Archive for the ‘Enforcement’ 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/


BIS Denies Export Privileges and OFAC Announces $2,774,972 Settlement with Jereh Group

2018/12/23

By: Danielle Hatch

The Bureau of Industry and Security (BIS) announced a settlement with Yantai Jereh Oilfield Services Group Co., Ltd., of Yantai Shandong Province, China (“Yantai Jereh”) in conjunction with the Office of Foreign Assets Control (OFAC).

BIS alleges that the company committed four violations of the EAR (Acting with knowledge of a violation and making false statements to BIS during the course of an investigation. Yantai Jereh has agreed to pay $600,000 to BIS and the company’s 5-year denial period will be suspended if the company pays the BIS fine, in addition to the penalty under their OFAC Settlement Agreement (details below). If at any time, the company commits any violations of the Regulations or fails to pay its penalties on time, BIS can revoke the denial suspension.

The settlement between the OFAC and Yantai Jereh is concurrent with the BIS settlement. The main difference is that the company had 11 violations of the Iranian Transactions and Sanctions Regulations causing a much larger fine of $2,774,972. All 11 violations involved exportation or rexxeportation or the attempted exportation or reexportation of US goods to Iran by way of China. Two of the 11 shipments of oilfield equipment spare parts (coiled tubing strings and pump sets) were seized by US Customs and Border Protection before they left the US.

OFAC determined that the violations constituted an egregious case and the company did not voluntarily disclose their violations.

BIS Charging Letter: https://efoia.bis.doc.gov/index.php/documents/export-violations/export-violations-2018/1206-e2573/file

OFAC Settlement: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20181212.aspx


Huawei CFO Arrested at Request of US

2018/12/23

By: Danielle Hatch

On December 1, 2018 Huawei Chief Financial Officer Meng Wanzhou was arrested in Vancouver, Canada at the request of the United State. Huawei is the world’s biggest supplier of telecom network equipment and the second biggest smartphone seller across many countries in Europe, Asia and Africa.

The US is accusing Meng and Huawei of defrauding several banks such as HSBC and Standard Chartered, by hiding payments from Iran in violation of US sanctions regulations. US officials believe that Huawei was trying to use the banks to move money out of Iran in addition to possible illegal exports to Iran and other sanctioned countries since 2016. The US case against Meng involves Skycom Tech Co. Ltd, which has been described as one of Hauawei’s “major local partners” in Iran, the company often used Skycom Tech’s Tehran office to provide mobile network equipment to major telecommunications companies in Iran. Reuters has reported that Skycom was more of an “unofficial subsidiary” of Huawei and basically conducted business in Iran for Huawei. The US believes that Meng and other Huawei representatives misled banks about Huawei’s control of Skycom so that they could gain access to more than $100 million worth of transactions related to Skycom.

Huawei has said that its Iran operations were “in strict compliance with applicable laws, regulations and sanctions” of the United Nations, United States and European Union, according to Canadian court documents that were released earlier this month. Chinese Vice Foreign Minister Le Yucheng said, “The actions of the US seriously violated the lawful and legitimate rights of the Chinese citizen, and by their nature were extremely nasty.”

If the case makes it to the US (depending on Canada), it will likely involve several government forces including the Department of Justice (DOJ), the Office of Foreign Assets Control (OFAC), the Commerce Department’s Bureau of Industry and Security (BIS), and US Customs Enforcement.

More information: https://www.reuters.com/article/us-usa-china-huawei/huawei-cfo-seeks-bail-on-health-concerns-canada-wants-her-in-jail-idUSKBN1O80GL

https://www.cnbc.com/2018/12/18/huawei-cfo-meng-wanzhou-extradition-case-what-happens-next.html


Reimposition of Iran Sanctions Starts

2018/12/23

On November 5, 2018 the Office of Foreign Assets Control (OFAC) began to re-impose several sanctions on Iran related to the 180-day wind-down period and the reimposition of US sanctions that had been lifted or waived in connection with the Joint Comprehensive Plan of Action (JCPOA).

The biggest change you will see is that over 700 people have been designated or identified and added to the SDN list, including those that had been recently removed from the list in connection with JCPOA. In addition, person and associated block property that was previously identified on Executive Order (EO) 13599 have been moved to the SDN list and OFAC has removed EO 13599 from its website.

