Last week, the D.C. Circuit affirmed the U.S. Treasury Department’s Office of Foreign Assets Control’s (“OFAC”) wide latitude to impose Iran sanctions, but it set aside a $4.07 million penalty against car accessory seller Epsilon Electronics (“Epsilon”). The D.C. Circuit found that the agency cut too many corners in its investigation of Epsilon.

In July 2014, OFAC imposed the $4.07 million penalty on Epsilon, alleging that a series of shipments in 2012 by the company to Asra International Corporation, LLC in Dubai, United Arab Emirates (“Dubai Asra”) were destined for end-use in Iran. Sending products to Iran would violate the Iranian Transactions and Regulations. OFAC is authorized to impose civil penalties against individuals or entities who export to a third party who it has reason to know intends to send those goods to Iran.

The case dealt with the initial question of whether OFAC must prove that the goods ended up in Iran in order to hold the company liable for the breach of U.S. sanctions. The court determined that OFAC had enough evidence to support a finding that the first 34 shipments from Epsilon to Dubai Asra violated the sanctions. However, for the final five shipments, the court found that OFAC failed to explain why it discounted certain evidence and why the conclusion about the first 34 shipments applied to the last five, in light of the countervailing evidence presented. The evidence included several email exchanges between Epsilon’s sales team and Dubai Asra’s manager that indicated that the last five shipment were intended for a Dubai retail store and not Iran.

The U.S. Court of Appeals for the D.C. Circuit remanded the case to the district court, with instructions to remand the matter to OFAC for further consideration of the alleged 2012 violations relating to the final five shipments, and calculation of the total monetary penalty imposed for all liability findings. While the court found that the government does not need to show that the goods actually ended up in Iran, the court did conclude that OFAC did not adequately explain its determination that Epsilon had reason to know that the goods would end up in Iran. Because OFAC failed to justify its conclusion that Epsilon should be held liable for the last five shipments as well as the first 34, the final liability determinations were deemed capricious and arbitrary.

The decision establishes key precedents related to trade compliance. The case shows that OFAC does not need to prove that the goods actually reached the sanctioned country in order to impose penalties. Additionally, the case shows that agency enforcement actions from OFAC can be subject to judicial review. This could lead to enhanced transparency between violators and the government imposing sanctions. For more information about the case, read the opinion here.

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.

55833041 - north korea flag

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.

Effective today, January 27, 2016, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) have further reduced sanctions affecting U.S. relations with Cuba.  The amendments to the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR) represent significant steps toward the liberalization of commerce and travel which were first announced by the Obama administration in December 2014.

Cuba's flag
Copyright: mishchenko / 123RF Stock Photo

Among the reductions in current regulations are new allowances for financing, exportation, and travel.

  • Financing  – Restrictions on payment and financing terms for authorized non-agricultural exports and reexports have been removed and U.S. banking institutions are now permitted to provide financing for such transactions.  The U.S. Department of Commerce has indicated that payments of cash in advance; sales on an open account; and financing by third-country financial institutions or U.S. financial institutions will all permissible under the newly revised regulations.
  • Exports – OFAC and BIS have expanded general licenses for goods and services which aid the Cuban people.  General licenses related to the export and reexport of telecommunications items, agricultural items, civil aviation safety items, and news gathering software and technology items have all be expanded.  OFAC and BIS have also announced a case-by-case licensing policy which will facilitate the exportation of goods (including artistic and cultural endeavors as well as education, infrastructure, public health, and sanitation items) which will benefit the Cuban people even if their exportation necessarily involves the Cuban government or other state-owned enterprises with whom commercial interaction is generally prohibited under current U.S. regulations.
  • Travel – OFAC authorized travel for additional business-related reasons as well as authorizing additional transactions which are incident to authorized travel.  Among the newly authorized reasons for travel are the production of media and artistic programs (including, television programs, films, music recordings, the creation of artworks by Cuban artists), and the organization of professional conferences, sports competitions, artistic exhibitions, and public performances, as well as additional types of humanitarian projects such as disaster preparedness projects. It is now also permissible to travel to Cuba and engage in market research, marketing, sales and contract negotiation, delivery, installation, and leasing of items which are incident to otherwise authorized activities in Cuba.

Although relations between the U.S. and Cuban continue to take strides toward liberalization, numerous sanctions regulations remain in full effect and can carry significant penalties if violated.  Accordingly, companies looking for opportunities in Cuba must, with the the help knowledgeable counsel, remain vigilant in their adherence to existing regulations despite the progress of the past year and the promising trend of rapid deregulation.

On January 16, 2016, the U.S. Department of State and the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) lifted certain nuclear-related “secondary sanctions” (sanctions targeting non-U.S. persons for certain Iran-related activities undertaken outside of the U.S.) against Iran pursuant to the Joint Comprehensive Plan of Action (JCPOA). This long awaited action took place in exchange for Iran’s commitment to limit its nuclear program and after the International Atomic Energy Agency verified that Iran carried out its nuclear commitments under the JCPOA.  Notwithstanding the sanctions relief, U.S. companies and persons continue to be barred from most transactions involving Iran and many secondary sanctions continue to stay in place.

