OFAC’s $4.1 Million Penalty on Berkshire Hathaway Subsidiary: Why it Matters

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today announced it was imposing a $4.1 million penalty against Nebraska-based Berkshire Hathaway Inc. for illicit transactions by its Turkish subsidiary Iscar Kesici Takim Ticareti ve Imalati Limited Sirket (“Iscar Turkey”) with Iran. While announcements of OFAC penalties for sanctions violations are not rare, this one has a few notable points.

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At first glance, the fact pattern is not terribly uncommon. A Middle Eastern subsidiary of a U.S. company engaged in illicit trade with Iran. Oftentimes this comes from misunderstanding by local managers and employees. This time, the knowledge was there, as were clear warnings coming from the home base not to violate sanctions. According to the OFAC Settlement Agreement, Iscar Turkey is in the business of manufacturing machinery, specifically cutting tools and inserts. Its local manager thought EU and US sanctions on Iran would ultimately be lifted, and to prepare for this, began low level trade with Iran using Euro payments and falsified invoices from Turkish companies (to hide that the shipments were going to Iran). This was coupled with other actions, including travel to Iran. In all, 144 transactions were consummated with Iran, with the transaction value totaling $383,443.

So what are the takeaways? Here are just a few.

Transaction Value versus Penalty Amount. $383,443 is roughly 9% of the final penalty amount settled with OFAC – $4,144,651. But it would be foolish to look at the penalty alone. Think of the legal fees and the cost of the internal review just to start – a lot of work likely went into this response and reaching this settlement. That is not cheap and beyond financial cost, probably resulted in many lost hours at the company directed towards the internal review and back and forth with counsel and compliance experts. Notably, this case arose from a Voluntary Self-Disclosure (VSD), which means the maximum penalty amount was already reduced by 50% (OFAC encourages such disclosures by offering up a 50% discount, with other factors potentially also helping bring down the penalty amount). In other words, penalties could have been much higher had OFAC learned about this on its own without the VSD. OFAC itself mentions the base civil penalty amount was $18,420,672 – meaning Berkshire’s pro-active response and the existing facts caused a 77%+ reduction in potential penalties.

Hefty Settlement Covenants. Remedial steps are critical in mitigating penalties in an apparent violation. The steps Berkshire agreed to here are fairly rigorous. There are specific mentions in the Settlement Agreement of management commitment, imposing strict internal controls, better training, risk assessment, and testing and auditing. These are all fairly standard steps a company in such a position should take, but the granularity of the covenants in the Settlement Agreements highlights their importance.

Berkshire had taken some precautions. Oftentimes fines can come from pure recklessness from the top down, but this does not really seem to be the case here. Per the Settlement Agreement “The Apparent Violations occurred under the direction of certain Iscar Turkey senior managers despite Berkshire and IMC’s repeated communications to Iscar Turkey regarding U.S. sanctions against Iran and the application of the ITSR to Iscar Turkey’s operations.”

Like many cases before it, but in some ways more so, the lesson learned here is that the discovery of violations merit serious responses. While Iscar Turkey was the downstream subsidiary of a major, public U.S. corporation, it is still a foreign company. The transactions were not huge in value, and arguably not even a footnote for a company of Berkshire’s scale. Therefore, seeing this, one can imagine what the stakes could be for sanctions violations by U.S. persons in the United States.

Importantly, companies sometimes simply do no take these violations seriously. Maybe it’s due to their personal beliefs (e.g., opposition to sanctions, thinking the sale bears no impact on U.S. policy) or the fact that OFAC is still a civil agency and such cases often do not have a criminal enforcement angle. This can be disastrous for several reasons – it prevents a serious response which can mitigate the penalty as well as reduce the likelihood of future violations, and it also prevents learning a lesson (perhaps unless OFAC responds by coming down with a hefty penalty). While it should go without saying, not committing to serious compliance approaches can be damaging and can lead to violations. Not taking serious approaches can be far worse. Based on what is provided in the Settlement Agreement, Berkshire’s remedial approach appears to have likely been fairly solid.

