On February 5, the U.K.’s Chancellor of the Exchequer was asked the following:

“How many suspected breaches of financial sanctions were reported to the Treasury’s Office of Financial Sanctions Implementation (OFSI) in 2017; what the value was of those breaches; and how many investigations into breaches, by sanctions regime, have (a) been opened and (b) are ongoing since new powers to impose penalties under the Policing and Crime Act entered into force.”

Initially, the government reported 118 suspected breach cases worth £117 million had been reported to OFSI.

Now less than two weeks later they have revised the answer to 133 breach cases worth £1.4 billion.

Regarding the last question, the government said “as of April 2017, a total of 103 suspected breaches have been reported to OFSI since OFSI gained the ability to impose monetary penalties under the Policing and Crime Act 2017…”

On 13 February, the EU published an Information Note to EU business operating and/or investing in Crimea/Sevastopol.

The new version of this note includes updates about relevant regulations as well as more information about precautions to take when doing business in the region.

On the last page, it provides links to further information on the implementation of restrictive measures in the following documents:

  • Guidelines on implementation and evaluation of restrictive measures, see here
  • Best Practices for effective implementation of restrictive measures, see here
  • Guidelines on the implementation of the prohibition on making indirectly available of funds and economic resources and the notions of ownership and control, see here
  • Frequently Asked Questions (FAQ), click here
  • EU sanctions map, see here

As reported in Crowell & Moring’s previous post, the U.K. government announced a Sanctions and Anti-Money Laundering (AML) Bill to provide the U.K. with the necessary framework and powers to implement economic sanctions and AML regulations once it formally exits the European Union.

The Sanctions and AML Bill was introduced in the House of Lords in October 2017. Several matters were discussed and amended during the Report stage in the House of Lords:

Sanctions:
The government restricted the regulation-making powers of the executive branch to cases in which there is good and reasonable cause for action and where the Parliament has issued a report.
Designations require procedural fairness and proportionality. In addition, the power to designate by description is now limited to cases in which it is not practicable for the Minister to identify by name all the persons falling within the description, and the description is sufficiently precise that a reasonable person would know whether any person falls within it.
The licensing regime was also discussed and the U.K. government stated that an initial framework for exceptions and licenses will be published and the interested parties will continue to be consulted before the Sanctions and AML Bill enters into force.

 

AML:
The government did not establish a broad power to create new criminal offenses in the AML context.
The new Bill will not implement a beneficial owner registry in overseas territories or a register of beneficial ownership of U.K. property registered outside the U.K. However, Clause 44 of the report requires the Secretary of State to publish and lay before Parliament three reports on the progress that has been made to put in place a register of beneficial owners of overseas entities.

The review of the Sanctions and AML Bill in the House of Lords was completed on January 24. The Bill was then introduced in the House of Commons for first reading on January 25. The version of the Bill introduced in the House of Commons can be found here, along with Explanatory Notes.

No amendments were made during this first reading, and the Bill’s second reading is scheduled for February 20. Three more steps are still necessary within the House of Commons (Committee Stage, Report Stage, and Third Reading) before the Bill is ready to receive royal assent and be enacted into law. There is no set time period for the discussion of amendments and royal assent.

 

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.

 

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 16, Lithuania became the third EU Member State to pass a law against human rights abuses in Russia in the name of Sergei Magnitsky, a lawyer who died in Russian jail in 2009 after exposing fraud by Russian officials. Such a law was initially enacted in the United States in 2012 as the Sergei Magnitsky Rule of Law Accountability Act, imposing travel and banking restrictions on Russian officials implicated in human rights abuses. Since then, the U.K., Estonia, and Canada have passed similar laws.

The Lithuanian Magnitsky Act, which members of the Lithuanian parliament approved unanimously, will enter into force in January and will include a list of approximately thirty Russian individuals generally also subject to the U.S. and Canadian acts. By comparison, implementation of the U.K. and Estonian equivalents, enacted in February and May of this year, respectively, appears to have been more gradual. However, there has also long been a source of support within the European Parliament for EU-wide measures. In fact, on November 30, parliament’s recommendation on the subject from April 2, 2014, was published. It recommended visa restrictions and asset freezing for 32 Russian officials who were part of the Sergei Magnitsky case.

Affected Russian interests are lobbying in the EU and U.S. to repeal or prevent Magnitsky Acts, arguing that such measures violate the principle of presumption of innocence that should be accorded to targeted Russian individuals. On the other hand, Magnitsky’s former employer, U.S. businessman turned human rights activist Bill Browder, leads the push for the British and Estonian governments to apply their measures in full and for other EU Member States to follow suit in implementing their own Magnitsky Acts.

Against the background of the continued imposition of sanctions on Russia for violating the territorial integrity of Ukraine and the scrutiny being brought to bear on allegations of Russian interference in the U.K. Brexit referendum and the recent elections in France and Germany, Browder’s campaign appears to be gaining momentum. As further evidence of fraud and abuses by certain Russian officials may still be revealed, other EU Member States and perhaps the EU itself may yet implement Magnitsky Acts.

For more information, contact: Jeff Snyder, Charles De Jager