Copyright: kagenmi / 123RF Stock Photo
Copyright: kagenmi / 123RF Stock Photo

WHO DOES THIS MOSTLY AFFECT?

The sanctions relief will be particularly important for global companies headquartered in the United States, U.S. private equity firms with foreign investments, and other United States entities with foreign subsidiaries.

WHAT CAN FOREIGN SUBSIDIARIES OF U.S. COMPANIES NOW DO?

On January 16, 2016, OFAC issued General License H (GL H) “Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person”.

The sanctions relief offered by GL H allows foreign entities “owned or controlled” by a U.S. person or entity to engage in most transactions with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that were previously prohibited by Section 215 of the Iranian Transactions and Sanctions Regulations (ITSR) with certain important exceptions outlined below.  An entity is “owned or controlled” by a U.S. person if the U.S. person: (1) holds a 50% or greater equity interest by vote or value in the entity; (2) holds a majority of seats on the board of directors of the entity; or (3) otherwise controls the actions, policies, or personnel decisions of the entity. This does NOT include foreign branches of US persons as these are considered “U.S. persons” and, therefore, do not qualify for the sanctions relief.

WHAT CAN’T FOREIGN SUBSIDIARIES OF U.S. COMPANIES NOW DO?

Foreign subsidiaries of U.S. companies cannot engage in transactions involving:

  • Exportation or reexportation of U.S. origin goods – the direct or indirect exportation, reexportation, sale or supply of goods, technology, or services from the United States or a U.S. person with knowledge or reason to know that these items are intended for Iran or the Government of Iran;
  • Reexportation from a third country of items containing 10% or more U.S.-controlled content with knowledge or reason to know that these items are intended for Iran or the Government of Iran; and reexport from a third country of foreign produced direct product of U.S. technology and software;
  • Any activity involving any item (including information) subject to the Export Administration Regulations (EAR), that is prohibited by the EAR, or requires a license, based on its end-user or end-use;
  • Any transfer of funds to, from, or through the U.S. financial system (foreign subsidiaries cannot use U.S. banks to process Iran-related transactions, including as correspondent banks for U.S. dollar-denominated transactions);
  • Any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any official, agent, or affiliate thereof;
  • Any person, entity, aircraft or vessel on OFAC’s list of Specially Designated Nationals (SDN) (or entities owned 50% or more individually, or in the aggregate, by one or more SDNs), or Foreign Sanctions Evaders, or who has been denied export privileges by Executive Order or otherwise;
  • Any activity related to the proliferation of weapons of mass destruction or ballistic missiles, support for international terrorism, Iran’s support for the Syrian regime, Iran’s destabilizing activities in Yemen, or Iran’s commission of human rights abuses against its citizens; and
  • Any covered nuclear activity involving Iran outside of the official procurement channel established by the JCPOA.

Additionally, trade with Iran in defense articles and defense services subject to the U.S. International Traffic in Arms Regulations (ITAR) is still broadly prohibited.

Copyright: pressmaster / 123RF Stock Photo
Copyright: pressmaster / 123RF Stock Photo

WHAT CAN AND CAN’T U.S. PARENT COMPANIES (AND US EMPLOYEES WORKING ABROAD) DO?

As a general rule, U.S. persons are still prohibited from ALL actions “facilitating” Iran-related activities of foreign entities (including subsidiaries). As such, virtually any involvement in Iran-related business by U.S. parent companies of foreign subsidiaries or their U.S. person employees, officers, or directors is prohibited. U.S. persons cannot facilitate, assist, guarantee, or otherwise participate directly or indirectly in any Iran-related business (without OFAC’s authorization).

The exception to the rule, is that U.S.-persons are authorized to be directly involved in the following:

  • Establishing operating policies and procedures under which its non-U.S. subsidiary can achieve the operational separation necessary for it to transact with Iran; and
  • Providing its non-U.S. subsidiary with business support, including common email, enterprise resource planning, and other services in connection with the foreign subsidiary’s Iran trade, provided the services are fully “automated” (they must operate passively and without human intervention, other than maintenance of the systems) and are “globally integrated”.

BOTTOM LINE

With the two narrow exceptions above, the prohibitions on U.S. persons with respect to Iran remain in place.  This includes prohibitions against all actions facilitating Iran-related activities of foreign subsidiaries.  GL H, which lifts certain sanctions against transactions with Iran for foreign subsidiaries of U.S. parent companies, has important restrictions and U.S. parent companies remain liable for their foreign subsidiaries’ transactions that are not covered by GL H.

