Federal Laws and Regulations Related to International Commerce

Transcription

1 M A N A G E M E N T a c c o u n t a n t s l i a b i l i t y Making Sure the Long Arm of U.S. Law Doesn t Come Knocking Federal Laws and Regulations Related to International Commerce By Cynthia L. Krom nternational bankers have become all too familiar with U.S. courtroom procedure lately, primarily due to violations of the U.S. Trading with the Enemy Act (TWEA) and the U.S. International Emergency Economic Powers Act (IEEPA). In December 2009, Credit Suisse AG agreed to a $536 million fine as part of a settlement deal with the U.S. Office of Foreign Asset Control (OFAC). Credit Suisse was accused of intentionally and willfully violating U.S. sanctions against Iran, Sudan, I 42 Cuba, Burma, North Korea, Libya, and the former Liberian regime of Charles Taylor, with the great majority of the transactions involving Iran. In addition, in December 2009, Lloyds TSB Bank PLC, agreed to a $217 million settlement for intentionally and systematically violating U.S. sanctions against Iran, Sudan, and Libya. In August 2009, Australia and New Zealand Banking Group Ltd., agreed to a $5.75 million settlement for violating TWEA and IEEPA sanctions against Sudan and Cuba.

2 While these large settlements with major international banks have made the headlines, they are not the only enforcement actions taken by OFAC. In recent months there have been civil settlements with a variety of organizations, including the following: Balli Aviation Ltd., from the United Kingdom, which agreed to a $15 million civil penalty for exporting three airliners from the United States to Iran; Industrial Maritime Carriers Worldwide LLC, which was fined $72,072 for transporting transformers, locomotives, and spare parts to Sudan; Innospec Inc., a Delaware corporation that agreed to a $2.2 million penalty for doing business in Cuba; and Hilton International Co., which agreed to a $735,407 penalty for unlicensed operation of two Hilton-brand hotels in Sudan. There were even sanctions against an individual who purchased Cuban cigars offered for sale on the Internet. In the past several years, Royal Crown, Chevron, and Amazon.com have all received penalty actions. These penalties may seem to be unrelated to the accounting profession or practice, but that presumption could be dangerous. Clearly, CPAs involved with a global corporation need to be aware of the sanctions programs related to TWEA and IEEPA in order to avoid problems with contracts and employment decisions. But consider different cases, such as a small jeweler or dealer in precious stones: There are specific sanctions against trading in particular diamonds. Technology companies need to be sensitive to the limitations on selling or exporting high-tech items, such as computer hardware and software, to certain countries or companies. All parties to such a transaction, including freight forwarders, consignees, insurers, and intermediaries may be subject to restrictions or prohibitions. While OFAC is an important player in enforcing regulations regarding foreign commerce and transactions, it is not the only regulator that CPAs need to be aware of. Another critical constituent is the Bureau of Industry and Security (BIS). Consider companies as diverse as the manufacturers or sellers of gun sights, automobile parts, satellite insulation blankets, microwave amplifiers, helmets, pipes and valves, or telecommunications equipment. Exporters of each of those items have received hefty penalties in the past several years. Or think about a college or university or hospital with faculty involved in research sharing information and technology with foreign nationals, including conference presentations and invitations to visit faculty laboratories, could be deemed an export falling under BIS requirements. Technical assistance and training could also fall within the scope of BIS regulation. Even local real estate transactions and charitable donations can lead to trouble, as the government maintains a long list of specific individuals and entities with whom any trans- 43

3 actions are forbidden: the Specially Designated Nationals (SDN) List. These prohibited individuals and entities are from Canada, Mexico, and much of the rest of the world. While it probably does not come as a surprise that the Taliban and Al Qaeda are on that list, how about Fiesta Stereo 91.5 FM? Chess Air? Central Electricity and Water Corporation? Reginald B. Goodrich? China National Precision Machinery Import/Export Corporation? These are named individuals and companies from Colombia, Equatorial Guinea, Sudan, Liberia, and China, respectively. Transacting with any of them could get one in hot water and the cliché about ignorance of the law not being an excuse holds true. These regulations apply to all U.S. persons and entities, including companies, nonprofit groups, and government agencies, whether physically located in the United States or on foreign soil. The discussion below serves as a