The audio portion of the conference may be accessed via the telephone or by using your computer's speakers.

Transcription

1 Presenting a live 90 minute webinar with interactive Q&A Foreign Assets Control Facilitation: Preparing for Heightened Enforcement Identifying and Mitigating Risks for U.S. Persons and Companies Absent Clear Guidance THURSDAY, APRIL 7, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Ronald I. Meltzer, Partner, WilmerHale, Washington, D.C. Greta Lichtenbaum, Partner, O'Melveny & Myers, Washington, D.C. Erin L. Crockett, Director, Corporate Global Trade Compliance, Dresser, Addison, Texas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Continuing Education Credits FOR LIVE EVENT ONLY For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps: In the chat box, type (1) your name, (2) your company name and (3) the number of attendees at your location Click the arrow to send

3 Tips for Optimal Quality Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

4 Prohibited Facilitation Under OFAC Regulations Ronald I. Meltzer Wilmer Cutler Pickering i Hale and Dorr, LLP April 7, 2011

5 OVERVIEW 1. What is facilitation? 2. Exceptions 3. Recent enforcement cases WilmerHale 5

6 Part One: What is facilitation? Circumvention of OFAC requirements by routing or supporting otherwise prohibited transactions through foreign persons Aiding or permitting non-us persons to perform activity that would be prohibited if undertaken by US persons Explicit and imputed prohibition across all OFAC sanctions programs Broad and elastic: even minor or indirect actions that support or approve another person s transaction with OFAC targets can constitute prohibited facilitation WilmerHale 6

7 Definitions of facilitation: Iran, Sudan and Burma regulations Iran: approving, financing, facilitating, or guaranteeing any transaction by a foreign person, where the transaction would be prohibited if performed by US person or within the United States (31 CFR ) Sudan: action by a US person that assists or supports transactions with Sudan by any other person (31 CFR ) WilmerHale 7

8 Definitions of facilitation: Iran, Sudan and Burma regulations (continued) Burma: approving, financing, facilitating, or guaranteeing a transaction by a foreign person, if such transaction would be prohibited when performed by US person or within the United States (31 CFR (a)) Exception for certain types of new investment in Burma (31 CFR (b)), such as certain contracts to sell/purchase goods WilmerHale 8

9 Cuba: evasion/avoidance CACR prohibits [a]ny transaction for the purpose or which has the effect of evading or avoiding any part of the [CACR] prohibitions (31 CFR (c)) Interpreted to prohibit facilitation WilmerHale 9

10 Other examples of facilitation from OFAC regulations Altering policies or operating procedures to enable a foreign affiliate/subsidiary to perform OFAC-prohibited transactions Altering a foreign affiliate s/subsidiary s s operating policies and procedures to facilitate OFAC-prohibited transactions Referring purchase orders, requests for bids, or other business opportunities involving OFAC targets t to a foreign person WilmerHale 10

11 Penalties For Iran, Sudan and Burma (under IEEPA): Civil: $250,000 per violation or twice transactional value Criminal: $1 million per violation and 20 years For Cuba (under TWEA): Civil: $65,000 per violation Criminal: $1 million per violation and 10 years WilmerHale 11

12 Part Two: Exceptions 1. Authorized transactions 2. General inventory rule WilmerHale 12

13 Authorized transactions s Prohibited facilitation requires that the underlying transaction be unauthorized If the transaction is permitted (either by general authorization or a specific license), then taking action to approve, facilitate or support that transaction is not prohibited Examples: Information and informational materials Transactions covered by OFAC licenses WilmerHale 13

14 General Inventory Rule What if a US person sells goods to a foreign person in a third country that does business in Iran? Does that activity constitute prohibited facilitation? General inventory rule: US persons may sell/transfer goods to a third-country t party, even if a small/unidentifiable portion of such goods is destined for or ends up in OFAC targets Not in the OFAC regulations established by longstanding g agency practice WilmerHale 14

