is highly likely that the same fate awaits any new general license.

Possible Scenarios for SPB Exchange Investors

In its investor communications, the SPB Exchange mentions the individual option for investors to apply for a specific OFAC license. Yet, the emphasis favors a collective solution—an agreement with OFAC on unfreezing funds. While the allure of relying on the SPB Exchange’s resolve and hoping for success is strong, it’s essential to be wary of potential pitfalls.

Firstly, there is no guarantee that the SPB Exchange can successfully negotiate with OFAC. Secondly, it’s a protracted process that will endure for at least 1.5-2 years, perhaps even longer. Now, envision depending on the SPB Exchange to resolve this issue, only to discover, after a few years, that an agreement with OFAC was not reached. Considering the strategy adopted by the SPB Exchange, such a scenario cannot be ignored.

It appears that the most practical avenue for unfreezing the assets of SPB Exchange participants and their clients is to submit an application for a specific OFAC license. It takes about one year to obtain the license.

Conclusion

Undoubtedly, the SPB Exchange will strive to either lift US sanctions or discover avenues to mitigate their repercussions on its investors. However, navigating the negotiation process with the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury can span several years, and predicting the outcomes proves to be a formidable task. This becomes especially noteworthy when considering the strategic approach taken by the SPB Exchange.

Therefore, for all investors—trading participants on the SPB Exchange and their clients—there remains only one real and proven recourse, namely, to obtain OFAC approval for unfreezing their funds. Such approval can be sought in the form of a specific OFAC license.