Archive for the ‘Sanctions’ Category

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.


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.

 


Use Caution: Air Cargo Industry Experiences Increasing Compliance Regulations

2018/06/29

By: Ashleigh Foor

(Source: Bobsguide, 29 May 2018.)

Air cargo industry, be warned: regulations are ever-increasing in 2018, leading to more fines and penalties for those involved in illegal trade. A Maersk company recently violated international sanctions by carrying arms components with the potential for military use from North Korea to Egypt. This is just one example of what appears to be a lack of strong compliance procedures that diligently screen parties, goods, and destinations involved in a transport.

The use of air cargo continues to increase as it is the fastest means of transport for sending goods all over the world, but with many high profile sanctions breaches in the news many are left wondering if the industry can abide by these increasing regulations while still fulfilling the need for speedy exports. These new levels of regulation are due to the air cargo industry being used to launder money and fulfill terrorist objectives. Air cargo companies are currently required to check Airway Bills (AWBs) against sanctions and dual-use goods watch lists. Noncompliance can lead to hefty fines, loss of export/import privileges, along with reputational damage and even prison time.

The air cargo industry is in danger of losing its competitive advantage – speed – due to the burden of compliance regulations. The International Air Transport Association (IATA) believes that if these increased regulations are not dealt with and followed efficiently then costs will increase – slowing transit and hurting the industry’s unique selling point.

Currently, around 50% of AWBs globally are still processed on paper rather than electronically (e-AWBs). IATA is highly recommending a change from outdated paper-based processes to automated and digital screening solutions so that airway bills are verified with speed and accuracy. Companies that still rely on manual checks are at an immediate disadvantage.

One air cargo company leading the way in overhauling its compliance processes is Lufthansa Cargo. They have implemented a digital sanctions and dual-use goods screening engine that automatically checks cargo documentation to identify any irregularities that could pose a risk. The technology scans descriptions of goods to identify if they have the potential for military use as well as checks origin and destination locations to confirm the cargo is not moving to or from a sanctioned territory.

With all of the changes taking place and scandals in the headlines recently, automation and digitization of processes are not simply great goals to strive towards – they’re expected and necessary for staying compliant. Air cargo companies must evolve to meet higher regulatory requirements, and ultimately, to do their part in protecting global security.


Turkish Banker Receives 32 Months for Violating U.S. Sanctions Against Iran Involving Billions of Dollars

2018/05/30

By: Ashleigh Foor

On January 3, 2018, a five-week jury trial wrapped up and convicted Mehmet Hakan Atilla, 47, a resident and citizen of Turkey, to 32 months for conspiring with others in a scheme to violate U.S. economic sanctions imposed on the Islamic Republic of Iran. The violation involved billions of dollars’ worth of Iranian oil proceeds held at Atilla’s employer (Turkish Bank-1).

Atilla, a Turkish banker, Reza Zarrab, an international gold trader, and others defrauded U.S. financial institutions by using them to conduct transactions on behalf of the government of Iran and other Iranian entities which were barred by U.S. sanction. They did so by making these transactions falsely appear as if they involved food, therefore falling within humanitarian exceptions to the sanctions regime.

Atilla lied to U.S. Treasury officials about Turkish Bank-1’s activities and its supposed compliance efforts to avoid subjecting the bank to U.S. sanctions. Atilla and his co-conspirators’ deceptions led U.S. banks to unknowingly process international financial transactions in violation of the IEEPA, and to launder through the U.S. financial system funds promoting the scheme.


Summary of the Presidential Memorandum: “Ceasing U.S. Participation in the JCPOA and Taking Additional Action to Counter Iran’s Malign Influence and Deny Iran All Paths to a Nuclear Weapon”

2018/05/30

By: Ashleigh Foor

(Source: The White House)

On May 8, 2018, President Trump addressed the United States in a Presidential Memorandum, “Ceasing U.S. Participation in the JCPOA and Taking Additional Action to Counter Iran’s Malign Influence and Deny Iran All Paths to a Nuclear Weapon”. He started by stating that the safety and security of the United States and the American people is his highest priority. He then stated that since the inception of the Islamic Republic of Iran in 1979, the revolutionary theocracy has declared its hostility toward the United States and remains the world’s leading state sponsor of terrorism, listing other offenses such as human rights abuses and proving assistance to Hezbollah, Hamas, the Taliban, al-Qa’ida, and other terrorist networks.