primer to get CPAs started, along with resources to develop one s knowledge further. What Is OFAC? The Office of Foreign Assets Control is part of the U.S. Department of the Treasury. OFAC is structured to administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals. OFAC acts on the authority of specific legislation, as well as presidential national emergency powers, to impose controls on transactions that violate U.S. law and to freeze assets under U.S. jurisdiction. The nearly two dozen sanctions that OFAC enforces are against targeted foreign countries and regimes, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. Other threats to national security, U.S. foreign policy, or the U.S. economy would also be within OFAC s purview. Economic sanctions against foreign powers date back to the War of The longest-serving secretary of the Treasury, Albert Gallatin, administered sanctions against Great Britain in retaliation for impressment of American citizens into the Royal Navy and Britain s military support of Native Americans attacking American settlers moving into the Northwest Territory. Similar sanctions were imposed on transactions with the Confederacy during the Civil War. The Office of Foreign Funds Control was established by Executive Order 8389 in 1940, in response to the Nazi invasion of Norway, in order to enforce wartime controls over enemy assets and restrictions on trade with enemy states. The Division of Foreign Assets Control was established in 1950 following the entry of the People s Republic of China into the Korean War. In 1962, the Division of Foreign Assets Control became OFAC, which continues as a federal agency under the U.S. Department of the Treasury, specifically within the purview of the under secretary of the Treasury for Terrorism and Financial Intelligence. OFAC s primary enforcement actions involve TWEA and IEEPA, but its authority does extend beyond those acts. Trading with the Enemy Act The Trading with the Enemy Act, enacted in 1917, authorized the use of economic sanctions against foreign nations, citizens and nationals of foreign countries, or any other persons aiding a foreign country. This act was passed by Congress in anticipation of U.S. involvement in World War I, and was intended to grant the president authority to regulate and restrain international commerce with declared enemy states and their nationals. In 1933, TWEA was amended to apply not only during wartime, but during any other period of national emergency declared by the President. This was adjusted in 1977 to allow for only one-year sanctions that may be extended by presidential determination. In fact, only two national emergency TWEA sanctions continue: full economic sanctions against Cuba and its nationals, and significant sanctions against North Korea. TWEA is enforced by OFAC, with criminal penalties of up to $1 million and imprisonment up to 20 years, as well as civil penalties up to $250,000 or twice the amount of the underlying transaction for each violation. It is possible to obtain permission for certain transactions by requesting an approval letter from OFAC, though these approvals are rare. International Emergency Economic Powers Act The International Emergency Economic Powers Act was enacted in 1977 to clarify the president s powers with respect to national emergencies. Prior to the enactment of IEEPA, presidents had claimed relatively unlimited power to declare national emergencies without limiting their scope or duration, without citing any relevant statutes, and without reporting to Congress. IEEPA limits presidential authority to declare a national emergency in the presence of an unusual and extraordinary EXHIBIT 1 OFAC Country Sanctions Programs Balkans (Macedonia, Serbia, Western Balkans) Belarus Burma Congo (Democratic Republic) Cote d Ivoire (Ivory Coast) Cuba Iran Iraq Lebanon Liberia (former Taylor regime) North Korea Somalia Sudan Syria Zimbabwe EXHIBIT 2 OFAC Responses per Economic Sanctions Enforcement Guidelines No Action Request for Additional Information Cautionary Letter Finding of Violation Civil Monetary Penalty Criminal Referral Other Administrative Action 44

4 threat to the national security, foreign policy, or economy that originates in whole or a substantial part outside the United States. Once such a national emergency declaration is made, the president then has the power to block transactions and freeze assets. In the event of an attack on the United States, the president may also confiscate property connected with any person, group, or country that aided in the attack. These powers are not unlimited, because the IEEPA comes under the provisions of the National Emergency Act (NEA). The terms of the NEA permit any presidentially declared national emergency to be terminated by congressional resolution. In addition, such emergencies must be renewed annually to remain in effect. Under the provisions of an IEEPA declaration, commerce or transactions with certain governments, organizations, companies, and