15 General Inventory Rule (continued) Two key limitations: Items when shipped from the United States or by a US person to the third-country t party must not be specifically intended for eventual sale to or use in OFAC targets Third-country party s inventory must not be predominantly used for selling/sourcing g such items to OFAC targets WilmerHale 15

16 Part Three: Recent Enforcement Cases Trans Pacific National Bank (Jan. 2011) Aon Energy (Jan. 2011) Stena Bulk LLC (Jan. 2009) WilmerHale 16

17 Trans Pacific National Bank (Jan. 2011) Trans Pacific (a San Francisco bank) processed two wire transactions to transfer $35,600 to a foreign person in September 2007 The two wire transfer requests referenced Iranian material and Iran material No voluntary disclosure Trans Pacific settled the case for $12,500 WilmerHale 17

18 Aon Energy (Jan. 2011) Aon Energy (a Houston-based subsidiary of Aon Corporation) brokered reinsurance retrocession deals (i.e., reinsurance for reinsurers) on behalf of European reinsurer and retrocessionaires (policy sellers) in October 2005 The premium was $62,883 and covered construction risks associated with petroleum project in Iran No voluntary disclosure Aon settled the case for $36,000 WilmerHale 18

19 Stena Bulk LLC (Jan. 2009) Stena Bulk LLC is a US subsidiary of a Swedish shipping company In 2003 and period, Stena Bulk provided transportation related services for shipment of oil to/from Sudan Stena Bulk voluntarily disclosed the violations Settled for $426, WilmerHale 19

20 Ronald I. Meltzer WilmerHale (202) WilmerHale 20

21 Greta L.H. Lichtenbaum U S Economic Sanctions Laws: U.S. Economic Sanctions Laws: How Risks of Facilitation Violations Typically Arise

22 Facilitation General Basic principle: A U.S. person may not facilitate activities of a non-u.s. person that the U.S. person could not engage in directly A risk for ALL sanctions programs This provision refers to facilitating the activities of any foreign person (including an affiliate), and can create many challenges It can prevent U.S. companies and persons from supporting transactions with sanctioned countries initiated outside the United States, even where the U.S. company s role is limited 22

23 Facilitation Foreign Affiliate Risks Risks arise with foreign subsidiaries that are not independent Divergence of functional structure from legal structure Interlocking officers, directors or employees Lack of maintenance of separate corporate formalities Transaction-specific facilitation of non-u.s. affiliates activities in sanctioned countries can arise in many ways, including: Providing various types of financial i assistance Exercising mandatory approval for contracts Changing a subsidiary s processes and procedures to permit a transaction to occur without U.S. participation is facilitation Brokering, financing, guaranteeing a contract Assisting on exportation or re-exportation of goods and services Insuring a subsidiary s trading activities with Iran Referral of purchase orders, requests for bids, or similar business opportunities to which the U.S. person would not directly respond Transporting or warranting the quality of goods sold by a subsidiary to Iran Business or legal planning relating to the trade in goods, technology, or services between Iran and any other location 23

24 Facilitation Foreign Affiliate Risks Shared Support Services Human Resources/Personnel U.S. involvement in hiring process or requirements for personnel responsible for sanctioned country business Multiple employment contracts for individuals Secondment of staff to foreign subsidiaries of U.S. company with sanctioned activities Employment of foreign nationals resident in Sudan or Iran 24

25 Facilitation Foreign Affiliate Risks U.S.-based Enterprise Resource Planning ( ERP ) systems ERP systems are designed to integrate all data and processes of multinational companies into a unified system, using various components of computer software and hardware to achieve the integration. Can A U.S. parent be deemed to facilitate a foreign subsidiary s transactions with sanctioned countries if those transactions are effected through an ERP system based in the United States? OFAC precedent is limited on questions of U.S.-based, automated support. Cuba travel service provider precedent from 2002 ( FACRL-EU-10) is somewhat on point, suggesting that there is some risk of facilitation from U.S.- based ERP systems that provide operational support. 25

