Office of Foreign Assets Control (OFAC)

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.

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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.

Updates about the current situation in Venezuela have been coming in rapidly. Recently, we wrote about OFAC adding PdVSA to the SDN list. In this podcast, Crowell & Moring’s Cari Stinebower, Eduardo Mathison, and Mariana Pendás provide an overview of recent developments in Venezuela and explain what U.S. companies need to know about how these developments could impact trade.Compudemano

Click on an option below to access the podcast:

Crowell.com | SoundCloud

 

Crowell & Moring’s Latin America Practice helps clients navigate laws, regulations, and issues by jurisdiction; resolve international disputes and litigation; and assist with both domestic and cross-border corporate and M&A transactions. Additionally, we bring cultural and political sophistication within Latin America to our work and represent clients in both English and Spanish, among other languages. The Crowell & Moring Latin America practice is available to counsel on a wide range of issues. Please click here for contacts and additional information.

On February 11, 2019, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended two General Licenses (GLs) and revised three Frequently Asked Questions (FAQs) relating to the January 28, 2019 designation of Petróleos de Venezuela, S.A. (PdVSA) and the Government of Venezuela.

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The amended GLs provide further guidance on how to navigate the recently-issued sanctions on PdVSA.

Amended GLs:

General License 3C (“GL3C”): replaces GL3B by (a) extending the deadline to wind down financial contracts “involving, or linked to” so-called “GL3C Bonds” from 12:01 AM on March 3 to 12:01 AM on March 11, 2019, and (b) clarifying that the GL only authorizes U.S. Persons to purchase or invest in GL3C Bonds if such purchases or investments are ordinarily incident and necessary to the divestment or transfer of holding in GL3C Bonds.

General License 9B (“GL9B”): replaces GL9A with similar amendments, including by (a) extending the wind-down period to 12:01 AM on March 11, 2019 from March 3, 2019 and (b) clarifying and re-ordering the conditions and exceptions on the granted authorization.

For more information on GL3B and GL9A, please see our recent post.

Updated FAQs:

FAQ 650: addresses the issue of the expected level of due diligence required for the recently amended GLs. It also states that GL3C and GL9B authorize U.S. persons to facilitate the transfer or divestment of securities or bonds to non-U.S. persons.

FAQ 661: provides further explanation on what GL9B authorizes in terms of the PdVSA securities. It states that if a U.S. person decides to sell or transfer any interests in the PdVSA securities, it must be to a non-U.S. person. It also clarifies that U.S. persons may continue to hold their PdVSA securities while still being subject to certain restrictions on the sale in secondary markets.

FAQ 662: explains that GL3C allows U.S. persons to divest, transfer, or facilitate the divestment or transfer of any of GL3C Bonds to any non-U.S. person. Further, it states that U.S. persons may continue to hold their interests in the GL3C Bonds, but are subject to certain restrictions on the sale of those bonds in the secondary market.  Finally, it notes that while non-U.S. persons may continue to deal with the GL3C Bonds, if the transactions involve a U.S. Person or the U.S. financial system, they must comply with the terms of GL3C.

For more information on the PdVSA sanctions and guidance under any Venezuela-related sanction, please contact the Crowell & Moring team.

Crowell & Moring’s Latin America Practice helps clients navigate laws, regulations, and issues by jurisdiction; resolve international disputes and litigation; and assist with both domestic and cross-border corporate and M&A transactions. Additionally, we bring cultural and political sophistication within Latin America to our work and represent clients in both English and Spanish, among other languages. The Crowell & Moring Latin America practice is available to counsel on a wide range of issues. Please click here for contacts and additional information.

 

On January 31 and February 1, 2019, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended two General Licenses (GLs) relating to the January 28, 2019 designation of Petróleos de Venezuela, S.A. (PdVSA), amended two Venezuela-related Frequently Asked Questions (FAQs), and issued thirteen new FAQs.

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The new amendments and additions provide additional guidance for navigating the PdVSA sanctions and clarify, to some extent, the scope of authorization in each of the new GLs.

