On February 14, 2019, the Office of Foreign Assets Control (OFAC) announced it had assessed a civil monetary penalty of over $5.5 million dollars against AppliChem GmbH (AppliChem) of Darmstadt, Germany (a company that manufactures chemicals and reagents for the pharmaceutical and chemical industries) for 304 violations of the Cuban Assets Control Regulations, 31 C.F.R. part 515 (CACR). Specifically, OFAC determined that between May 2012 and February 2016, after it had been purchased by a U.S. company and come within the jurisdiction of the U.S. sanctions on Cuba, AppliChem sold chemical reagents to Cuba. 19 C.F.R. § 515.201.

Pedro Szekely

A.The U.S. Company’s Merger and Acquisition Due Diligence Team Successfully Identified the Cuban Sanctions Issue.

On January 1, 2012, Illinois Tool Works, Inc. (ITW), a company based in Glenview, Illinois, acquired AppliChem. In December 2011, during its merger and acquisition due diligence, ITW discovered references to countries subject to U.S. economic and trade sanctions on AppliChem’s website. That same month, ITW told AppliChem it would be required to cease all Cuban transactions after it was acquired. ITW then incorporated AppliChem into its Reagents Division, and allowed AppliChem’s former owners to stay on as manager-employees. On January 12, 2012, the General Manager of ITW’s Reagents Division sent AppliChem’s former owners a memorandum explaining ITW’s guidelines for complying with U.S. sanctions, including the CACR.

B. Willful Evasion by the Non-U.S. Entity and Persons Working for It.

However, despite these warnings, AppliChem continued to complete and collect on existing orders with Cuba under pre-acquisition contracts. Upon discovering AppliChem’s continued Cuban business, ITW’s European legal department sent a third warning to AppliChem’s former owners on April 5, 2012 to immediately cease all sales to Cuba.

In late January, 2016, an anonymous report was made through ITW’s ethics helpline. The call alleged that AppliChem had continued making sales to Cuba through an intermediary company in Berlin, Germany. ITW began a full investigation, which revealed that AppliChem’s former owners had continued AppliChem’s Cuba business by creating a scheme that concealed this business from ITW after having been specifically told by ITW to cease Cuban sales.

Rather than ceasing sales to Cuba as directed by ITW, between February 2012 and April 2012, AppliChem designed and implemented what it called the “Caribbean Procedures” (whereby Cuba was referred to by the code word “Caribbean”), which made sure that no documents mentioning Cuba would be prepared or retained by AppliChem in connection with its continued business with the country. Pursuant to the Caribbean Procedures, AppliChem engaged an external logistics company and an independent hazardous materials consultant to prepare the necessary shipping documents and hazardous materials declarations, which previously had been handled internally.

Once AppliChem implemented the Caribbean Procedures, AppliChem senior management conducted both written and in-person training sessions for AppliChem’s staff, particularly those working in the logistics department, to ensure that Cuba-related sales would be concealed from ITW. The reasons for the implementation of the Caribbean Procedures were “well known to AppliChem staff during this time” and were described by AppliChem staff as an “open secret” at AppliChem. Consequently, between May 2012 and February 2016, AppliChem fulfilled Cuban orders on 304 invoices. The transaction value of the shipments made during this time was €2,833,701 (approximately $3,433,495).

C.  OFAC Investigation and Results

OFAC determined that ITW voluntarily self-disclosed the violations on behalf of AppliChem, and that the violations constituted an egregious case. The statutory maximum civil monetary penalty applicable in this matter was over $20 million dollars. The base civil monetary penalty was over $10 million dollars.

OFAC determined the following to be aggravating factors:

(1) the willful conduct of AppliChem’s management;

(2) the use of written procedures to engage in a pattern of conduct in violation of the CACR;

(3) AppliChem’s sales to Cuba of approximately $3,433,495 in 304 transactions over the course of five years caused significant harm to the sanctions program objective of maintaining a comprehensive embargo on Cuba; and

(4) the size and sophistication of AppliChem, with an average annual revenue of around $23 million between 2012 and 2015, and the fact that it is a subsidiary of ITW, a large international company.

OFAC determined the following to be mitigating factors:

Once ITW discovered ApliChem’s perfidy, it cooperated by filing a thorough voluntary self-disclosure with OFAC, providing prompt responses to requests for information, performing a thorough internal investigation, and signing a tolling agreement on behalf of AppliChem.