The lessons learned here are broad and go far beyond Iran sanctions, which were far narrower in scale in 2012-2016 when the violations occurred in this case. They tell us a lot about the agency’s approaches, and perhaps unaffected by who will be sitting in the White House on January 20, 2021. As such, those thinking a potential Biden win could cause sanctions to reverse course should look at examples like this – Obama-era violations, and take note.

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Are Friendships Subject to Sanctions?

In an interesting OFAC Enforcement Release issued this week, the agency announced that an individual formerly working for the U.S. Army was fined for engaging in transactions with a foreign person designated as a Specially Designated National (SDN).

Specifically, a U.S. Army official stationed at the U.S. Embassy in Colombia was penalized for engaging in at least 24 transactions with a narcotrafficker designated by OFAC. The U.S. person stationed in Bogota had evidently befriended an individual that has been designated by OFAC, and had over time “bought jewelry, meals, clothing, hotel rooms, and other gifts” for the individual over the course of a relationship. Ultimately the penalty was reduced from a maximum of over $33 million down to $5,000. While the penalty amount is not anything drastic and certainly far below the massive penalties we often see in OFAC enforcement cases against companies, this case is very interesting on a number of fronts – including the fact that:

(1) such releases seem to rarely be issued against natural persons;

(2) there was no identifying information of any of the parties (compared to corporate enforcement releases where the names of companies are generally provided); but also

(3) because of the nature of the transactions at issue – these were not commercial transactions per se but rather appear to have been the hallmarks of a personal relationship – gifts, meals, hotel stays. It begs the question – are personal relationships and generally friendships subject to sanctions?

For those who are familiar with sanctions laws, the answer is pretty clear. When parties are designated by OFAC, depending on the program under which they are sanctioned, most transactions with them by U.S. persons become prohibited for the U.S. person. Given the bar on dealings in the transfer of property to/from such parties, there is no line drawn for individual relationships. In other words, just like a U.S. person generally cannot export goods to a sanctioned company, it would naturally follow that they cannot give a gift to a sanctioned individual, or say, receive money or a small loan from that person. Again, the limitations vary based on the program under which the party is sanctioned, but these kind of limitations are not uncommon, regardless of the country the party is in.

There are a few key takeaways here, but it appears the biggest is the fact that sanctions laws like so-called “blocking programs,” whereby individuals and organizations are subject to blocking by U.S. persons (think of narcotraffickers, kingpins, certain terrorist entities, persons designated for corruption or human rights violations, etc.) are not just limited to corporate entities and are generally comprehensive enough to have an impact on personal relationships.

Further, the case very importantly highlights that compliance is critical for individuals too. This can translate into many different contexts – individual transactions in sanctioned countries like Iran or Cuba for example, or personal dealings (e.g., gift giving) with parties on the SDN list that may not fit many people’s definition of “commercial.” While all interaction with such a party might not be prohibited, they can still be under strict limitations, and the law often does not distinguish between “arms-length” commercial transactions or activities (like gift giving) that may transpire in the course of a personal relationship. As such, individuals should be alert to these risks and work to prevent them accordingly.

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U.S. Government Issues Xinjiang Supply Chain Advisory

On July 1, the U.S. Departments of State, the Treasury, Commerce, and Homeland Security issued a detailed advisory. This is in response to the various types of regulatory exposure companies could face when dealing with suppliers and vendors in China’s northwestern Xinjiang region, given substantial allegations of forced labor and other human rights abuses.

The focus of the Advisory is on what the government identifies as the three key risk factors:

  1. Assistance in the transfer of surveillance technology to the Chinese government.
  2. Relying on labor sourced to the Xinjiang region, which may be among other things, forced.
  3. Aid in the construction of internment facilities for various minorities, such as the Uyghurs and other Muslim minority groups, including the Kazakhs.

