Responding Properly To OFAC Obligations

Transcription

1 Responding Properly To OFAC Obligations

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3 Speakers: Ann Broeker Economic sanctions compliance program lead, Former OFAC Attorney GE Capital Erich Ferrari Founder Ferrari Associates, P.C.

4 Complying with Sanctions Detecting potential sanctions exposure through screening and appropriate due diligence Screen against appropriate lists based on business profile SDN List and country based sanctions as a baseline Screen appropriate persons and transactions Beneficial owners, related parties such as banks, and transactions such as third party payments Escalate matches for timely review Identify exposure that isn t captured through screening through due diligence Indirect sanctions exposure where a customer does business in a sanctioned country New Crimea sanctions likely require more manual review Awareness in the business is critical

5 Complying with Sanctions Protecting against violations through contract language Ensuring customer doesn t engage in activities with sanctioned countries or persons that causes a sanctions violation For instance, loan agreements where customer does some business in a sanctioned country Challenge ensuring language remains up to date in changing sanctions environment Where necessary, seeking authorization from OFAC Timing can be an issue

6 Complying with Sanctions in a Dynamic Environment The government is constantly calibrating sanctions to meet foreign policy and national security goals Unlike other export controls, sanctions are intended to change behavior Dynamic nature of sanctions results in practical challenges to ensure compliance with evolving sanctions regimes Two categories of change: New/Emerging Sanctions Ukraine/Russia-Related Sanctions Easing of Sanctions Cuba Iran Framework Agreement Myanmar/Burma

7 Complying with New Sanctions: Ukraine/Russia-Related Sanctions Areas that present compliance challenges: 50% rule in context of Ukraine/Russia-related sanctions New type of sectoral sanctions Crimea territorial sanctions

8 Fifty Percent Rule Identifying which Russian entities are subject to sanctions is challenging Volume: many of the Russian businessmen and companies subject to blocking sanctions have ownership or other interests in a large number of entities. In addition, several of Russia s largest companies and banks are subject to sectoral sanctions as a result of ownership. How much due diligence is necessary? Aggregate ownership interests: on August 13, 2014, OFAC issued Revised Guidance on Entities Owned by Persons Whose Property or Interests in Property are Blocked and published FAQs clarifying that it aggregates ownership interests across multiple sanctioned parties for purposes of applying the 50% rule Divestment of sanctioned ownership interests: still challenging to become comfortable doing business with entities due to lack of mechanism for OFAC to confirm ownership changes (Example: SMP Bank)

9 Sectoral Sanctions Traditional screening doesn t lend itself to limited scope of sectoral sanctions Volume: many hits against sectorally sanctioned entities despite limited nature of sanctions targeting certain new debt and equity Comprehensive screening makes sense in the context of broad sanctions Escalation of alerts may not be necessary or appropriate for all sectoral sanctions matches Contract language may need to be revised Sanctions language in contracts may be outdated if it prohibits dealings with sanctioned persons ; may not need to be that broad But language may be too narrow with respect to Crimea sanctions if contract language uses the term sanctioned countries since Crimea is a territory Couldn t predict current sectoral sanctions, but we ll likely see more in the future

10 Crimea Territorial Sanctions US sanctions language is familiar; results in comprehensive territorial sanctions similar to Sudan, Iran, and Cuba programs. Corresponding EU sanctions. Screening and detection challenges remain because Crimea is not a country Can t screen against Crimea as easily as countries such as Iran and Sudan that will more naturally appear in addresses Must instead screen against cities, businesses, and banks in Crimea Crimean address could be in Ukraine or Russia US calls Crimea region of Ukraine, but Russia claims it annexed the territory in March 2014.