This case demonstrates the importance of auditing and verifying foreign subsidiaries. In contrast to previous enforcement actions in which a buyer failed to identify a sanctions exposure, ITW identified the sales and took steps to ensure they ceased. The issue arose because of its new subsidiary’s ability to circumvent those instructions and hide ongoing sales, underscoring the importance of verifying that internal procedures are being followed. Further, U.S. companies with international operations should consider:

(i) implementing risk-based controls, such as regular audits, to ensure subsidiaries are complying with their obligations under OFAC’s sanctions regulations;

(ii) performing follow-up due diligence on acquisitions of foreign persons known to engage in historical transactions with sanctioned persons and jurisdictions; and

(iii) appropriately responding to derogatory information regarding the sanctions compliance efforts of foreign persons subject to the jurisdiction of the United States.

 

 

If you have any questions regarding this penalty decision or any other aspect of U.S. economic sanctions, please do not hesitate to contact our team.

Photo by Thomas A on Flickr

On January 16, 2019, the Trump administration signaled a possible major shift in its policy toward Cuba by announcing it was considering allowing the suspension of Title III of the Helms-Burton Act to lapse, thereby opening the floodgates to litigation over property confiscated by Fidel Castro and the Cuban government 60 years ago.

History of the Act

The Helms-Burton Act, formally titled the Cuban Liberty and Democratic Solidary Act (a/k/a the Libertad Act), was signed into law in 1996 with the goal of increasing pressure on Cuba for peaceful democratic change. The Act codified the United States embargo in place at the time on trade and financial transactions with Cuba and required the President to produce a plan for providing economic assistance to a transition government. Additionally, the Act aimed to punish non-U.S. companies doing business in Cuba. Title III created a private cause of action authorizing U.S. nationals to file suit in U.S. courts against persons or companies that may be trafficking in and profiting from properties confiscated by the Cuban government following the 1959 socialist revolution. U.S. claimants that had their claims certified by the Foreign Claims Settlement Claims Commission may also be able to seek treble damages for their claims.

The Helms-Burton Act was not well received in the international community, however. Both the European Union and Canada quickly announced their opposition, arguing that the provisions violated international trade treaties by punishing foreign companies for doing business outside of the U.S. The EU went so far as to bring a case at the World Trade Organization. At the time, the U.S. threatened to invoke the “national security exception” that is contained in the WTO treaty texts, but following negotiations between the U.S. and the EU, the suit was dropped in 1998.

Although Title III could have kept many lawyers busy throughout the U.S., Cuba, and beyond, the provision never actually took effect. The Act granted the President authority to suspend the lawsuit provision for consecutive six month periods if necessary to expedite a transition to democracy in Cuba and if doing so was in the national interest. Every president since President Clinton has relied on and exercised this suspension authority. In 2013, President Obama delegated the power to suspend the provision to his Secretary of State, who then continued to suspend the provision each time it came up.

Rumblings of Change

The Trump administration first had to weigh in on the provision in July 2017. Then Secretary of State Rex Tillerson delegated the decision to his Under Secretary who in turn suspended Title III. In recent months though, the administration has hinted that it may break from more than 20 years of tradition and allow lawsuits to be brought under Title III. In November 2018, White House National Security Adviser John Bolton remarked that the administration planned to give the provision “serious review.” In the most definitive move yet, earlier this month the administration suspended Title III for only 45 days until March 18, 2019 and urged any person doing business in Cuba to consider whether they were “abetting this dictatorship” by trafficking in confiscated property.

What To Expect

Although no official changes have been made, the Trump administration has vowed to be tougher on Cuba. Invoking Title III would permit Americans with claims to confiscated property in Cuba to attempt to sue companies whose business in and with Cuba today are connected to these properties, creating a potential risk for companies that do business in Cuba and which may also be subject to the jurisdiction of courts in the U.S.

So what does this mean for potential claimants and companies doing business in Cuba? It really depends on their situation. For the last 60+ years, people have believed that change in Cuba and/or change in U.S. policy towards Cuba was potentially imminent. And since Helms-Burton was enacted and came into (as of now still suspended) force, there have been some changes in Cuba and some changes in U.S. policy toward the island that is located only 90 miles away. Nevertheless, 60 years later, the embargo persists and claimants whose property was confiscated by the Cuban Government remain uncompensated.

Rumors that the suspension of Title III might end circulate every few years, but usually not so publicly and never from such highly placed sources. Could this time be different? – The answer is yes.

If you have or believe you may have claims to property confiscated by the Cuban Government on or after January 1, 1959, should you start dusting off old documents and trying to determine who, if anyone, may be trafficking in property in which you may have a claim?