“There is no doubt that Iran previously attempted to bolster its revolutionary aims through the pursuit of nuclear weapons and that Iran’s uranium enrichment program continues to give it the capability to reconstitute its weapons-grade uranium program if it so chooses,” stated the President. Therefore, as President, he has approved an “integrated strategy for Iran that includes the strategic objective of denying Iran all paths to a nuclear weapon.”

Trump then goes on to explain the preceding administration’s participation in the Joint Comprehensive Plan of Action (JCPOA) as an attempt to meet the threat of Iran’s pursuit of nuclear capabilities. Although some believed the JCPOA would moderate Iran’s behavior, he said, Iran has only escalated its destabilizing activities. “Iran’s behavior threatens the national interest of the United States,” said the President. On January 12, 2018, Trump outlined two paths moving forward – that the JCPOA’s “disastrous flaws would be fixed by May 12, 2018, or, failing that, the United States would cease participation in the agreement.” He states that these issues were not fixed and that he is making good on his pledge to end the United States’ participation in the JCPOA. “Further, I have determined that it is in the national interest of the United States to re-impose sanctions lifted or waived in connection with the JCPOA as expeditiously as possible,” Trump stated.

The changes are outlined below:

Section 1.  Policy.  It is the policy of the United States that Iran be denied a nuclear weapon and intercontinental ballistic missiles; that Iran’s network and campaign of regional aggression be neutralized; to disrupt, degrade, or deny the Islamic Revolutionary Guards Corps and its surrogates access to the resources that sustain their destabilizing activities; and to counter Iran’s aggressive development of missiles and other asymmetric and conventional weapons capabilities.  The United States will continue to pursue these aims and the objectives contained in the Iran strategy that I announced on October 13, 2017, adjusting the ways and means to achieve them as required.

Sec. 2.  Ending United States Participation in the JCPOA.  The Secretary of State shall, in consultation with the Secretary of the Treasury and the Secretary of Energy, take all appropriate steps to cease the participation of the United States in the JCPOA.

Sec. 3.  Restoring United States Sanctions.  The Secretary of State and the Secretary of the Treasury shall immediately begin taking steps to re-impose all United States sanctions lifted or waived in connection with the JCPOA, including those under the National Defense Authorization Act for Fiscal Year 2012, the Iran Sanctions Act of 1996, the Iran Threat Reduction and Syria Human Rights Act of 2012, and the Iran Freedom and Counter-proliferation Act of 2012.  These steps shall be accomplished as expeditiously as possible, and in no case later than 180 days from the date of this memorandum.  The Secretary of State and the Secretary of the Treasury shall coordinate, as appropriate, on steps needed to achieve this aim.  They shall, for example, coordinate with respect to preparing any recommended executive actions, including appropriate documents to re-impose sanctions lifted by Executive Order 13716 of January 16, 2016; preparing to re-list persons removed, in connection with the JCPOA, from any relevant sanctions lists, as appropriate; revising relevant sanctions regulations; issuing limited waivers during the wind-down period, as appropriate; and preparing guidance necessary to educate United States and non-United States business communities on the scope of prohibited and sanctionable activity and the need to unwind any such dealings with Iranian persons.  Those steps should be accomplished in a manner that, to the extent reasonably practicable, shifts the financial burden of unwinding any transaction or course of dealing primarily onto Iran or the Iranian counterparty.

Sec. 4.  Preparing for Regional Contingencies.  The Secretary of Defense and heads of any other relevant agencies shall prepare to meet, swiftly and decisively, all possible modes of Iranian aggression against the United States, our allies, and our partners.  The Department of Defense shall ensure that the United States develops and retains the means to stop Iran from developing or acquiring a nuclear weapon and related delivery systems.

Sec. 5.  Monitoring Iran’s Nuclear Conduct and Consultation with Allies and Partners.  Agencies shall take appropriate steps to enable the United States to continue to monitor Iran’s nuclear conduct.  I am open to consultations with allies and partners on future international agreements to counter the full range of Iran’s threats, including the nuclear weapon and intercontinental ballistic missile threats, and the heads of agencies shall advise me, as appropriate, regarding opportunities for such consultations.

Sec. 6.  General Provisions.

(a)  Nothing in this memorandum shall be construed to impair or otherwise affect:

(i)   the authority granted by law to an executive department or agency, or the head thereof; or

(ii)  the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b)  This memorandum shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c)  This memorandum is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.