Amended GLs:

  • General License 3b (“GL3b”): replaces GL3a by authorizing certain transfers and divestment of funds, provided that they must be to a non-U.S. person. Importantly, it adds a new authorization to enable U.S. persons to engage in transactions necessary to facilitating, clearing, and settling trades of holdings in the bonds specified in the Annex, provided that such trades were placed before February 1, 2019, even if the whole trade was not completed prior to the issuance of the GL. Finally, this GL allows until March 3, 2019, transactions that are necessary to the wind down of financial contracts and other agreements (entered into prior to February 1, 2019).
  • General License 9a (“GL9a”): replaces GL9 by amending the term, “PdVSA-related debt” to “PdVSA securities,” and authorizing transactions necessary to facilitating, clearing, and settling trades of holdings in the PdVSA securities that were placed before January 28, 2019. GL9a also allows until March 3, 2019, transactions that are necessary to the wind down of financial contracts and other agreements (entered prior to February 1, 2019) linked to PdVSA securities issued prior to August 25, 2017. Lastly, GL9a updates the List of Bonds (Annex) by adding bonds issued by Petrozuata Finance Inc., Cerro Negro Finance Ltd., and La Electricidad de Caracas.

For more information on the original GL3a and GL9 please see our recent client alert.

Amended FAQs:

In conjunction with the Amended GLs, OFAC issued supplemental guidance in the form of FAQs, as follows:

FAQ 595 was amended to (a) state that GL5 remains in effect despite OFAC’s designation of PdVSA, and (b) include guidance on GL9, which authorizes transactions involving certain PdVSA debt, including the PdVSA 2020 8.5 percent bond.  FAQ 595 states that U.S. persons who are bondholders would be included under this exclusion.​

FAQ 648 defines “maintenance” under GL6 and GL11 to include all transactions that are necessary to continue operations. OFAC further defines the term as including “all transactions and activities ordinarily incident to performing under a contract or agreement in effect prior to the sanctions effective date (in the case of General License 6, January 8, 2019, and in the case of General License 11, January 28, 2019).” It will be key for companies to demonstrate in their transaction history that the transactions it will engage in are consistent and recurring from previous transactions. This FAQ also states that GL6 and GL11 could include renewing contracts if they are ordinarily incident and necessary to contracts in effect prior to the applicable sanctions effective date. However, this FAQ does highlight that U.S. financial institutions may not process transactions that will benefit PdVSA or any entity they possess 50% or more ownership.

NEW FAQs:

The new FAQs provide guidance on the seven newly issued GLs as well as explain the changes and authorizations in the amended GLs:

  • Address the expected level of due diligence necessary associated with the transfer of debt under GL9a;
  • Address bonds issued by PdVSA or any entity in which it owns, directly or indirectly, a 50% or greater interest;
  • Do not allow funds to be bought, sold, or engaged with any entity that appears in OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List);
  • Authorize, with certain exceptions, U.S. person employees of non-U.S. entities located in a country other than the United States or Venezuela to engage in transactions and activities prohibited by E.O. 13850 that are ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements involving PdVSA or entities owned, directly or indirectly, 50% or more by PdVSA that were in effect prior to January 28, 2019;
  • State that U.S. persons are allowed to purchase petroleum products from PdVSA as long as funds owed to PdVSA are placed in a blocked, interest-bearing account located in the United States;
  • State that U.S. persons in Venezuela are allowed to purchase gasoline products from PdVSA as long as it is done in a blocked, interest-bearing account located in the United States;
  • Address cash transactions with PdVSA;
  • Address exporting issues, while noting that the GLs do not generally extend to cover transactions with ALBA de Nicaragua (ALBANISA), meaning U.S. persons are generally prohibited from engaging in most transactions with ALBANISA today; and
  • Explain that the path to sanctions relief for PdVSA is through a bona fide transfer of control of the company to Interim President Juan Guaidó or a subsequent, democratically elected government.

 

For more information on the PdVSA sanctions and guidance under any Venezuela-related sanction, please contact the Crowell & Moring team.

 

Crowell & Moring’s Latin America Practice helps clients navigate laws, regulations, and issues by jurisdiction; resolve international disputes and litigation; and assist with both domestic and cross-border corporate and M&A transactions. Additionally, we bring cultural and political sophistication within Latin America to our work and represent clients in both English and Spanish, among other languages. The Crowell & Moring Latin America practice is available to counsel on a wide range of issues. Please click here for contacts and additional information.

On January 31, 2019, e.l.f. Cosmetics, Inc. (“ELF”) agreed to pay $996,080 to settle its potential civil liability for 156 apparent violations of the North Korea Sanctions Regulations (NKSR). Elf is a cosmetics company headquartered in Oakland, California.

