In a recent enforcement action, the Treasury Department’s Office of Foreign Assets Control (OFAC), took what appears to be an unprecedented step in finding that a Taiwanese shipping company had violated the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR).

Copyright: 1971yes / 123RF Stock Photo
Copyright: 1971yes / 123RF Stock Photo

The alleged violation surrounds a ship-to-ship transfer of oil between a vessel owned by B Whale Corp. (BWC), a subsidiary of TMT Group (TMT), and a vessel owned by the National Iranian Tanker Co., which is listed as a specially designated national (SDN).  BWC and TMT maintain that the transaction involved oil originating in the United Arab Emirates and was conducted by subcontractors who were contractually prohibited from dealing with SDNs.  Nevertheless, OFAC determined that by turning off vessel identification systems and using circuitous routes, the BWC vessel had taken efforts to conceal its actions and the origin of the oil.

The novel issue here, is how OFAC came to assert jurisdiction over BWC and TMT to make its finding.  In 2013, TMT brought a voluntary bankruptcy proceeding in the Southern District of Texas, seeking protection from US creditors.  The allegedly improper oil transfer occurred after the bankruptcy proceeding had commenced.  During that proceeding, there was a motion by TMT’s creditors to remove TMT’s management due to “fraud or dishonesty” under the Bankruptcy Code.  Shortly thereafter,  OFAC conducted its investigation and asserted that it had jurisdiction,  because “BWC was a U.S. person within the scope of the ITSR because it was present in the United States for the bankruptcy proceedings when the transaction occurred.” Further OFAC determined that the vessel “was subject to U.S. sanctions regulations because it was property under the jurisdiction of a U.S. bankruptcy court, and therefore the oil transferred to the vessel was an importation from Iran to the United States as defined in the ITSR.”

With the issuance of an enforcement action against a non-US company, there is concern among foreign companies that OFAC is pushing the bounds of its jurisdiction.  OFAC’s two statements regarding the basis for jurisdiction, however, permit contrasting views of OFAC’s intent and the what this decision means for the future of sanctions enforcement. On one hand, the first statement, that BWC was a US person “because it was present in the United States for the bankruptcy proceeding,” rightfully gives reason for pause as mere presence in the United States as a basis for jurisdiction would signal a massive expansion of OFAC’s understanding of its jurisdiction.  On the other hand, the second statement, that the vessel came under the jurisdiction of the bankruptcy court, may, however, circumscribe the impact of this enforcement action.  With this qualification, it is not the mere presence of the foreign company before a US Court which conferred jurisdiction, but the well established principal that assets of the debtor — regardless of location — fall under the jurisdiction of the bankruptcy court.  While any expansion of jurisdiction is concerning to foreign companies and the US companies who transact with them, this assertion of jurisdiction may well be limited to a foreign company that availed itself of US bankruptcy protection and then used its assets for an unlawful purpose.   Should OFAC find other means of extending its jurisdictional reach, however, a new era of enforcement may be beginning.

 

The U.S. Senate Finance Committee will hold a hearing on March 14th to consider the nomination of Robert Lighthizer, of Skadden, Arps, Slate, Meagher & Flom LLP, to serve as the next U.S. Trade Representative. The U.S. Trade Representative is the head of the Office of the United States Trade Representative (USTR) and is a Cabinet member who serves as the President’s principal trade advisor.

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Lighthizer, who has focused his career on trade litigation and policy, was a deputy trade representative during the Reagan administration, and he was chief of staff for the Senate Committee on Finance. Lighthizer is a vocal advocate for an enforcement-focused U.S. trade policy.

Former King & Spalding LLP attorney Stephen Vaughn, who worked with Lighthizer at Skadden, is the current trade representative, on an interim basis.

The selection of Lighthizer as President Trump’s pick to serve as the new U.S. Trade Representative has not been as controversial as other recent Cabinet nominees. However, Lighthizer’s status as an advocate for the Brazilian government in a 1985 trade case appears to require a waiver before he can serve as the U.S. Trade Representative.

President Trump has promised to renegotiate international trade deals like the North American Free Trade Agreement (NAFTA) and punish companies that ship work overseas, and it appears that the selection of Lighthizer is consistent with this approach. President Trump said in announcing Lighthizer as his choice for the U.S. Trade Representative that Lighthizer would help “fight for good trade deals that put the American worker first.”

