Archive for the ‘Russia’ Category

OFAC Dings U.S. Defense Contractor for Sanctions Violations, Inadequate Screening

2018/12/23

By: Thad McBride on December 12, 2018

POSTED IN INTERNATIONAL TRADESANCTIONS (OFAC)

  • Penalties imposed for violations of U.S. sanctions on Russia and Ukraine
  • Violations identified during pre-acquisition due diligence on contractor
  • Denied persons screening was conducted but missed prohibited parties

In late November 2018, the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) announced that Cobham Holdings, Inc. agreed to pay $87,507 to settle violations of U.S. sanctions on Ukraine and Russia.

Violations Identified During Pre-acquisition Due Diligence

According to OFAC, the violations were committed by Cobham’s former subsidiary, Metelics, prior to the sale of Metelics to MACOM. It was MACOM that identified the violations during due diligence related to its acquisition of Metelics. And it was presumably MACOM that required Cobham to make the voluntary disclosure to OFAC that led to the penalty in this matter.

The penalty is small by recent OFAC standards. (For example, it is about 620 times less than Societe Generale paid to OFAC as part of its global settlement of sanctions violations.)

But as a cautionary tale, the Cobham matter is important to any exporter.

Products Sold to Entity Blocked Under U.S. Sanctions

According to OFAC, during a six-month period in 2014 and 2015, Metelics sold products through distributors in Canada and Russia to a blocked entity under U.S. sanctions. That entity – Almaz Antey Telecommunications LLC (AAT) – was not explicitly named as a blocked party on the OFAC List of Specially Designated Nationals and Blocked Persons (the SDN List).

Yet AAT was nonetheless a blocked person because it was 51 percent-owned by a party – JSC Almaz-Antey – that was named on the SDN List. As OFAC has made abundantly clear, any entity that is owned 50 percent or more by one or more blocked persons is a blocked entity itself.

Any blocked person, whether named on the SDN List or not, is effectively off limits to U.S. companies and individuals.

Screening Challenges Lead to Violations

The chronology of this matter demonstrates the challenges exporters face when screening third party business parties.

According to OFAC, on June 18, 2014, Metelics agreed to sell products to AAT through a Canadian distributor. On June 19, Metelics screened AAT against its prohibited parties screening software. At that time, JSC Almaz-Antey was not a prohibited party – and thus neither was AAT.

On June 27, Metelics shipped products to AAT. In connection with that shipment, Metelics again conducted denied parties screening and identified no match for AAT.

None of this is surprising or problematic from OFAC’s standpoint because JSC Almaz-Antey was not designated as an SDN until July 16, 2014. That is when things get more interesting.

On July 31, 2014, Metelics made another shipment to AAT. In connection with this shipment, Metelics again conducted denied parties screening for AAT and again did not identify any matches – even though JSC Almaz-Antey, the majority owner of AAT, was now named on the SDN List.

Based on this, OFAC deemed the screening effort to be insufficient. OFAC emphasized that Metelics proceeded with shipment to AAT “despite the inclusion of two uncommon terms [‘Almaz’ and ‘Antey’] in the names of both the SDN and [AAT].” OFAC’s statement suggests that the screening software should have identified at least a potential match, which Metelics would presumably have reviewed further before continuing with the transaction.

Notably, there is no indication that Metelics somehow set the software or screening mechanism to avoid identifying a match with AAT. In fact, in its press release, OFAC states that the screening software was set-up to identify “fuzzy” search criteria yet missed the similarities between AAT and JSC Almaz-Antey.

It thus appears that Metelic was not entirely to blame for these apparent violations. Yet in explaining the penalty in this case, OFAC also notes that Metelics “was subject to a consent agreement for violations of the International Traffic in Arms Regulations [ITAR]… resulting from recurring compliance failures.” Arguably those ITAR compliance failures should have made Metelics particularly vigilant about protecting against failures with its screening system.

While OFAC does not name the provider of the screening software in this case, the agency does state that “[p]ersons employing sanctions screening software should take steps to ensure it is sufficiently robust.” In other words, simply because a company uses software to conduct screening does not mean that software is adequate to protect against violations.

Analysis

This may be a tough lesson for exporters to absorb.  It’s not clear that many exporters conduct quality control checks of their screening software. The raison d’etre for such software is to identify actual or potentially prohibited parties based on name similarities. That is exactly what Metelics expected its software to do.

The proliferation of prohibited and restricted parties – and the lists of such parties – makes it impossible for most companies to keep up-to-date with those lists on their own. That’s the reason so many companies seek software solutions to help meet their compliance obligations. It is the responsible thing to do.

Which makes it a little jarring to read the following exhortation from OFAC:

It is essential that companies engaging in international transactions maintain a culture of compliance where front line staff are encouraged to follow up on sanctions issues, including by promptly reporting to compliance personnel transactions suspected to involve sanctioned parties.

That is surely good advice but it is not clear how it pertains to the facts in the Cobham matter. There is no indication that any Metelics employee was aware of a transaction suspected to involve sanctioned parties – or that any employee ducked their head in the sand.

Nevertheless, it is useful to remember the value of periodic risk assessments during which compliance policies, procedures, and processes are reviewed. Potential weaknesses can be identified and addressed before they lead to violations.