26 Facilitation Risk: Unrelated Parties Facilitation risk exists with relationships with unrelated non-u.s. parties (e.g., g,joint development projects, joint ventures, agents, clients and customers) Includes the referral of business to non-u U.S. persons Level of risk depends on how much business there is in sanctioned countries, and what U.S. company s role is in the shared activities Risk should be assessed on a case-by-case basis Expectations vis-à-vis sanctioned countries should be set at the beginning of the relationship Due diligence and advance planning are critical 26

27 Facilitation: Mergers & Acquisitions If there is a revenue stream from a sanctioned country, can change terms of the deal Significant revenue from sanctioned countries can be problematic If business is Cuba-related related, may need an OFAC license prior to closing, and business may need to cease if interest of U.S. person is controlling If asset purchase, may need license prior to closing If stock purchase of non-u.s. entity, may have to choose between: (1) retaining revenue stream and allowing new sub to operate independently; and (2) foregoing revenue stream consider post-closing compliance audit 27

28 Facilitation: Mergers & Acquisitions If there is a revenue stream from an embargoed country, planning about the following issues is essential: Placement of U.S. persons in management positions of foreign subsidiary, including the Board Modifications o to operating procedures es Delegations of authority from new parent Integration, especially IT, business support functionality and finance/treasury 28

29 Greta Lichtenbaum O'Melveny & Myers

30 Strategies For Overcoming Facilitation Challenges Mitigating Risks

31 Understanding Your Company s Risk! Company s Risk Profile impacts facilitation concerns Higher OFAC standards for Banks and Financial Institutions Products or technology desired in sanctioned countries Mix of US and Non-US origin products and/or technologies Expats population Reliance on US Parent Policies and procedures, i.e. Grants of Authority US Persons board members Heavy Letter of Credit financing Large global operation Strong focus on collaborative centers of excellence Wide distributor or third-party network 31

32 Policy Versus Law... Some companies have withdrawn from conducting business with one or more of the U.S. economic sanctioned countries Companies should make an honest self-appraisal of how aggressive or conservative it is willing to be in regards to sanctioned countries opportunities 32

33 Internal Compliance Program An effective ICP a complete OFAC program Formalized policies and procedures Controls and testing Due Diligence path Provides road map Detects and prevents violations Mitigates penalties Benefits 33

34 A Strong ICP Foundation Upper management support Cannot succeed without management s support Tone at the top middle bottom Custom-fit to your company One size does not fit all tailored to company s risk profile Thoughtful application to businesses, products, customers, geographies Flexible and evolving Be alert to OFAC changes dynamic program Increased programs or existing programs strengthened Manageable Reduce complex regulations to workable steps 34

35 Due Diligence Essential Companies Know Which employees are U.S. Persons or Persons Subject to the Jurisdiction of the United States... And the employees know they are subject to the sanction regulations The members of their Supply Chain Customers and other third parties are properly screened and vetted before entering into a business relationship not a listed SDN or owned/controlled by a listed SDN Extension of the member s supply chain do they have business, directly or indirectly, in a sanction country? Educate and raise awareness ensure they are inadvertently referring business or causing your company to refer business Is an audit or monitoring program needed what triggers one? Companies with a global customer base or extensive e e network of agents or traders should consider implementing formal or structured due diligence procedures 35

36 Due Diligence OFAC March 31, 2011 Notice Practices used by the Islamic Republic of Iran Shipping Lines (IRISL) and companies acting on its behalf to evade U.S. and international economic sanctions 36

37 Due Diligence Continued OFAC March 31, 2011 Notice 1. Using container prefixes registered to another carrier; 2. omitting or listing invalid, incomplete or false container prefixes in shipping i container numbers; and/or 3. naming non-existent ocean vessels in shipping documents Do not unwittingly process fraudulent shipping documents or facilitate t prohibited activities iti Be alert to the presentation of fabricated vessel names in trade documents and check the bona fides of unfamiliar entities issuing shipping i documents Verify the accuracy of container numbers, particularly when unfamiliar with the issuer of the shipping documents 37

