Office of Foreign Assets Control (OFAC)

In consultation with the Department of State and pursuant to Executive Order 13662, the Director of the Office of Foreign Assets Control (“OFAC”) has updated Directive 4, which will expand sanctions on the Russian energy industry.

The new rules issued by OFAC prohibit certain activities by a U.S. person or within the United States, except where such activities are otherwise authorized by law or a license. The rules bar persons subject to U.S. jurisdiction from providing, exporting, reexporting (directly or indirectly) goods, services (except financial services), or technology in support of exploration or production for deepwater, Arctic offshore or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to Directive 4.

Additionally, Directive 4 further prohibits the provision, exportation, or reexportation (directly or indirectly) of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that meet all three of the following criteria: (1) the project was initiated on or after January 29, 2018; (2) the project has the potential to produce oil in any location; and (3) any person determined to be subject to Directive 4, including their property or interests in property, either has a 33% percent or greater ownership interest in the project or owns a majority of the voting interests in the project.

Examples of prohibited projects include, for example, drilling services, geological services, and mapping technologies. The prohibitions do not apply to the provision of financial services, for example, clearing transactions or providing insurance related to such activities.

The full text of Directive 4, as amended, can be found here.  For a listing of persons that are subject to a directive under Executive Order 13662, see OFAC’s Sectoral Sanctions Identifications List.

Recently OFAC also announced new sanctions on Russia’s financial sector and energy sector, as set forth in the revised Directive 1 and Directive 2, respectively.

On October 12, 2017, the United States lifted its general commercial embargo on Sudan. Because Sudan has played a role in international terrorism, the U.S. has maintained a comprehensive embargo against Sudan since 1997. These sanctions were contained in executive orders and the Sudanese Sanctions Regulations (SSR).

Following a 16-month diplomatic effort, the United States removed sanctions that had prohibited U.S. persons from engaging in or facilitating most transactions that involved Sudan or its government. U.S. persons may now engage in most transactions without the need for a general or specific license from the Office of Foreign Assets Control (OFAC).

On January 17, 2017, the U.S. temporarily lifted sanctions with respect to Sudan and its government. OFAC issued a general license that temporarily authorized transactions prohibited by the SSR, which was contingent on the U.S. government’s determination regarding Sudan’s developments in key areas. Earlier this month, the Secretary of State provided a determination to President Trump that the government of Sudan has made positive development in the cessation of hostilities in conflict areas, improving humanitarian access throughout Sudan, and addressing regional conflicts and threats of terrorism.

Effective October 12, 2017, the temporary general license is no longer operable and OFAC authorization is not required for proposed transactions that were previously prohibited by the SSR, unless the proposed transaction implicates the Darfur Sanctions Regulations or other OFAC-administered sanctions regulations.

While most sanctions were lifted, significant restrictions remain in place for those seeking to trade with Sudan, primarily with respect to export controls and individuals and entities listed on the Specially Designated Nationals List (SDN List). OFAC sanctions related to the conflict in Darfur still remain in place, and the revocation does not affect OFAC’s designations of any Sudanese persons pursuant to other sanctions authorities.

Additionally, this does not impact Sudan’s status as a state sponsor of terrorism. Pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), an OFAC license is still required for certain exports and reexports to Sudan of agricultural commodities, medicine, and medical devices as a result of Sudan’s inclusion on the State Sponsors of Terrorism List (SST List).

General License A, which went into effect on October 12, 2017, authorizes exports and reexports of certain TSRA items to Sudan. General License A is available for review here. General License A replaces the need for any existing general or specific licenses currently issued to authorize conduct that was otherwise prohibited under the Sudan sanctions program.

U.S. persons are still required to comply with the export and reexport controls of the Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, Bureau of Industry and Security (BIS). These requirements include restrictions that are maintained as a consequence of Sudan’s inclusion on the SST List and apply to certain exports and reexports of items on the Commerce Control List. BIS also maintains end-use and end-user controls on the export and reexport to Sudan of EAR99 items by U.S. persons and non-U.S. persons.

Despite lifting the general commercial embargo on Sudan, the sanctions revocation does not affect past, present or future OFAC enforcement actions related to violations of the SSR that occurred prior to January 17, 2017. Additionally, the revocation does not mean that sanctions cannot be quickly reimposed by the U.S.

Co-Author, Santos Ramos

On June 16, 2017, President Trump announced changes to United States’ Cuban sanctions regime which will stem the tide of liberalization that Obama Administration set in motion 2014. While the regulatory changes have not yet taken effect, the Department of Treasury’s Office of Foreign Assets Control (OFAC) released updated its online resources to reflect the Trump Administration’s forthcoming changes.  Most notably, under the announced changes, individual “people-to-people” travel will no longer be permitted and any trade or business ventures involving Cuba’s military, intelligence and security services is strictly prohibited.