The Bass, Berry & Sims trade lawyers work closely with clients to assist in risk assessments and other compliance exercises. Our targeted, efficient approach to such matters leads to practical, effective solutions. Feel free to contact us anytime if we can assist you.

Article: https://www.bassberrygovcontrade.com/ofac-dings-u-s-defense-contractor-for-sanctions-violations-inadequate-screening/


A Crude Awakening: U.S. Sanctions on the Russian Oil Sector

2018/11/26

By: Olga Torres, Esq. and Derrick Kyle, Esq. All of Torres Trade Law.

Introduction
This article will discuss U.S. economic sanctions on Russia as enforced by the Office of Foreign Assets Control (“OFAC”), a government agency within the U.S. Department of the Treasury. Specifically, we will provide an overview of Directive 4 to Executive Order 13662 (“Directive 4”), which prohibits certain transactions related to the Russian oil sector.1 While Directive 4 does not prohibit all oil sector transactions with companies in Russia, it does create many potential obstacles for U.S. businesses. We will also briefly discuss Russian oil sector prohibitions administered by the Department of Commerce Bureau of Industry and Security (“BIS”).2 Russia and Texas are two of the largest producers of oil and gas in the world, and, because many companies involved in the petroleum industry in Texas have dealings with Russian entities or individuals, they are likely to be faced with sanctions issues. Below we describe some of the issues that need to be addressed prior to the commencement of transactions involving Russian parties in the context of certain oil exploration and production activities.

Background
U.S. economic sanctions are a tool of foreign policy that target countries as well as activities related to national security and other foreign policy-based concerns, such as terrorism, narcotics trafficking, human rights, and cybersecurity. In 2014, the Obama Administration implemented various economic sanctions against Russia in response to Russia’s occupation of the Crimea region of Ukraine. These sanctions programs included: 1) a trade embargo against Crimea; 2) blocking sanctions against persons listed on the Specially Designated Nationals and Blocked Persons (“SDN”) List; and 3) sectoral sanctions prohibiting certain transactions with persons identified on the Sectoral Sanctions Identification (“SSI”) List.3 President Obama’s sanctions were implemented primarily through a series of Executive Orders.

In August 2017, President Trump signed the Countering America’s Adversaries Through Sanctions Act (“CAATSA”). This comprehensive, bipartisan sanctions regime targeted Russia, North Korea, and Iran. The part of CAATSA that focuses on Russia, the Countering Russian Influence in Europe and Eurasia Act of 2017 (“CRIEEA”), codified many of the Executive Orders implemented during the Obama Administration.4 Additionally, CRIEEA expanded the existing scope of sanctions on Russia as well as implemented new secondary sanctions (sanctions that apply to activities by non-U.S. individuals and entities).5 The sanctions on Russia were passed in response to Russia’s cyber meddling in the 2016 elections as well as their continued occupation of the Crimea region of Ukraine.

Specifically, the relevant Russian sectoral sanctions are implemented through four directives. Directives 1 through 3 prohibit and impose restrictions on various kinds of financial transactions between U.S. persons and individuals or entities identified on the SSI List. Directive 4 is slightly different from the other Directives in that it provides more tangible restrictions on exports of goods and non-financial services related to the Russian oil industry.

Directive 4
Directive 4 prohibits:
The provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that:

(1) have the potential to produce oil in the Russian Federation, or in a maritime area claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to this Directive […]; or

(2) are initiated on or after January 29, 2018, that have the potential to produce oil in any location, and in which any person determined to be subject to this Directive… has (a) a 33% or greater ownership interest, or (b) ownership of a majority of the voting interests.

There is a lot to unpack in Directive 4. To start, “persons subject to this Directive” means persons that are listed on the SSI List and specifically identified as subject to Directive 4. The list of parties subject to Directive 4 includes several prominent Russian energy companies, such as Gazprom, Lukoil, and Rosneft. Notably, OFAC’s 50% rule applies for purposes of the SSI List. The 50% rule states that an entity that is owned 50% or more by an individual or entity on the SSI List will also be treated as being on the SSI List. So, if Company A is listed on the SSI List and owns 80% of Company B, then Company B will also be considered to be on the SSI List. OFAC also applies the 50% Rule in conjunction with aggregation rules when determining which transactions are prohibited. For example, Company A and Company B are both listed on the SSI List. Company A owns 30% of Company C, while Company B owns 25% of Company C. Company C would be considered to be on the SSI List, because it is owned 55% by entities on the SSI List.7

Further, Directive 4 was amended by CAATSA in October 2017 to add the second section of the directive related to oil produced in any location. This updated prohibition is interesting for a couple of reasons. First, the prohibition potentially now applies to oil projects anywhere in the world. Second, this part of the prohibition focuses on ownership of or voting interests in the project by a Directive 4-subject person, rather than just the involvement of a Directive 4-subject person. Importantly, this portion of the Directive 4 prohibition applies to listed persons having only a 33% ownership interest in the specified projects. Therefore, a project with a Russian company as a minority owner in a country other than Russia could be subject to the prohibitions of Directive 4.