The issues cited by the July 1 Advisory have various potential applications under U.S. trade law, including sanctions and export controls. A number of Chinese companies and government entities have in recent months been added to the Department of Commerce’s Bureau of Industry & Security (BIS) Entity List.  

According to the Advisory, broad swaths of sectors are affected by the issue of forced labor, from mobile phones to cleaning supplies, food processing, and textiles, among many others.  

The advisory also touches on a number of other compliance-based issues for a broad range of businesses, including financial institutions.

What’s the takeaway?

The obvious lesson here is that the Xinjiang region has certain risks for U.S. companies, both legally and reputationally. However, there are two other issues here:

  1. Region-specific risks. In some ways Xinjiang highlight risks in the Advisory are like geographic compliance risks in other regions, for example in the Middle East (regarding Syria, Iran, Russia) or Latin America (Cuba and Venezuela).
  2. The drive towards more sophisticated risk-based, detailed compliance programs. Over the years it has been made increasingly clear that compliance programs are not “check the box” exercises and government enforcement agencies are giving these programs increasing scrutiny in order to assess their efficacy. Laws change, and so do risks. Accordingly, it makes sense to incorporate measures to protect against evolving risks like those detailed in the Advisory. These changes will help prevent dynamic risks like those related to sourcing and dealing in Xinjiang. Add to this the increasing number of risk advisories issued by agencies like OFAC, and it becomes clearer that periodic evaluation and assessment is critical.

Companies doing business in Xinjiang or with vendors from the region should take note and dig deeper beyond the advisory, understanding the particular risks of their respective sectors, and with their specific counterparties.

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BIS Extends Huawei General Licenses

The U.S. Department of Commerce’s Bureau of Industry & Security (BIS) yesterday granted an extension of the existing Temporary General License (TGL) for China’s Huawei Technologies Co. and 115 other affiliates around the world from those parties’ current placement on the BIS Entity List.

A previous TGL (modifying the respective Entity List entries) was issued on May 20, 2019 for the original 69 entities placed on the list, and a subsequent extension incorporating the additional 46 entities was issued on August 21, 2019 (effective August 19).

The extension of the TGL provides these entities with some significant reprieve, however it does not remove their entries from the Entity List. As this reprieve is not permanent and is subject to repeal, and as it does not cause a removal from the Entity List for that period of time, there are still lingering effects that likely cause hesitation for many companies considering business with Huawei, including those whose products and technologies are not of U.S. origin or otherwise subject to the U.S. Export Administration Regulations (EAR).

The timely nature of these TGLs reflects in some part the urgency given the widespread use of Huawei’s technologies and products. Other companies named to the Entity List may experience a tougher challenge in demonstrating the need for such relief, and the presumption is likely that the named party is actively seeking permanent removal from the list, not just a series of short-term lifelines. This requires a good-faith effort to take all steps required to seek a proper delisting of the company.

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The Other American Designation – the BIS Entity List

While many professionals in the compliance space around the world are familiar with the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) list of Specially Designated Nationals and Blocked Persons (the “SDN List”), another U.S. government list is quickly rising in importance.  As news articles over the past few years (think ZTE and Huawei) have indicated the U.S. Department of Commerce’s Bureau of Industry & Security’s Entity List is becoming increasingly noticed and used as a tool of U.S. foreign policy in curtailing the flow of U.S. origin goods and technologies to certain foreign parties.

The Entity List is arguably the most potent list at the BIS, an agency tasked with administering the Export Administration Regulations (“EAR”), a set of regulations governing U.S. origin goods – broadly defined in a way that covers many goods made even outside the United States with U.S. technologies or foreign goods that have transited through the United States.  While a BIS list, the naming of parties to the Entity List, the modification of their entries, and their removal is the responsibility of the End-User Removal Committee (ERC), an inter-agency group with representatives from various U.S. departments, including Commerce, Defense, and Energy.

