Understanding U.S. Sanctions May 15, 2012

Transcription

1 Understanding U.S. Sanctions May 15, 2012 Kenneth L. Bachman Paul Marquardt 2012 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved. Throughout this presentation, Cleary Gottlieb and the firm refer to Cleary Gottlieb Steen & Hamilton LLP and its affiliated entities in certain jurisdictions, and the term offices includes offices of those affiliated entities.

2 The Office of Foreign Assets Control (OFAC) and Sanctions Programs

3 OFAC Jurisdiction The U.S. Treasury s Office of Foreign Assets Control ( OFAC ) administers and enforces certain U.S. sanctions imposed against targeted countries, governments, persons and activities. OFAC sanctions generally operate by restricting or prohibiting the activities of U.S. persons a defined term that includes both individuals and entities. U.S. persons include: U.S. entities and their non-u.s. branches, but generally not their non-u.s. subsidiaries (the Cuba sanctions are the exception); U.S. branches and U.S. subsidiaries of non-u.s. parent companies; U.S citizens or permanent residents ( green card holders) wherever located; and Non-U.S. directors, officers, and employees when present in the United States. 3

4 Primary OFAC Issues Non-U.S. companies who are acting outside the United States generally do not face direct OFAC liability (except in the case of certain re-exports of U.S. goods or technology). However, OFAC has become increasingly aggressive in asserting jurisdiction over non-u.s. companies through their U.S. contacts, because they cause or aid a violation by a U.S. person, or because they re-export U.S. origin services to sanctioned persons. A non-u.s. company may face direct liability for violating U.S. sanctions if any of the following are involved in their dealings with sanctioned parties. U.S. dollars U.S. sources of funds or technical support Hidden U.S. persons (e.g., green card holders) working for the company Acts within the United States Assistance by a U.S. person 4

5 U.S. Sanctions Primary Issues U.S. persons dealing with foreign companies will be primarily concerned about the risk of facilitating (a very broad concept) indirect dealings with sanctioned parties and will focus on: Whether the counterparty is a sanctioned entity Whether a significant portion of the counterparty s business is with sanctioned parties or in sanctioned countries Whether proceeds of any investment or financing will be used to support activities with sanctioned parties or in sanctioned countries 5

6 U.S. Sanctions Primary Issues (cont d) U.S. persons may seek contractual representations and covenants to protect them from OFAC liability Counterparty is neither a sanctioned entity nor owned or controlled by sanctioned entities Counterparty derives a de minimis portion of its operating income from dealings with sanctions targets and has a de minimis proportion of its assets in sanctions targets Proceeds of investments or financing will not be used for dealings with or in sanctions targets Market standard, based on OFAC practice, is typically a 10% de minimis threshold. If the threshold is exceeded, pressures on diligence and ringfencing of proceeds will increase, and some U.S. parties may refuse to participate. If the foreign company issues securities in the U.S., the SEC views an issuer s dealings with designated state sponsors of terrorism as material information that should be disclosed Currently includes Iran, Sudan, Syria and Cuba Some U.S. institutional investors have policies prohibiting investment in companies active in these countries, particularly Iran and Sudan 6

7 The Importance of OFAC Sanctions Increasing risk. Sanctions risk has increased sharply as U.S. regulators have sought new tools for international enforcement, especially in anti-terrorism efforts, and are increasingly aggressive in extraterritorial enforcement. Increasing penalties. Penalties for most sanctions violations have also increased sharply in recent years. For each transaction that is the basis of a violation, the civil fine for most sanctions violations is now the greater of $250,000 or twice the transaction amount (there is no cap). For most willful violations, a criminal fine of up to $1,000,000 may be imposed (and a maximum jail sentence of 20 years for natural persons). No defenses based on lack of knowledge or intent. OFAC sanctions are a strict liability regime. OFAC is often unwilling to give clear comfort, other than on a case by case basis. However, penalties may be mitigated by a range of factors, including self-disclosure of violations and good compliance programs. 7