Another important aspect of Directive 4 is the meaning of the terms used in the directive. As with many other sanctions regimes, the terms used do not necessarily carry their ordinary meanings. OFAC provided the definitions of some important terms in the Frequently Asked Questions (“FAQs”) section of its website:

  • Initiated. Part of Directive 4 applies only to projects initiated on or after January 29, 2018. According to OFAC, a project is initiated when, “a government or any of its political subdivisions, agencies, or instrumentalities (including any entity owned or controlled directly or indirectly by any of the foregoing) formally grants exploration, development, or production rights to any party.”
  • Services. OFAC defines services to include, for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. Importantly, for purposes of Directive 4, services does not include the provision of financial services, clearing transactions or providing insurance related to such activities.
  • Deepwater. OFAC defines deepwater as underwater activities at depths of 500 feet or more.
  • Shale projects. The term “shale projects” applies to projects that have the potential to produce oil from resources located in shale formations.
  • Artic offshore projects. This phrase applies to projects that have the potential to produce oil in areas that (1) involve operations originating offshore, and (2) are located above the Arctic Circle.

While the above focuses on primary sanctions, CAATSA also implements secondary sanctions. Under Section 225 of CAATSA, the President is required to impose sanctions on non-U.S. persons that knowingly make a significant investment in a “special Russian crude oil project,” which is a deepwater, Arctic offshore, or shale oil project in Russia.13 The Department of State (“State”) is tasked with administering Section 225 and has stated it will determine what is “significant” on a case-bycase basis. In published guidance,14 State has explained that it will not consider an investment significant if a U.S. person would not require specific licenses from OFAC to participate in the same conduct.15 Section 226 of CAATSA, administered by OFAC, also now requires the imposition of secondary sanctions on Russian or other foreign financial institutions that knowingly engage in or facilitate significant transactions involving Russian deepwater, Arctic offshore, or shale oil projects.

The penalties for violations of Directive 4 can be steep. Civil penalties can be up to $295,141 per violation, or up to twice the value of the transaction that was the basis for the violation. Criminal, willful or knowing violations, can lead to penalties of up to $1 million per violation and imprisonment up to 20 years for individuals.

Screening of Parties
Because the Directive 4 prohibitions hinge on the involvement of a party on the SSI List, it is important that companies engage in the screening of all parties involved in potential transactions. Various government agencies maintain lists of entities and individuals with whom U.S. (and sometimes non-U.S.) persons are restricted or prohibited from transacting. These lists include, but are not limited to, OFAC’s SSI and SDN Lists, and the BIS Entity List. Entering into a transaction with a party on a denied party list can have grave consequences, such as sanctions, fines, or the denial of export privileges.

As such, companies should ensure that all parties to a transaction are screened. The U.S. Government provides a free screening search function that consolidates multiple government screening lists, aptly named the Consolidated Screening List (“CSL”).17 By searching for the name and address of an individual or company on the CSL, parties are able to screen against multiple government lists at once.

Example
Because the minutia of the above can be complex, the following example aims to highlight the issues encountered during a Directive 4 analysis. Suppose Company A (a Texas company) plans to enter into an agreement to sell fracking fluid to Company B (a Russian company). Based on the sales agreement, Company A knows the fracking fluid will be used in a hydraulic fracturing project in Russia, and hydraulic fracturing is most often associated with shale projects. Company B is a subsidiary of Company C, which is on the SSI List and owns an unknown percentage of Company B. Finally, assume it is not clear from the sales agreement who the owner of the specific fracking project is. Company A should resolve several questions before exporting any fracking fluid to Company B in Russia. These questions include:

  • Is Company B subject to Directive 4 based on Company C’s listing on the SSI List?
  • When was this project initiated?
  • Who are the owners of the specific project, and how is this ownership structured? Is a 33% or greater owner listed on the SSI List?
  • Is this project a shale project? Even if not, how can Company A be sure the fracking fluid will not be used in a shale project?

End-use statements and other assurances from Company B stating that the project is not a shale project or subject to any U.S. sanctions would be helpful to show due diligence on the part of Company A. But OFAC sanctions violations are viewed under a strict liability standard, so if OFAC determines the fracking fluid has been used in activities prohibited by Directive 4, Company A could face an enforcement action. Additionally, it is notoriously difficult to determine the ownership structure of some Russian companies and oil projects, so Company A may not be able to obtain a verifiable answer regarding the applicability of Directive 4 to Company B or the proposed transaction. Ultimately, companies working in this space must conduct a cost-benefit analysis with regards to each proposed transaction and determine the level of risk with which they are comfortable. A legal opinion from international trade counsel can be helpful in deciding whether or not a transaction is permissible.

BIS Rule
As if the above was not complicated enough, the Department of Commerce’s export control agency, BIS, has its own prohibitions on exports to the Russian oil industry. Section 746.5 of the Export Administration Regulations (“EAR”) imposes specific licensing requirements for certain parts identified in Supplement No. 2 to part 746 of the EAR as well as specific parts identified in the regulation. These parts cannot be exported, reexported, or transferred without a license if the party knows the item will be used directly or indirectly in the exploration for, or production of, oil or gas in Russian deepwater or Arctic offshore locations or shale formations in Russia.