Treasury/OFAC Amends and Reissues North Korea Sanctions Regulations

2018/04/04

(Source: Treasury/OFAC)

The Department of the Treasury’s Office of Foreign Assets Control (OFAC) is announcing the amendment and reissuance in its entirety of the North Korea Sanctions Regulations, 31 C.F.R. part 510, in order to implement Executive Order (E.O.) 13687, E.O. 13722, and E.O. 13810, and to reference the North Korea Sanctions and Policy Enhancement Act of 2016 and the Countering America’s Adversaries Through Sanctions Act of 2017.  Pursuant to these authorities, all property and interests in property of the Government of North Korea and the Workers’ Party of Korea are blocked, and U.S. persons are generally prohibited from engaging in transactions with them without authorization from OFAC and must block property or interests in property that are in, or come within, the United States or the possession of a U.S. person.  In addition, these authorities provide the Secretary of the Treasury, in consultation with the Secretary of State, additional tools to disrupt North Korea’s ability to fund its weapons of mass destruction and ballistic missile programs.  OFAC is also publishing new and updated North Korea-related FAQs.

The Regulations and the FAQs emphasize that all U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all individuals and entities within the United States, and all U.S.-incorporated entities and their foreign branches.  Furthermore, all transactions within the United States, including all financial transactions that transit the U.S. financial system, must comply with OFAC regulations.  For additional information, see FAQ 11 and 31 C.F.R. part 510, subpart G.

Violations of the North Korea Sanctions Regulations, issued under the authority of the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06 (IEEPA), and other statutes can result in substantial civil monetary penalties, referral for criminal prosecution, or both.  Each violation of the North Korea Sanctions Regulations is subject to a civil monetary penalty of up to the greater of the IEEPA statutory maximum ($289,238 as of March 1, 2018) or twice the value of the underlying transaction.  Criminal penalties of IEEPA can reach $1,000,000 and 20 years imprisonment per violation.  For additional information, see FAQ 12 and 31 C.F.R. part 510, subpart G.

For additional information regarding OFAC’s prohibitions and penalties, see Basic Information on OFAC and Sanctions.

The regulations will be published in the Federal Register, and the changes will take effect, on: March 5, 2018.

Further information about the North Korea sanctions may be found here


Company Pays $1,220,400 for 37 Violations of the Iranian Transactions and Sanctions Regulations

2018/02/08

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced in December 2017, a $1,220,400 settlement with DENTSPLY SIRONA INC. (DSI), a US company with the successor in interest to DENTSPLY International Inc. (“DII” and, together with DSI, “DENTSPLY”) to settle a potential civil liability for 37 apparent violations of § 560.204 of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (ITSR).

Around November 26, 2009 and July 5, 2012, DII subsidiaries UK International (“UKI”) and DS Healthcare Inc. (d.b.a. Sultan Healthcare), (“Sultan”), exported 37 shipments of dental equipment and supplies from the US, directly or indirectly to Iran, to distributors in third-countries, with knowledge or reason to know that the goods were ultimately destined for Iran.  OFAC determined that DII did not voluntarily disclose the apparent violations and that the apparent violations constitute a non-egregious case.

Full Details: https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20171206.aspx


US Firms Part Ways with China’s ZTE Monitor

2018/02/08

In early 2017 China’s largest telecommunications company agreed to pay a nearly $900 million penalty to the US after entering a guilty plea for illegally shipping goods to Iran and North Korea. ZTE was charged with 380 violations of the EAR, including (1) Conspiracy (2) Acting with Knowledge of a violation in Connection with Unlicensed Shipments of Telecommunications Items to North Korea via China and (3) Evasion. The company also entered into a settlement with OFAC for violating the Iranian Transactions and Sanctions Regulations (“ITSR”; 31 CFR Part 560). More Information on these charges can be found here.

Part of the settlement with OFAC required the company to hire an initial independent compliance monitor approved by the US government for a three-year term. The monitor is responsible for preparing the initial three annual audit reports to be provided to the US government. In addition, ZTE had to hire an independent compliance auditor, also approved by the US government, for an additional three years to prepare the remaining three annual audit reports.