8 The Office of Foreign Assets Control and Sanctions Programs OFAC sanctions offer few bright-line principles dividing legal and illegal behavior. Instead, each person s risks and requirements will depend on a number of factors, including: What sanctions are encountered. The scope and severity of sanctions varies widely depending on the activity, program, and persons involved. When sanctions are encountered. OFAC sanctions are a function of U.S. foreign policy, and are generally subject to different interpretations depending on the geopolitics of the moment. How sanctions are encountered. OFAC is a strict liability regime, but penalties are assessed through a risk-based analysis and depend significantly on the policy impact of behavior, the quality of compliance programs, and numerous additional factors. 8

9 Sources of OFAC Law: Statutes & Legal Authority OFAC sanctions are principally authorized by Executive Orders under two broad Congressional grants of authority. Trading with the Enemy Act ( TWEA ) (1917) Originally enacted for the President s use of wartime economic powers. Expanded in 1933 to deal with peacetime national emergencies. Expansion clawed back by IEEPA, but existing TWEA-based program against Cuba remains in place. International Emergency Economic Powers Act ( IEEPA ) (1977) Primary legal authority for virtually all existing OFAC sanctions. Supplemented occasionally by other legislation (e.g., the Anti-Terrorism and Effective Death Penalty Act of 1996 and the Foreign Narcotics Kingpin Designation Act of 1999). 9

10 Sources of OFAC Law: Implementing Regulations OFAC sanctions are generally implemented through regulations that OFAC issues under broad directives set forth in Executive Orders. These regulations (31 C.F.R. ch. V) are the main source of law in assessing OFAC risks. However, the regulations are often incomplete; many fact patterns will not be addressed directly by a clear rule. Regulations can be effective immediately; ordinary notice and comment procedures under the Administrative Procedure Act are inapplicable because a foreign affairs function is involved. 10

11 Sources of OFAC Law: Guidance The OFAC web site provides fairly complete summaries of (i) sanctions programs and (ii) some risks for certain industries. However, when there are ambiguities or nuances in the regulations or summaries, other OFAC guidance is minimal. Published FAQs and industry guidance are often very general or oriented toward operational, not legal, issues. OFAC often mixes and matches concepts from one sanctions program to interpret another. Case law is minimal and often ill-suited for generalization. No analog to the SEC no-action process or FRB legal interpretation process exists. OFAC only occasionally publishes interpretative rulings on individual inquiries it receives (only 24 total to date). OFAC staff may be approached informally, but are often reluctant to opine on a fact pattern without very specific and detailed information. Interpretative letters or licenses may be sought from OFAC with full written documentation; the process often takes months and is rarely consistent with the timing of transactions. 11

12 Scope of OFAC Sanctions: Types of Restrictions There are two general types of restrictions: Asset controls restrict a U.S. person from freely dealing in property in which a sanctioned person has an interest. U.S. persons must usually freeze such property when it comes into their possession or control. Under most programs, U.S. persons may not simply reject (return) the property. Property is defined very broadly and includes any property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future or contingent. Very indirect interests are sufficient. Transaction controls restrict a U.S. person from freely dealing with sanctioned persons. These restrictions range from a full embargo on all dealings between a U.S. person and a sanctioned country to restrictions on particular types of transactions (e.g., transactions with specific persons or industries, or transfers of sensitive U.S. goods and technology). OFAC sanctions also generally prohibit U.S. persons from approving or facilitating transactions by non-u.s. persons that would be unlawful if conducted by a U.S. person. 12

