Office of Foreign Assets Control (OFAC)

The Countering America’s Adversaries Through Sanctions Act (CAATSA) was signed into law by President Trump on August 2, 2017. This put in motion several deadlines, three of which are due next Monday, January 29, 2018.

Based on past experience, the Trump administration may not meet these deadlines. Nonetheless, it is clear that the impact of these sanctions will be felt differently by different sectors of the U.S. economy. This is an opportunity for industries to participate in a dialogue with State and the key sanctions architects to seek ways to mitigate the disruption of any sanctions while preserving their intended effect on Russian interests.

Section Title Action
231 Imposition Of Sanctions With Respect To Persons Engaging In Transactions With The Intelligence Or Defense Sectors Of The Government Of The Russian Federation. 231(a) states, “The President shall impose five or more of the sanctions described in section 235 with respect to a person the President determines knowingly, on or after such date of enactment, engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.”

 

Section Title/Responsible Agency Summary
241 Report On Oligarchs And Parastatal Entities Of The Russian Federation.

This report is to be submitted by the Secretary of the Treasury in consultation with the Director of National Intelligence and the Secretary of State.

241(a)(1) – (a)(5) describe the required elements of the report:

·         The identification and assessment of senior foreign political figures and oligarchs in the Russian Federation;

·         An assessment of Russian parastatal entities;

·         The exposure of key U.S. economic sectors to these entities;

·         The likely effects of imposing debt and equity restrictions on parastatal entities, as well as adding them to Treasury’s Specially Designated Nationals and Blocked Persons List (SDN); and

·         The potential impacts of imposing secondary sanctions on persons or entities identified in this report.

 

Section Title/Responsible Agency Summary
243 Report On Illicit Finance Relating To The Russian Federation.

This report is to be submitted by the Secretary of the Treasury in consultation with the Director of National Intelligence and the Secretary of State.

243(a) states this report will describe “in detail the potential effects of expanding sanctions under Directive 1 (as amended), dated September 12, 2014, issued by the Office of Foreign Assets Control under Executive Order No. 13662 (79 Fed. Reg. 16169; relating to blocking property of additional persons contributing to the situation in Ukraine), or any successor directive, to include sovereign debt and the full range of derivative products.”

 

In December 2017, the Government of Venezuela announced the adoption of a new digital currency called Petro—backed by Venezuelan oil resources—in what it described as an attempt to avoid the impact of U.S. Financial Sanctions. On January 19, OFAC published a new Frequently Asked Question (FAQ) offering its view that the proposed currency may be exposed to U.S. sanctions.

As previously reported by Crowell, on August 24, 2017, President Trump issued Executive Order (E.O.) 13808, prohibiting U.S. persons from dealing in new debt (of certain maturities)bonds (previously issued ones other than those identified by general license), and all new securities with the Government of Venezuela, and entities it owns or controls, including Petróleos de Venezuela (PDVSA) (but generally excluding CITGO Holdings Inc.).

According to OFAC, investing in the Petro could infringe these requirements.

Specifically, while OFAC offers very little insight into the structure of the Petro, the FAQ states that the new digital currency would carry rights to receive commodities in specified quantities at a later date. The new FAQ explains that a digital currency with these characteristics “would appear to be an extension of credit” to the Venezuelan Government, and therefore, U.S. persons engaging in transactions involving the Petro “may be exposed to U.S. sanctions risk.” The E.O. defines “new debt” broadly, including extension of credit. The FAQ makes no reference to the duration of any investment, but appears to assume that any investment would be for a maturity in excess of that permitted under U.S. sanctions.

Since its announcement, the Petro has been subject to controversy. The Venezuelan Government alleges that the new currency is intended to ease the deep economic recession in the country. However, commentators have expressed concern that the new Petro not only faces risks of corruption, but also is likely to have its own challenges under Venezuelan law. For instance, Article 3 of Venezuela’s Hydrocarbons Law establishes that oil reserves are part of the public domain, and as such, are not transferable. In early January, Venezuela’s Legislature rejected the issuance of the Petro, on the argument that it is illegal and unconstitutional. President Maduro, however, recently announced that the Petro is set to launch, ignoring the Legislature’s powers.