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ELF appeared to have violated § 510.201(c)1 of the NKSR by importing 156 shipments of false eyelash kits from two suppliers located in the People’s Republic of China (PRC) that contained materials sourced by these suppliers from the Democratic People’s Republic of Korea (DPRK). The total value of the imported shipments equaled $4,427,019.26. The statutory maximum civil monetary penalty amount for the apparent violations was $40,833,633, and the base civil monetary penalty amount for the apparent violations was $2,213,510.

OFAC determined that throughout the time period in which the apparent violations occurred, ELF’s OFAC compliance program was either non-existent or inadequate. The company’s production review efforts focused on quality assurance issues pertaining to the production process, raw materials, and end products of the goods it purchased and/or imported. Until January 2017, ELF’s compliance program and its supplier audits failed to discover that approximately 80 percent of the false eyelash kits supplied by two of ELF’s China-based suppliers contained materials from the DPRK.

OFAC considered the following facts and circumstances pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. Part 501, Appendix A, in reaching the settlement amount. It found the following to be aggravating factors:

  • The apparent violations may have resulted in U.S.-origin funds coming under the control of the DPRK government, in direct conflict with the program objectives of the NKSR;
  • ELF is a large and commercially sophisticated company that engages in a substantial volume of international trade; and
  • ELF’s OFAC compliance program was either non-existent or inadequate throughout the time period in question.

OFAC found the following to be mitigating factors in this case:

  • ELF’s personnel do not appear to have had actual knowledge of the conduct that led to the apparent violations in this investigation;
  • ELF 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;
  • The apparent violations do not appear to constitute a significant part of ELF’s business activities; and
  • ELF cooperated with OFAC by immediately disclosing the apparent violations, signing a tolling agreement, and submitting a complete and satisfactory response to OFAC’s request for additional information.

ELF then terminated the conduct which led to the apparent violations and has undertaken the following steps to minimize the risk of recurrence of similar conduct in the future:

  • Implemented supply chain audits that verify the country of origin of goods and services used in ELF’s products;
  • Adopted new procedures to require suppliers to sign certificates of compliance stating that they will comply with all U.S. export controls and trade sanctions;
  • Conducted an enhanced supplier audit that included verification of payment information related to production materials and the review of supplier bank statements;
  • Engaged outside counsel to provide additional training for key employees in the United States and in China regarding U.S. sanctions regulations and other relevant U.S. laws and regulations; and
  • Held mandatory training on U.S. sanctions regulations for employees and suppliers in China and implemented additional mandatory trainings for new employees, as well as, regular refresher training for current employees and suppliers based in China.

The notice from OFAC regarding this enforcement action highlights the risks for companies that do not conduct full-spectrum supply chain due diligence when sourcing products from overseas, particularly in a region in which the DPRK, as well as other comprehensively sanctioned countries or regions, is known to export goods.

OFAC indicated that it encourages companies to develop, implement, and maintain a risk-based approach to sanctions compliance and to implement processes and procedures to identify and mitigate areas of risks. It also explained that such steps could include, but are not limited to, implementing supply chain audits with country-of-origin verification; conducting mandatory OFAC sanctions training for suppliers; and routinely and frequently performing audits of suppliers.

 

For more information and in response to any questions regarding OFAC regulations and supply chain compliance please feel free to contact us.

On January 28, 2019, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated Petróleos de Venezuela, S.A. (PdVSA) pursuant to Executive Order (E.O.) 13850 – “Blocking Property of Additional Persons Contributing to the Situation in Venezuela”. Further, OFAC amended General License 3, issued eight (8) new General Licenses, and published a new Frequently Asked Question (FAQ) on the new E.O. – “Taking Additional Steps to Address the National Emergency with Respect to Venezuela.”  Additional FAQs are anticipated.

by Anyul Rivas

The sanctions designation and the corresponding general licenses appear modeled after sanctions programs designed to protect and preserve a jurisdiction’s assets from kleptocratic or corrupt regimes for the next duly elected Administration – in this case, Interim President Juan Guaidó.  Treasury Secretary Mnuchin’s statement illustrates this point:

“T[he] designation of PdVSA will help prevent further diverting of Venezuela’s assets by Maduro and preserve these assets for the people of Venezuela.  The path to sanctions relief for PdVSA is through the expeditious transfer of control to the Interim President or a subsequent, democratically elected government.”