13 Scope of OFAC Sanctions: The Targeting Trend OFAC sanctions have increasingly targeted designated entities ( smart sanctions ) and focused on terrorism. Older sanctions were rooted in TWEA and the historical practice of banning trading with the enemy and applied comprehensive sanctions to entire countries (e.g., Cuba, North Korea). Subsequent sanctions were narrower, principally using: Country-based programs that appear to sanction a smaller set of parties (e.g., Sudan, where the government is sanctioned, but not all citizens) or activities (e.g., Burma, where exports to the U.S. are prohibited, but most U.S. imports to Burma are not). Activity-based sanctions (e.g., terrorism, narcotics) that in practice tend to operate as sanctions on named parties. Sanctions against Iran are the exception the program is extremely broad. Most recent sanctions purport to be country programs but in practice apply only to designated parties (e.g., Liberia, Zimbabwe, Belarus, Côte d Ivoire, the Democratic Republic of the Congo). OFAC is using all of these sanctions most heavily in the service of the broad U.S. anti-terrorism and anti-proliferation programs. 13

14 Scope of OFAC Sanctions: Targets of Restrictions Asset and transaction controls vary significantly depending on the particular OFAC program involved. Very generally, OFAC programs may be divided into four general categories: Comprehensive country programs. U.S. persons are prohibited from virtually all dealings or transactions with a sanctioned country, with persons located, organized, or resident in those countries, and in the case of Cuba, with all nationals wherever located. Cuba, Iran, Sudan, and Syria are currently subject to comprehensive programs. Non-comprehensive country programs. U.S. persons are prohibited from certain specified activities with the sanctioned country, as well as dealings with certain designated persons associated with the country or its government. Burma (Myanmar) and North Korea are currently subject to extensive programs. Restrictions are principally on some or all trade between U.S. persons and the target country; many other transactions may be permissible. 14

15 Scope of OFAC Sanctions: Targets of Restrictions (cont d) Regime-based country programs. U.S. persons are prohibited from dealing with designated persons associated with a regime or activity in various countries. These programs include individuals from or related to activities in Belarus, Côte d Ivoire, the Democratic Republic of the Congo, Lebanon, Somalia and Zimbabwe, as well as former regimes of Iraq, Liberia, Libya, and the Balkans. Restrictions extend only to dealings with the designated persons; there are no general restrictions on dealings with associated countries or nationals. Activity-based programs. U.S. persons are prohibited from dealing with designated persons associated with certain activities, such as terrorism, the proliferation of weapons of mass destruction, narcotics trafficking, trading in conflict diamonds, and activities of significant transnational criminal organizations. These programs also include certain trade restrictions. 15

16 Scope of OFAC Sanctions: Targets of Restrictions (cont d) What are Specially Designated Nationals ( SDNs )? SDNs are entities, groups or individuals specifically designated by OFAC as persons with which U.S. persons are restricted from dealing (currently over 4,600 unique entities). SDNs are gathered on a single publicly available list, but may be designated by OFAC under virtually any program. U.S. persons are therefore subject to different restrictions for different SDNs. The SDN list is not exhaustive, and U.S. persons are prohibited from dealing with many persons not specifically listed as SDNs, and sanctions diligence thus must go beyond namechecking the SDN list. Example. U.S. person finances a French entity that donates 90% of its profits to Hizbullah but is not listed as a SDN. Example. U.S. person enters into a service agreement with a Dubai entity that is controlled by a Sudanese government agency but is not listed as a SDN. Example. U.S. person deals with Fidel Castro, who is not listed as a SDN. Any entity owned by an SDN or controlled by a sanctioned government is likely sanctioned. While not all sanctioned parties are on the SDN list, many institutions use it as an initial screen for potential sanctions target hits to safeguard against U.S. persons within the organization engaging in clearly prohibited transactions. 16

17 Permissible Activities & Licensing All OFAC sanctions programs (even the comprehensive ones) allow certain activities, either with a specific license from OFAC or without prior application to OFAC ( general licenses ). Specific licenses may be requested for virtually any transaction that would ordinarily violate sanctions, but are typically denied without a compelling rationale (e.g., humanitarian assistance). General licenses vary depending on the program, but are usually confined to purely informational or administrative activities. Examples of activities that may be permissible for a U.S. person to conduct with a sanctions target include: Attending international conferences that include sanctions targets; Disseminating business information via a website; and Membership on worldwide or regional committees that (i) oversee transactions or other dealings with a range of parties, including sanctions targets, or (ii) engage in global business strategy and policy-making. 17