As such, U.S. parent companies need to carefully consider the risks in determining whether to allow their foreign subsidiaries to do business with Iran.  For those who choose to use GL H, it will be very important to conduct careful due diligence regarding the identity, ownership and sanctions status of the parties that they do business with involving Iran and to strictly comply with GL H in order to avoid slipping over the fine line of permitted transactions.

spirits4The European Union (EU) has requested consultations, a World Trade Organization (WTO) dispute proceeding, with Colombia to address what it believes are discriminatory practices against spirits being imported from the EU into Colombia. The EU says that Colombian authorities treat imported alcoholic beverages from the EU in a manner that is inconsistent with the WTO.

The EU spirits face higher taxes than local brand spirits, and Colombia’s regional authorities impose market-access restrictions for imported spirits. The EU believes this creates a competitive disadvantage against EU spirits and is inconsistent with the non-discrimination obligations of the WTO rules.  Because the EU is the number one exporter of spirits into Colombia, it is most impacted by these discriminatory practices.

The EU and Colombia signed a comprehensive free trade agreement in 2013. The trade agreement aims at opening up both markets and committed Colombia to creating a level market for imported and local goods.  The August 2015 deadline has passed for these arrangements to come into effect, which has spurred the EU to initiate the consultations.

The objective of the consultations is for the parties to resolve the dispute themselves, without litigation. The bilateral consultation is the first step in the settlement process.  If the consultations fail, and the parties are unable to resolve the dispute within 60 days, the EU can request adjudication by a panel to rule on the compatibility of Colombia’s trade practices with the WTO rules.

Copyright: kgtoh / 123RF Stock Photo
Copyright: kgtoh / 123RF Stock Photo

The Joint Comprehensive Plan of Action (the JCPOA), between the so-called P5+1 countries (United States, United Kingdom, Germany, France, Russia and China) and Iran was formally adopted on Oct. 18, 2015 (Adoption Day) to lift certain sanctions on Iran. Please see our previous blog post for a summary of the JCPOA.

Adoption Day is the initial milestone in implementation of the JCPOA. Accordingly, the President took the first steps to implementation by directing the Secretary of State, the Secretary of the Treasury, the Secretary of Commerce, and the Secretary of Energy to take all appropriate preparatory measures to ensure the prompt and effective implementation of the U.S. commitments under the JCPOA.

While Adoption Day marks an important milestone, the U.S. will not begin to lift sanctions on Iran until “Implementation Day,” which is the date on which the International Atomic Energy Agency confirms that Iran has implemented certain key nuclear-related measures. Implementation Day (and hence the lifting of additional U.S. sanctions) is not expected to occur until spring 2016.

OFAC issued a Frequently Asked Questions Memorandum to answer questions about Adoption Day and what that means for US businesses.

OFAC will provide further guidance on the sanctions measures that will be lifted pursuant to the JCPOA, as well as those measures that will remain in place, prior to Implementation Day. We will continue to keep you informed of any new issued guidance.

As of December 18, 2015, U.S. companies will no longer be required to obtain a license to export crude oil.  President Obama signed into law the Consolidated Appropriations Act, 2016 (H.R. 2029) that included Section 101 of Division O.  The new law ends the 40-year ban on crude oil exports from the U.S.

Effective immediately, a Department of Commerce license is no longer required to export crude oil.  Crude oil is now classified as EAR99.  The classification as EAR99 indicates that crude oil is subject to the Export Administration Regulations (EAR), but is not listed with a specific Export Control Classification Number on the Commerce Control List.  Most exports of crude oil may now be made as NLR (no license required).

Why Is This Important

The law makes it easier for U.S. companies to export crude oil, and it also makes it difficult for the U.S. government to reimpose such restrictions. The President can only reimpose export licensing requirements or other restrictions on the export of crude oil from the U.S. for a period of one year or less.  Additionally, the President and his administration would need to take affirmative actions to reinstate the export ban, including declaring a national emergency and issuing a notice of the declaration of such emergency in the Federal Register.

Things to Remember

  1. The new law excludes shipments of crude oil to embargoed or sanctioned countries or persons, including those end-users and end-uses covered in parts 744 and 746 of the EAR. U.S. companies will still need authorization to export to these countries or persons.
  2. Companies holding current licenses for crude oil exports should be aware of section 750.7(i) of the EAR regarding terminating license conditions.  Even though crude oil has become eligible for export without a license, the export still remains subject to the EAR and any export, reexport, or disposition of the crude oil must be made in accordance with the requirements of the EAR.
  3. This change does not relieve an exporter or reexporter of its responsibility for any export violations that might have occurred prior to December 18, 2015.
Copyright: kagenmi / 123RF Stock Photo
Copyright: kagenmi / 123RF Stock Photo

On July 14, 2015, the so-called P5+1 countries (United States, United Kingdom, Germany, France, Russia and China) and Iran agreed on the Joint Comprehensive Plan of Action (the “JCPOA”) to lift certain sanctions on Iran in exchange for Iran’s assurance and commitment not to pursue certain weapons proliferations activities.   On July 20, 2015, the United Nations Security Council unanimously endorsed the JCPOA.

Continue Reading Iran Nuclear Deal – The Joint Comprehensive Plan of Action