Similar programs include the Kuwait sanctions program and the current remaining sanctions in Iraq and Libya.   As a result, the sanctions on PdVSA are accompanied by general licenses allowing U.S. Persons (individuals and entities) to wind down or maintain certain transactions—in some instances, by mandating that payments flow into interest bearing blocked (or “frozen”) accounts.

For more information, please see Crowell’s Client Alert.

Crowell & Moring’s Latin America Practice helps clients navigate laws, regulations, and issues by jurisdiction; resolve international disputes and litigation; and assist with both domestic and cross-border corporate and M&A transactions. Additionally, we bring cultural and political sophistication within Latin America to our work and represent clients in both English and Spanish, among other languages. The Crowell & Moring Latin America practice is available to counsel on a wide range of issues. Please click here for contacts and additional information.

 

 

On December 20, 2018, President Trump signed into law the Nicaraguan Investment Conditionality Act (NICA Act). The sanctions listed in the NICA Act are additional and would be complementary to the current sanctions that have already been imposed on Nicaragua by the US Office of Foreign Assets Control (OFAC). The NICA Act aims to block any loan that could be issued by international financial institutions that could benefit the current Government of Nicaragua and will only allow international loans once the Department of State determines that the Government of Nicaragua is taking the appropriates steps towards democracy, corruption-free elections and institutions, strengthening the rule of law, respecting the freedom of the press and individuals and entities with opposing views, and combating corruption.

The NICA Act requires U.S. members of the various international financial institutions (IFIs) such as the World Bank and Inter-American Bank to use their “voice, vote and influence” to oppose the extension of loans and financial or technical assistance for projects related to Nicaragua. The NICA Act complements the current sanctions that were recently issued by the most recent Executive Order (E.O.) 13851, “Blocking Property of Certain Persons Contributing to the Situation in Nicaragua”, which gives the President the authority to designate asset-blocking sanctions and visa-rejections to any current or former officials (since 2007) of the Government of Nicaragua or any person acting on behalf of the Nicaraguan Government engaging in human rights abuse or corruption.

These new sanctions are already affecting Nicaragua, even if indirectly. According to published reports in Nicaragua, major U.S. banks including but not limited to Wells Fargo and Bank of America that have operated as correspondent banks for Nicaraguan financial institutions have notified their Nicaraguan correspondent banks that that they will be closing their accounts and ceasing their operations in and with Nicaragua. These banks are reportedly taking these steps as a result of the higher risks recently associated with the country.

These new sanctions imposed by the United States (described below) may lead other businesses to also cease or diminish their commercial relations with Nicaragua. At a minimum, Nicaragua is “high risk” for business transactions.

Executive Order 13851 Announced on November 27, 2018

On November 27, President Trump issued Executive Order (E.O) 13851, “Blocking Property of Certain Persons Contributing to the Situation in Nicaragua”. The E.O. establishes criteria for blocking property and interests of property that are or hereafter come within the possession or control of any U.S. person (including U.S. persons such as foreign branches located outside the United States) of persons determined by OFAC to be responsible for or complicit in—inter alia—serious human rights abuse or corruption in Nicaragua, as well as actions or policies that undermine democratic processes or institutions or that threaten the peace, security, or stability of Nicaragua.

Consistent with other Orders promulgated pursuant to the International Emergency Economic Powers Act (“IEEPA”), the new E.O. specifically prohibits:

  1. Receiving and contributing funds, goods, or services by or to benefit any person designated by the E.O.;
  2. Any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set in this E.O.Pursuant to this E.O., OFAC added two individuals associated with the Government of Nicaragua to its Specially Designated Nationals (SDN) List:

Pursuant to this E.O., OFAC added two individuals associated with the Government of Nicaragua to its Specially Designated Nationals (SDN) List:

  • Rosario Murillo de Ortega (also known as “La Chayo”) – Vice-President and First Lady of Nicaragua.
  • Nestor Moncada Lau (also known as “Chema”) – National Security Advisor and private Secretary of President Daniel Ortega

Global Magnitsky Sanctions Issued on July 5th, 2018

These recently issued sanctions build upon the previously announced Global Magnitsky Sanctions designations of the following three individuals who were identified for their close relationships to the Nicaraguan regime for human rights abuses and acts of corruption:

  • Francisco Javier Diaz Madriz – Current Acting Director General of the National Police (was a commissioner at the time these sanctions were issued).
  • Fidel Antonio Moreno Briones – Leader of the government-controlled Sandinista Youth.
  • Jose Francisco Lopez Centeno – Vice-President of ALBANISA (51% owned by Venezuela’s state-owned PDVSA), and President of Petronic (Nicaragua’s state-owned oil company).