people are restricted. There are four sanctions, based on the nature of the activity: counter narcotics trafficking, counter-terrorism, nonproliferation, and diamond trading. In addition, 15 countries are subject to IEEPA sanctions at varying levels (see Exhibit 1) the newest of which is Somalia, with sanctions concerning pirates and piracy and the destabilization of the Somali government. Finally, the SDN or blocked persons list includes more than 3,500 people or organizations with whom it is illegal to do any business due to their involvement with narcotics, weapons of mass destruction, and other illegal activities. What Happens When a Violation Occurs? In November 2009, OFAC issued Economic Sanctions Enforcement Guidelines to clarify the provisions and penalties in enforcement matters. The guidelines delineate the range of responses to apparent violations of U.S. economic sanctions, regulations, and laws. They range from no action through civil and criminal prosecution and other administrative actions (see Exhibit 2). OFAC has the power to freeze or block assets as a preventative measure. Freezing prevents the owner from accessing the asset no transfers, no transactions even though the title remains with the owner. Once assets are frozen, an appeal must be made directly to OFAC. In virtually every court case brought against an OFAC freezing action, the courts have deferred to OFAC s decision. OFAC also has the power to reject a transaction, instructing a U.S. entity to refuse to engage in a transaction. It is possible to apply for a specific license, which is written authorization to allow transactions that would otherwise be blocked; these are decided on a case-bycase basis. In determining which action to take and, if appropriate, the amount and nature of the civil penalty to impose, OFAC does consider aggravating and mitigating fac- 45

5 tors. Among these are the timing of the apparent violation, whether the violations were willful and/or reckless, any history of prior violations or a pervasive pattern of violations, and the level of cooperation with OFAC. Included in the guidelines is the civil penalty matrix shown in Exhibit 3, which would correspond with the current statutory maximum of the greater of Voluntary Egregious Case Self-Disclosure No Yes Yes One-half of transaction value One-half of statutory maximum (capped at $125,000 per violation/$32,500 per TWEA violation) No Applicable schedule amount Statutory maximum (capped at $250,000 per violation/$65,000 per TWEA violation) Bureau of Industry and Security (BIS), U.S. Department of Commerce: Commerce Control List to categorize exports BIS list of denied persons, denied entities, and unverified parties Export control information and license applications Federal Financial Institutions Examination Council: Information and reporting forms for financial institutions Office of Foreign Assets Control (OFAC), U.S. Department of the Treasury: SDN (Specially Designated Nationals) list Sanctions programs Interpretive rulings and guidance OFAC forms OFAC training events by region EXHIBIT 3 OFAC Civil Penalty Guidelines EXHIBIT 4 Resources $250,000 or twice the transaction value. It should be noted that each transaction is a separate violation subject to penalties; while enforcement hasn t yet been applied as such, each individual dollar could be considered a transaction. From the matrix in Exhibit 3, it is clear that voluntary self-disclosure is a wise option, and OFAC clarifies that substantial cooperation with the office will be recognized. Indeed, the application of these guidelines, including mitigating factors, can be observed in the outcomes of the three headline-making cases involving international banks: Credit Suisse. Over a 20-year period, Credit Suisse processed thousands of transactions that concealed the involvement of sanctioned parties. The transactions, many of which involved wire transfers and securities dealings through the United States, involved elaborate procedures to ensure that the involvement of sanctioned parties was concealed. The bank s London affiliate, eager to take advantage of a business opportunity, even used code names, including wood and iron, to obfuscate the parties to the exchanges. Between August 2003 and December 2006, Credit Suisse processed more than 5,100 banking transactions involving about $645 million, and 176 securities transactions worth about $152 million through the United States. These actions by Credit Suisse were considered intentional, willful, and pervasive, and the $536 million fine that was agreed upon reflected these factors. Lloyds. Violations of U.S. Treasury regulations appear to have begun at Lloyds in the mid-1990s, at the behest of its Iranian banking customers. From June 2003 through August 2006, Lloyds routed at least 4,200 electronic funds transfers with a value of $37 million through banks in the United States, intentionally manipulating and deleting information in the wire transfer instructions to disguise any relationship to Iran, Sudan, or Libya. This policy of concealing any mention of U.S.