The USTR is an agency that negotiates directly with foreign governments to create trade agreements to resolve disputes and participate in global trade policy organizations. The USTR is responsible for developing and coordinating U.S. international trade, commodity, and direct investment policy, and overseeing negotiations with other countries. The USTR works closely with Congress and specifically with the House Committee on Ways and Means and the Senate Committee on Finance, the two Committees with principle responsibility for international trade issues.

In a recent decision, the Court of International Trade shot down an importer’s argument that its Thanksgiving and Christmas-themed serve ware and dinnerware should be exempt from duties as instruments of “specific religious or cultural ritual celebrations.”

Copyright: alexraths / 123RF Stock Photo
Copyright: alexraths / 123RF Stock Photo

Subheading 9817.95.01 of the Harmonized Tariff Schedule of the United States (“HTSUS”) provides that no duty is to be assessed for: “[u]tilitarian articles of a kind used in the home in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions, such as Seder plates, blessing cups, menorahs or kinaras.”

The crux of importer, WWRD US LLC’s, argument was that the definition of “cultural ritual” was sufficiently broad so as to include the traditions of Thanksgiving and Christmas dinners.  The importer put forth a variety of definitions of the term “ritual”, including Merriam Websters’s definition of “a customarily repeated often formal act or series of acts.”

Judge Mark A. Barnett, however, derived the Court’s understanding of the scope of the subheading from the exemplars included therein.  While Judge Barnett did not question the cultural significance of the Thanksgiving and Christmas holidays, his opinion focused on the subheading’s requirement of “specific” rituals.  The exemplars, the Seder plate used during Passover, the menorah used during Hanukkah, and the kinara used during Kwanzaa, involved specific sequential rituals, not merely the observance of a recurring event such as Thanksgiving of Christmas dinner.

Ultimately, the ITC found that US Customs and Border Protection’s classifications and resulting duty rates, ranging between 3% and 6%, were proper.  While the importer’s creative classification argument was unsuccessful in this case, a zealous advocate can make a significant difference in the duties, and the bottom line, of any import transaction.

February 22, 2017 marked a major milestone for global trade.  The Trade Facilitation Agreement (TFA) entered into force on February 22nd after the World Trade Organization (WTO) obtained the needed acceptance from two-thirds of its 164 members.  Rwanda, Oman, Chad and Jordan submitted their instruments of acceptance to WTO Director-General Roberto Azevêdo, which brought the total number of ratifications over the required threshold for the TFA to take effect.  This is the most significant multilateral deal that has been concluded in the 21 year history of the WTO.

The TFA seeks to expedite the movement, release and clearance of goods across borders. The TFA also aims to simplify and clarify international import and export procedures and to make trade-related administration easier and less costly. The WTO forecasts that the TFA will create a significant boost for the multilateral trading system.

Implementation of the TFA is predicted to benefit all members and should slash members’ trade costs by an average of 14.3 percent.  Developing countries potentially have the most to gain from the implementation of the TFA.  The TFA is predicted to increase the number of new products exported by developing countries by as much as 20 percent, with least developed countries likely to see an increase of up to 35 percent, according to the study by WTO economists in 2015.

While the critical mass has now been reached, allowing the TFA to become effective, there are several remaining WTO members that may still ratify the TFA.

The International Trade Commission (ITC) issued an order on January 27, 2017,  barring the import table saws produced by German tool manufacturer, Robert Bosch GmbH (“Bosch”). The ITC determined that the components of Bosch’s REAXX safety technology infringed the two patents held by US-based SawStop LLC (“SawStop”).  As described in a press release at the outset of the ITC’s investigation, both the saws produced by SawStop and by Bosch contain active injury mitigation technologies which are able to detect when a user comes into contact with the blade can avoid catastrophic injury.

As the ITC had previously determined that Bosch’s saws infringed two of SawStop’s patents, the ITCs recent order was limited to Bosch’s request that the ITC forego any penalties and permit the continued importation of its saws because: (1) SawStop did not have the manufacturing and distribution capacity to meet US demand and (2) by preventing the import of Bosch’s safer saw, the ITC would be increasing potential injuries to consumers.  Indeed, Bosch cited to “millions or billions of dollars” in societal costs for severe injuries from the use of unsafe saws. Ultimately, Bosch’s argument that US consumers should be afforded the ability to buy saws with the latest safety technology (leaving aside the countless antiquated table saws that fill factories and wood shops across the country) was unpersuasive.  Further, the ITC appeared to accept that SawStop was capable of meeting demand and ordered that all of Bosch’s infringing saws be excluded.