If you are a company doing business in or with Cuba, or with Cuban products (such as nickel, timber, sugar, etc.), should you examine whether you are potentially subject to civil jurisdiction in the U.S. such that you could be sued as a defendant under Title III of Helms-Burton?

If you are the EU, should you start dusting off the old WTO complaint against the U.S.? And what might that mean if the Trump administration invokes the national security clause?

If you are Cuba and worried that such threats might stifle further foreign investment, should you “come to the table” to try to make a deal with the Trump administration?

The answer to all of these questions is of course – it depends. It depends on what you think the Trump Administration might do. It depends on whether you think the Trump Administration might be willing to break with decades of tradition. It depends on the magnitude of your potential claims and exposure. It also depends on whether there is anything that you might be able to do about it.

Are these answers satisfying and/or do they bring increased certainty to your everyday or business relations concerning Cuba? The answer is of course no. But for the last 60+ years, U.S. relations with Cuba have been impacted both because of and despite that uncertainty.

If you would like to discuss your particular situation with regard to potential claims as either a potential plaintiff or defendant under Title III, please reach out to your regular Crowell & Moring attorney or one of the POCs listed on this post.

 

 

 

 

 

 

 

On July 25, OFAC updated its Frequently Asked Questions (“FAQs”) on President Trump’s Cuba Announcement. The revised FAQs generally maintain the same tone and reiterate certain aspects of the new U.S.-Cuba policy.

However, as we develop below, there is an important subtle change: OFAC has included explicit language stating that existing specific licenses may be affected if it is explicitly noted in the forthcoming regulations. The changes in the guidance can be divided into three categories:

Prior Business in Cuba Will Not Be Affected (unless otherwise stated!)

  • The key change in these FAQs relates to the potential effect of any amended regulations on existing licenses. In the first version issued on June 16, OFAC stated that new regulations will be forthcoming and will not affect specific licenses previously granted.  In the revised FAQs, OFAC modified this position to note that existing licenses will not be affected “unless explicitly noted”.  (See FAQ 12).
  • OFAC includes an example explaining that U.S. businesses will be permitted to continue with prior transactions with entities related to the Cuban military, intelligence, or security service, when those transactions were outlined in contingent or other contractual arrangements agreed prior to the issuance of the forthcoming regulations. (See FAQ 9).

Reminder about the New Definition of “Prohibited Official”

  • OFAC specifically states that while remittances remain authorized, the new definition of Cuban prohibited official may exclude certain Cubans from receiving remittances. (See FAQ 11).
  • Group people-to-people travel will still be authorized; however, OFAC now notes that U.S. persons cannot deal with Cuban prohibited officials for a predominant portion of their activities in Cuba when traveling under such general license. (See FAQ 3).

Travel Provisions

  • The State Department previously indicated it would be publishing a list of entities that are owned or controlled by the Cuban military. OFAC’s new FAQs reiterate that previously scheduled travel arrangements involving entities that are subsequently identified on the State Department list will remain authorized, provided that the arrangements have been made prior to the publication of the list (See FAQ 4, 5, 7, 8.). The new FAQs reiterate that no new transactions with listed entities will be authorized after publication of the list.
  • Finally, for the first time, the new FAQs indicate that additional categories of currently authorized travel may be affected by the upcoming changes. Specifically, beyond “people-to-people” travel, OFAC notes that travel for (a) education or (b) ‘support for the Cuban people’ may be impacted by the upcoming regulations. (See FAQ 6).

For more information, contact: Cari Stinebower, Dj Wolff, Mariana Pendas

New U.S. sanctions were announced last week on Cuba, Russia, and Iran, though none of the new restrictions has an immediate effect.

After weeks of internal deliberations, President Trump on June 16 partially fulfilled a campaign pledge by announcing a limited re-implementation of sanctions on Cuba. The new Cuba measures will only take effect after the relevant agencies implement new regulations, a revision process that will begin within the next 30 days, but may take several months.

Separately, on June 15, the U.S. Senate overwhelmingly passed new sanctions on both Iran and Russia; that legislation must still be voted on by the U.S. House of Representatives, but appears likely to pass with strong bipartisan support in the next several weeks.

Please click below for more information on what was a busy week in Washington.

Cuba: Presidential Memorandum Announcing New Restrictions

Russia: Senate Legislation Imposes New Primary, Secondary, and Sectoral Sanctions

Iran: Senate Legislation Imposes New Non-Nuclear Sanctions