SANCTIONS: OVERVIEW, HOT TOPICS AND COMPLIANCE CHALLENGES U.S. SANCTIONS: GENERAL PROHIBITIONS U.S. DEPARTMENT OF THE TREASURY (OFAC)

Transcription

1 SANCTIONS: OVERVIEW, HOT TOPICS AND COMPLIANCE CHALLENGES Scott M. Flicker Chair, Washington D.C. Office Paul Hastings LLP 2 U.S. SANCTIONS: GENERAL PROHIBITIONS U.S. DEPARTMENT OF THE TREASURY (OFAC) 3 The Department of the Treasury s Office of Foreign Assets Control ( OFAC ) monitors compliance with the United States sanctions regime. This includes: Prohibitions against doing business with sanctioned individuals and entities, wherever located; and Restrictions on engaging in specific activities with governments, entities and nationals in or of countries under U.S. economic embargo. 1

2 OFAC: GEOGRAPHIC REGIONS AND GOVERNMENTS 4 Balkans Belarus Burundi Central Africa Republic Cuba* Democratic Republic of Congo Iran* Iraq Lebanon Libya North Korea* Russia/Ukraine (Crimea*) Somalia South Sudan Sudan* Syria* Venezuela Yemen Zimbabwe * = Country-Wide Restrictions NOT ALL PROGRAMS ARE THE SAME! SPECIALLY DESIGNATED NATIONALS ( SDNS ) 5 OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. But not all restricted entities are listed (e.g., those owned 50% or more by a listed party). It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called "Specially Designated Nationals" or "SDNs. Their assets are blocked and U.S. persons are generally prohibited from dealing with them. SDNS THE 50% RULE 6 All property or interests in property owned by an SDN is blocked. This includes all property of an entity in which an SDN owns a 50 percent or greater interest. That interest can be direct or indirect. It also includes all property interests of an entity in which no one SDN owns a 50 percent interest, but at least 50 percent of the ownership interests, in the aggregate, are owned by SDNs. The property interests such an entity are blocked regardless of whether the entity itself appears on the SDN list. 2

3 OTHER LISTS 7 Foreign Sanctions Evaders ( FSEs ) - OFAC Sectoral Sanctions List (OFAC Russia/Ukraine) Denied Persons and Entity Lists- BIS Non-Proliferation Sanctions and Debarred Persons Lists States Consolidated Screening List (Treasury, BIS and State): Non-U.S. Lists (HMT; EU; UN) OTHER SOURCES OF RESTRICTION: EXPORT CONTROLS 8 Coverage: U.S.-Origin Goods/Technology Controlled Destinations/End Uses/End Users Licensing and Reporting Requirements Primary Regulators: The Export Administration Regulations ( EAR ): U.S. Department of Commerce (BIS). Regulates the export of some technical information, hardware and software that are considered dual-use in the sense that they can be used in both military and civil applications. The International Traffic in Arms Regulations ( ITAR ): U.S. Department of State (DDTC) The U.S. Department of State maintains a licensing system for the export of defense articles, services and technology that are listed on the United States Munitions List ( USML ). Also Nuclear Regulatory Commission and U.S. Patent Office A NOTE ON OTHER SOURCES OF RESTRICTION: STATE DEPARTMENT PROGRAMS 9 Non-Proliferation Sanctions ( INKSNA ) Focuses on trade with Iran, Syria or North Korea of certain equipment and technology subject to multilateral weapons, missile or nuclear controls. Sanctions can include restrictions on U.S. Government contracts, foreign assistance, or export authorizations. Anti-Terrorism Measures Secretary of State has authority to identify Foreign Terrorist Organizations. U.S. persons are prohibited from providing material support to FTOs. State Department works with Treasury Department (OFAC) on implementation of most sanctions programs. 3

4 UNITED STATES SANCTIONS: GENERAL PROHIBITIONS 10 U.S. persons may not deal with Targeted Persons. U.S. persons may not engage in most transactions involving Comprehensively Embargoed Jurisdictions (Iran, Cuba, Crimea, North Korea or Syria). Cuba and Iran restrictions also cover non-u.s. subsidiaries/controlled affiliates of U.S. companies. U.S. persons may not evade sanctions rules. U.S. persons may not facilitate any dealings by non-u.s. persons that would be prohibited for a U.S. person. Includes approving, financing, guaranteeing a transaction. Includes referring prohibited business to a non-u.s. person. UNITED STATES SANCTIONS: GENERAL PROHIBITIONS 11 Can also apply to: Non-U.S. persons acting abroad, if the actions cause violations of U.S. sanctions, e.g.: Shipping U.S.-origin goods to a sanctioned destination Offshore transactions denominated in U.S. dollars if the transactions involve Cuba, Iran, Syria, or Sudan or SDNs, especially if there is some act of concealment. Non-U.S. persons can be subject to secondary sanctions for engaging in certain transactions involving Iran Other governments worldwide also maintain comprehensive sanctions programs (e.g., Her Majesty s Treasury, EU) SOME TRANSACTIONS ARE AUTHORIZED 12 OFAC Licenses: Specific vs. General Licenses Examples of OFAC General Licenses: Sale of certain agricultural products, medicines and medical devices Transactions ordinarily incident and necessary to give effect to licensed transactions Iran General License D-1 (Personal Communications over the Internet) BIS Licenses: Individual Validated Licenses vs. License Exceptions 4