- sanctioned countries was documented in writing and approved by senior managers within Lloyds. The Payment Services Aide Memoire containing those instructions noted that any funds identified as relating to any of the [sanctioned countries] are liable to seizure by the U.S. Office of Foreign Assets Control (OFAC), and retrieval can be a protracted and difficult affair. Despite the obviously intentional and willful nature of these actions, Lloyds mitigated the penalty through substantial cooperation with OFAC and a prompt and thorough response, facilitating a $217 million settlement that was subsumed by a Department of Justice/New York District Attorney settlement of $350 million. 46

6 Australia and New Zealand Banking Group. Between June 2004 and January 2006, the Australia and New Zealand Banking Group (ANZ) processed 16 export letters of credit relating to trade with Sudan in an aggregate amount of more than $28 million. From August 2004 through September 2006, ANZ processed 15 financial transactions violating sanctions against the government of Cuba, in an aggregate amount of nearly $78 million. These transactions, which were processed through U.S. financial institutions, violated TWEA and IEEPA. The $5.75 million penalty that was settled upon is a relatively small amount, however, and reflects both ANZ s prompt and thorough remedial action to prevent future violations and the non-egregious nature of the transactions. Several transactions with Sudan related to wheat and other agricultural products, which could have received approval had proper channels been followed. In addition to these civil and potential criminal penalties, there is one other OFAC violation that should be of interest to CPAs. Failure to comply with recordkeeping obligations may result in a penalty as high as $50,000 per violation. Financial Crimes Enforcement Network Like OFAC, the Financial Crimes Enforcement Network (FinCEN) is part of the U.S. Department of the Treasury, but they serve as a government-wide financial intelligence and analysis network. Their mission is to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse, and they do so primarily by promoting transparency in financial systems both in the United States and abroad. FinCEN is particularly charged with the enforcement of the Bank Secrecy Act and other anti money laundering measures. The Patriot Act of 2001 broadened the scope of the Bank Secrecy Act to include terrorist financing as well as money laundering, and FinCEN is leading the financial war against terror, combating financial crime, and enforcing economic sanctions against rogue nations. More information on FinCEN and the Bank Secrecy Act may be found in Protecting CPAs and their Clients from the Risk of Financing Terrorism by Cynthia L. EXHIBIT 5 Elements of an Effective Compliance Program (Based on OFAC and BIS Recommendations) A meaningful risk analysis, including consideration of the types of transactions being conducted, the goods being exported, and the destination thereof A written compliance program, communicated to all organization members and others who may be involved Senior company officials responsible and accountable for overseeing the compliance program and any necessary remedial activities Training of officers and employees to understand what is required to remain in compliance Ongoing screening of customers, suppliers, and other parties to transactions, including comparison with the BIS list, the SDN list, and other published prohibitions Careful attention to recordkeeping requirements An internal system for reporting violations, including whistleblower protection A plan and mechanism for voluntary self-disclosure Internal and external reviews and audits to determine whether the compliance program and company procedures are effective or need revision A strong team of accountants, attorneys, and other experts who can advise the organization EXHIBIT 6 Action Steps for CPAs Get educated. Familiarize yourself with the relevant laws by visiting the websites suggested on a regular basis. The laws and lists change, so once is not enough. Attend OFAC training events, BIS online seminars, FAE Conferences, and become active in the NYSSCPA Anti Money Laundering and Counter-Terrorist Financing Committee or the Banking Committee. Know the business. Professionals are responsible for understanding an employer or client s business and the risks it poses. Look for red-flag transactions, and statistically sample a few transactions to cross-check against sanctions lists. If a client is not forthcoming, ask yourself whether it is worth the risk to retain their business. Prepare management. Be sure that managers at a client or employer have the education they need to comply with these laws. Direct them to experts in the field who can help them develop and institutionalize an effective compliance program. Work with bankers. Financial institutions are particularly familiar with OFAC and BSA requirements. Enlist an employer or client s banker as a member of your compliance team. Consult them when questions arise, and request that they raise any concerns without hesitation. Follow up. Compliance is not a one-and-done due-diligence activity. Make sure you keep abreast of developments and changes to sanctions, and keep clients and managers up to date as well. Verify that the compliance program continues to be updated and enforced. Be particularly attentive to changes in the business activities and turnover among key personnel. 47