Additionally, if the party is unable to determine whether the item will be used in such projects, then a BIS license is required for export. Parties should also be aware that BIS may inform persons individually or through amendment to the EAR that a license is required for a specific end-use or end-user because there is a high risk of use in the activities specified above. Any request for such a license will likely be denied as BIS maintains a general policy of denial for such license requests.

Latest Developments
In the latest string of Russian sanctions related developments, the State Department announced on August 8, 2018 that it would be imposing new sanctions on Russia pursuant to the Chemical and Biological Weapons Control and Warfare Elimination Act (CBWA), as a result of Russia’s attempted assassination of former Russian intelligence officer Sergei Skripal and his daughter. A Federal Register notice was published on August 27, 2018 and more significant sanctions must be imposed in the next three months if the U.S. government finds that Russia does not meet certain conditions, absent a waiver by the President of the United States.20 These potential additional sanctions should be closely monitored because there is an option for a very punitive track of sanctions depending on how the Russian government responds.

Conclusion
Overall, Directive 4, CAATSA sanctions, and other U.S. Government regulations impose a complex network of restrictions on U.S. parties seeking to do business with the Russian oil industry. Even when OFAC and other relevant agencies provide guidance, few bright line rules exist. Whether a transaction is covered by the specific authority is determined by the facts of the specific case.

As such, it is important that parties who want to engage in transactions with the Russian oil industry conduct their due diligence. All parties to the transaction should be screened against the SSI and SDN Lists, as well as any other denied party lists maintained by U.S. government agencies. The ownership of these parties and the interests held in oil projects must also be investigated to determine the potential involvement of sanctioned parties. Additionally, although this article focuses on Russian sanctions, other oil-producing nations, including Iran and Venezuela, among others, are subject to OFAC-administered sanctions. This means that any company engaged in oil and gas transactions with foreign companies or countries should make sure that there are no prohibitions on the transaction and conduct a review of any applicable sanctions programs.

Full Article: http://www.torrestradelaw.com/blog_images/4%20Article-ILS_%20Torres%20Law_%20A%20Crude%20Awakening%20U.S.%20Sanctions%20on%20%20Russias%20Oil%20Sector.pdf


State Department Adds to CAATSA List

2018/10/29

Countering American’s Adversaries Through Sanctions Act of 2017 (CAATSA) allows sanctions to be imposed on persons that knowingly, engage 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.

The Chinese entity, Equipment Development Department of the Central Military Commission (EDD) formerly known as the General Armaments Department (GAD) has been added after engaging in a significant transaction with a person that is connected to the defense or intelligence sectors of the Government of the Russian Federation.

The Secretary of State is also updating the previously issued guidance to specify additional persons:

Section 231(d) List Regarding the Defense Sector of the Government of the Russian Federation

  • Komsomolsk-na-Amur Aviation Production Organization (KNAAPO)
  • Oboronlogistika, OOO
  • PMC Wagner

Section 231(d) List Regarding the Russian Intelligence Sector of the Government of the Russian Federation

  • Antonov, Boris Alekseyevich
  • Aslanov, Dzheykhun Nasimi Ogly
  • Badin, Dmitriy Sergeyevich
  • Bogacheva, Anna Vladislavovna
  • Bovda, Maria Anatolyevna
  • Bovda, Robert Sergeyevich
  • Burchik, Mikhail Leonidovich
  • Bystrov, Mikhail Ivanovich
  • Concord Catering
  • Concord Management and Consulting LLC
  • Gizunov, Sergey Aleksandrovich
  • Internet Research Agency LLC
  • Kaverzina, Irina Viktorovna
  • Korobov, Igor Valentinovich
  • Kovalev, Anatoliy Sergeyevich
  • Kozachek, Nikolay Yuryevich
  • Krylova, Aleksandra Yuryevna
  • Lukashev, Aleksey Viktorovich
  • Malyshev, Artem Andreyevich
  • Morgachev, Sergey Aleksandrovich
  • Netyksho, Viktor Borisovich
  • Osadchuk, Aleksandr Vladimirovich
  • Podkopaev, Vadim Vladimirovich
  • Polozov, Sergey Pavlovich
  • Potemkin, Aleksey Aleksandrovich
  • Prigozhin, Yevgeniy Viktorovich
  • Vasilchenko, Gleb Igorevich
  • Venkov, Vladimir
  • Yermakov, Ivan Sergeyevich
  • Yershov, Pavel Vyacheslavovich

Federal Register Notice: https://www.govinfo.gov/content/pkg/FR-2018-10-05/pdf/2018-21684.pdf


Sanctions in Name Only Imposed on Russia for Nerve Gas Attack

2018/08/30

(Source: Export Law Blog, 8 Aug 2018. Reprinted by permission.)

By: R. Clifton Burns, Esq., Bryan Cave LLP, Washington DC, Clif.Burns@bryancave.com, 202-508-6067.

Clif Burns, Bryan Cave Leighton Paisner, Washington, DC. Copyright Clif Burns 2018

According to a State Department press release released today, the United States has made a determination that Russia used novichok, a chemical warfare agent, in an attack on British soil and, as a result, the US will impose sanctions on Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the “CBWC Act”), 22 U.S.C. § 5601 et seq.  The text of these sanctions was not released.  Instead, the text will be in a Federal Register notice expected to be published on or around August 22.  The sanctions will be effective as of the date of the publication of that notice.