Guidepost Solutions and Larkin Trade International were hired in June 2017 by the US monitor, James Stanton, a Texas civil and personal injury lawyer in charge of the oversite regime for ZTE. Stanton’s job is to help evaluate ZTE’s US export controls compliance and sanctions laws, and mitigate any future violations. US District Judge Ed Kinkeade, who presided over the ZTE sanctions case, actually rewrote the agreement to put Stanton in charge of monitoring the company before signing off on the plea deal. It has been said that Stanton has a lack of experience in US trade controls and the order naming him is sealed, leaving the reasoning behind the judge’s decision unclear. This situation is a bit of an anomaly because generally, the Department of Justice chooses an independent monitor in corporate criminal cases from candidates proposed by the company, which is how the agreement was originally written before Judge Kinkeade rewrote it. ZTE and the Justice Department agreed to Judge Kinkeade’s choice and the changes to the monitorship agreement, sources said, because the plea had already been negotiated and filed in the judge’s court and a temporary license allowing ZTE to continue to obtain US made goods was about to expire.

In December 2017, rumors broke out that Guidepost Solutions and Larkin Trade International had resigned in August 2017 from the job of actively auditing ZTE. Although the exact reason is unclear, some say it was a result of  Stanton restricting their access to ZTE documents and officials, which ultimately hindered their ability to effectively monitor the company. Stanton’s first report was due to the US government last month and this report, as well as the subsequent 2 reports will decide whether the company is liable for an additional fine of $300 million or being added to the US denial list.

Nearly all parties related to the case, including Guidepost Solutions, Larkin Trade International, Judge Ed Kinkeade, and James Stanton have all declined requests for comments based on this news. Additional details about this story and the ties between Judge Kinkeade and James Stanton can be found at https://www.reuters.com/article/us-usa-zte-exclusive/u-s-experts-resign-from-monitoring-chinas-zte-corp-sources-idUSKBN1EG03R


Impact of President Trump’s Iran Policy Announcement: No Changes for Now, but the Future of the JCPOA Remains Uncertain

2017/11/15

By: Glen Kelley, Doug Jacobson, Michael Burton & David Brummond Jacobson Burton Kelley PLLC

www.jbktradelaw.com

On October 13, 2017 President Trump announced the long-awaited results of his Administration’s Iran policy review. The key aspect of the announcement was that President Trump will not renew certification of Iranian compliance with the Joint Comprehensive Plan of Action (“JCPOA”) as required by the Iran Nuclear Agreement Review Act of 2015 (“INARA”), a law passed by the US Congress to provide oversight of the JCPOA. President Trump stated that his decision was made because Iran “has committed multiple violations of the JCPOA” and “has not lived up to the spirit of the agreement.”

President Trump also stated that he will “terminate” US participation in the JCPOA unless the parties to the JCPOA agree to make various changes to the JCPOA and that he will request the US Congress to modify INARA to reflect the Administration’s concerns. Following President Trump’s announcement, OFAC designated the Iranian Revolutionary Guard Corps (“IRGC”) as a Specially Designated Global Terrorist (SDGT) as required by Congress in a law passed in August 2017. While there has been much discussion on the designation of the IRGC as a SDGT, in practice the designation was purely symbolic as the IRGC has been listed on OFAC’s Specially Designated National List since 2007 under various Executive Orders.

Though significant, these announcements do not trigger any changes in the status of the JCPOA or to existing US sanctions.

Following the President’s announcement, Secretary of State Rex Tillerson indicated that staying in the JCPOA “was in the best interests of the US.” In addition, Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker said yesterday that it “is important not to confuse the internal US legal process of certification under INARA with our continued implementation of the JCPOA.”

President Trump’s decision not to certify Iran’s compliance with the JCPOA under Inara now shifts the burden to the US Congress, which could in the coming months reimpose some or all of the secondary sanctions on Iran that were waived on January 16, 2016 when the JCPOA was implemented. In addition, President Trump could in the future refuse to waive the secondary sanctions on Iran that remain suspended and could direct OFAC to terminate OFAC General License H.

While the US position on Iran should become clearer in the coming months, President Trump’s continued criticism of the JCPOA increases the uncertainty regarding (1) the future of US sanctions relief that was a key part of the nuclear agreement with Iran, and (2) whether non-US companies will continue to be able to conduct business with Iran without fear or being subject to US sanctions.

Increased Risk of US Withdrawal from JCPOA and “Snap-Back” of US Sanctions on Iran

It is important to recall that the US has suspended only a small portion of its Iran sanctions for US companies (relating to commercial aircraft), and “US persons” remain prohibited from nearly all transactions involving Iran or its government.