The Petro is also being closely watched by observers in Russia. Having been subject to financial sanctions that closely resemble those in force against Venezuela since July 2014, Russia recently announced it is considering following Venezuela’s steps and adopting a cryptocurrency it has also stated is intended to limit the impact of U.S. Sanctions.

Depending on how that currency is structured, OFAC’s FAQ on the Petro may give some insight into how it would view a similar effort undertaken by Russia.

For more details on Venezuela’s Financial Sanctions, please see Crowell’s Client Alerts from September and November 2017.

 

On Friday, January 12, 2018, President Trump agreed for the third time to waive the application of certain nuclear-related sanctions on Iran, pursuant to the United States’ commitments under the Joint Comprehensive Plan of Action (JCPOA). Pursuant to the JCPOA, the U.S. President is required to regularly “waive” the application of certain U.S. sanctions on Iran. Failing to issue the waivers would cause these sanctions to be re-imposed, which arguably would constitute a violation by the United States of its commitments under the JCPOA. (In contrast to President Trump’s failure to certify Iran’s compliance with the JCPOA to the U.S. Congress in October, which was a requirement of U.S. law but had no direct effect on the JCPOA.)

However, President Trump stated that this would be the last time he would issue these waivers unless the European signatories to the deal (Germany, France, and the United Kingdom) agree to rewrite the nuclear deal within the next 120 days.

The 120-day deadline reflects the date on which the next waiver is due. As shown in the chart below, the United States must waive portions of four laws on staggered timelines to meet its commitments under the JCPOA. The next deadline is a waiver of sections of the National Defense Authorization Act (NDAA) for FY 2012, which would need to be renewed on or before May 13, 2018.

U.S. Sanctions Relief under the JCPOA

Law Must be Renewed Every Last Decision Update Current Decision Expiration Date
National Defense Authorization Act (NDAA) for FY 2012 120 days January 13, 2018 May 13, 2018
Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) 180 days Mid-Jan 2018 Mid-July 2018
Iran Sanctions Act (ISA) 180 days Mid-Jan 2018 Mid-July 2018
Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) 180 days Mid-Jan 2018 Mid-July 2018

 

President Trump’s ultimatum has already met strong resistance in both Europe and Iran. It is unknown how successful U.S. diplomacy will be in building support to renegotiate the JCPOA. There is also the impact of the recent populist uprising in Iran to consider.

Office of Foreign Assets Control (OFAC)

  • On December 6, OFAC announced that DENTSPLY SIRONA Inc. (DSI), a U.S. company incorporated in Delaware, the successor in interest to DENTSPLY International Inc. (DII), agreed to pay $1.2 million to settle its potential civil liability for 37 apparent violations of the Iranian Transactions and Sanctions Regulations. Between 2009 and 2012, DII subsidiaries exported 37 shipments of dental equipment and supplies from the U.S. to third countries, with knowledge or reason to know the goods were ultimately destined for Iran. OFAC determined this was a non-egregious case and that DII did not voluntarily disclose the apparent violations.
    • Aggravating factors included:
      • The subsidiaries acted willfully and had knowledge or reason to know the goods were destined for Iran;
      • Management knew of the apparent violations; and
      • DENTSPLY is a large and commercially sophisticated company with knowledge of U.S. sanctions requirements.
    • Mitigating factors included:
      • DENTSPLY had not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the first transaction, although DENTSPLY was previously the subject of a settlement involving substantially similar apparent violations in 2001;
      • The harm to the ITSR program objectives was limited because the exports were likely eligible for a specific license;
      • DENTSPLY took remedial steps, including voluntarily expanding the scope of the review to include a full, company-wide inquiry following a subpoena to one of its subsidiaries that led to the subsequent revelations involving the other subsidiary; and
      • DENTSPLY cooperated with OFAC’s investigation, including by providing detailed and well-organized information for its review, and by agreeing to toll the statute of limitations for a total of 1,104 days.

Despite increased pressure from the U.S. and the UN Security Council, human rights groups estimate about 16 countries still host North Korean laborers. A recent estimate by the Korea Institute for National Unification in Seoul puts the number of North Korean workers overseas at around 147,000. Most work in China and Russia, but reports continue to surface of North Korean workers even in EU countries.

In Poland for instance, a recent New York Times report found North Korean workers in a number of industries, including agriculture, the manufacture of shipping containers, and even ship construction. The report also includes the names of companies – Armex (reportedly linked to a UN sanctioned company called Rungrado General Trading) and Wonye – that have allegedly been involved in supplying such workers.

