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.

 

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.

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.

UK-Based biopharmaceutical company AstraZeneca agreed to pay the U.S. Securities and Exchange Commission (SEC) $5.5 million to settle claims that its Chinese and Russian subsidiaries had made improper payments to state-controlled health care providers in violation of the Foreign Corrupt Practices Act (FCPA).

In an order released earlier this week, the SEC outlined both the claims against AstraZeneca and the company’s cooperative and remedial efforts which were taken into account as part of the settlement.

Between 2007 and 2010 in China, sales staff made payments and gave gifts to physicians and administrators to ensure that state-owned health care providers would purchase AstraZeneca products. In one scheme described in the SEC Order, Chinese sales staff paid individuals for their appearance at fabricated speaking engagements. The conduct in Russia occurred between 2005 and 2010 and similarly paid members of state-owned health care providers to use AstraZeneca products.

AstraZeneca did not self-report its violations; however, it was still able to work toward a settlement based on its cooperation with the SEC. The SEC specifically noted that AstraZeneca disclosed documents and information collected during its own internal investigation including translations of key documents. The SEC also cited AstraZeneca’s remedial efforts including creation of a centralized compliance program with key compliance individuals placed in high-risk markets. AstraZeneca also took appropriate steps with regard to the employees involved ranging from trainings and reassignment to lower-risk areas of responsibility to voluntary separations and dismissals.

Yet again, full and complete cooperation appears to be the key to forging settlement of FCPA claims. Even after failing to self-report, the SEC lauded AstraZeneca’s cooperation and the information that the company’s internal investigation provided which would not have been discernable without the company’s assistance. In addition, the SEC recounted the numerous remedial steps that AstraZeneca undertook. If a company does not have the capacity to guide its own internal investigation or plan and implement remedial measures, it should contact a law firm that has the knowledge and resources to help the company make meaningful contributions to the investigation of any claims that arise.

AstraZeneca will pay $5.5M to the Securities and Exchange Commission to settle claims that it violated the Foreign Corrupt Practices Act by making improper payments to state controlled health care providers in China and Russia.

Background

The SEC complaint provides that the staff of AstraZeneca’s foreign
subsidiaries bribed health care providers in China and Russia with cash and 123rf.comgifts to persuade them to purchase products from the company.   In addition, the SEC stated that AstraZeneca lacked proper internal accounting controls over the relations of its China and Russia subsidiaries and government officials and falsely recorded the improper payments as “bona fide business expenses” in its financial statements.  The SEC added that AstraZeneca did not track employee reimbursements or speaker fees, gifts, travel and entertainment, and did not enforce its corporate policy against improper payments to government officials in China and Russia.  It also did not provide adequate FCPA training to sales staff who regularly interacted with local officials in the health care industry, according to the SEC.

The SEC indicates that AstraZeneca has taken steps to become compliant with the Foreign Corrupt Practices Act by providing anti-corruption training and revamping its internal controls and procedures.

Implications for U.S. Companies that do Business Abroad

AstraZeneca’s settlement and the $5.5M payment that it must make emphasizes the importance of FCPA compliance by U.S. companies that do business abroad.  The line between proper and improper payments, gifts, travel and entertainment expenses to foreign officials under the FCPA can be difficult to draw by company staff without proper training.  Doing business in countries where the level of corruption is high, such as Russia and China, can make FCPA compliance especially challenging.

As such, it is key for U.S. companies to have robust FCPA compliance programs and audit testing, to provide careful due diligence for particular transactions and relationships, to keep proper records, and to promptly respond to violations or indications of violations.  Our team of international trade attorneys at Fox Rothschild can assist with any of these matters.

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In the past two days, two more countries – Peru and Saudi Arabia – ratified the World Trade Organization’s Trade Facilitation Agreement (TFA).  Their ratification followed Mexico and Hondurus, who ratified the TFA earlier this month.

The submission of instruments of acceptance from Peru and Saudi Arabia means that more than 80 percent of the ratifications needed for the TFA to take effect have been obtained.   The TFA will enter into force once two-thirds of the WTO membership formally accepts it.  Now that Peru and Saudi Arabia have accepted the TFA, there are a total of 89 ratifications.

The TFA requires its members to establish and maintain a national committee on trade facilitation to facilitate implementation of the TFA.  Earlier this year, on June 8th, the WTO hosted an experience-sharing event to help members of the WTO identify best practices and the challenges faced by WTO members in establishing or maintaining national trade facilitation committees.

The TFA contains provisions for improving the movement, release and clearance of goods and increasing global merchandise exports.  According to the WTO, the TFA could add USD 1 trillion per year to global trade.  For a brief summary of the TFA, see our earlier post here.  The World Trade Report 2015 is available here.