The impact of being on the Entity List can be devastating. The limitations can vary, for example some Russian entities on the list are subject to somewhat narrow prohibitions on certain oil extraction-related technologies (which can be very broad for their purposes given the scope of what they do) to blanket bans on all items subject to the EAR. It usually leads to a domino effect, where even transactions that are not prohibited become impossible to execute due to de-risking by suppliers, vendors, and service providers like banks and shippers, in cases where the transaction is not even prohibited under the regulations.  Broad prohibitions can be painful and can cause companies to collapse. You may recall a story where China’s ZTE was apparently unable to fix a urinal in its men’s room due to difficulty in obtaining a part, all arising from its Entity List designation.

Removal from the Entity List, while rare, is not impossible. The rarity may come from the fact that few may take the necessary expert approach towards removal. It’s critical to take immediate steps quickly to begin the process for permanent removal, and this should be done by experienced lawyers well-versed in U.S. trade regulations, particularly export controls. Given the reputation issues at stake, companies that are serious about rehabilitating their businesses must address the designation seriously.Compliance Items

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Posted in Compliance, Entity List, Export Controls

Treasury Adds Scores of Iranian Companies to SDN List

The US Department of the Treasury announced it was adding scores of Iranian entities to its list of Specially Designated Nationals and Blocked Persons (the SDN list) due to their connections with the Islamic Revolutionary Guards Corps (IRGC)-affiliated Basij force, specifically the Bonyad Taavon Basij (Basij Cooperative Foundation).  Importantly, however, these additions are not strictly military related, and include some Iranian economic giants across sectors including automotive, finance, and mining, including household names such as:

  • Bahman Automotive Group
  • Bank Mellat
  • Esfahan Mobarakeh Steel Company
  • Iran Tractor Manufacturing Company (ITMC)
  • Mehr Eqtesad Bank
  • Parsian Bank
  • Sina Bank

Mobarakeh Steel and ITMC are the largest companies in the region in their respective sectors of steel production and tractor manufacturing.  Importantly, Bank Mellat and Bank Parsian are among Iran’s largest financial institutions.  Bahman Group is a large automotive company that has assembled foreign automobiles in Iran.

The additions of the banks may be the most interesting for many, especially U.S. persons seeking to divest from Iran. Being designated under the SDGT (Executive Order 13224) makes virtually all transactions with such entities prohibited.  This covers otherwise exempt or general license transactions such as medical, food, and agricultural sales, and the transfer of personal remittances.  As such, to the extent U.S. persons have any transactions with Iran in non-sanctioned areas such as humanitarian sales and divestment or personal remittances, they should take extra care to make sure such entities have no interest in such transactions.  Any such involvement can subject such funds to blocking upon coming into possession of a U.S. person.  The release of blocked funds requires a specific OFAC license.   If such entities have been or are involved, a specific OFAC license will now be needed and such parties should not proceed without first consulting a professional.

This announcement dovetails an advisory issued last week by the Department of the Treasury’s Financial Crime Enforcement Network (FinCen) on deceptive Iranian financial practices.

Importantly, today’s move by the Department of the Treasury does not appear to be related to President Trump’s announcement in May 2018 that the United States would be ceasing participation in the Joint Comprehensive Plan of Action (the “Iran Deal”), but rather part of the Administration’s policy to increase pressure against the Islamic Republic, particularly on the economic front.

 

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How does Sanctions Snap Back Impact Iranian-Americans?

We’ve been getting a lot of questions at the office as to what President Trump’s May 8, 2018 announcement to cease U.S. participation in the Joint Comprehensive Plan of Action (JCPOA, also known as the “Iran Deal”), an agreement between Iran and the “P5+1” (U.S., UK, France, Russia, China, and Germany) over Iran’s nuclear program. In the midst of this sanctions snap-back and sliding value of the Iranian Rial, many Iranian-Americans naturally have some cause for consternation and confusion.