Nearly all of the suspended US sanctions were “secondary” sanctions primarily directed at non-US companies and individuals. The recent events increase the risk of reimposition or “snap-back” of US sanctions, which could be done in one of the following ways:

1. Reimposition of Sanctions Within Next 60 Days – Once the President fails to certify Iran’s compliance with the JCPOA, Congress can pass “qualifying legislation” under INARA in 60 days choosing to reimpose all or some of the Iranian sanctions that have been suspended. However, there does not appear to be significant interest by Congress to proceed in this direction at this time and it is not likely that the necessary votes can be obtained to proceed under this route.

2. Contingent Future Sanctions – Another scenario that is being contemplated by congressional leadership (the Corker-Cotton proposal) is to amend INARA to automatically reimpose US sanctions on Iran’s nuclear program in the future if Iran crosses key thresholds. Among the thresholds being considered is if weapons-grade nuclear material accumulates to the point where there is less than a one-year “breakout” period for obtaining a nuclear weapon.

3. Failure to Waive Suspended Sanctions – Under the JCPOA the President must waive the various sanctions that were suspended. Depending on the underlying law, these waivers must be renewed every 120 days to every six months. It is possible that the Trump Administration could simply choose not to renew one or more of the waivers, which would automatically reimpose the US sanctions. The next waiver deadline is in mid-January 2018. Such action would not require congressional approval and would effectively snap-back sanctions on Iran.

4. Unilateral Withdrawal from JCPOA – The JCPOA does not specifically authorize any party to the agreement to “withdraw.” However, the US could choose to cease implementing its commitments under the agreement, which would effectively lead to US abrogation of the JCPOA.

Next Steps and Practical Impact

Because the JCPOA is a multilateral arrangement, a decision by the US to withdraw from the agreement or to reimpose sanctions would have significant ramifications. Iran has threatened to stop complying with its commitments to curtail its nuclear program if the US reimposes sanctions. The costs of Iran’s reinitiating its nuclear program, however, could undercut the sanctions relief it has received from trading partners other than the US. The EU has made clear that if the suspended US sanctions are reimposed, the EU intends to continue to abide by the terms of the JCPOA so long as Iran does. If US sanctions are reimposed, the EU member states would likely support their companies in their Iranian activity and would strongly oppose any US government move to penalize them under reimposed sanctions. There is also the possibility that the EU would expand its sanctions blocking legislation (sometimes referred to in the EU as antiboycott laws) to cover US secondary sanctions on Iran. If Iran stopped complying with the JCPOA, the EU member states would likely withdraw their support for their companies’ activities in Iran, and might even move to the dispute resolution procedures of the JCPOA or a UN Security Council review, which could lead to the reimposition of EU sanctions.

While we are currently in uncharted waters and are dealing with an unpredictable US Administration, the following is a summary of the possible changes to impact on the JCPOA and US sanctions:

1. Incremental non-nuclear additional sanctions are likely, but the reimposition of the suspended US secondary sanctions or other major changes in the near future seem unlikely at this time. It is important to recall that there have been no immediate changes to US sanctions on Iran.

2. The Trump Administration could terminate US participation in the JCPOA and reimpose sanctions in the future, if insufficient progress is made with the parties to the JCPOA to address certain concerns relating to Iran. There are early indications that EU leaders might try to find a way to provide these additional assurances from Iran regarding their activities of concern.

3. The US could reimpose the suspended secondary (extraterritorial) sanctions. While appearing dramatic, this may not have much practical impact on many non-US companies. Moreover, if discreet secondary (extraterritorial) sanctions are “snapped-back”, it seems likely the EU and its member states would defend EU-based companies from the adverse economic consequences of a reimposition of sanctions.

4. If US sanctions are reimposed, there is reason to believe that Iran, after protesting, would continue to abide by its JCPOA commitments, particularly if it remains clear that the EU and other countries involved in the JCPOA intend to continue to abide by its terms and authorize business with Iran. Of course it is possible that Iran would follow through on its threat to pull out, and this likely would have a more dramatic practical impact.

Whatever the outcome, the OFAC policy that authorizes the export of US-origin humanitarian products to Iran, including medicine, medical devices, and agricultural products, will remain unchanged, just as it was during the height of US sanctions. However, payments for these transactions remains difficult due to the reluctance of many non-US banks to handle Iran-related payments.


Expanded Russia, Iran, and North Korea Sanctions: Top 10 Takeaways

2017/10/16

(Source: Latham & Watkins LLP)

Authors: Les P. Carnegie, Esq., les.carnegie@lw.com, 202-637-1096; and William M. McGlone, Esq., william.mcglone@lw.com, 202-637-2202

President Trump signs the “Countering America’s Adversaries Through Sanctions Act,” which – among other measures – requires Congressional review to ease Russia-related sanctions.