5 PENALTIES FOR SANCTIONS VIOLATIONS 13 The penalties for violations of OFAC sanctions can be substantial: Criminal penalties Fines ranging from $50,000 to $10 million, Imprisonment ranging from 10 to 30 years; and Civil penalties Vary depending on the authorizing statute; Up to the greater of $284,582 per violation (as of August 1, 2016) or twice the value of the violative transaction(s) under the International Emergency Economic Powers Act. Reputational risks. Strict liability regime. 14 RECENT CHANGES TO OFAC PROGRAMS DISCONTINUED PROGRAMS 15 Cote d Ivoire: Terminated September 14, 2016 Burma (Myanmar): Terminated October 7, 2016 Sudan: Suspended January 13, 2017; Revoked October 12, 2017 U.S. persons are still barred from transacting with SDNs resident in these jurisdictions. 5

6 NEW PROGRAM - VENEZUELA 16 Implemented August 24, 2017 Followed Designation of certain Venezuelan officials New provisions similar to sectoral sanctions: No new debt of or for PDVSA > 90 days maturity No new debt of or for other Govt of Vz entities > 30 days maturity No new equity for any Govt of VZ entity, including PDVSA No other purchases of securities from the Govt of VZ No dealings in Govt of VZ bonds unless on authorized list General License permits dealings involving CITGO only General License permits transactions involving agriculture, medicines, medical devices RECENT SIGNIFICANT CHANGES - RUSSIA 17 Original Sectoral Sanctions Program (2014) Presidential Order directing the Treasury Secretary to identify persons or entities operating in sectors of the Russian Federation economy including financial services, energy, metals and mining, engineering, and defense and related materiel Treasury Directives designated entities in Financial, Energy and Defense sectors Restrictions on dealings in new equity and new debt of various maturity tenors issued by targeted entities in the Financial sector Also Directive 4 prohibiting provision of goods, services (except financial services) or technology in support of certain Russian deepwater, Arctic offshore or shale oil development projects involving designated entities. RECENT SIGNIFICANT CHANGES - RUSSIA 18 Countering America's Adversaries Through Sanctions Act (effective October 2017) Shortened the tenor of prohibited new debt for Directive 1 and Directive 2 entities. Broadened the scope of Directive 4 to cover (as of January 29, 2018) any oil development project in which one or more designated entities own 33% or more. Restrictions on substantial transactions with designated entities in the Russian intelligence and defense sectors. 6

7 IRAN SANCTIONS POST JCPOA 19 While many U.S. sanctions were eased for non-u.s. persons, U.S. persons continue to be generally prohibited from conducting transactions involving Iran. General License H permits foreign entities that are owned or controlled by U.S. persons to engage in the foregoing activities; however, U.S. persons must still refrain from facilitating such activities, except for limited support described in General License H. Significant restrictions continue to exist for certain types of transactions by non-u.s. persons involving Iran: Dealings with SDNs, including the IRGC. Exports or reexports of certain U.S.-origin goods. Support for the Iranian military or WMD. U.S. DOLLAR TRANSACTIONS U.S. dollar clearing by U.S. financial institutions for Iranrelated transactions remains prohibited. 20 Thus, transactions between non-u.s. persons and Iranian counterparties conducted in U.S. dollars are still subject to sanctions, as those transactions would require prohibited involvement of U.S. financial institutions ( export of services or facilitation ). There are exceptions: Food, agricultural and medical transactions authorized under the TSRA. Licensed exports and reexports of certain U.S. goods, services and technology (e.g., in support of commercial civil aviation). 21 EFFECTIVE COMPLIANCE: FEATURES AND CHALLENGES 7