Travel

Trump Administration’s new Cuban travel policies crack down on the potential for individual ‘vacation’ travel to Cuba. Under the Obama Administration’s reforms to the Cuban sanctions, individuals could travel to Cuba as long as they affirmed that they were engaged in permitted activities, such as educational and artistic study, news reporting, or other endeavors designed to promote and aid the Cuban people.  Under the newly announced changes, individuals will no longer be able to travel to Cuba on their own for “people-to-people travel” (i.e., educational travel that does not involve any academic study towards the pursuit of a degree and is not under the auspices of an organization). Group people-to-people travel will still be permitted as long as the group is led by a U.S.-based organization and maintains a full-time schedule of educational or other permitted activities. Unfortunately for those who may have already booked their tickets to Havana, the new regulation will not be prospective, meaning that any travel that does not conform with the new regulations (even if previously planned) will be prohibited.

Trade and Business

Companies seeking to do business in Cuba will also have to navigate stricter regulations. While trade and business ventures with the Cuban government remained restricted under the Obama Administration’s revised sanctions, the new rules will more clearly delineate entities which are associated with Cuban military conglomerate Grupo de Administración Empresarial SA (GAESA). GAESA, which is comprised of Cuban military, intelligence, and security services, has an extensive web of subsidiaries and ownership interests which some estimate touch as much as 60 percent of the Cuban economy. OFAC and Department of Commerce, Bureau of Industry and Security (BIS) will publish an extensive list of prohibited entities when the new regulations are completed. The new trade policy will be prospective, however, meaning that any contracts and licenses executed and issued prior to effective date of the new regulations will not be terminated.

What Should U.S. Companies Do?

U.S. companies which have already entered into contracts with a GAESA-related companies will be able to continue operating without any change. Any U.S. company seeking to begin or expand business in Cuba after the new policy takes effect, however, must heed the warning that any transaction with GAESA-related entities is prohibited. Moreover, while OFAC and BIS will strive to produce a comprehensive list of GAESA-related entities, it may prove to be a difficult and ever-evolving challenge.  Accordingly, despite any published list of entities, it will almost certainly remain the responsibility – and potential liability – of U.S. companies to know with whom they are conducting business. In addition, U.S. companies must be vigilant about any renewals of contracts or licenses with GAESA-related entities, as there has been little guidance as to whether renewing an existing contract will be considered continued operation or a new, prohibited engagement.

Last week the Trump administration announced new Iran-related sanctions imposed against 18 Iranian entities and individuals. The sanctions are the administration’s response to Iran’s ballistic missile program and destabilizing actions in the region.

The actions of the administration were taken pursuant to Executive Order (E.O.) 13382, which targets proliferators of weapons of mass destruction and their means of delivery by freezing the assets of those proliferators, as well as E.O. 13581, which blocks the property of transnational criminal organizations.

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) placed sanctions on individuals and entities for their support of the Iranian military and the Islamic Revolutionary Guard Corps, and for engaging in international hacking efforts. The U.S. Department of State placed sanctions on entities for their involvement in ballistic missile research and development for the Iranian government.

These sanctions were announced only a day after the Trump administration recertified Iran’s compliance with the Joint Comprehensive Plan of Action (JCPOA). The JCPOA is a 2015 nuclear deal that was agreed to by the P5+1 (China, France, Germany, Russia, the United Kingdom, and the U.S.), the European Union (EU), and Iran, to ensure a peaceful nuclear program in Iran. The JCPOA offers Iran sanctions relief if it continues to curb its nuclear program and follow the timeline of requirements set forth in the JCPOA.

The JCPOA states that its participants anticipate that the “full implementation of this JCPOA will positively contribute to regional and international peace and security.” However, the U.S. believes that the other actions taken by Iran undermine the positive contributions and goals of the JCPOA to bring about peace and security in the Middle East.

These new sanctions mean that Americans are prevented from doing business with these newly sanctioned entities and individuals. It also means that any assets these entities and individuals have in the U.S. will be frozen.

In a press release issued in connection with the announcement of the sanctions, the State Department also called upon Iran to release Baquer Namazi, Siamak Namazi, and Xiyue Wang, all of whom are U.S. citizens detained by Iran.

Despite the announcement of the new sanctions, the U.S. is still committed to complying with its commitments under the JCPOA, and Iran will continue to receive the same sanctions relief it received under former President Obama.

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.

On Monday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) leveled one of the largest sanctions actions in OFAC’s history. OFAC sanctioned 271 employees of Syria’s Scientific Studies and Research Center (“SSRC”).

According to OFAC, the SSRC is responsible for developing chemical weapons that were used against civilians by Syrian government forces earlier this month in Khan Sheikhoun, Syria. OFAC has stated that these 271 designated individuals are scientists who have expertise in chemistry and related scientific disciplines and have supported the SSRC program since at least 2012. OFAC has stated that these individuals are working on developing chemical weapons for Syrian President Bashar Assad.