In written responses released earlier this week, Senator Jeff Sessions of Alabama reaffirmed that he will enforce the Foreign Corrupt Practices Act and the International Anti-Bribery Act of 1988 if he is confirmed as US Attorney General.  Sen. Sessions was responding to the questions of Sen. Sheldon Whitehouse (D-RI), and others, following Sen. Session’s nomination hearing before the Senate Judiciary Committee.  Sen. Whitehouse’s question focused on a comment by President Trump during a 2012 interview in which President Trump referred to the FCPA as a “terrible law.”  [Editor’s note, President Trump refered to the FCPA as a “horrible law,” not a “terrible law,” during the 2012 interview].  Sen. Whitehouse asked:

13) President Trump has called the Foreign Corrupt Practices Act a “terrible law.” But the Act, as amended by the International Anti-Bribery Act of 1998, is the cornerstone of federal efforts to prevent and prosecute bribery of foreign officials by U.S. corporations, and to maintain a fair and level playing field for small and mid-size corporations doing business overseas. Since 2008, the federal government—DOJ, SEC, and the FBI—have maintained about 150 active investigations at any given time, resulting in $1.56 billion in fines in 2014.

Will you commit to continued vigorous enforcement of the Foreign Corrupt Practices Act and the International Anti-Bribery Act of 1998?

Sen. Sessions responded:

Yes, if confirmed as Attorney General, I will enforce all federal laws, including the Foreign Corrupt Practices Act and the International Anti-Bribery Act of 1998, as appropriate based on the facts and circumstances of each case.

One must take Sen. Sessions at his word and assume that the FCPA and Anti-Bribery Act will enforced to the letter of the law until there is an indication of a shift of DOJ priorities to the contrary.  As always, training and compliance programs remain the as a critical foundation for any company doing business abroad.

Earlier today, the Department of Justice announced that construction conglomerate Odebrecht SA and its affiliate Braskem SA have pleaded guilty to their maintenance of an elaborate bribery scheme which paid out approximately $788 million in bribes to government officials around the world since 2001.

To facilitate its massive bribery scheme, Odebrecht established its “Division of Structured Operations,” which federal prosecutors dubbed the “Department of Bribery.” The Division of Structured Operations operated on its own floor and used its own communication and computer networks. Code names and secure emails were used by those requesting bribes, bribe recipients, and financial institutions to make payments out of a ‘shadow budget.’ The shadow budget, which accounted for and tracked all bribe payments in complex spreadsheets, was comprised of funds funneled by Odebrecht into off-shore entities and then back into the Division of Structure Operations.

Under their respective plea agreements, Odebrecht and Braskem agreed to pay, at least, a combined $3.5 billion in penalties.  Odebrecht agreed with the DOJ that $4.5 billion would be an appropriate criminal fine, but has claimed that is unable to pay a fine of that amount.  Accordingly, the plea agreement states that Odebrecht will pay at least $2.6 billion, however, an ongoing review of Odebrecht’s ability to pay may result in Oberbrecht paying an amount closer to $4.5 billion. Braskem will pay approximately $957 million in criminal fines.  Brazil, where both of the companies are headquartered, will receive 80% of the fines and the United States and Switzerland will each receive 10%.  Notably, Oderbrecht was credited with 25% reduction in the fine sought based on its cooperation with investigators. Braskem was credited with a 15% reduction based on its partial cooperation.

This blockbuster plea agreement highlights the growing trend of global enforcement. While few companies will ever consider implementing a bribery scheme of the magnitude Odebrecht’s, even small acts to grease the wheels create a slippery slope and companies of all sizes must take precautions — through compliance and training programs — to make sure that a culture where bribery is condoned and supported never begins to gain momentum.

In a recently released report, TRACE International, an international anti-bribery business association, ranked 199 countries based on the risk of encountering bribery within the country’s public sector.

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Go to Interactive Map (credit: TRACE International)

The TRACE Matrix’s rating are based on four core domains: business interactions with government, anti-bribery laws and enforcement, government transparency, and capacity for civil oversight.  As part of the part of the business interactions with government domain, the report examines the extent to which business must interact with government officials and weight of regulatory burden which may increase the number of bribery opportunities as well as the reported expectation of businesses that they will have to pay a bribe somewhere along the way.  As part of the second domain, the report considers both enacted anti-bribery laws as well as the actual level of enforcement of any anti-bribery statutes. Government transparency is measured by indicators such as the public availability of government budgets and conflict of interest training conducted with civil servants.  Finally, the civil oversight domain examines the freedom of the press and social development.