The E.O. also authorizes future designations of any person that has been an official of the government of Nicaragua since January 10, 2007 and is determined to have engaged or attempted to engage in:

 

  • Serious human rights abuse in Nicaragua;
  • Actions or policies that undermine democratic processes or institutions in Nicaragua;
  • Actions or policies that threaten the peace, security, or stability of Nicaragua;
  • Any transaction or series of transactions involving deceptive practices or corruption by, on behalf of, or otherwise related to the Government of Nicaragua, such as the misappropriation of public assets or expropriation of private assets for personal gain or political purposes, corruption related to government contracts, or bribery.

The E.O. defines the term “Government of Nicaragua” as any political subdivision, agency, or instrumentality thereof, including the Central Bank of Nicaragua, and any person owned or controlled by, or acting for or on behalf of, the Government of Nicaragua. This definition bears a resemblance to recent sanctions targeting Venezuela – but without the general licenses.

Companies doing business in Nicaragua must exercise caution when engaging in any transactions with any entity that may be owned (50% or more) by any of the newly sanctioned Nicaraguan officials, as the link to these individuals may not be obvious. Consistent with past approaches, it appears that an individual high risk for corruption risk is also high risk for sanctions exposure. Compliance programs for businesses continuing ties to Nicaragua should continue to include robust beneficial ownership due diligence, supply chain transparency, record keeping, and, potentially, audits of counter parties to ensure the same high standards apply throughout the transaction chain.

 

 

Crowell & Moring will continue to monitor the situation in Nicaragua, including any potential effects of any upcoming sanction(s) or legislation.

On November 5, 2018, in accordance with President Trump’s May 8, 2018 decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) issued an amendment to the Iranian Transactions and Sanctions Regulations (ITSR). The amendment followed on the expiration of the final 180-day wind-down period for transactions previously authorized by “General License H” and for the re-imposition of the remaining “secondary sanctions,” which concluded November 4, 2018, at 11:59 PM.

This action, along with the August 6, 2018 issuance of a new Executive Order (E.O. 13846), reinstates a full U.S. embargo against Iran, and fully re-imposes all U.S. sanctions which had been suspended or waived since the implementation of the JCPOA in January 2016.

Below, we summarize OFAC’s action, as well as related actions taken by the State Department to authorize certain waivers of these sanctions. OFAC:

  1. Amended the ITSR to revise 31 C.F.R. § 560.211(c) to implement the authority granted in E.O. 13846 to block all interests in property in the United States, or under the control of a U.S. Person, of a person that has been designated for having either –
    1. Materially assisted or provided support to the Government of Iran in the purchase or acquisition of U.S. currency or precious metals on or after August 7, 2018.
    2. Materially assisted or provided support to the National Iranian Oil Company (NIOC), the Naftiran Intertrade Company (NICO), or the Central Bank of Iran (CBI) on or after November 5, 2018.
  2. Removed the EO 13599 non-SDN List (denoting blocked persons that meet the definition of “Government of Iran” and “Iranian financial institution”) and relisted more than 700 individuals and entities, including Bank Melli, National Iranian Tanker Company (NITC), and hundreds of others, on the Specially Designated Nationals and Blocked Persons List (SDN List).
  3. Amended the existing general license provided in 31 C.F.R. § 560.543 related to the sale of real property in Iran to further authorize U.S. persons to engage in all transactions necessary and ordinarily incident to the sale of personal property in Iran and to transfer the proceeds to the United States, provided that the property was either acquired before the individual became a U.S. Person, or was inherited from persons in Iran.