11 Easing of Cuba Sanctions On December 17, 2014, President Obama announced a shift in U.S. policy towards Cuba that included easing some of the sanctions in place against the country since 1960 On January 16, 2015, the U.S. Departments of Commerce (BIS) and Treasury (OFAC) published revised regulations that formally implement the President s announced changes to the Cuba sanctions program On May 29, 2015, the U.S. government removed Cuba from the list of State Sponsors of Terrorism The vast majority of the Cuba embargo remains in place, and most transactions related to Cuba remain prohibited for US companies and their foreign subsidiaries that are subject to US jurisdiction for purposes of Cuba sanctions

12 Easing of Cuba Sanctions What Changed on January 16? Some categories of newly authorized transactions include: Export of building materials for private residential construction, agricultural equipment for farmers, goods for use by private sector Cuban entrepreneurs (Support for the Cuban People) Humanitarian activities in Cuba Certain categories of travel and travel-related transactions previously requiring specific licenses Certain financial transactions and financing for authorized exports Limited transactions for foreign subsidiaries of US companies

13 Easing of Cuba Sanctions Many questions about scope of the general licenses/license exceptions; OFAC issued updated FAQs in April Authorizations can include key carve-outs that challenge practical implementation; policy goals may not align with practical implementation Example: Banks and credit card providers may process credit and debit card payments in Cuba, as long as the charges or withdrawals are made by persons engaging in authorized travel-related transactions (15 CFR (c)(5)) Persons subject to U.S. jurisdiction may rely on the traveler with regard to compliance with the authorization, provided there is no knowledge or have reason to know that a transaction is not authorized by this section Banks weren t viewing travel by non-us persons located outside of the United States as authorized travel New OFAC FAQ says general license applies to third country travelers to Cuba

14 Easing of Cuba Sanctions-Foreign Subsidiaries Any U.S.-owned or -controlled partnership, association, corporation, or other organization in a third country is authorized to provide goods and services to a Cuban national who is an individual located outside of Cuba, provided that the transaction does not involve a commercial exportation, directly or indirectly, of goods or services to or from Cuba (15 CFR ) Limited relief for most activities involving independent foreign subsidiaries of U.S. companies

15 Easing of Iran Sanctions? Joint Plan of Action (JPoA) between P5plus1 and Iran The JPoA between the P5plus1 (five UN Security Council members and Germany) and Iran was originally negotiated in November The original agreement provided for six months to negotiate a final deal starting in January 2014; deadline was then extended several times to June 30, Framework Agreement announced in April Detailed agreement to be drafted by June 30 Nuclear-related sanctions will be lifted when IAEA has verified that Iran has taken all of its key nuclear-related steps No timetable provided (expectation is months after final agreement) No definition of nuclear-related sanctions Sanctions imposed for terrorism, human rights, missile controls, or other reasons will remain Complex Iran sanctions framework that include territorial sanctions, targeted blocking sanctions, and extensive secondary sanctions imposed by the President and Congress may make it difficult to take advantage of lifting of the nuclear-related sanctions

16 Easing of Burma Sanctions-Lessons Learned for Cuba and Iran? Example of the US Government lifting-or generally authorizing-broad categories of prohibitions Similar dramatic lifting of sanctions in programs like first and second Libya sanctions programs The USG significantly eased Burma sanctions in July 2012 Generally authorized export of financial services to Burma (note this prohibition had effectively served to prohibit US trade with Burma) Generally authorized new investment in Burma Generally authorized transactions involving several banks on the SDN List in 2013

17 Easing of Burma Sanctions Certain restrictions remained Financial services and new investment general licenses excluded Burmese Ministry of Defense, including the Office of Procurement, and any state or nonstate armed group Persons, including several banks, remained on the SDN List Reporting requirement for new investment over $500,000 Remaining Challenges Dealing with the Burma-related targeted sanctions that remain in place, particularly those targeting banks Banks may reject payments to accounts at Burmese banks still on the SDN List, even if they are authorized by the export of financial services general license May want to ask customer to use different bank account, even if payments will be authorized, if bank is still on SDN List

18 Easing of Burma Sanctions Remaining Challenges (continued) Navigating other remaining requirements Carefully calculate new investment to determine whether reporting requirement is triggered Ambiguity may drive conservative approach Avoid dealing with Ministry of Defense and other prohibited parties Majority owned entities can be difficult to identify, but standard sanctions representations contract language can help