Because these sanctions are being imposed under the CBWC Act, we can already get a good idea of what these sanctions will be.   The Act contemplates sanctions being imposed in two stages.  The first stage, described in section 5605(a), sets forth the following sanctions, all of which are required to be imposed upon the offending country:

  • Termination of all foreign assistance
  • Termination of all arms sales
  • Termination of all foreign military financing
  • Denial of U.S. government credit or assistance
  • Termination of all exports of items controlled on the Commerce Control List for NS reasons

To be honest, none of these sanctions will have any significant impact on Russia.  Arms sales to Russia have been prohibited for some time now.   The country chart already has Russia controlled for both columns of NS controls.  Of course, you could say that the new sanctions will mean that NS items will not be considered for licenses under any circumstances.  But I don’t think licenses to export NS items to Russia are being readily granted now.

The second stage, if it happens, would take place on November 8 of this year unless the President determines that Russia is no longer using chemical or biological weapons.  If that determination is not made, the President is required to impose three sanctions from a set of six possible sanctions.  Those six possible sanctions are:

  • Opposing multilateral bank financial assistance to Russia
  • Prohibition of U.S. bank loans to the government of Russia
  • Prohibition of all exports of all U.S. goods and technology to Russia
  • Downgrading or suspending diplomatic relations with Russia
  • Termination of all service to and from the United States by Russian airlines

Whether the President will make the findings necessary to impose this second stage and which three of the six will be imposed is anyone’s guess, although I suspect that most people likely have a pretty good guess.   The upcoming Federal Register notice will probably not even address the second stage sanctions.   If the United States does in fact impose the three second stage sanctions, the best guess is probably that he will impose the least restrictive of those, i.e., opposing multilateral bank loans, prohibiting U.S. bank loans, and expelling a few more diplomats.

 


Company Fined $155,000 for Screening Related Violations

2018/08/30

By: Danielle Hatch

Mohawk Global Logistics Corp. has been fined $155,000 for 3 violations of the Export Administration Regulations (EAR) related to exporting to companies on the Entity List.

Around August 2012 Mowhawk exported an LNP-20 Liquid Nitrogen Plant (EAR99 and valued at $33,587) to the All-Russian Scientific Research Institute of Experimental Physics (VNIIEF). The company had a screening process in place and when they screened VNIIEF they got a hit and the shipment was initially flagged. During the BIS investigation Mowhawk acknowledged that the export supervisor accidently overrode (or ignored) the red flag and the shipment was processed. Mowhawk filed EEI and listed the shipment as No License Required (NLR) which would have been accurate had the end user not been on the Entity List. Since VNIIEF is a denied party a license is always required to export any items subject to the EAR. This was the 1st of 3 total charges.

In February 2014 and August 2015, Mokhawk once again exported to an organization on the Entity List, but this time they were in China. The company exported Real-Time Back Reflection Laue Camera Detectors and Accessories (EAR99 and valued at $177,156) to the University of Electronic Science and Technology of China (UESTC). Once again, Mowhawk used screening software, but this time it failed to flag the transaction because Mowhawk didn’t screen UESTC’s full, unabbreviated name. This could be a common mistake, however, all of the documents that UESTC provided to Mowhawk clearly identified UESTC’s full name as it was listed on the Entity List along with an almost exact matching address. The shipment was processed in February 2014 and they filed EEI as NLR. As with the first charge, had the export not gone to someone on the Entity List a license likely would not have been required.

In August 2015 Mowhawk exported the same exact items to UESTC after they had been returned for warranty repair. This time, Mowhawk didn’t screen the transaction at all using their screening software and there was no EEI filed in connection with this particular export to UESTC. These transactions were charges 2 and 3.

Settlement Agreement:

  • Pay $135,000 in 3 separate payments
  • Payment of the remaining $20,000 is suspended as long as the company pays the $135,000 on time.
  • If payments are not received on time, BIS may issue an order denying all of Mowhawk’s export privileges
  • Mowhawk can’t take any action or make any public statement denying the allegations in the BIS Charging Letter or Order

Order and Charging Letter: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2018/1193-e2561/file


Strict Export Regulations May Be Costing Us Industry Billions in Foreign Sales

2018/07/30

(Source: Defense News, 18 June 2018.)

A new RAND report (a source for research on policy ideas and analysis) studying the spread of unmanned aerial vehicles suggests that the current export controls for drones might be hurting the US more than helping.

US competitors like China and Russia are filling the void that has been left by the limitation on US drone exports in markets like the Middle East where the US historically dominated in sales. Over the past several years, Jordan, Saudi Arabia, and United Arab Emirates (UAE) were denied requests to buy American drones, and have since turned to China to purchase similar systems. The Trump administration recently revealed a new set of export policies concerning military technology in an attempt to facilitate the transfer of military technology, but the changes do not change the status of drones under the Missile Technology Control Regime.

How does the MTCR work?

The MTCR is a voluntary export control group of 35 nations who collaborate to prevent signatories from proliferating longer-range cruise and ballistic missile technology. The arms control regime was extended to UAVs because early iterations of drones were considered a subset of cruise missile technology due to their active guidance system.

