Russia and Belarus sanctions hit state contractors

Point of view: Russia and Belarus hit public contractors


07/28/2022


By Paul Debolt, Dismas Locaria and Lindsay Meyer

Illustration from iStock

While many American contractors have faced federal restrictions in response to the invasion of Ukraine, many are unaware that state governments have executive orders or similar laws aimed at severing business with contractors operating in or with Russia or Belarus.

These new state measures vary in scope and severity. Some impose reporting or certification requirements on government contractors at the state level, particularly those operating in Eastern Europe or Russia.

New Jersey, for example, recently banned its state agencies from doing business with companies closely tied to the governments of Russia or Belarus. Executive Order 291, issued March 2, called for a mandatory review of state contracts, including those with “companies that directly invest in…companies [owned or controlled by the government of Russia, Belarus, or their instrumentalities]directly or through subcontracting.

While this executive order does not directly impose a burden on the business community, a companion New Jersey state statute, PL2022, c.3 does.

Under this law, state agencies are generally prohibited from doing business with entities or individuals determined by the state to be “engaged in prohibited activities” in Russia or Belarus, including those with close ties to their governments or headquartered in Russia.

It is important to note that an entity contracting with the State of New Jersey must certify that neither it, nor any of its subsidiaries or affiliates under common ownership, is “engaged in prohibited activities” in both countries. Otherwise, he must explain these activities precisely. Additionally, if the contracting company engages in “prohibited activities,” it will be obligated to terminate such activities within 90 days and certify as such to the state. Under this law, false certification may result in civil penalties and the suspension or termination of contractual rights.

The state governments of California, Colorado, Indiana, Massachusetts, Minnesota, New York, North Carolina, Ohio, Washington and others have also recently taken various steps to dissociate Russian companies, public entities or their subsidiaries.

California Executive Order N-6-22, issued March 4, requires contractors with projects valued over $5 million to report to the state their compliance with federal economic sanctions, as well as any actions taken in response to Russia’s actions in Ukraine.

In New York, Executive Order 16, issued March 17, directs state agencies to refrain from entering into contracts with entities “conducting business operations in Russia” and to request certification from bidders regarding operations there. -down as part of the procurement process. Some states have also decided to divest of all state-owned Russian assets. Others have enacted bans banning the sale of Russian-origin vodkas in state liquor stores.

As with sanctions programs at the federal level, the impact of these state measures is highly fact-dependent and must be assessed on a case-by-case basis.

As with similar international trade restrictions, there is a distinction between the definition of “person” and that of “offerer”, the former being much broader and including affiliated entities beyond the procuring entity itself. Notably, for prohibitions on dealing with Venezuela’s Maduro regime under the Supplement to the Defense Federal Acquisition Regulations, the Venable law firm obtained confirmation from the Defense Acquisition Regulations Board that the restrictions were the responsibility of the “offeror” and did not extend to the broadest defined “persons” involved.

The definitions of each executive order or applicable state law should be carefully reviewed so that a company is not accused of submitting a false certification to a government authority.

Moreover, it is important to remember that these obligations do not rest solely on the entrepreneur. Instead, they must also consider any transfer requirements to ensure contractors remain compliant with these restrictions. Here it is advisable to seek and obtain periodic certifications of their compliance. It is also essential to remember that these requirements are not static.

Finally, contractors should also be aware of the potential demands for additional costs if added to a contract after award. For example, if a state requires these provisions to be passed immediately to a company’s subcontractors, there is a risk that a subcontractor may view this as a change to the subcontract and seek reimbursement for the associated costs. to this additional regulatory burden.

Therefore, contractors should consider researching not only the costs associated with its compliance with these new provisions, but also the costs claimed by any subcontractors.

Just as at the federal level, state obligations may continue to evolve. Therefore, it is prudent to confirm that contractors remain compliant with the requirements for the duration of the contract or pending applicable restrictions.

Paul Debolt is Co-Chair and Dismas Locaria is a partner in Venable LLP’s Government Contracts Group. Lindsay Meyer is co-chair of the firm’s international trade group. Anna Perina also contributed to this article.


Topics: Global defense market