On Wednesday, August 2, 2017, President Trump signed into law the Countering America’s Adversaries Through Sanctions Act (the Act). The Act significantly expands and codifies US sanctions targeting Russia, and it adds several measures to the already comprehensive US sanctions on Iran and North Korea. The Act passed both houses of Congress last week, with a vote of 419-3 in the House of Representatives and 98-2 in the Senate.

The Act is particularly significant because it codifies many of the Russia-related sanctions measures introduced by President Obama through executive orders, effectively requiring President Trump to secure Congressional approval before easing the targeted US sanctions relating to Russia. Russian President Vladimir Putin has announced his intention to impose retaliatory sanctions in response to the Act, and the Russian Foreign Ministry reportedly ordered a more than 60% cut in US diplomatic staff and suspended use of two US facilities in Russia.

Here are the top 10 takeaways from the Act:

RUSSIA-RELATED SANCTIONS

(1) Codifying and Expanding Existing Sanctions.

The Act codifies the following Executive Orders issued by President Obama: Executive Orders 1366013661136621368513694, and 13757. Among other measures, these Executive Orders imposed a virtual embargo on the Crimea region of Ukraine; imposed sanctions against perpetrators of malicious cyber activity and designated Russian and Ukrainian individuals, including government officials and oligarchs; and provided the underlying authority for Office of Foreign Assets Control (OFAC) Directive 1Directive 2Directive 3, and Directive 4.

The first three OFAC Directives prohibit US persons from extending medium- to long-term credit, or otherwise dealing in “new” debt (and in some cases “new” equity), of designated Russian financial institutions, energy firms, and companies in the defense sector. Directive 4 prohibits US persons from providing goods, software, technology, and services in support of certain non-conventional oil projects in Russia.

The Act expands certain of these Executive Orders and Directives:

* The Act gives the US Treasury Secretary the power to impose sanctions pursuant to Executive Order 13662, including the financing-type sanctions found in the OFAC Directives, against state-owned parties in Russia in the railways, metals, and mining sectors of the Russian economy. Prior to the Act, the targeted sectors were limited to the financial, energy, and defense sectors.

* No later than 60 days after enactment of the Act (or approximately the beginning of October), the US Treasury Secretary must modify Directive 1 to reduce the “new” debt prohibition to 14 days, down from the current 30 days, and Directive 2 from the current 90 days to 60 days. These 14-day and 60-day changes will be effective 60 days after the Directives are modified, which provides some time for US parties to adjust to this change. Notably, current OFAC interpretation (see OFAC FAQ # 419) is that extending payment terms of more than 30 days to a Directive 1 target violates the “new debt” prohibition, meaning that payment terms to Directive 1 parties will need to be reduced to no more than two weeks. The same is the case with respect to Directive 2 targets, for which the payment term requirement will be reduced to 60 days.

– The Act also requires the US Treasury Secretary to, within 180 days of enactment, submit to Congress a report “describing in detail the potential effects of expanding sanctions under Directive 1 … to include sovereign debt and the full range of derivative products.”

* No later than 90 days after the Act’s enactment (or approximately the beginning of November), the US Treasury Secretary must modify Directive 4, to prohibit US persons not only from providing goods, services (other than financial services), and technology to projects in Russia relating to the exploration or production for oil for deepwater, Arctic offshore, or shale projects, but to such projects anywhere in the world. Notably, the Directive’s expansion appears to reach non-conventional exploration and production beyond Russia, applies only to “new” deepwater, Arctic offshore, or shale projects, and only those projects where the Directive 4 target “has a controlling interest or a substantial non-controlling ownership interest in such a project defined as not less than a 33 percent interest.”

– This “new” and “substantial non-controlling ownership interest” language was added by the House to the Senate version, in an attempt to ease concerns raised by US energy firms and European allies regarding the breadth of the provision. This new provision will be effective 90 days after the US Treasury Secretary modifies Directive 4.

(2) Congressional Oversight of the President’s Russia-Related Actions.