It was not until October 2017 that the EU agreed to stop renewing work permits for North Korean labor. However, media reports indicate local governments in Poland continued to approve such permits after the EU’s decision. New legislation took effect in Poland on January 1, 2018, barring new foreign worker permits in Poland, but there is reportedly little coordination between provincial governments and the national government on these permits.

The increased focus on imports produced by North Korean labor in third countries – now subject to exclusion from the United States, as well as exposing U.S. persons to OFAC sanctions – creates a need for enhanced due diligence in supply chain operations. Reports like these can help companies identify such products and transactions, something that is generally very difficult to do.

 

On December 27, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended the Iraq Stabilization and Insurgency Sanctions Regulations to implement Executive Order 13668 of May 27, 2014 (“Ending Immunities Granted to the Development Fund for Iraq and Certain Other Iraqi Property and Interests in Property Pursuant to Executive Order 13303, as Amended.”).

E.O. 13668 terminated the protections granted under amended E.O. 13303 in response to the changed circumstances in Iraq, including the Government of Iraq’s progress in resolving and managing the risk associated with outstanding debts and claims arising from actions of the previous regime. This action removes the regulatory provisions that implemented the protections granted under amended E.O. 13303.

On November 9, OFAC published two new Frequently Asked Questions (FAQs) with regard to Venezuela-related sanctions pursuant to Executive Order 13808 (E.O.), issued on August 24. The E.O. prohibits U.S. persons from dealing in new debt, bonds and securities with the Government of Venezuela and Petróleos de Venezuela (PDVSA).

FAQ 547 addresses whether U.S. persons can participate in meetings about restructuring outstanding debt by the Venezuelan Government or PDVSA. OFAC explains that provided that no SDNs are involved in any restructuring efforts, General License 3 of the E.O. authorizes U.S. persons to engage in transactions related to certain bonds specified in the Annex to General License 3. Notably, General License 3 does not authorize transactions involving new debt of the Government of Venezuela—for a maturity of more than 30 days—or to PDVSA—for a maturity of more than 90 days. Therefore, while OFAC appears to allow U.S. persons to participate in restructuring negotiations covered by General License 3, it appears that any restructuring agreement resulting from such negotiations would yet require specific government authorization. OFAC defines “new debt” broadly, including, for example, extensions of credit.

FAQ 548 relates to whether “PDVSA” includes all PDVSA subsidiaries for purposes of the E.O. The FAQ clarifies that the E.O. extends to all subsidiaries of PDVSA unless authorized by OFAC. In particular, General License 2 authorizes transactions with CITGO Holding, Inc., and any of its subsidiaries. CITGO Holding, Inc. is a subsidiary of PDVSA and has operations in the United States.

For more details on the E.O. issued on August 24, see Crowell’s Client Alert.

For more information, contact: Cari Stinebower, Jeff Snyder, Dj Wolff, Eduardo Mathison

Office of Foreign Assets Control (OFAC)