18 Scope of OFAC Sanctions: Footnotes and Caveats This taxonomy and the SDN list must be treated with considerable caution. Programs and designations change constantly. Example. Sanctions against Libya were terminated in September In response to the Qadhafi regime s actions in quelling a popular uprising, sanctions were reintroduced in February 2011, only to be eased again in September 2011 after Qadhafi s removal. Example. New designations of Iranian financial institutions, Mexican persons, and Syrian corporations in just the last few weeks. Categories and lists help, but are not sufficient. Avoiding governments is not enough. Sanctions may apply to virtually all persons related to a specific country or activity. Avoiding certain countries is not enough. Sanctions may be unrelated to the geographic location or nationality of a designated party. Avoiding SDNs is not enough. Sanctions may apply to entities that, while not themselves SDNs, derive most of their operating income from sanctions targets or hold most of their assets in such targets. 18

19 OFAC Sanctions in Practice

20 Common OFAC Sanctions Issues Most common situations involve indirect dealings by a U.S. person with a sanctions target (or approving or facilitating such dealings). For example: A U.S. company wants to make a minority investment in a Spanish company with operations in Cuba. A London bank wants to underwrite a debt offering by a French company that has an Iranian subsidiary and offer the debt to U.S. investors. A Dubai company with U.S. directors and managers wants to acquire a Sudanese company. A German company with U.S. subsidiaries wants to acquire an Iranian company. A U.S. bank wants to clear U.S. dollars for a U.K. correspondent with Zimbabwean clients. Situations involving direct dealings are less common: A U.S. company may want to deal directly with a sanctions target, such as through use of an OFAC license (e.g., export food to Cuba). New OFAC sanctions may directly affect the operations or business interests of a U.S. or non-u.s. company. 20

21 Practical Scenario #1: Underwriting or Financing in the U.S. A London bank wants to underwrite a global offering of securities of a French company that has investments and dealings in Iran. Issue. OFAC could see the purchase of securities by U.S. investors as a prohibited facilitation or indirect dealing with Iran by the U.S. investors. Guidelines for facilitation. An informal safe harbor rule has been developed by the sanctions bar after years of practice and consultation with OFAC to guide when a U.S. person will be facilitating a transaction. U.S. persons can generally engage in transactions with a non-u.s. entity with bona fide business activities that are unrelated to sanctions targets, provided that the non-u.s. entity derives less than 10% of its operating income from dealings with sanctions targets and has less than 10% of its assets in sanctions targets. Income or assets in excess of the 10% limits do not mean the U.S. bank would be ipso facto prohibited from underwriting or purchasing the securities; however, further diligence and analysis would be required. The 10% limit is informal, and market practice is currently unsettled, with some underwriters seeking representations based on a 5% limit. But no indirect dealings whatsoever. Whatever the safe harbor levels, U.S. persons may not be involved in any dealing with the French company that amounts to an indirect dealing with Iran. For example, U.S. investors cannot purchase the securities where the proceeds are directed in whole or in part to finance the company s activities in Iran. 21

22 Practical Scenario #1: Underwriting or Financing (cont d) The underwriter can take several measures to protect itself: Diligence. Review the level of the issuer s or seller s involvement in activities in any sanctioned country and ensure that the proceeds of the issuance or sale are not directly linked to activities with sanctions targets. Contract terms. The underwriter should also obtain representations and covenants to the effect that: The issue or sale of the securities do not and will not result in a violation of the U.S. sanctions laws and regulations by any party; and The issuer or seller will not use the proceeds in a manner that will give rise to a violation of the U.S. sanctions laws and regulations by any party. Disclosure. Ensure that any activities relating to sanctioned countries are disclosed to U.S. investors. These issues and concerns are present any time a U.S. person (e.g., private equity fund, hedge fund, investment company) seeks to invest or otherwise provide financing to a non-u.s. person that deals with sanctions targets. 22