Notably, the Act gives the US Congress the opportunity during a 30-day review period to disapprove of any effort by the President to reduce, waive, or eliminate US sanctions relating to Russia. Section 216 of the Act gives Congress the power to review (i) any action to terminate the application of the sanctions in the Act, the codified Executive Orders mentioned above, and certain other statutes; (ii) any action to waive the application of sanctions targeted at certain persons, such as parties added to the Specially Designated Nationals and Blocked Persons list (SDN List) or the List of Sectoral Sanctions Identifications parties (SSI List), or (iii) any “licensing action that significantly alters United States’ foreign policy with regard to the Russian Federation.”

(3) Energy Pipeline Secondary Sanctions.

The Act gives the President the power to impose, but does not require, secondary sanctions on foreign persons that knowingly (i) make an investment of US$1 million or more (or US$5 million or more over a 12-month period) that directly and significantly contributes to enhancing Russia’s ability to construct energy export pipelines or (ii) sell, lease, or provide to the Russian Federation, goods, services, technology, information, or support (valued at US$1 million or more, or during a 12-month period with an aggregate value of US$5 million or more) that could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy pipelines.

* The Act appears to require the President to impose any such sanctions “in coordination with allies of the United States.” This language was added to the House version of the Act in response to concerns raised by European allies, in light of such projects as the proposed Nord Stream 2 natural gas pipeline from Russia to Germany.

(4) Cybersecurity Sanctions.

On or after 60 days of enactment, the Act requires the President, subject to a national security interest waiver, to impose asset-blocking as well as travel sanctions, including certain secondary sanctions, on any person who knowingly engages in significant activities that undermine the cybersecurity of any person or government, including a democratic institution, on behalf of the Russian government. Any national security interest waiver submitted by the President to avoid the imposition of sanctions must be accompanied by a certification that the Russian government has “made significant efforts to reduce the number and intensity of cyber intrusions conducted by that Government.” The Act includes a definition of what constitutes “significant activities undermining cybersecurity,” which includes, among other activities, significant destructive malware attacks.

(5) Secondary Sanctions Targeting Certain Activities Relating to Russian Intelligence and Defense Sectors, Sanctions Evaders, and Privatizations.

The Act requires the President to impose secondary sanctions on those (including non-US persons) who he determines:

* Have knowingly engaged 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.” Secondary sanctions are to be imposed 180 days after enactment of the Act. The Act requires the President to issue guidance or regulations no later than 60 days after the date of the Act’s enactment to “specify the persons that are part of, or operate for or on behalf of, the defense and intelligence sectors of the Government of the Russian Federation.”

* Are responsible for, complicit in, or have supported serious human rights abuses in any territory forcibly occupied or otherwise controlled by the Russian government. The Act also requires sanctions on foreign persons that (i) knowingly have materially violated, attempted to violate, or conspired to violate or caused a violation of US sanctions or the Ukraine Freedom Support Act of 2014, or (ii) “facilitates a significant transaction or transactions, including deceptive or structured transactions” for or on behalf of a person that is a target of US sanctions, or for that person’s child, spouse, parent, or sibling.

* With actual knowledge make an investment of US$10 million or more (or any combination of investments not less than US$1 million each, which in the aggregate equals or exceeds US$10 million in a 12-month period), or facilitate such an investment, if the investment “directly and significantly” contributes to the ability of the Russian government to “privatize state-owned assets in a manner that unjustly benefits” Russian government officials or “close associates” or family members of those officials. The Act does not define the terms “investment,” “unjustly benefit,” and “close associates.”

(6) Sanctions Targeting Crude Oil Projects and Corruption.

The Act limits the discretion of the President under the Ukraine Freedom Support Act of 2014 by requiring the President to impose secondary sanctions on a foreign person that knowingly makes a “significant investment” in a “special Russian crude oil project” as well as foreign financial institutions that support such investments. The Ukraine Freedom Support Act does not define the term “significant investment” and defines a “special Russian crude oil project” to be a crude oil extraction project in Russian deepwater (i.e., more than 500 feet deep), Arctic offshore locations, or shale formations. The President can waive the imposition of such secondary sanctions by invoking a national interest waiver.

* The Act also limits the President’s discretion under the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014, requiring him to impose secondary sanctions against a Russian government official or close associate or family member involved in an act of significant corruption in Ukraine, Russia, or elsewhere.

(7) Sanctions Relating to Support for the Syrian Government.

The President is required to impose asset-blocking and travel sanctions on any person determined by the President to have knowingly exported, transferred, or otherwise provided significant financial, material, or technological support to the Syrian government in acquiring or developing advanced conventional weapons, ballistic, or cruise missile capabilities, as well as biological, chemical, and nuclear weapons and related technologies.