  • On November 17, American Express Company (AMEX) agreed to pay $204,277 to settle its potential civil liability for 1,818 alleged violations of the Cuban Assets Control Regulations (CACR). The violations occurred between 2009 and 2014, at which time a wholly-owned subsidiary of AMEX, Alpha Card Group, owned 50 percent of BCC Corporate SA (BCCC), a Belgium-based credit card issuer and corporate service company. Alpha Card and BCCC failed to implement controls to prevent its credit cards from being used in Cuba. AMEX and BCCC voluntarily self-disclosed the violations. OFAC determined this was a non-egregious case.
    • Aggravating factors included:
      • Personnel within both Alpha Card and BCCC had reason to know of the conduct that led to the apparent violations.
      • Despite Alpha Card’s business model prior to its acquisition of BCCC in March 2009, in which it dealt exclusively with AMEX-related products (and therefore had insight into all the parties involved in any transactions throughout the network), none of the companies involved appear to have appreciated the possibility or risk that BCCC-issued credit cards could be used in Cuba, and the company should have taken steps to assess the level of sanctions risk, and related controls, for BCCC-issued credit cards.
      • The apparent violations resulted in harm to U.S. sanctions program objectives at the time they occurred.
      • AMEX is a large and commercially sophisticated financial institution.
      • During OFAC’s investigation, AMEX and BCCC provided certain information on multiple occasions that was verifiably inaccurate or incomplete, including material omissions.
    • Mitigating factors included:
      • BCCC has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the apparent violations.
      • Upon discovering the apparent violations, AMEX took swift and appropriate remedial action.
      • AMEX and BCCC voluntarily self-disclosed the apparent violations to OFAC.
      • BCCC signed a statute of limitations tolling agreement and tolling agreement extensions.
  • On November 28, OFAC issued a Finding of Violation to Dominica Maritime Registry, Inc. (DMRI) of Fairhaven, Massachusetts, for a violation of the Iranian Transactions and Sanctions Regulations (ITSR). On July 4, 2015, the company executed a binding Memorandum of Understanding, which OFAC determined to be a contingent contract, with the National Iranian Tanker Company (NITC), an entity of the Government of Iran. The company did not voluntarily disclose the violation. OFAC ruled it a non-egregious case.
    • Aggravating Factors:
      •  DMRI failed to exercise a minimal degree of caution or care by executing a contingent contract with an entity it knew was listed on the SDN List at the time of the violation.
      • DMRI executives had actual knowledge of, and actively participated in, the conduct the led to the violation, and were aware of NITC’s status when DMRI executed the contingent contract.
      • DMRI undermined the policy objectives of the ITSR by dealing in the blocked property of a Government of Iran entity identified on the SDN List.
    • Mitigating factors included:
      • DMRI had not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transaction giving rise to the violation.
      • DMRI is a small company.
      • DMRI took remedial actions, including engaging trade counsel to assist it in understanding its obligations under U.S. sanctions laws, updating its OFAC compliance procedures, and undertaking a process to establish an OFAC compliance training program for all employees.
    • OFAC determined a Finding of Violation was the appropriate enforcement response because DRMI is a small company, the scope of the contract at issue was limited, and there was no performance on the contract.

Bureau of Industry and Security (BIS)

  • On November 20, BIS announced a Settlement Agreement with Pilot Air Freight, LLC (a.k.a. Pilot Air Freight Corp.) of Lima, Pennsylvania, to settle potential civil liability for one alleged violation of the Export Administration Regulations (EAR). In February 2015, Pilot allegedly aided or abetted an attempted unlicensed exported to IKAN Engineering Services in Pakistan, an entity on BIS’ Entity List. The item was an ultrasonic mill cutting machine controlled for Anti-Terrorism reasons, and valued at more than $250,000.
    • Pilot was assessed a civil penalty of $175,000.
    • The company agreed to complete two external audits of its export controls compliance program.

For more information, contact: Jeff Snyder, Edward Goetz

Department of Justice

  • On October 4, a retired U.S. Army colonel was charged with one count of conspiracy to violate the Foreign Corrupt Practices act (FCPA) and the Travel Act and one count of conspiracy to commit money laundering in an indictment filed in the District of Massachusetts. The indictment is connected to his alleged role in a scheme involving a planned $84 million port development project in Haiti.

Office of Foreign Assets Control (OFAC)

  • On October 5, OFAC announced BD White Birch Investment LLC (White Birch USA) of Greenwich, Connecticut, agreed to pay $372,465 to settle its potential civil liability for three alleged violations of the Sudanese Sanctions Regulations. The company facilitated the sale and shipment of Canadian-origin paper from Canada to Sudan in 2013.
    • Aggravating factors included:
      • “(1) White Birch USA exhibited reckless disregard for U.S. sanctions requirements by failing to exercise a minimal degree of caution or care with regard to the apparent violations;
      • (2) White Birch Canada personnel appear to have attempted to conceal the ultimate destination of the goods from its bank (a U.S. financial institution serving as the confirming bank on a letter of credit) with respect to two of the apparent violations;
      • (3) multiple White Birch USA personnel, including individuals in supervisory or managerial positions, had actual knowledge of and were actively involved in, or had reason to know of, the conduct that led to the apparent violations;
      • (4) White Birch USA is a large and commercially sophisticated company;
      • (5) White Birch USA’s compliance program was either non-existent or inadequate at the time of the apparent violations; and
      • (6) White Birch USA did not initially cooperate with OFAC’s investigation into the apparent violations, particularly when it submitted materially inaccurate, incomplete, and/or misleading information to OFAC.”
    • Mitigating factors included:
      • “(1) White Birch USA has no prior OFAC sanctions history, and has not received a penalty notice or Finding of Violation in the five years preceding the earliest date of the transactions giving rise to the apparent violations; and
      • (2) White Birch USA has reported to OFAC that it has taken remedial steps in response to the apparent violations, including by updating the company’s employee manual to include additional information concerning economic sanctions, implementing new compliance policies, and administering company-wide OFAC compliance training.”