In parallel, OFAC also issued a number of frequently asked questions (FAQs), which generally provide guidance regarding how OFAC will interpret its Iran-related authorities going forward. This includes, in addition to other things, the following notes:

  • General Summary: The provision of goods or services, or extension of debt or credit, to an Iranian counterparty after November 4, 2018, even pursuant to contracts that were lawful and in effect prior to the U.S. withdrawal from the JCPOA (May 8, 2018) may result in the imposition of sanctions unless otherwise authorized by OFAC. (FAQ 630)
  • Non-U.S. Persons Receiving Payment for pre-Nov. 5 Activity: However, non-U.S., non-Iranian persons may receive payment for goods or services fully provided or delivered prior to the expiration of the relevant wind-down period and pursuant to contracts in effect prior to the U.S. withdrawal from the JCPOA (May 8, 2018) after November 5, 2018. (FAQs 631, 634)
  • U.S. Persons Receiving Payment for pre-Nov. 5 Activity: In contrast, U.S. persons, and non-U.S. entities owned or controlled by U.S. persons, will require prior authorization from OFAC to receive payment on or after November 5, 2018 for goods or services fully provided or delivered prior to the expiration of the relevant wind-down period and pursuant to contracts in effect prior to the U.S. withdrawal from the JCPOA on May 8, 2018. (FAQ 635)
  • U.S. Persons and New SDNs: U.S. persons, and non-U.S. entities owned or controlled by U.S. persons, require prior authorization from OFAC to receive any payment involving any of the re-listed SDNs from the former EO 13599 List. (FAQ 636)
  • Insurance: OFAC clarified that non-U.S. insurers, reinsurers, and brokers could face U.S. “secondary” sanctions for processing claims after November 5, 2018, even if those claims relate to “incidents” that occurred prior to November 5, 2018 and during a period in which the underlying activity and insurance policy were not prohibited.

In addition to OFAC’s actions, the State Department issued guidance on two sets of waivers that it has issued for sanctions under its authority. Specifically:

  • Significant Reduction Exemption for Crude Oil Importers: The State Department noted that it was granting a “significant reduction exemption” to China, India, Italy, Greece, Japan, South Korea, Taiwan, and Turkey. As a result, these countries and importers in these countries will not face “secondary” sanctions risk for importation of Iranian crude oil. The State Department specifically noted that it continues to negotiate with these countries to “get all the nations to zero [oil imports].”
  • Civil Nuclear Energy Waivers: Second, the State Department stated that it will not impose “secondary” sanctions related to ongoing nonproliferation projects at Arak, Bushehr, and Fordow as an “interim measure that preserves oversight of Iran’s civil nuclear program.” These waivers do not, however, extend to any “new civil nuclear projects.” The State Department specifically noted that these waivers are conditional upon “the cooperation of the various stakeholders” and can be rescinded at any time.

These amendments represent the final step in re-imposing the full suite of U.S. primary and secondary sanctions after President Trump’s May 8, 2018 decision to fully withdraw from the JCPOA, returning the U.S. sanctions program to its pre-JCPOA state.

U.S. persons and non-U.S. persons that are owned or controlled by U.S. persons are now prohibited from conducting virtually all Iran-related activity without a license.

Non-U.S. persons face renewed “secondary” sanctions risks for conducting certain types of transactions with sanctioned persons (e.g., Iranian persons on the SDN list) and Iranian industries (e.g., petroleum, petrochemicals, energy, shipping, shipbuilding, precious metals, etc.).

Despite widespread global opposition to these developments—including the passage of updated “Blocking” legislation in the European Union—we expect the Administration to aggressively enforce these new authorities to increase the perceived pressure on Iran, both through expanded enforcement of “primary” sanctions (e.g., aggressive investigation and imposition of penalties with respect to perceived violations) and through increased numbers of “secondary” sanctions designations.

 

 

 

As a consequence of U.S. and UN sanctions on the Democratic People’s Republic of Korea (DPRK or North Korea), companies increasingly need to coordinate compliance efforts across the typically distinct worlds of economic sanctions and import/customs compliance. This is particularly necessary with respect to identifying, and mitigating the risk of DPRK-related labor in supply chains. Below, we summarize first the expanded scope of UN restrictions on the DPRK, including the prohibition on the use of DPRK labor, and then second, how those rules have been implemented and expanded in the United States in increasingly complex ways.

Part I:    United Nations Restrictions:

The United Nations has maintained limited sanctions on North Korea for years, but in 2017 it expanded those sanctions in a number of material ways.  Of relevance to this analysis, the UN Security Council (UNSC) reached a determination that all DPRK labor outside of North Korea poses a high forced labor-related risk.  As a result, the UNSC first required that all new work visas for DPRK citizens be approved by the UNSC, before expanding that restriction in December 2017 (UNSCR 2397) to require all UN Member States to repatriate all DPRK workers currently employed in their territory “immediately but not later than 24 months” (i.e., December 2019).  Therefore, for example Chinese and Taiwanese companies could currently employ DPRK citizens, but they will be required to reduce that employment and ultimately curtail it, or risk violation of UN resolutions.