An amendment to the Iranian Transactions Sanctions Regulations (ITSR) has taken affect and will reimpose certain sanctions pursuant to EO 13846 and technical changes that remove references to EO 13599.

OFAC Frequently Asked Questions: https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#630

Notice: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20181105.aspx


Texas Man Sentenced to 6 years in Prison for Cuba Embargo Violations

2018/10/30

By: Danielle Hatch

Bryan Evan Singer, 46, of Bryan Texas was sentenced to 6.5 years in prison on September 27, 2018 for attempting to export electronic devices to Cuba. On May 2, 2017 Singer was traveling from Stock Island, Florida to Havana, Cuba via his boat “La Mala” when law enforcement stopped him to conduct an outbound inspection of the boat. During the inspection, Singer explained that he was only taking items to Cuba that were on the deck of his boat and that the value of the items was less than $2,500 (possibly suspicious or a red flag). Law enforcement continued to search the boat and found a hidden compartment under a bolted down bed in the cabin where they discovered over $30,000 worth of electronic devices. Of those devices, there were 300 Ubiquiti Nanostation Network devices which allow for highly encrypted connections between computer networks over long distances, making a license required to export them to Cuba.

Singer did not apply for a license for the items…in case you didn’t already guess that.

Justice: https://www.justice.gov/usao-sdfl/pr/texas-resident-sentenced-south-florida-more-6-years-prison-violations-cuban-embargo


OFAC Reaches $5 Million Settlement with JPMorgan Chase Bank

2018/10/30

By: Danielle Hatch

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced this month that it had reached a $5,263,171 settlement with JPMorgan Chase Bank, N.A. for 87 violations of the Cuban Assets Control Regulations, the Iranian Transactions and Sanctions Regulations, and the Weapons of Mass Destruction Proliferators Sanctions Regulations.

The transactions were net settlement payments with a very small portion being provided to the interests of airlines that were on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), blocked pursuant to OFAC sanctions, or located in countries subject to OFAC sanctions. The transactions included airline freight charges which are not exempt from the prohibitions of the International Emergency Economic Powers Act (IEEPA).

On a separate issue, OFAC issued a Finding of Violation to JPMC for violations of the Foreign Narcotics Kingpin Sanctions Regulations and the Syrian Sanctions Regulations. Between 2011 and 2014 JPMC processed 85 transactions worth $46,127.04 held accounts on behalf of six customers who were on the SDN list.

In both situations JPMC voluntarily disclosed the violations and they were considered to be non-egregious violations by OFAC.

Settlement Agreement: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20181005.aspx


Chinese Intelligence Officer Charged with Espionage and Stealing Trade Secrets

2018/10/30

By: Danielle Hatch

Yanjun Xu (aka Qu Hui and aka Zhang Hui), a Chinese Ministry of State Security (MSS) operative, has been arrested and charged with conspiring and attempting to commit economic espionage and stealing trade secrets from several US aviation and aerospace companies. The MSS is the intelligence and security agency for China and is responsible for counter-intelligence, foreign intelligence and political security. It has the power to conduct espionage both in China and abroad.

The indictment explains that from 2013 to 2018, Xu targeted certain aviation companies (in and outside of the US) and proceeded to contact specific experts who worked within those companies. Xu was able to get some of them to travel to China, under the pretense that they would be delivering a university presentation. These employees travel was paid for in addition to stipends by Xu. GE Aviation was one of the companies listed in the indictment that Xu encountered.

Xu was extradited to the US this month, Assistant Director Bill Priestap of the FBI’s Counterintelligence Division explained, “This unprecedented extradition of a Chinese intelligence officer exposed the Chinese government’s direct oversight of economic espionage against the United States.”

Justice: https://www.justice.gov/opa/pr/chinese-intelligence-officer-charged-economic-espionage-involving-theft-trade-secrets-leading


Chinese National Sentenced to 46 Months in Prison for Illegal Exports

2018/10/29

By: Danielle Hatch

Si Chen, 33, known as “Cathy Chen” plead guilty to illegally exporting sensitive space communications technology to China was sentenced this month to 46 months in prison. Chen was arrested in May 2017 after an investigation by the Office of Export Enforcement uncovered her elaborate scheme involving illegal exports, money laundering, and forged passports.