Earlier this year, the US Department of Justice announced a one-year pilot program under which US corporations could mitigate their own liability for violations of the Foreign Corrupt Practices Act (FCPA) by voluntarily self-disclosing FCPA violations within their organization, in addition to fully cooperating with DOJ investigations and taking steps to remediate any misconduct. Skeptics, however, wondered if and when evidence that voluntary self-disclosure was impacting FCPA prosecutions would ever come to light.

The DOJ’s decision not to pursue charges against Johnson Controls, a global conglomerate which produces among other things, automotive parts and large scale HVAC components, may be the bellwether that everyone has been waiting for.

On July 11, 2016, the US Securities and Exchange Commission imposed $14 million in sanctions and served Johnson Controls with a cease-and-desist order regarding certain practices in China. The SEC alleged a scheme in which 16 Johnson Controls employees (including high-level executives of its Chinese subsidiary) created inflated and sham purchase orders and then used the money paid toward these purchase orders to bribe Chinese officials.

Significantly for those watching the DOJ pilot program, while SEC imposed penalties, the DOJ issued a declination letter and closed its investigation without bringing charges against Johnson Controls. The declination letter specifically cited the the DOJ pilot program as part of its basis for not pursuing charges. Further, the declination letter explained the factors leading to its decision, including: Johnson Control’s voluntary self-disclosure of of the matter, the company’s extensive investigation, its cooperation in the investigation, and its remedial steps such as terminating all the individuals involved.

If the pilot program is extended, and voluntary self-disclosure is the new cost of admission to meaningful mitigation of corporate liability for FCPA violations, then internal monitoring, auditing, and investigation of such activities are more valuable than ever. Further, training employees to identify potential FCPA violations and creating mechanisms through which they can report suspicious conduct internally is also critical because it gives the company an opportunity to investigate and self-disclose, ideally, before the conduct has become a target of US authorities.

The Miami Herald is reporting that the Cuban government used the Panamanian law firm Mossack Fonseca to create at least 25 corporations registered in the British Virgin Islands, Panama and the Bahamas. Mossack Fonsenca, and its clients, have come under immense scrutiny since the leak of hundreds of thousands of pages of the firm’s files, which have been come known as the “Panama Papers”, revealed elaborate tax shelters used by some of the world’s wealthiest individuals and organizations.

In a June 7, 2016 report, the Miami Herald alleges that at the Cuban government used Mossak Fonseca to set up numerous corporations and then used these off-shore entities to conduct business, including numerous exchanges of oil for Cuban goods, which was prohibited by the US embargo on Cuba. Although the Panamanian firm’s aid or involvement with the Cuban government is likely beyond the jurisdiction of US officials, the potential ramifications for US corporations who may have dealt with the alleged off-shore Cuban entities is uncertain.

Under Cuban Assets Control Regulations (31 C.F.R. Part 515), an entity can potentially avoid penalties if it is able to demonstrate that is did not willfully violate the regulations, had no reason to know or suspect that it was involved in a prohibited transaction, and the entity reported the prohibited transaction to the Office of Foreign Assets Control (OFAC) as soon as it became aware of the violation. (31 C.F.R. 515.203). It is also possible that individual transactions may have been authorized pursuant to specific licenses issued by OFAC. The critical issue, therefore, is whether any US entities knew or should have known that they were dealing with an entity connected to the Cuban government. As investigations of the Panama Papers continue, correspondence contained therein could potentially demonstrate knowledge by US companies about the Cuban connections of the off-shore entities identified in the Miami Herald report.

US companies who may have engaged the Cuban off-shore entities should be proactive and investigate what, if any, contact they may have had with these entities as self-reporting any transactions to OFAC is a necessary first step in cooperation. Depending on the size of the organization, using a third-party investigator, such a law firm, may ensure the preservation of documents and, in turn, the integrity of the investigation should an investigation by OFAC become necessary.

On June 20, 2016, U.S. President Barack Obama will deliver the keynote address at the meeting of the international trade and investment delegation. This event is being organized by the United States – India Imports Council (USIIC).

The USIIC will be taking a trade and investment delegation composed of 18 members from Gujarat, India, to the U.S.  The delegation will attend SelectUSA, a project of the U.S. Department of Commerce, where the U.S. will present its trade benefits to over 50 other countries. The goal is to promote foreign direct investment and trade in the U.S.  The delegates from Gujarat represent several business sectors, including infrastructure, mining, logistics, pharmaceuticals, automotive, and financial services.

For more information about the USIIC and the trade relationship between the U.S. and India, visit the USIIC website.