8 RECOGNIZING TRIGGERS 22 Geographic trigger: Does the activity involve a comprehensively-sanctioned jurisdiction? Where will goods and services be provided? Counterparty trigger: Is the counterparty located or based in a sanctioned jurisdiction? Is the counterparty on, or owned/controlled by a person or entity on, the SDN or other sanctions lists? U.S. nexus trigger: U.S. persons or (in the case of Iran or Cuba) U.S.-controlled entities involved? U.S.-origin goods or services involved? U.S. financing involved? 23 SANCTIONS DILIGENCE Initial questions Who are the parties? Screening of counterparties, their directors, and their shareholders against the SDN list, and any other applicable lists of Sanctions Targets Review of owners and ownership percentages to determine whether the 50% rule is implicated What activities is the transaction intended to support? What jurisdictions are involved? Digging deeper What other business activities are undertaken by the parties? What will the source of payment be? Review of parties compliance history and awareness of sanctions laws Screening should be conducted (1) prior to entering into a business relationship Screening should be appropriately documented through questionnaires, memos to file on diligence follow-ups, etc. Red flags should be escalated for further analysis. SANCTIONS DILIGENCE (CONT D): OFAC GUIDANCE 24 Per OFAC guidance, diligence procedures should be risk-based, taking into account the unique risk profile posed by each counterparty and transaction, based on considerations including: Is the counterparty regulated by a Federal functional regulator, widely known, or listed on an exchange? Has the firm had any previous experience with the counterparty or does it have prior knowledge about the counterparty? Is the firm facilitating a U.S. person s investment or involvement in a foreign entity that conducts business in a Sanctioned Jurisdiction? Is the counterparty located or operating in a high-risk foreign jurisdiction that is considered to be poorly regulated or in a known offshore banking or secrecy haven? Is the counterparty located or operating in countries where local privacy laws, regulations, or provisions prevent or limit the collection of client identification or beneficial ownership information? 8

9 PUTTING OFAC S 50% RULE TO PRACTICE An entity owned 50% or more, in the aggregate, directly or indirectly, by one or more Sanctions Targets is itself considered to be a Sanctions Target (whether or not such entity is listed on the SDN List). Challenges in practice: Use of intermediaries to make purchases,sales or investments can pose an OFAC risk as the true beneficiaries names (and owners) may not be disclosed to the U.S. parties involved. Screening up the chain required A customer or vendor may be subject to sanctions because it is 50% or more owned by a sanctioned party; screening limited to the issuer itself would not reveal this information. Risk-Based Approach: Is customer a regulated entity or a public company with broadly distributed ownership? Or a private, closely-held entity (corporation, partnership, trust)? 25 SPEAKER S BIOGRAPHY 26 Scott Flicker Partner, Litigation Department Washington, D.C. Tel: Fax: scottflicker@paulhastings.com Litigation Scott Flicker is the Chair of the Paul Hastings Washington D.C. office. He is a member of the firm s Investigations and White Collar Defense and Global Trade Controls practices. Mr. Flicker represents clients in a variety of regulatory and litigation matters, with a concentration in international trade and commercial regulation, including foreign investment reviews, export controls and trade sanctions, competition law, and trade agreements. Primary industries represented on trade policy and litigation matters include: agriculture, automobiles and auto parts, aviation, energy, financial services, infrastructure, telecommunications, petrochemical, steel, cement/concrete, engineering, high technology and textiles. Mr. Flicker also has extensive experience in representing clients in international arbitrations. OUR OFFICES 27 THE AMERICAS ASIA EUROPE Atlanta 1170 Peachtree Street, N.E. Suite 100 Atlanta, GA t: f: Chicago 71 S. Wacker Drive Forty-fifth Floor Chicago, IL t: f: Houston 600 Travis Street Fifty-Eighth Floor Houston, TX t: f: Los Angeles 515 South Flower Street Twenty-Fifth Floor Los Angeles, CA t: f: New York 200 Park Avenue New York, NY t: f: Orange County 695 Town Center Drive Seventeenth Floor Costa Mesa, CA t: f: Palo Alto 1117 S. California Avenue Palo Alto, CA t: f: San Diego 4747 Executive Drive Twelfth Floor San Diego, CA t: f: San Francisco 101 California Street Forty-Eighth Floor San Francisco, CA t: f: São Paulo Av. Presidente Juscelino Kubitschek, 2041 Torre D, 21º andar Sao Paulo, SP Brazil t: f: Washington, D.C th Street, N.W. Washington, D.C t: f: Beijing 26/F Yintai Center Office Tower 2 Jianguomenwai Avenue Chaoyang District Beijing , PRC t: f: Hong Kong 21-22/F Bank of China Tower 1 Garden Road Central Hong Kong t: f: Seoul 33/F West Tower Mirae Asset Center1 26, Eulji-ro 5-gil, Jung-gu, Seoul, 04539, Korea t: f: Shanghai 43/F Jing An Kerry Center Tower II 1539 Nanjing West Road Shanghai , PRC t: f: Tokyo Ark Hills Sengokuyama Mori Tower 40th Floor, Roppongi Minato-ku, Tokyo Japan t: f: Brussels Avenue Louise 480-5B 1050 Brussels Belgium t: f: Frankfurt Siesmayerstrasse 21 D Frankfurt am Main Germany t: f: London Ten Bishops Square Eighth Floor London E1 6EG United Kingdom t: f: Milan Via Rovello, Milano Italy t: f: Paris 96, boulevard Haussmann Paris France t: f: For further information, you may visit our home page at or us at info@paulhastings.com Paul Hastings LLP 9