7 Krom and Peter Romaniuk (The CPA Journal, September 2010). Bureau of Industry and Security Within the U.S. Department of Commerce is the Bureau of Industry and Security, which is headquartered in Washington, D.C., but has eight other regional offices and export control officers in five overseas locations. BIS is responsible for developing and enforcing export regulations for national security, foreign policy, and nonproliferation reasons: the Export Administration Regulations (EAR) regulates commercial and dual use (commercial and military use) exports from the United States and also the reexport of items of U.S. origin, including foreign-made items with more than de minimis U.S.-origin content. For BIS purposes, blueprints, plans, and technical information are all considered within their purview, even if mailed, faxed, or electronically distributed. The degree of control over a particular export will vary with the country of destination; the end use or end users; and the technical capabilities of the particular produce, software, or technology involved. For example, general purpose microprocessors, such as those used in cellular phones and personal computers, are generally permitted, but are prohibited from export to terrorist countries as well as to military end users in countries deemed national security concerns. In contrast, highperformance computers retain a higher level of export regulation. There are five product groups and 10 Commerce Control List categories that should be consulted to determine whether an export license is needed. Most exports are No License Required, but a surprising number of items are subject to various prohibitions. BIS recognizes the realities of global economic competition, but its paramount concern is the security of the United States. Violation of the EAR may result in criminal and civil penalties. The BIS maintains denied persons and denied entity lists, as well as an unverified list ; collectively, these are known as the BIS list. These lists, officially published in the Federal Register, include hundreds of individuals, businesses, and other entities who are subject to EAR licensure requirements if a U.S. business or person wishes to export or transfer specified items to them. Inclusion on one or more of these lists reflects activities sanctioned by the State Department and activities contrary to U.S. national security or foreign The degree of control over a particular export will vary with the country of destination; the end use or end users; and the technical capabilities of the particular produce, software, or technology involved. policy interests. Any transaction with any of these parties will raise a red flag with BIS, mandating resolution before engaging in the proposed transaction. While these lists include prohibitions against expected countries like Iran and Iraq, a number of the sanctioned individuals and organizations are in friendly countries such as Canada, Singapore, Germany, Hong Kong, Ireland, and the United Arab Emirates. BIS violations are varied, as are the penalties assessed, as evidenced by the following cases: Yamada America Inc., an Illinois company, exported diaphragm pumps to Taiwan, Singapore, Brazil, and Ecuador without the required licenses. Penalty: $220,000. Metric Equipment Sales, a California company, exported digital oscilloscopes to Israel without a BIS license. These oscilloscopes are controlled for nuclear nonproliferation reasons. Penalty: $50,000 criminal fine, $150,000 administrative penalty, and five-year denial of export privileges. Thomas Campbell Butler, a professor at Texas Tech University, was convicted of 47 counts involving the illegal export of a potentially deadly bacteria from his research lab without BIS licenses. Penalty: A two-year prison sentence and a $37,500 fine, as well as loss of export privileges for 10 years. WaveLab Inc., in Virginia, exported power amplifiers to the People s Republic of China without the required BIS licenses. Penalty: $15,000 criminal fine, $85,000 criminal forfeiture, one year of supervised probation, and five-year denial of export privileges. Armor Holdings Inc., located in Florida, exported crime control items (handcuffs, face shields, riot helmets, and fingerprinting equipment) to consignees in 41 countries, including Mexico and France. Armor Holdings failed to file the required shipper s export declarations and to obtain appropriate license authority. Penalty: $1,102,200 administrative fine. Worldwide Sports & Recreation Inc. (dba Bushnell Corporation), exported night vision devices to a Japanese company through a Florida intermediary without the required BIS licenses. Both the foreign company and the domestic intermediary pleaded guilty. Penalty: Bushnell was sentenced to a $650,000 criminal fine and five years probation, as well as an administrative penalty of $223,000 and a one-year denial of export privileges. It should be noted that most BIS cases reach negotiated settlements prior to a formal administrative hearing, particularly when a voluntary self-disclosure of violation is made. When a negotiated settlement is reached, there is neither an admission nor a denial of the charges. Therefore, in several of the BIS cases above, the presumption of innocence still applies despite the conclusion of the case. As with OFAC, BIS has issued guidelines to the appropriate penalties for administrative export control enforcement cases in the form of EAR Supplement 1. Several factors are taken into account, including the destination of the export, the degree of willfulness, the number of violations, voluntary self-disclosure, and the level of cooperation with the BIS investigation. Cautionary Advice Both BIS and OFAC offer advice to avoid or mitigate any violation of the relevant laws. On its website, OFAC offers specific guidance to particular industry 48

8 groups, including the financial sector, insurance industry, travel and tourism industry, and nonprofit organizations. OFAC also offers training sessions via teleconference or in person. BIS has a fairly extensive online training program accessible free of charge, and archived webinars. For more information, see the resources in Exhibit 4. Both organizations strongly recommend taking proactive measures that may not only prevent violation, but may moderate penalties if violations do occur. Development of an effective compliance program, with elements such as those shown in Exhibit 5, would be a good start. A key preventative measure is to know the customer and other parties to the transaction. CPAs should look for red flags, including orders for items that seem inconsistent with the needs of the purchaser, a willingness to pay cash for very expensive items, avoidance of routine installation or maintenance, an abnormal shipping route, or simple evasiveness. Take steps to evaluate all the information to determine the bona fides of the party and the legitimacy of the transaction. If there is continued reason for concern, refrain from the transaction until cleared by the appropriate agency. Exhibit 6 is a checklist of steps CPAs can take. or individuals that may come under the scrutiny of these agencies must exercise due diligence. They must be wary of the regulatory pitfalls that can lead to corporate or personal exposure to enforcement proceedings. If financial experts aren t knowledgeable and prepared to advise employers and clients in these matters, who will be? CPAs have an important role to Young CPA Conference Monday, June 13, 2011 Tuesday, June 14, 2011 Hilton Garden Inn Albany Airport play in supporting the national security and foreign policy interests of the United States as well as in protecting themselves, their employers, and their clients. Cynthia L. Krom, PhD, CPA, CFE, is an assistant professor of accounting at Marist College, Poughkeepsie, N.Y. Supporting Public Policy The laws discussed above TWEA, IEEPA, and EAR are the primary laws that impact commerce and transactions with foreign governments, companies, and individuals. These laws place legal responsibility on persons who have information, authority, or functions relevant to carrying out such transactions. They apply not only to parties in the United States, but also to parties in foreign countries involved in transactions subject to these laws. Violations are subject to both criminal and administrative penalties. OFAC and BIS are not the only agencies involved with international transactions, however, nor are these the only relevant laws. Other federal agencies with a role in regulating commerce include the State Department, which controls arms exports, and the Department of Energy, which controls export of technology related to nuclear materials. Any CPA involved in the audit, tax preparation, or consultation of companies Building Your Career: Skills Employers Are Looking For, Skills You Need to Know The Perfect Conference for Young CPAs to Hone Their Skills: Leadership Detecting Fraud Conflict Management Becoming a Supervisor Goal Setting Networking Personal Branding Progressing in Your Career Navigating the Workplace Team-Building foundation for accounting FAE education To register, please visit or call Conference Information: Hilton Garden Inn Albany Airport 800 Albany Shaker Road Albany, NY Course Code: CPE Credit Hours: 16: 14 hours Advisory Services; 2 hours Auditing Member Fee: $225 Nonmember Fee: $250 This is an FAE Paperless Event. Visit for more information. 49