23 Practical Scenario #2: U.S. Operations of a German Bank A German bank with U.S. branches and subsidiaries wants to acquire a subsidiary in Sudan. Issue. OFAC could see the U.S. operations as engaging in a prohibited facilitation of or indirect dealing with the Sudanese subsidiary in violation of sanctions against Sudan. Possible sources of violations. The U.S. operations could be exposed to the Sudanese subsidiary through: Its connection to the parent s global activities (e.g., through common management, procedural overlaps, shared databases, etc.); Its involvement in or oversight of the parent s non-u.s. activities; or Its direct involvement in non-u.s. affiliates activities. Firewall solutions. Generally, the German bank should adopt policies and procedures to ensure separation of the U.S. and Sudanese operations: Recusal policies for U.S. individuals for any actions relating to the Sudanese operations (and accompanying delegation policies to transfer authority from the U.S. person to a non-u.s. person). Operational policies that include specific protocols designed to ensure that any U.S. person will be automatically excluded from any decisions, dealings, or transactions relating to the Sudanese operations. 23

24 Practical Scenario #2: U.S. Operations (cont d) As a non-u.s. person, the German bank itself generally would not be subject to U.S. sanctions. The risk of extraterritoriality. However, OFAC appears to have recently taken a more aggressive position where it concludes a non-u.s. person had caused or aided a violation by a U.S. person. Credit Suisse, Lloyd s, ABN AMRO, and other non-u.s. banks have faced significant penalties, and other actions are pending. The investigation may be as much a punishment as the formal penalty. Practical effects persist no matter what. Even if OFAC regulations do not support extraterritorial application, OFAC is creating facts on the ground. OFAC has indirectly expanded its effective reach beyond U.S. persons and territory by expecting U.S. parents to scrutinize foreign subsidiaries and U.S. subsidiaries to scrutinize foreign parents. OFAC increasingly works with home country regulators to enforce sanctions (e.g., the ABN AMRO fine was supported by the Netherlands). Some large banks have mandated compliance with OFAC sanctions for their entire global operation based on this pressure. 24

25 Recent OFAC Developments

26 Focus on Financial Institutions Scrutiny of internationally active banks by OFAC is increasing, wherever they are based. In recent years U.S. bank examiners and OFAC have been intensifying reviews of letters of credit advising or confirming and U.S. dollar clearing for adequacy of identifying information. A key issue is the use of cover payments (MT202s) that are used to clear U.S. dollar transfers and do not disclose their origin or beneficiary. The Wolfsberg Group and The Clearing House Association have endorsed measures to enhance the transparency of international wire transfers, including the development of more detailed payment messages and the adoption of basic message transparency principles. Dollar clearing is a key source of sanctions exposure; a U.S. bank (and potentially a non-u.s. parent) may be liable for OFAC violations if it clears dollars for sanctions targets, even indirectly (e.g., for a correspondent). OFAC requires banks to implement risk-based policies and procedures specifically for OFAC compliance (in addition to their anti-money laundering policies). 26

27 Focus on Iran The Iran sanctions involve some of the most complex, unintuitive provisions of the OFAC regulations. Regulators have focused on Iran owing to political pressure in the United States and geopolitical developments. U.S. Treasury officials have visited CEOs of international banks and international groups to urge that institutions cease doing business with Iran, particularly with its financial sector, arguing that the risks to global peace (and the institutions) outweigh the benefits. The U.S. has also globally supported targeted harsher actions, such as asset freezes, against designated Iranian institutions and individuals connected to terrorism or to nuclear proliferation. Many international banks have reduced or eliminated their dealings with Iran in recent years, and the U.S. has publicized those actions. Pending legislation would explicitly extend the Iranian sanctions to cover the non-u.s. subsidiaries of U.S. persons. 27

28 Iran Sanctions

29 Iran Sanctions - Overview In addition to OFAC sanctions, which apply to U.S. persons and activities, the U.S. maintains indirect sanctions aimed at foreign companies dealing with Iran. Unlike OFAC, no connection between the United States and the sanctioned activity needs to be shown. These laws are not legally binding on foreign companies. However, if they engage in the targeted activities with Iran, they themselves risk becoming the subject of U.S. sanctions that will prohibit or restrict their access to the U.S. market. 29