For more information, contact: Jeff Snyder, Edward Goetz

Bureau of Industry and Security

  • On August 31, BIS announced a Settlement Agreement with Narender Sharma and his company Hydel Engineering Products (Hydel/Sharma), both of Rumpur Bushahr, India. Hydel/Sharma was charged with one count of Conspiracy to Export Items from the U.S. to an Iranian Government Entity without Authorization. The purpose of the conspiracy was to sell and export U.S.-origin waterway barrier debris systems and related components to Iran via third countries. The company was assessed a penalty of $100,000 and agreed to a five-year denial of export privileges, suspended for a five-year probationary period.
  • On September 25, BIS announced a Settlement Agreement with Millitech, Inc., of Northampton, Massachusetts to settle 18 alleged violations of the Export Administration Regulations (EAR). Millitech is alleged to have engaged in prohibited conduct when it exported multiplier chains, controlled under Export Control Classification Number (ECCN) 3A001.b.4, to China and Russia without a license. The company was assessed a civil penalty of $230,000.

Department of Justice and Securities and Exchange Commission

  • Telia Company AB, a Stockholm-based international telecommunications company, entered into a deferred prosecution agreement in connection with a criminal information filed on September 21 in the Southern District of New York charging the company with conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA). Its Uzbek subsidiary, Coscom LLC, pled guilty to the same charge. Telia agreed to pay a total criminal penalty of $274,603,972 to the U.S., including a $500,000 criminal fine and $40 million forfeiture on behalf of Coscom. Separate settlements were made with the Securities and Exchange Commission and the Public Prosecution Service of the Netherlands in related proceedings. The total amount of criminal and regulatory penalties paid to U.S., Dutch, and Swedish authorities will be $965,773,949.
    • In its press release, the DOJ stated, “According to the companies’ admissions, Telia and Coscom, through various managers and employees within Telia, Coscom and affiliated entities, paid approximately $331 million in bribes to an Uzbek government official, who was a close relative of a high-ranking government official and had influence over the Uzbek governmental body that regulated the telecom industry. The companies structured and concealed the bribes through various payments including to a shell company that certain Telia and Coscom management knew was beneficially owned by the foreign official. The bribes were paid on multiple occasions between approximately 2007 and 2010, so that Telia could enter the Uzbek market and Coscom could gain valuable telecom assets and continue operating in Uzbekistan. Certain Telia and Coscom management also contemplated structuring an additional bribe payment in late 2012, after Swedish media began reporting about Telia’s corrupt payments in Uzbekistan, Swedish authorities began a criminal investigation and Telia opened an internal investigation.”

Directorate of Defense Trade Controls

  • On September 11, DDTC announced Bright Lights USA, Inc. settled 11 allegations that it violated the International Traffic in Arms Regulations (ITAR) with unauthorized exports of defense articles, including the export of technical data to a proscribed destination. Bright Lights voluntarily disclosed the alleged violations and agreed to pay a civil penalty of $400,000. DDTC did not seek disbarment because the company cooperated with the Department’s review, expressed regret, and took steps to improve its compliance program.
    • Among other things, between 2010 and 2012, the company exported ITAR-controlled technical data under Categories II, IV, and VII without authorization. Four of these were to China. The company also misclassified items under the Export Administration Regulations and exported them without a license to non-prohibited destinations.

Office of Foreign Assets Control

  • On September 26, OFAC announced Richemont North America, Inc., doing business as Cartier, agreed to pay $334,800 to settle its potential civil liability for four alleged violations of the Foreign Narcotics Kingpin Sanctions Regulations (FNKSR). Between 2010 and 2011, Cartier exported four shipments of jewelry to an entity on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List).

For more information, contact: Jeff Snyder, Edward Goetz