The regime divides missiles into two categories. This article will cover Category I.

Category I:

  • Capable of delivering a 500 kg payload more than 300 km
  • Sale of category I systems is restricted by a “strong presumption of denial” (meaning they are only exported in rare circumstances)
  • MQ-9 Reaper, RQ-4 Global Hawk and MQ-4 Triton are well-known unmanned systems that fall under this category

Drone proliferation

RAND found that 10 nations use category I drones, and more than 15 use near-category I systems that register just below the MTCR’s payload and distance restrictions. The report states that these increased proliferation rates are due to countries like China, Israel, and the UAE who are not part of the MCTR. More countries are expected to follow suit which will cause a “growing threat to U.S. and allied military operations,” the report says.

While category I systems can deploy missiles, their main threat lies in “their ability to conduct intelligence, surveillance, and reconnaissance (ISR) operations against U.S. forces prior to hostilities,” according to RAND. “Adversaries that would otherwise have difficulty detecting U.S. force deployments, monitoring U.S. operations, and maintaining targeting data on U.S. units can employ UAVs to maintain situational awareness of U.S. capabilities.”

The report identifies Russia, China, and Iran as unfriendly nations that will try to utilize drones to complicate US military operations.

A US-sized hole

Due to restrictions on US drone exports, competitors have established themselves in a market Rand expects to “grow from about $6 billion in 2015 to about $12 billion in 2025.”

“What you are enabling the competition to do is not just to sell some hardware,” Linden Blue, General Atomic’s chief executive, told reporters during an Aug. 16, 2017 roundtable at the company’s headquarters in Poway, California. “You’re enabling it to build a customer base for at least 20 years, I would say. You’re enabling them to build a logistics system. It will take them many years to get to where we are right now, but you’re helping them start out. They should be very thankful.”

Details: https://www.defensenews.com/newsletters/unmanned-systems/2018/06/18/strict-export-regulations-may-be-costing-us-industry-billions-in-foreign-sales/


Trilogy International Associates, Inc. and William Michael Johnson Each Receives $100,000 Civil Penalty for Export Violations

2018/04/04

By: Ashleigh Foor

On or about January 23, 2010, April 6, 2010, and May 14, 2010, Trilogy International Associates, Inc., of Altaville, CA exported an explosives detector and a total of 115 analog-to-digital converters to Russia. These items are subject to the EAR and controlled on national security grounds. The items were classified under Export Control Classification Numbers 1A004 and 3A001, respectively, and valued in total at approximately $76,035. Each of the items required a license for export to Russia pursuant to Section 742.4 of the EAR.

Between, on, or about January 20, 2010 and May 14, 2010, William Michael Johnson of Angels Camp, CA, caused, aided, and/or abetted three violations of the EAR, specifically three exports from the United States to Russia of items subject to the EAR without the required BIS export licenses.

Charges include:

  • Three Charges of 15 C.F.R. § 764.2(a) – Engaging in Prohibited Conduct
  • Three charges of 15 C.F.R. § 764.2(b) – Causing, Aiding, or Abetting a Violation

Penalty:

  • Civil penalty of $100,000 against Trilogy International Associates, Inc.
  • Civil penalty of $100,000 against William Michael Johnson
  • Debarred: Both Trilogy International Associates, Inc. and William Michael Johnson are denied export privileges for a period of 10 years from the date of this Order, until 26 February 2028.

Date of Order: 26 February 2018


Miltech, Inc. of Northampton, MA Receives 18 Charges of Alleged Export Violations

2017/11/15

By: Ashleigh Foor

On September 25, 2017, Miltech, Inc. of Northampton, MA was charged a civil penalty of $230,000 due to engaging in conduct prohibited by the EAR when it exported items subject to the EAR from the United States to China and Russia without the required BIS Licenses. On eighteen separate occasions between, on, or around October 14, 2011 and July 14, 2014, Miltech exported active multiplier chains, items classified under Export Control Classification Number (“ECCN”) 3A001.b.4 and valued in total at approximately $364,947, without seeking or obtaining the licenses required for these exports pursuant to section 742.4 of the EAR. These items are controlled on national security and anti-terrorism grounds.

Miltech received 18 charges of 15 C.F.R. § 764.2(a) for engaging in prohibited conduct. $180,000 of the $230,000 penalty must be paid within 30 days, and the remaining $50,000 will be suspended and waived after two years if Miltech fulfills the terms of its settlement agreement and this order.  The company will not be debarred if penalty is paid as agreed and Miltech complies with other terms of this settlement.


Russia Will Struggle to Turn on Siemens Turbines in Sanctions-Bound Crimea

2017/08/03

(Source: Reuters, 19 July 2017.)

MOSCOW (Reuters) – Russia outfoxed European Union sanctions by delivering gas turbines made by Germany’s Siemens to the annexed Ukrainian region of Crimea. Now for the hard part, switching them on.

No Russian company, according to Reuters data, has ever got a Siemens turbine working without the help of the manufacturer.

In this case, Siemens said the turbines were shipped to Crimea behind its back and is refusing to be involved, leaving Moscow to work out how to start them up to fulfill President Vladimir Putin’s promise to give Crimea a stable power supply.