Importantly, the general laws on remittances and asset divestiture from Iran are largely the same for U.S. persons, which the sanctions regulations define as U.S. citizens and permanent residents wherever they are (including in Iran) or other people physically in the United States. While we can no longer import Iranian-origin food products or carpets, regulations governing the sale of personal assets, the transfer of personal and family funds and the receipt of gifts remain intact. The only noticeable difference legally is that certain Iranian banks like Melli, Mellat, Sepah, and Tejarat will soon return to the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) list of Specially Designated Nationals and Blocked Persons (the “SDN” list). This means that transactions involving such entities will largely require specific OFAC licenses to be permissible to avoid blocking (aka “freezing”) by U.S. banks, for example.

Beyond the law however, we are seeing some tangible differences from the pre-JCPOA era. For one, the size of transfers appears to be shrinking, although this may be a direct result of the spike in the Dollar’s value versus the Iranian Rial/Toman.  In other words, for example, a $500,000 asset divestiture may require more funds transfers now than before.

Also, banks appear to be stepping up scrutiny of Iran-related transfers (such as gifts, proceeds from the sale of real estate, etc.) Remember, the law does require you to keep proper records of Iran-related transactions and these laws are not new. However, recent trends we have seen point to the increased importance of this. It is not only a legal requirement but a best practice that banks will likely look for more and more when processing funds transfers for their clients.

The best you can do is be firm on what the law is – often many people start inquiring as to what U.S. law is after they have begun the divestment or transfer process. That’s too late. Many transactions require licenses and while the laws on such licensing haven’t changed because of the JCPOA (other than issues connected to banks that will go back on the SDN list and an increased number of other entities that are being designated by OFAC), the logistics are getting a bit more difficult. These logistical issues can naturally create legal exposure points, so it’s best to be thorough and comprehensive. Exercising best practices is not only a matter of complying with the law but keeping good documents and properly informing your U.S. financial institution through the right channels (i.e., informing the right people, not just anybody at the bank).

Remember, banks often look for erratic activity in accounts, much like credit card companies do.  Oftentimes remittance transfers from Iran (like the transfer of inheritance or the sale of a home) will be unlike transactions typical to your account, and the source is not going to be identifiable as funds must be processed from a third country. This can arouse suspicion for a completely lawful transfer. Therefore, as bank compliance departments increase their scrutiny, there will be more responsibility on the part of customers to ensure that the underlying transaction (1) was lawful, and either allowed by OFAC by general or specific license (and you have a specific license if needed); and that (2) all aspects of the handling and transfer of the funds are lawful.  Otherwise you can run a high risk of having your funds rejected, or your account. It is key to provide proper documentation to your bank’s compliance team to ensure everything is not only done legally but also transparently.

 

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Telecommunications and the Iran Protests – a Sanctions Response from the Trump Administration?

Many have been caught by surprise by widespread anti-government protests in Iran that started in Mashhad last week ostensibly over food prices and have now engulfed the whole country, going on to their 9th straight day.  The Trump administration has indicated moral support for the protestors’ right to peaceful demonstration and their gripes against the Iranian government. “Support,” however, is very vague, and some are demanding that the United States do more to demonstrate support. In the absence of diplomatic relations between the two states, how could this support work out? The answer may very likely lie in our sanctions laws.

Much has been said about decertification of the Joint Comprehensive Plan of Action (JCPOA), the so-called “nuclear deal” entered into by the United States and the “P5+1” nations of the United States, United Kingdom, France, Germany, Russia, and China in 2015, implemented in January 2016. But that’s not the real extent (or potentially even the focus) of sanctions as a foreign policy tool in U.S. policy against Iran.

The United States continues to maintain a very robust sanctions architecture in place against Iran, covering the vast majority of trade between so-called “U.S. persons,” which include U.S. companies, as well as citizens and permanent residents wherever located, and others are physically in the United States.  Despite the 2015 nuclear deal (the Joint Comprehensive Plan of Action or JCPOA), a large number of “secondary” sanctions remain in place. These are limitations whereby the U.S. can place limits on the U.S. activities of third country actors (such as European or Asian companies) that engage in certain transactions with Iran or specific Iranian entities that may be sanctioned by the United States.