19 Topic Areas Reporting Requirements OFAC Enforcement Guidelines Voluntary Self-Disclosures OFAC Administrative Subpoenas

20 What Triggers an OFAC Investigation? Reports Blocking Reports Reject Reports Other Submissions Licenses, 3 rd Party Responses to Administrative Subpoenas Voluntary Self-Disclosures Submitted by Subject Party Submitted by third parties Other Information Ongoing/Existing Cases Publicly Available Information Informants Referrals from Other Agencies (including Regulators)

21 Reporting Requirements Record Keeping and Reporting Requirements U.S. persons are required to maintain records for 5 years of any transaction implicating the regulations of Chapter V, Title 31 C.F.R. (31 C.F.R ) Also a requirement to furnish those records on demand by OFAC Administrative Subpoenas (31 C.F.R ) Blocking and Reject Reports Filed with OFAC whenever transactions with sanctions nexus is blocked or rejected Blocking report Blocked Party (e.g., SDNs) has interest in the transactions Reject report transaction is prohibited but no blocked party Information to Include The value date, amount, and type of transaction Parties involved in the transaction (originator/beneficiary, financial institutions, sanctioned party) Steps taken in identifying the reported transaction

22 OFAC Enforcement Guidelines General Factors A: Willful or Reckless Violation of Law B: Awareness of Conduct at Issue C: Harm to Sanctions Program Objectives D: Individual Characteristics E: Compliance Program F: Remedial Response G: Cooperation with OFAC* H: Timing of Apparent Violation in Relation to Imposition of Sanctions I: Other Enforcement Act J: Future Compliance/Deterrence Effect K: Other Relevant Factors

23 OFAC Enforcement Guidelines General Factor G: Cooperation with OFAC Voluntary Self-Disclosure? Provide all relevant information Promptly respond to all requests for information Tolling agreement? Substantial cooperation can lead to a reduction of 25-40%; in cases involving voluntary self-disclosures can be viewed as a further mitigating factor

24 Voluntary Self-Disclosures Voluntary vs. Non-Voluntary (Appendix A, Part 501) Self-initiated prior to or at the same time that OFAC, or other government agency, discovers the apparent violation or substantially similar apparent violations Substantially similar apparent violation is one that is part of a series of apparent violations or is part of the same pattern or practice of conduct VSD must include, or be followed up with, sufficient detail for OFAC to understand the apparent violation s circumstances (must be materially complete) Not a VSD If third party is required to, and does, notify OFAC due to transaction s blocking or rejection If disclosure is suggested by other government agency or official If made on behalf of entity without consent of senior management If disclosed in license application or administrative subpoena Contains false or misleading information

25 Voluntary Self-Disclosures What Goes Into a VSD? Specifics regarding transactions: value, dates, parties, purpose, implicated sanctions program, history with parties Personnel involved in the transactions: management/supervisory involvement; compliance/legal review Policies and procedures: did personnel follow policies, do the violations indicate a weakness in Subject Persons policies? Supporting documentation: payment instructions, invoices, bill of lading, purchase order, customer account information, etc. Remedial actions: staff conducted review, follow up with customer/correspondent; adjustments to policies/procedures; changes to filter calibration on screening software

26 OFAC Administrative Subpoenas Hallmark of an OFAC investigation OFAC has statutory and regulatory authority to compel parties to respond and submit records All responses must be truthful false or misleading information could lead to 18 U.S.C criminal violation Communicating with Enforcement Make initial call to enforcement officer to ensure you understand the scope of the subpoena Negotiate extensions if necessary Tolling Agreements, rolling productions Communicate by writing to ensure accuracy of administrative record Next Steps Make sure to provide information responsive to subpoena AND relevant to OFAC Enforcement Guidelines Be prepared for multiple subpoenas may want to expand your investigation

27 Conclusion If you have questions after the event please contact me: Erich Ferrari Phone: THANK YOU!

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