Topping the list of least-bribery-prone countries were: (1) Sweden, (2) New Zealand, (3) Estonia, (4) Hong Kong, and (5) Norway.  The United States ranked 20th on the list, just behind Australia and Luxembourg and just ahead of Mauritius and Latvia.  Nigeria was ranked the most bribery prone country with Angola (198) and Yemen (197) rounding out the bottom three.

Assessing the potential risk of conducting business or routing supply chains through certain countries is the first step in managing potential liability under the Foreign Corrupt Practices Act. Even in the least risky countries, training and compliance programs are a necessity. However, in high risk countries, trainings must be tailored to anticipate the level of bribery and other corruption pressures which officers and employees will face with regularity.

The 15-member U.N. Security Council (the Council) imposed new sanctions on North Korea (also known as the Democratic People’s Republic of Korea or DPRK) on November 30, 2016 by unanimously approving a resolution imposing new sanctions — UN Security Council Resolution (UNSCR) 2321.

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The resolution is a clear response to North Korea carrying out its fifth and largest nuclear test so far in September 2016. The resolution tighten the sanctions adopted by the Council in March 2016 and is aimed at cutting North Korea’s hard currency that it uses to fund its prohibited weapons programs.

The sanctions impose a cap on coal exports, which is North Korea’s chief source of hard currency and constitutes about one third of North Korea’s export revenue. Pursuant to the resolution, North Korea can sell no more than 7.5 million metric tons of coal a year, or bring in no more than $400 million in sales, whichever comes first. In addition to restricting the export of coal, the resolution also bans North Korean copper, nickel, silver and zinc exports.

Two of the five permanent members of the Council, China and the United States, have been working together to pass the resolution. China is North Korea’s principal patron and coal customer. China’s permanent representative to the United Nations, Liu Jieyi, called on North Korea to halt its nuclear tests. He said the resolution demonstrated “the uniform stance of the international community.”

The U.S. Ambassador to the United Nations, Samantha Power, said that “the United States recognizes that China is working closely with us.” Power stated that “[n]o resolution in New York will likely, tomorrow, persuade Pyongyang to cease its relentless pursuit of nuclear weapons. But this resolution imposes unprecedented costs on the DPRK regime for defying this council’s demands.”

The resolution also requires countries to tell the United Nations how much North Korean coal they are buying and expands the list of banned items for import by North Korea, including luxury goods like rugs and tapestries valued over $500 and porcelain and bone china worth more than $100.

In addition to other export controls, the resolution also imposes banking restrictions and transportation restrictions. The resolution includes an expanded list of individuals and entities that are subject to travel bans and asset freezes, including North Korea’s ambassadors and envoys to Egypt, Sudan, Syria and Myanmar.

On December 2, 2016, the US Treasury Department’s Office of Foreign Assets Control announced related sanctions designations of additional individuals and entities with ties to the Government of North Korea or its nuclear and weapons proliferation efforts, and aircrafts blocked as property of a designated entity.

North Korea has been under United Nations sanctions since 2006 over its nuclear and ballistic missile tests. For United States businesses the resolution does not significantly change the status quo, as US law already prohibits nearly all activity involving North Korea. The resolution will primarily impact areas where North Korea has a strong international presence, including banking, transportation and commodities trade.

US President-elect Trump has promised to abandon the Trans-Pacific Partnership (TPP) trade deal as soon as he takes office. Trump has promised to leave the TPP, which took the Obama administration seven years to negotiate, and instead “negotiate fair bilateral trade deals that bring jobs and industry back on to American shores.”

The TPP is an agreement between 12 nations reached in October, 2015. The TPP sets forth a comprehensive trade framework covering goods and services, cross-border investments, intellectual property, the environment and many other topics of critical importance to companies engaged in international trade. The TPP aims to deepen economic ties between the member nations, cut tariffs and foster trade to boost economic growth.

The member nations are the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

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The text of the TPP still has to be signed and then ratified by all 12 signatories and then implemented by the individual nations’ legislatures. To take effect, the deal has to be ratified by February 2018 by at least six countries that account for 85% of the group’s economic output. This means that Japan and the US will need to be on board.

Earlier this month the TPP cleared its main hurdle in Japan’s parliament, but approval by the US is much less certain. It is likely that after the transition from President Obama to President-elect Trump, the US will no longer continue to work toward implementing the TPP.

Click here to learn more about the TPP.