So, given recent events in Iran, what could the Trump administration change with respect to sanctions?

Satellite

Information & Communications Technology (IT) 

The Iranian government’s restrictive internet policies have been a key challenge to Iranian civil society on many fronts.  Despite the presence of nearly 50 million smart phones in Iran, the government continually throttles the internet and blocks sites like YouTube, Facebook, and Twitter (even though many Iranian officials maintain a presence on these sites), and there have been recent reports of blocking Instagram and Telegram, a messaging app hugely popular in Iran.

These actions are not new, and in 2013, in a bid to improve the access of people in Iran to telecommunications with one another and the outside world, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued General License D (now General License D-1).  This “General License” authorizes the lawful exportation to Iran of many U.S. origin telecommunications goods and services, such as mobile phones, tablets, laptops and accessories without having to obtain OFAC approval, provided the sales are executed in a lawful manner, which includes restrictions on end-use, end-user, and receipt of payment. While GL D-1 is expansive in what it allows, it is not without limitations, and there has been talk of expanding the scope of and activities it authorizes, or at least encouraging the U.S. government to expand it.

Although U.S. companies can export many fee-based and non-fee based apps to Iran, they cannot host a wide array of Iranian web content, such as e-commerce sites or related apps (for example those allowing users in Iran to purchase goods).  This is consistent with U.S. sanctions policy of limiting Iran’s commercial activity with U.S. persons.  The effect is that lawful U.S. apps become more difficult to access from Iran as companies like Apple and Google have closed their app stores to Iranians, presumably out of fear that Iranians could download certain apps that are not permitted and that the U.S. tech giants may host Iranian apps that they are not allowed to. Therefore, a lot of what is allowed to happen simply isn’t available, or at least not with ease.  OFAC could clarify its position on such activities in the coming days and weeks, making it easier for companies to export these goods and services.

Second, OFAC could expand General License D-1 to also include the exportation of items like Apple TV, Roku and the Amazon Fire, which will allow individuals in Iran with easier access to foreign television feeds. Given the Iranian government’s practice of jamming signals from foreign news channels like the BBC Persian or Voice of America (VOA), not to mention fairly regular drives to collect illegal rooftop satellite dishes, this move could be seen as a way to expand people’s access to foreign media and receive more varied news. It could also enable the provision of services to Iran enabling the exportation of internet and television connectivity to individuals in Iran, enabling them to bypass the throttled internet.

Sanctioning Iran’s State-Owned Television & Radio

The other potential move by the U.S. government could be to reimpose currently waived sanctions against IRIB, which maintains a constitutional monopoly on television and radio.  Remember a few years back when the United States was imposing new sanctions legislation against Iran in rapid succession.  One issue of concern particularly after the 2009 Iranian election was the use of Iranian television to broadcast mass trials and allegedly false confessions Following implementation of the Iran Freedom and Counter-Proliferation Act of 2012 (the IFCA), the IRIB was added to the OFAC Specially Designated Nationals (SDN) list, effectively a “black list” of parties around the world that U.S. persons are generally barred from dealing with.  This originated from the Iran Threat Reduction and Syria Human Rights Act (aka the “Threat Reduction Act” or “TRA”), which, among other things, called for drastic expansions of U.S. broadcasting to Iran and Persian-language content and to overcome the regime’s attempts to jam outside broadcasting signals.

The IFCA notably has a provision (§ 1244) calling for the designation on the SDN list of certain non-U.S., non-Iranian persons, such as Asian and European companies if they under some circumstances “knowingly provides significant financial, material, technological, or other support to, or goods or services in support of any activity or transaction on behalf of or for the benefit of” an Iranian SDN such as IRIB. In other words, the U.S. government can sanction a European company for providing material satellite services to the IRIB if there is no U.S. waiver or other authorization in place.  That would cause an effective blocking of that entity from the United States economy and banking system.