Siemens has filed a lawsuit against its Russian customer over the delivery of the turbines to Crimea and says it will do everything in its power to block their installation and commissioning.

If Russia can somehow get the turbines operating at the two new power plants under construction, having already irked Europe by delivering them, it will again demonstrate its ability to thumb its nose at the sanctions.

Ten industry specialists who spoke to Reuters said starting up the turbines without engineers from Siemens or its partners would be a tough test of the country’s engineering resourcefulness, fraught with technical problems, expensive and a legal minefield.

“Without Siemens it will be very hard to do it,” said an industry source.

But the majority of the specialists said it can be done — even if it has never been attempted before.

Hunt for a Contractor

A firm involved in building the Crimean power plants had hired a Russian company called Interavtomatika, which is 45.7 percent owned by Siemens, to help turn on the turbines, according to three sources familiar with the project.

Since then, Siemens said it has got a written undertaking from Interavtomatika that it will halt any activities connected to Crimea.

In an implied threat to pull out of the venture, a company source familiar with the matter has also said Siemens is reviewing its engagement in its Russian businesses. The source declined to say whether that could affect Interavtomatika and Siemens declined to comment.

EU companies are banned from transferring energy technology to Crimea under the sanctions, imposed after Moscow seized the peninsula from Ukraine in 2014. But, in a loophole Moscow seems to have exploited, their Russian subsidiaries are not directly liable.

When asked if its turbines could be assembled, installed, and commissioned without its cooperation, Siemens said it was unwilling to speculate about future developments and did not want to fuel such speculation. Russia’s Energy Ministry did not respond to a Reuters request for comment.

Several of the industry sources said a Russian firm called ROTEK had experience with Siemens turbines. It is part of the Renova conglomerate controlled by billionaire Viktor Vekselberg.

The company, along with its partners, services 13 Siemens gas turbines in Russia similar to the model delivered to Crimea, according to ROTEK’s website. The company, asked by Reuters if it has been approached to help with the Crimea turbines, declined to comment.

Some of the Siemens turbines ROTEK services are installed at power stations owned by gas giant Gazprom and ROTEK services those ones with a Gazprom-owned firm called Teploenergoremont-Servis. That company, via a representative in Gazprom’s power division, declined to comment.

High Risk

Any Russian company that agrees to set up the Crimea turbines must weigh the “very high” risk of sanctions being imposed on any EU or US business it has, according to Artyom Zhavoronkov, partner in the Russian office of law firm Dentons.

Renova has assets in the European Union and the United States. Gazprom has assets in the European Union.

Russian officials have not acknowledged shipping Siemens turbines to Crimea. They say the turbines were obtained second hand and were Russian-made. Siemens makes turbines at a factory it co-owns in Russia.

Technopromexport, the Russian company building the Crimean power plants, has also not confirmed the turbines are made by Siemens. It declined to go into detail on how they would be serviced, beyond saying it would be “by Russian specialists and contractors”.

If no firm wants to take on the job, Technopromexport and its partners could instead assemble a team of specialists themselves to get the task done, several of the industry specialists said.

One person close to the Crimea power plants project said a recruitment drive was already underway to find people in the Russian power sector who had experience of launching Siemens gas turbines.

According to one industry specialist, 18 turbines of the same model now in Crimea have previously been launched in Russian power stations. As a result, there is a pool of people who have at least observed the turbines being commissioned.

“In theory you can try to launch them without Siemens,” said one industry specialist, who, like all the other people in the sector who spoke to Reuters, requested anonymity because of the sensitivity of the subject.

The turbines can be launched if you “gather up the people and the know-how from when these turbines were already used, in Russia and abroad,” said the first industry source.

The model of Siemens turbines the German firm and the three sources close to the power plant say is now in Crimea — the SGT5-2000E — is not the latest word in turbine technology, but is highly sophisticated.

It is run by an automatic control system that uses Siemens proprietary software. It contains highly-engineered parts — such as the blades that turn the turbine — which up to now have only ever been bought from Siemens or its partners.

The blades need to be replaced after between three and four years and no home grown Russian company manufactures blades compatible with the Siemens turbines in Crimea, several of the specialists told Reuters.

Workarounds mentioned by people in the industry included sourcing non-original spare parts from manufacturers in China, Russian engineers attempting to replicate the blades themselves or trying to buy them via intermediaries.

“There are organisations in Russia that, in principle, can make the blades,” said an energy sector source in ex-Soviet Belarus who has experience of working with Siemens equipment. “How reliable they are, that’s another matter.”


Beware of Contracts Signed by Specially Designated Nationals

2017/08/03

(Source: Commonwealth Trading Partners)

By: Chalinee Tinaves, Esq., Commonwealth Trading Partners, ctinaves@ctp-inc.com.

On July 20, 2017, the Office of the Foreign Assets Control (OFAC) announced a $2 million penalty against ExxonMobil Corporation and two of its subsidiaries for violating the Ukraine-Related Sanctions Regulations. According to OFAC, ExxonMobil violated the sanctions when its execs dealt in services with Igor Sechin, President of Rosneft OAO, when they signed eight legal documents relating to oil and gas projects in Russia between May 14, 2014, and May 23, 2014.