Because of the sanctions, U.S. persons are now generally prohibited from conducting business with these designated individuals. Any property or interest in property of the 271 individuals in the possession or control of U.S. persons or within the United States must be blocked. Additionally, U.S. banks have been ordered to freeze the assets of any employees that have been named.

The sanctions more than double the number of individuals and entities sanctioned by the United States pursuant to Syria-related Executive Orders.  These sanctions are intended to hold the Assad regime and those who support it accountable for the regime’s violations of the Chemical Weapons Convention and UN Security Council Resolution 2118.

 

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.

 

15359408 - brown flax seeds on white background

On September 13, 2016, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) announced a $4.3 million settlement with international seed producer and exporter PanAmerican Seed Company (“PanAm Seed”). In its official statement regarding the enforcement action, OFAC alleges that PanAm Seed faced statutory and civil penalties in the amount of $12 million for “egregious” violations of US sanctions against Iran.

OFAC alleges that between May 2009 and May 2012, PanAm Seed repeatedly violated US export controls by exporting seeds to two Iranian distributors. As part of the alleged scheme, PanAm Seed made 48 sales to consignees in unrestricted countries who would then reexport the seeds the Iranian distributors. Among the aggravating factors which led this case to be labeled “egregious,” OFAC noted that the Iranian sanctions program permits the export of certain agricultural products (likely including the seeds in question) under a specific license; however, PanAm Seed knowingly chose not apply for a specific license and instead chose to pursue its reexportation scheme. OFAC also cited PanAm Seed’s sophistication and substantial international sales when discussing its reckless disregard for its OFAC compliance responsibilities and knowledge of its mid-level managers of the intent to reexport seeds to Iran. Finally, despite mitigating efforts to implement compliance programs and PanAm Seed’s history of compliance, OFAC repeatedly noted that PanAm Seed did not self-report these violations and initially refused to cooperate in OFAC’s investigation.

It is difficult to understand why PanAm Seed chose not to seek a specific license which would have permitted the exports in question and avoided this significant fall out. Whether it was a lack of clarity regarding the scope of the Iranian sanctions program, a failure of the company’s employees to appreciate the ramifications of violating OFAC sanctions, or some combination of the two, this “egregious” case likely could have been avoided with comprehensive training and compliance structures which could not be evaded by transparent sales to consignees. Ensuring that training and compliance programs are up-to-date and genuinely robust may be the single most important thing a company to do to protect itself against future claims of misconduct, egregious or otherwise.

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.

Copyright: lkunl / 123RF Stock Photo
Copyright: lkunl / 123RF Stock Photo

On Tuesday, the U.S. Department of Treasury continued its effort to ease sanctions against Myanmar, which the U.S. refers to as Burma, by creating and extending general licenses for banking services, personal transactions and other trade that impacts state-owned banks and businesses. The sanctions relief is intended to allow American individuals, banks and companies to do business with Burmese financial institutions.

The sanctions relief is in response to Burma’s political and economic progress. Burma held historic elections last November and transitioned away from the military ruling party toward a democratic government in April of this year. It has also shown steady improvement of its record on human rights.

The U.S. had waived its longstanding bans on investment and trade in 2012 after Burma began political and economic reforms, but has retained restrictions on dozens of companies and individuals because they oppose reform or were implicated in human rights abuses and military trade with North Korea. With the new sanctions relief that started in 2012 and that has been expanded by the Treasury yesterday, U.S. companies can gain a foothold in the Burmese market.

In a statement about the sanctions relief, President Obama said:

“The Government of Burma has made significant progress across a number of important areas since 2011, including the release of over 1,300 political prisoners, a peaceful and competitive election, the signing of a Nationwide Ceasefire Agreement with eight ethnic armed groups, the discharge of hundreds of child soldiers from the military, steps to improve labor standards, and expanding political space for civil society to have a greater voice in shaping issues critical to Burma’s future.”

President Obama also recognized that Burma still poses a threat to the U.S., and the U.S. continues to have concerns regarding human rights violations. Despite the sanctions relief, the U.S. will continue to keep restrictions on trade and investment with the military in place.

As part of the sanctions relief, the Treasury’s Office of Foreign Assets Control (OFAC) updated an existing general license that frees up the ability to transact business with entities that were on OFAC’s Specially Designated Nationals (SDN) List. The Treasury also removed 10 state-owned businesses and banks from the SDN List, allowing those entities to trade and invest with their U.S. counterparts.

However, OFAC also added several entities to the SDN List, blocking the assets of six different companies that are more than 50 percent owned by other SDN entities: Steven Law and Asia World, which were initially blocked for supporting the former military-led government in Burma.

You can learn more about the current Burma sanctions at the Treasury’s website.