In 2014 and 2015, before the JCPOA, the Obama administration issued a waiver on certain “secondary sanctions” on IRIB, which punish third country companies that engage in certain transactions with the entity.  This waiver enabled IRIB to deal with satellite companies around the world to broadcast its signals, many but not all of which reached far beyond Iran’s borders.  By revoking this waiver, the U.S. Department of State could substantially paralyze IRIB’s ability to broadcast not only outside Iran but even within its borders.

But didn’t the JCPOA get rid of these limitations? Not really. As part of the JCPOA, many activities subject to sanctions in the IFCA were waived, but only for Iranian entities in the “annex” to the JCPOA, which does not include the IRIB.  Given this, the IRIB remains subject to secondary sanctions and the Department of the Treasury has wide discretion to designate entities violating the spirit of §1244.

Alternatively there are other possibilities OFAC and the Department of State may pursue, such as sanctioning more human rights violators, blocking any assets of theirs coming into the hands of U.S. persons among other things.

The past 15 or so years have seen increasing bipartisan support for sanctions as a non-violent tool to implement U.S. policy objectives and effectuate a change in behavior by sanctioned entities. It is likely sanctions may be the United States’ first formal response to recent events.

Posted in Iran, OFAC, Sanctions

No, the Iran Deal is not over…

The long awaited policy statement by President Trump on Iran along with the “decertification” of the Iran nuclear deal or the Joint Comprehensive Plan of Action (JCPOA) finally happened yesterday.  What does it all mean?

shutterstock_101051161 This blog is really focused on legal issues and is not a political blog, so I will keep the political discussion short. The plan announced yesterday strives to be a comprehensive approach that addresses U.S. policy on Iran in totality, beyond simply the nuclear program and the scope of the JCPOA.  Notably, the United States and Iran did not ever reached a “grand bargain” on bilateral matters, and the JCPOA did not address longstanding U.S. grievances against Iran, which largely served as the basis for the main body of U.S. sanctions against Iran, including the Iranian Transactions and Sanctions Regulations (ITSR), which has many comprehensive restrictions on dealings by U.S. persons with Iran. In effect the nuclear deal in many respects dialed back the clock to 2005 or 2006, where Iran was under many, albeit less, sanctions (the fact that the world of business and compliance has changed markedly since then notwithstanding, which is part of the reason Iran has not been able to benefit as much from sanctions relief as it had hoped).

Decertification is not the end of the deal, at least not for now.  The White House’s press release has some new information but much of this appears more of a pronouncement than really new policy.  Effectively, the President has punted the issue to Congress, which can vote to modify certain legislation it passed when the JCPOA was implemented. That legislation placed certification requirements on the President, whereby confirmation had to be given every 90 days. That may be ultimately removed. Therefore, the deal is still standing.

As for the Islamic Revolutionary Guards Corps (IRGC), it was already sanctioned before, so the impact of the additional designation (under Executive Order 13224, which is focused on counterterrorism) will be arguably minimal (notably, many entities placed on any type of restriction by the United States typically face an effective “shutdown” in dealings with foreign companies, however light the actual restrictions may be).  The IRGC has been under so many designation one has to wonder who was actually willing to do business with it before yesterday’s decision.

In the long run, this should have little effect on the ITSR as that body of regulations was largely unchanged by the JCPOA. This means people-to-people communications, medical exports, food exports and IT exports will most probably remain intact.

What remains to be seen is how the new policy will shape carveouts (referred to as “general licenses” or “exemptions”) in the ITSR. We may see more willingness by OFAC to approve activities in spaces like telecommunications and informational technology (IT) exports, as such technologies can expand the access of Iranians to the outside world. We may see other similar changes elsewhere.  This is not comparable to what the Administration is doing on the North Korean sanctions front.  That said, like other actions by the U.S. government, the ripple effects of such policy modifications, meaning the “psychological” impact, can be much farther reaching on the business and broader communities than what is actually mandated by law.