Court documents show that from March 2013 to the end of 2015, Chen purchased and smuggled “jammers” which are used in military communications as well as devices used in space communication applications. The devices were worth more than $100,000 and required a license from the Department of Commerce for regional stability and national security reasons. Chen forged her passport, she used a Chinese passport with her photo on it and the name, “Chunping Ji” which she used to rent an office in Pomona, California where she would receive the export-controlled items. After she had the items, she would then ship them to Hong Kong using the false name on the passport, false product descriptions, and she undervalued the items on the shipping documents to avoid red flags or suspicions. Once the items reached Hong Kong they were then transshipped to China. Chen received the money for the items via an account at a bank in China in one of her family member’s names once the items reached China.

United States Attorney Nick Hana explained during the sentencing, “This defendant knowingly participated in a plot to secretly send items with military applications to China. The smuggled items would be used in a number of damaging ways, including in equipment that could jam our satellite communications. We will aggressively target all persons who provide foreign agents with technology in violation of US law.”

Justice: https://www.justice.gov/usao-cdca/pr/pomona-woman-sentenced-federal-prison-scheme-smuggle-restricted-space-communications


Owner of Defense Firm Charged with Defrauding DOD out of 7 Million in Contracts

2018/09/27

By: Danielle Hatch

Ferdi Murat Gul (Fred Gul), 42, of Turkey has been indicted by a grand jury on the following counts:

  • One count of conspiracy to commit wire fraud
  • Six counts of wire fraud
  • One count of conspiracy to violate the Arms Export Control Act (AECA)
  • Once substantive count of violating the Arms Export Control Act

Gul is the principal owner, chief executive office, and general manager of Bright Machinery Manufacturing Group Inc. (BMM), a defense contracting company in New Jersey and FMG Machinery Group (FMG), a purported manufacturing company in New York. He also has an ownership interest in HFMG Insaat (HFMG), a manufacturing company located in Turkey.

Between October 2010 and June 2015 Gul would submit bids for DoD contracts for BMM, he would submit quotes based on BMM providing military goods manufactured in the US. BMM actually relied on Gul’s Turkish company, HFMG for the goods. Over the course of 5 years BMM was awarded approximately $7 million in DoD contracts. BMM fraudulently won 346 contracts to manufacture torpedoes for the US Navy, bomb ejector racks, and armament utilized in US Air Force aircraft, and firearms and mine clearance systems used by US military abroad. Later testing by the DoD exposed the some parts had several design flaws and were unusable.

Gul and his conspirators hid the fraudulent activity from the government by submitting forged certifications and fabricated information by email to DoD. They also falsely claimed that they performed quality control on the procedures and parts sold to DoD. To have HFMG create the parts for BMM, Gul exported drawings and technical data to Turkey. Some of this information was subject to the International Traffic in Arms Regulations (ITAR) and required a license form the State Department.

The wire fraud counts carry a maximum penalty of 20 years in prison and a fine of $250,000. The Arms Export Control Act violations carry a maximum penalty of 20 years in prison and a $1 million fine.

Ferdi Murat Gul is currently at large and believed to be in Turkey. Also remember…The charges and allegations of this indictment are merely accusations, and the defendant is considered innocent until proven guilty (cue sound from Law & Order).

Department of Justice: https://www.justice.gov/usao-nj/pr/owner-defense-firm-charged-conspiracy-defraud-department-defense-7-million-violate-arms


Swedish Telecom Company Pays Penalty for Sanctions Violation

2018/08/30

By: Thad McBride on July 19, 2018

Thad McBride is a member at Bass, Berry & Sims PLC (Washington, DC) and leads the firm’s International Trade Practice Group. He regularly counsels clients on compliance matters related to economic sanctions and embargoes, export controls, CFIUS, US anti-boycott controls, customs, and other import controls. In addition, he guides clients through internal audits and investigations and represents companies facing government investigations and enforcement actions. He is a regular contributor to the firm’s Government Contracts and International Trade blog and can be reached at tmcbride@bassberry.com

POSTED IN INTERNATIONAL TRADESANCTIONS (OFAC)

  • Ericsson Caused Violation by Having U.S. Party Ship Equipment to Sudan
  • U.S. Employee Facilitated Sudan Business
  • OFAC Expects Parties Conducting International Business to Have Robust Compliance Processes

In June 2018, the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) announced that Ericsson, a Swedish telecommunications company, agreedto pay approximately $145,000 for violating U.S. sanctions on Sudan.  Among other things, this is one of the few OFAC enforcement actions explicitly premised on a non-U.S. actor causing a U.S. company to violate U.S. sanctions.