If you’ll travel back in time to March 2014, as tensions were heating up regarding Russian deployment of military forces in the Crimea region of Ukraine, President Obama issued Executive Order 13661, “Blocking Property of Additional Persons Contributing to the Situation in Ukraine,” in response to actions deemed to constitute an unusual and extraordinary threat to the national security and foreign policy of the U.S. Section 1(a)(ii) authorized the Secretary of the Treasury to designate officials of the Government of the Russian Federation, block any property or interests in property, and prohibit dealing in any property and interests in property of a person listed on the Specially Designated Nationals and Blocked Persons List (SDN List). Section 4 of E.O. 13661 prohibited US persons from making “any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to this order” as well as receiving “any contribution or provision of funds, goods, or services” from a designated person.

On April 28, 2014, OFAC designated Igor Sechin as an official of the Russian government, thereby generally prohibiting US persons from conducting transactions with him. Although Rosneft OAO is:

  • designated on the Sectoral Sanctions Identifications List (SSI List) pursuant to Executive Order 13662 “Blocking Property of Additional Persons Contributing to the Situation in Ukraine;”
  • subject to Directive 2 (prohibiting transacting in, providing financing for, or otherwise dealing in new debt of greater than 90 days maturity if that debt is issued on or after the sanctions effective date by, on behalf of, or for the benefit of the persons operating in Russia’s energy sector); and
  • subject to Directive 4 (prohibition against the direct or indirect provision of, exportation, or reexportation of goods, services, or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation or in maritime area claimed by Russian Federation and extending from its Territory); nonetheless, Rosneft OAO is not designated on the SDN List and is therefore not subject to blocking sanctions.

As you can see, the conflict lies in how to conduct business transactions with an organization that is not blocked with an executive who is. According to the release, OFAC rejected ExxonMobil’s position that Sechin was acting in his professional capacity as President of Rosneft OAO when they signed the legal documents. Specifically, ExxonMobil referenced comments by a Treasury Department spokesman in April 2014 allowing BP Plc Chief Executive, Bob Dudley, to remain on the board of directors of Rosneft OAO so long as he did not discuss personal business with Sechin. In rejecting this argument, OFAC indicated that statement did not address ExxonMobil’s conduct nor did the plain language of Ukraine-Related Sanctions Regulations include a distinction between “personal” or “professional.” Further, OFAC has not interpreted the Regulations to create a carve-out for designated parties acting in their professional capacity.

Interestingly, in support of its position, OFAC pointed to its Frequently Asked Question #285 published on March 18, 2013, regarding the Burma Sanctions Program. Although conveniently now removed from OFAC’s FAQs and website following the termination of the Burma Sanctions Regulations, an archived link detailing FAQ #285 captured the full text of OFAC’s response to ministry dealings with a designated Burmese Government minister. According to OFAC:

A government ministry is not blocked solely because the minister heading it is an SDN. U.S. persons should, however, be cautious in dealings with the ministry to ensure that they are not, for example, entering into any contracts that are signed by the SDN.

However, in Treasury’s restatement of FAQ #285 in the ExxonMobil announcement, OFAC indicated that US parties should “be cautious in dealings with [a non-designated] entity to ensure that they are not providing funds, goods, or services to the SDN, for example, by entering into any contracts that are signed by the SDN.”

Rejecting ExxonMobil’s rebuttal that OFAC regulations state that different interpretations may exist among and between the sanctions programs that it administers, FAQ #285 “clearly signaled” that OFAC views the signing of a contract with an SDN as prohibited, even if the entity on whose behalf the SDN signed was not sanctioned in situations where sanctions programs also involve SDNs. These reasons, in addition to the definitions of “property” and “property interest” in the Ukraine-Related Sanctions Regulations, E.O. 13661, and statements issued by the White House and the Department of Treasury, served to provide ExxonMobil with notice that signing the legal documents with Sechin would violate the prohibitions in the Ukraine-Related Sanctions Regulations.

In assessing the penalty based on OFAC’s Economic Sanctions Enforcement Guidelines, among other aggravating factors, OFAC viewed ExxonMobil’s transaction to be a show of “reckless disregard for U.S. sanctions requirements when it failed to consider warning signs associated with dealing in the blocked services of an SDN” and contributed “significant harm” to the objectives of the Ukraine-Related Sanctions Program. Following the announcement, ExxonMobil stood by its position that it acted in full compliance with the sanctions guidelines in 2014 and argued that the Treasury Department is “trying to retroactively enforce a new interpretation of an executive order that is inconsistent with the explicit and unambiguous guidance from the White House and Treasury issued before the relevant conduct and still publicly available today.”

What does all this mean for U.S. companies? While FAQ #285 was initially crafted to address contracts with a designated government official (which Sechin satisfied based on his designation as a Russian official), it is unclear whether this interpretation would also be applicable in situations involving non-government SDNs and their corporate dealings. Further, the prohibited conduct of entering into a contract signed by an SDN in FAQ #285 was listed as an example. It is entirely possible that a range of other contract activities are prohibited by SDNs like negotiating a contract. Companies must be aware of the risks associated with projects that would require authorization by an SDN. Further, companies can mitigate their risk by screening all the parties involved in a transaction to avoid potentially violating a sanctions program.