 

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ExxonMobil’s Sanctions Penalty and the Lesson on Specially Designated Nationals

OFAC slapped a $2 million penalty on ExxonMobil on Thursday for alleged violations of U.S. sanctions on Russia. Specifically the allegations were that during a narrow, 9-day window in May 2014, the U.S.-based oil giant entered into several contracts with Russian energy company Rosneft OAO where the signatory was Igor Sechin, who was named by OFAC as a Specially Designated National (SDN).  (It’s worthy to note that ExxonMobil then turned around and brought suit, alleging some similar arguments to those my law firm Akrivis Law Group successfully made on behalf of Epsilon Electronics in California in its landmark case challenging a $4 million penalty by OFAC.)  Beyond the constitutional arguments, this case highlights the taint of the SDN in transactions.

Russia-US

SDNs, as you probably know, are non-U.S. entities (companies, organizations, or natural persons) who have been designated by OFAC for varying reasons.  The list, which is effectively a “black list” for U.S. persons, numbers well into the hundreds of pages (it is almost reminiscent of the old white pages the phone company issued every year).  While many are in sanctioned countries like Iran, Cuba, and Syria, many are in countries with which the United States maintains very robust trade and diplomatic ties. U.S. persons are generally barred from dealing with such entities and these entities’ assets that come into possession of U.S. persons must generally be blocked.  Since there are many ways to get on to the SDN list (in large part through Executive Orders), not all designations are treated equally. In fact, there are sometimes carveouts for some SDNs.

Despite these nuances ion the list, many parties around the world, specifically banks, often adopt a “de-risking” approach towards SDNs – meaning they will generally not comb through the laws and enable or execute those transactions that may be exempted under law (even if they are specifically licensed by OFAC to do so) – rather, they prefer to simply not deal with such entities, even if a transaction does not include a single U.S. element. Long story short, it can be a fast downward spiral for any company, organization, or individual on a truly global scale. Getting off the list can be very challenging and time consuming.

So what happened here? Even though Rosneft was not itself on the SDN list, OFAC’s position was that ExxonMobil effectively imported the services of a designated entity, specifically Mr. Sechin. The dealing with Rosneft itself was not necessarily an issue per se, but having an SDN sign the contracts on behalf of Rosneft was.  In other words, Sechin’s signature on the contract and other work he did in furtherance of constituted a prohibited dealing for ExxonMobil.

ExxonMobil tried to argue that White House statements at the time indicated that these types of transactions were not problematic (although OFAC published a somewhat responsive Frequently Asked Question or “FAQ” on the same issue vis-à-vis the Burmese sanctions). White House or government agency statements can be very useful in determining a compliance approach or strategy, but ultimately the actual law is what’s written in the books.

Beyond the issue of policy versus law, again, the most important point here arguably is that the presence of an SDN can taint an entire transaction. OFAC licenses for certain activities with sanctioned countries often state that certain entities remain off limits. Therefore even if an activity is specifically licensed by OFAC or subject to a general license, one must be very careful to avoid SDNs in any aspect of the transaction (unless there is an applicable carveout or the specific license clearly states that you are allowed to deal with a given SDN for a particular purpose). The presence of an SDN may not necessarily invalidate all activities surrounding a given transaction.  However, it can not only constitute a violation of applicable OFAC regulations, but also lead to money or other assets being blocked.

The lesson here is particularly important in countries like Russia where many designated entities are persons or companies of extremely elevated importance in those countries’ economies. The SDN “taint” typically trickles down to any entity they own or control (think subsidiaries), which is why you should always do your due diligence and care to make sure all aspects of your transaction, not just the one that’s the focus of your attention, is compliant with applicable OFAC regulations.

 

 

 

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