Non-U.S. Companies Can Violate Sanctions If They Cause a Violation

According to OFAC, the violations involved Ericsson, AB (EAB), which is based in Sweden, causing a U.S. seller of a satellite hub to export that hub from the United States to Sudan.  Interestingly, in connection with EAB’s purchase of the satellite hub, an EAB employee communicated about the matter with Ericsson’s compliance department.  In those communications, the EAB employee was informed that the purchase of the satellite would violate Ericsson’s sanctions compliance policy.

Yet the EAB employee proceeded with the acquisition, with support from an Ericsson employee in the United States.  OFAC asserted that the two Ericsson employees agreed to identify “Botswana” as the destination of the satellite hub.  The EAB employee then structured the acquisition so that the satellite hub was shipped through several other countries, including with help from a third party in Lebanon, before eventually arriving in Sudan.

U.S. Employee Facilitated Transaction by Supporting the Sudan Business

It appears that, when the Ericsson U.S. employee was first contacted by his counterparts at EAB, he informed them that he could not be involved in any Sudan business.  But subsequently, he did assist his EAB counterparts by providing technical guidance related to the Sudan project.  (The U.S. employee sent one e-mail related to Sudan in which “East Africa” was listed as the subject of the e-mail.)  The U.S. employee also met in person with an EAB employee to discuss the project.

There is no indication that the U.S. employee had any role in purchasing or shipping the satellite hub to Sudan.  Nonetheless, by providing guidance and advice about the Sudan project, the U.S. employee facilitated that project and thereby violated U.S. sanctions on Sudan.  Like other U.S. sanctions programs, under U.S. sanctions on Sudan, U.S. persons were prohibited from indirectly supporting (or facilitating) a project in Sudan that the U.S. person could not engage in directly.

Conduct Occurred Well Before Recent Lifting of U.S. Sanctions on Sudan

As we have discussed in prior blog posts (see this January 2018 blog post), it typically takes a long time for OFAC to impose penalties for sanctions violations.  The conduct at issue in the Ericsson matter occurred in 2011 and 2012.  Ericsson tolled the statute of limitations during OFAC’s investigation of the matter.

In fact, by the time Ericsson agreed to settle the matter, U.S. sanctions on Sudan had been lifted.  However, the U.S. government does maintain export controls on Sudan under the Export Administration Regulations.  As a result, an export license is needed to export most U.S.-origin items to Sudan, even though economic sanctions have been lifted.

This illustrates one of the practical challenges for U.S. companies considering business in Sudan.  Discussions about that business and even the provision of business services are generally permitted without a license.  Actual exports of products still usually require a license.  So Sudan is not entirely open for business from a U.S. perspective.

Compliance Is Complicated, Appropriate Resources Are Needed

The compliance narrative in this matter is jumbled.  As detailed above, the Ericsson compliance department advised the EAB employee – correctly – about the potential liability associated with Sudan business.  The U.S. employee of Ericsson originally responded to requests related to Sudan by stating his inability to work on a Sudan project.  Yet both the EAB employee and the Ericsson U.S. employee proceeded with the Sudan business.

This seems on its face like a situation in which company employees went rogue.  Notably, the company disclosed the violation to OFAC, which is one reason that OFAC imposed a penalty well below the statutory maximum amount (roughly $360,000).

Yet in imposing any penalty, OFAC indicates that Ericsson could have done better.  In particular, in the press release related to the matter, OFAC states the following:

This enforcement action highlights the importance of empowering compliance personnel to prevent transactions prohibited by U.S. economic and trade sanctions.  Entities should ensure their sanctions compliance teams are adequately staffed, receive sufficient technology and other resources, and are delegated appropriate authority to ensure compliance efforts meet an entity’s risk profile.

The Bass, Berry & Sims international trade team works closely with clients to assess their risks and put in place effective, cost-efficient measures to prevent and detect trade compliance violations.  OFAC clearly expects such measures.  Feel free to contact us anytime if we can assist in developing and implementing them.