(8) Secondary Sanctions Described.

The so-called “secondary sanctions” described in the Act target the activities of non-US persons. These secondary sanctions can be applied to parties beyond the jurisdiction of the United States, and they effectively take the form of a denial of US benefits, as opposed to monetary penalties available under US “primary” sanctions (which apply to US persons).

* In the context of the Act, the menu of secondary sanctions from which the President can select (generally, he must select up to five) includes the following:

– Denial of export-import bank financing and assistance

– Denial of US export licensing

– Prohibition against US financial institution making loans or providing credits of more than US$10 million in any 12-month period

– Use of US government power to oppose a loan from a non-US financial institution to the sanctioned party

– Denial of US Government procurement

– Prohibition against transactions in foreign exchange that are within US jurisdiction

– Prohibition against transfers of credit or payments between financial institutions or by, through, or to any financial institution, if within US jurisdiction

– For foreign financial institutions, (i) loss of designation as a primary dealer in US Government debt instruments by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York and/or (ii) revocation of right to serve as an agent of the US Government or to serve as repository for US Government funds

– Effect on the property rights of sanctioned persons for property within US jurisdiction (i.e., asset blocking similar to those on OFAC’s SDN List)

– Prohibition against US persons investing in or purchasing significant amounts of equity or debt instruments of the sanctioned persons

– Travel prohibitions directed at corporate officers, principals, or controlling shareholders or principal of, or a shareholder with a controlling interest in

– Placement of any of these secondary sanctions on the principal executive officer or similar officers of the sanctioned person

IRAN

Largely in response to Iran’s ballistic missile tests, the Act imposes new sanctions targeting Iran’s defense sector and the Islamic Revolutionary Guard Corps (IRGC).

(9) Asset-Freezing and Terrorism-Related Sanctions.

The Act requires the President to impose asset-freezing sanctions (and for non-US persons, a travel ban) against any US or foreign person that knowingly engages “in any activity that materially contributes to the activities of the Government of Iran with respect to its ballistic missile program” or programs to develop, deploy, or maintain weapons of mass destruction. Subject to his exercise of a national security interest waiver, the President must also impose asset-freezing sanctions (and for non-US persons, a travel ban) against any US or foreign person who knowingly contributes to the “supply, sale, or transfer” to Iran of “battle tanks, armored combat vehicles, large caliber artillery systems, combat aircraft, attack helicopters, warships, missiles or missile systems … or related materiel, including spare parts.”

* The Act also requires the President to impose the same sanctions on those who knowingly provide “technical training, financial resources or services, advice” or other services in supporting the use of the material listed. 90 days after the Act’s enactment, the President must impose terrorism-related sanctions pursuant to Executive Order 13224 against the IRGC and its “officials, agents or affiliates.” Notably, significant transactions with the IRGC can already subject non-US persons to US secondary sanctions, which survived the implementation of the Nuclear Agreement with Iran in January 2016.

NORTH KOREA

Largely in response to North Korea’s successful test of an intercontinental ballistic missile on July 4, 2017, the House of Representatives recently introduced certain North Korea-related provisions to the Act. Among other measures, the Act requires the US Secretary of State to provide Congress, within 90 days of enactment, a determination as to whether North Korea should be considered a state sponsor of terrorism.

(10) Additional Designation Authority and Human Rights Provisions.

The Act broadens the list of persons the President must impose asset-blocking measures under the North Korea Sanctions and Policy Enhancement Act of 2016 (NKSPEA). These additional targets include those who knowingly procure certain precious metals from North Korea; sell or transfer rocket, aviation or jet fuel to North Korea; provide fuel or supplies for designated North Korean vessels or aircraft; provide insurance services to vessels owned or controlled by the North Korean government; or maintain a correspondent account with any North Korean financial institution.

* The Act also expands the President’s discretionary authority to designate parties under the NKSPEA, including parties who knowingly acquire coal, iron, or iron ore from the North Korean government; purchase significant amounts of textiles from North Korea; or sell or transfer significant amounts of crude oil, condensates, petroleum products, or natural gas resources to the North Korean government, among other activities. Under the human rights-related provisions, the Act prohibits most goods produced by North Korean labor from entering the US and allows for the imposition of sanctions on most parties who knowingly employ North Korean labor.

* These new North Korea sanctions presumptively increase the prospects of designations of parties from China in the coming weeks.