U.S. Department of the Treasury

On April 20, 2017 the Department of Treasury’s Office of Foreign Assets Control (OFAC) offered new guidance for individuals and entities (and their counsel) who seek to have their names removed from OFAC’s list of Specially Designated Nationals (SDN).

The guidance comes in the form of updates to OFAC’s Frequently Asked Questions and sets forth the procedures for petitioning for removal from the SDN list.  The petition itself appears quite simple.  In fact, the only requirements are that it include: (1) the name and contact information of the SDN; (2) the date of the relevant OFAC listing action; and (3) a “detailed description” of the reasons that individual or entity should be removed from the SDN list. Parties may also submit additional evidence or argument as to why the SDN designation is not appropriate.

While OFAC notes that all petitions are unique, OFAC announces a goal to send its first questionnaire within 90 days of receiving a petition.  The time a party takes to respond to the questionnaire (and any subsequent questionnaires) can, of course, significantly draw out the overall petition process.

Although individuals may submit their own petitions, hiring proper counsel is likely a wise decision.  Not only can knowledgeable counsel navigate the grounds on which OFAC is likely to remove a person from the SDN list (i.e., positive change in behavior, change in the basis for the designation, mistaken identity, or death), counsel can help ensure that information disclosures will comport with OFAC’s expectations (ideally limiting the number of follow-up questionnaires).

Counsel should be cautioned not to run afoul of OFAC’s sanctions regimes while representing an SDN.  Although there are general licenses under most of OFAC’s sanctions regimes permitting legal services to aid a person in contesting SDN status, restrictions on the origin of payments may complicate matters.

New clarity on the path off of the sanctions black list is encouraging evidence of OFAC’s commitment to ensuring that the SDN list encourages good behavior and is not a heavy-handed punishment.  While the reality of the petition process may not be as simple as the FAQ suggests, clear guidelines are a great aid to targeted individuals and their counsel.

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.

As U.S. sanctions on Cuba continue to thaw, some long standing disputes have been reignited.  Perhaps chief among them is the decades-old battle over the trademark for “Havana Club” rum.

The original distillery that produced Havana Club rum was expropriated by the Castro regime in the 1960s.  After the original distiller’s trademark registration had lapsed, the Cuban government registered the mark in the United States in 1976.  The Cuban government assigned its rights in the mark to spirit producer Pernod Ricard in 1993.  Meanwhile, distiller Bacardi Ltd., which had fled Cuba in the 1950s, acquired rights to the Havana Club mark from the family of the original distiller in 1994.

After litigation in U.S. courts over the right to use the mark ensued, U.S. Congress passed the Omnibus Appropriations Act in 1998, which included Section 211, known as the “Bacardi Act.” Section 211, which was reportedly crafted at the behest of Bacardi, protected the trademarks of companies which had been expropriated by the Cuban government and, in turn, solidified Bacardi’s claim to the Havana Club mark through its connection to the original distillers.  In 2001, the World Trade Organization found that Section 211 was illegal because it was aimed at a single country, Cuba. The United States has, however, largely ignored the WTO ruling.

As part of the recent reduction of restrictions on Cuba, Pernod Ricard (through a joint venture with Cubaexport) has been been permitted to renew the Havana Club once owned by the Cuban government.  In a recent letter to the U.S. Treasury Secretary and the U.S. Secretary of State, twenty-five members of Congress demanded an explanation as to how OFAC has permitted Cubaexport-Pernod Ricard to renew the Havana Club mark in light of Section 211.  The members of Congress, largely representing Florida districts, are particularly concerned the U.S. government is ignoring Section 211 and is instead choosing to recognize the rights once held by the Castro regime which expropriated the goodwill of the brand decades ago.  Neither the Department of Treasury nor the State Department has yet issued a response.

The Havana Club saga is a cautionary tale which demonstrates that even though formal U.S. regulations are being scaled back, the broader relationship between the countries remains politically charged and full of pitfalls.  Navigating both the black letter regulations and the larger landscape of Cuban-U.S. relations requires skilled advocates and patience as “normalization” continues to take root.

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.

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

On September 21, 2015, both the Department of Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) announced significant reductions in the regulation of transactions between US individuals and entities and Cuban nationals.

OFAC Regulatory Changes

The revised regulations and interpretive guidance are effective immediately and demonstrate substantial progress in the normalization of relations between the United States and Cuba which were historically first announced earlier this year.  Among the most significant changes to OFAC’s Cuban Assets Control Regulations include new permissions that:

  • US entities may establish a physical presence, as well as Cuban bank accounts, to further authorized businesses related to mail, parcel and cargo services, news bureaus, telecommunications and internet-based services, educational services, religious organizations, and travel and carriers services.
  • US entities may operate carrier services via vessels to and from Cuba, though travel to Cuba for tourism remains prohibited.
  • US entities may provide goods and services to Cuban nationals who are located outside of Cuba.
  • US entities may engage in legal services, emergency medical services, humanitarian, and diplomatic activities for the benefit of Cubans and Cuban nationals.

BIS Regulatory Changes

Similarly, the BIS has revised and clarified the Export Administration Regulations to facilitate the movement of authorized goods and people to and from Cuba by:

  • Expanding the categories of vessels which are authorized to temporarily sojourn in Cuba to include cargo, transport and recreational vessels.
  • Expanding the time aircraft can sojourn in Cuba.
  • Permitting export and reexport of: software to improve the “free flow of information” to, from and around Cuba; items incidental to establishment of authorized businesses; and, on a temporary basis, certain proprietary “tools of the trade” necessary to establish and support authorized business ventures.

Although these substantial revisions to OFAC and BIS regulations indicate that the Obama administration is committed to rapid liberalization, many significant regulations remain.

With limited guidance on how these new regulations will be interpreted and implemented, any U.S. individual or entity considering entry into the Cuban market should seek specific advice as to whether their proposed venture complies with all current regulations before they agree to any transactions with Cuban nationals.