Part II:   U.S. Restrictions:

In parallel, the United States has implemented a growing array of restrictions that also target DPRK labor.  Below, we summarize the relevant (a) U.S. sanctions prohibiting transactions with the DPRK and (b) a parallel set of import requirements presumptively prohibiting products manufactured with DPRK nationals in the supply chain:

(1) U.S. Sanctions on the DPRK:

The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has maintained a comprehensive embargo on the DPRK since 2017 and more limited restrictions for decades. Today, OFAC prohibits the export of any goods or services to the DPRK  and any transactions with the Government of North Korea or the Workers Party of North Korea.  OFAC generally considers a transaction with a DPRK national ordinarily resident in the DPRK to be prohibited as an indirect export of a service to the DPRK.

Importantly, for this analysis, OFAC also prohibits the importation of any goods or services from the DPRK, even items with only a de minimis percentage DPRK content (e.g., a $10,000 widget produced in Russia with a $2 North Korean origin part would be considered North Korean origin and prohibited entry into the United States).

Over the last few months, we have seen that OFAC has aggressively expanded its enforcement of these provisions, including designation of persons involved in DPRK trade, and issuing advisories to the shipping community about DPRK risks in the supply chain.  See https://home.treasury.gov/news/press-releases/sm458; https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/dprk_vessel_advisory_02232018.pdf; and https://www.treasury.gov/resource-center/sanctions/Programs/Documents/dprk_supplychain_advisory_07232018.pdf.

(2) DPRK-Related Import Prohibitions:

In parallel, since August 2017, U.S. Customs and Border Protection (“CBP”) has maintained a North Korean related import restriction.  Specifically, pursuant to Section 321(b) of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), CBP utilizes a presumption that any “significant goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part by the labor of North Korean nationals or citizens” is produced through forced labor and therefore is prohibited for entry into the United States.  The presumption can be rebutted only through “clear and convincing” evidence that the DPRK nationals are not forced labor (e.g., a demonstration that they are asylees or refugees in a third country).  To assist importers in meeting their “reasonable care” obligation to ensure that goods entering the United States meet these new provisions, the Department of Homeland Security has published CAATSA Section 321(b) Guidance on due diligence steps importers can take, while CBP has noted that the seafood industry presents a high risk of DPRK nationals.  See e.g., https://www.cbp.gov/newsroom/spotlights/cbp-leads-delegation-thailand-discusses-forced-labor-concerns-fishing-industry.

Part III: Significant Points for Importers, Exporters and U.S. Companies

The net result of the overlap of the above restrictions is:

  • All U.S. and non-U.S. companies are prohibited to grant new work permits to DPRK nationals, except DPRK nationals seeking an asylum or refugee status.
  • U.S. companies are prohibited under U.S. sanctions law from directly or indirectly exporting goods or services to the DPRK, including transacting with persons ordinarily resident in the DPRK.
  • U.S. companies are prohibited under U.S. sanctions to import any products produced in whole or in part (no matter how small the percentage) with DPRK origin material into the United States.
  • All products manufactured in whole, or in part, with DPRK national labor are presumptively considered to be produced with forced labor and are therefore prohibited to enter the United States, unless the importer can demonstrate through “clear and convincing” evidence that the DPRK nationals were not forced labor (e.g., by demonstrating they are asylum seekers).

 

On July 31, 2018, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Ukraine-/Russia-related General License 13C, which replaces and supersedes General License 13B in its entirety. 

General License 13C extends to 12:01 a.m. October 23, 2018, the “authorized period to make certain divestment and transfer activities related to debt, equity, or other holdings in EN+ Group, GAZ Group, or United Company RUSAL PLC, or in entities in which those persons own, directly or indirectly, a 50 percent or greater interest, that were issued by Irkutskenergo, GAZ Auto Plant, or Rusal Capital Designated Activity Company (Other Issuer Holdings), subject to certain conditions and exceptions.” 

Previously, General License 13B had authorized the same activity, but only until 12:01 a.m. August 5, 2018.

Further information on this topic in may be found in FAQs 570 and 571 on OFAC’s website.