38 Parent Versus Subsidiaries Important to understand company structure including any subsidiaries structure... Despite the fact that a wholly-ownedowned and incorporated European company may, under U.S. law, legally conduct business with sanctioned countries, the following factors can result in the company being subject to jurisdiction in the U.S.: The company s senior management is comprised of U.S. Persons The company s senior management is based in the United States and essentially runs the company from there tight control over subs There are U.S. Persons working within the business that have dealings with sanctioned countries and have not properly recused themselves Foreign persons use the mail or wires to communicate with a U.S. Person regarding a dealing or transactionti with a sanctioned country CISADA - Understand transactions in which subs participate! 38

39 Recusal Policy Do we need one? Example: Placement of U.S. employees within or U.S. officers/directors on boards of foreign subsidiaries Procedures for U.S. Persons and Persons subject to the economic sanctions to formally recuse themselves Receiving, initiating or forwarding any correspondence, documents or other materials related to business with a sanctioned country Attending meetings where there are discussions related to business in sanctioned countries Participating in any conversations or telephone calls where business with sanctioned countries is discussed Make Recusal Forms readily available 39

40 Education and Training Scope should receive training on how to properly respond to inquiries U.S. Persons Non- U.S. Persons May not refer any sanction matters or business opportunities Should not inadvertently include a U.S. Person Ongoing education and outreach efforts 40

41 Education and Training continued Non-U.S. Persons should not inadvertently include a U.S. Person Provide or forward any correspondence, documents or other materials related to business with a sanctioned country to a U.S. Person Refer any matters or opportunities related to a sanctioned country to a U.S. Person Discuss any matters or opportunities with a U.S. Person, in meetings, telephone calls or private conversations Request any assistance from a U.S. Person Example: Non-US engineer calling an engineer in the U.S. with a technical question and believing it is okay as long as he does mention the question involves an Iranian project 41

42 Understand Exemptions... Activity of a purely clerical or reporting nature that does not further trade or financial transactions with [sanctioned parties] is not considered prohibited facilitation. For example reporting on the results of a subsidiary's trade with Sudan is not prohibited, while financing i or insuring i that t trade or warranting the quality of goods sold by a subsidiary to the Government of Sudan constitutes prohibited facilitation. 42

43 Third Party Risks Channel Members distributors, agents and reps, Trading Houses, Customs Brokers and Freight Forwarders, Financial Institutions, Joint Ventures, etc. 3 rd Party Agreements and Contracts: Consider contract wording: Minimally, include wording that all parties to the contract are in compliance with applicable law Ideally, include more specific wording addressing compliance with TWEA, IEEPA and OFAC Regulations Potential benefits of contract wording Mitigation factor in event of violation Dialogue with business persons regarding OFAC Compliance Due diligence 43

44 Third Party Risks Joint Ventures Annual Reviews Who has majority ownership? Is there an agreement regarding export control compliance? What is the structure of the JV board? Do any board members need to sign a Recusal to ensure no facilitation actions? Agreement Clauses Compliance with U.S. laws and local laws Right to Audit Terms and Conditions Often includes Anti-Corruption Bribery (FCPA) Diligence as well! Not Legal advice Not acting as their Compliance group Education 44

45 Monitoring Review and audit routinely program and transactions Test samples based on risks and supply chain complexities Incorporate monitoring activities into Internal Audit program and other risk-base approaches Ensure a process for open communication and then for reporting inquiries from sanction countries Use sanctions-compliance clauses Build within 3 rd party agreements Triggers permitting reviews and audits as needed Develop policies and procedures oversight to ensure not changing to evade the regulations Perform periodic checks of the OFAC site or subscribe to the OFAC alerts 45

46 Questions? Thank you! Erin Crockett Director, Corporate Global Trade Compliance Dresser, Inc Comments are those of the presenter and do not necessarily reflect those of any one company. 46