30 Iran Sanctions and Financial Institutions - Overview Two distinct sets of sanctions relevant to financial institutions: Sanctionable activity relating to financing in the Iranian petroleum sector, refined products sector, or petrochemical sector. Administered by the U.S. Department of State Limits on correspondent accounts for financial institutions that deal with Iran. Administered by the U.S. Department of Treasury Current framework consists of several key laws, executive orders, and regulations that are important for foreign financial institutions to understand Iranian Transactions Regulations (1995) Iran Sanctions Act of 1996 ( ISA ) Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ( CISADA ) Iran Financial Sanctions Regulations (2010) Executive Order (2011) Section 1245 of the National Defense Authorization Act for FY2012 (the NDAA ) 30

31 Financing in the Iranian Petroleum Production/Refined Products Sector

32 Sanctionable Activity A financial institution could be sanctioned if it knowingly (includes should have known ): Finances a sale of refined petroleum products to Iran with a fair market value of $1MM in a single transaction or $5MM over 12 months; Finances the provision of goods, services, technology, or support that could directly and significantly contribute to the maintenance or enhancement of Iran's ability to develop its oil and gas industry with a fair market value of $1MM in a single transaction or $5MM over 12 months (including both upstream oil and gas production and refined products); Finances the provision of goods, services, technology, or support that could directly and significantly contribute to the maintenance or expansion of Iran's domestic production of petrochemical products with a fair market value of $250K in a single transaction or $1MM over 12 months. Itself provides any other service contributing to the activities listed above in excess of the value limits. 32

33 Enforcement Sanctions are not automatic. Investigation and then Presidential action required. Investigation, reporting and action on sanctionable activity are now mandatory, but no mechanism other than political pressure exists to force the Administration to act. Investigation can be terminated if party being investigated agrees to stop activity. Includes mandatory investigation of past violations. If a violation is found, the President is required to impose 3 of 9 available sanctions from a menu. Sanctions range from relatively mild to making the sanctioned party a Specially Designated National ( SDN ) with whom U.S. persons may not deal. Waivers of sanctionable activity possible. State and local entities (e.g., public pension funds) are authorized to maintain divestiture policies targeting companies doing business in Iran. 33

34 Limits on Correspondent Accounts for Financial Institutions Dealing with Iran

35 Correspondent Accounts The Iranian Financial Sanctions Regulations (IFSR) provide for restrictions, or an outright prohibition, on maintaining a correspondent account in the U.S. for any foreign financial institution that knowingly does any of the following: Facilitates WMD or terror-related activities by any Iranian government entity or financial institution or engages in money laundering in relation to such activities; Facilitates the activities of any person subject to UN financial sanctions; Facilitates any significant transaction, or provides significant financial services, for designated banks linked to Iran s terrorism or WMD activities or the Iranian Revolutionary Guard Corps These banks are identified as IFSR on the SDN list 35

36 Correspondent Accounts (cont d) The original IFSR list did not include the Central Bank of Iran, permitting trade transactions (especially oil purchases) through the CBI A change in law at the end of 2011 (the NDAA) extended the sanctionable activity to transactions with the CBI, with exceptions: Commercial banks: non-petroleum transactions sanctionable State-owned banks: non-petroleum transactions permitted Petroleum-related transactions: sanctionable for all banks beginning June 28, 2012 Exception: State Department makes a finding that a country has significantly reduced purchases of Iranian oil Exception: President finds that there is insufficient global supply to reduce purchases of Iranian oil (Note the President has currently determined that global supply is sufficient) Exception: President provides a national security waiver 36

37 What is a Significant Transaction or Financial Service? Treasury may consider the totality of the facts and circumstances. As a general matter, Treasury will look at the following: Size, number and frequency of transactions or financial services The nature of the transaction/financial service Level of awareness of personnel and whether the transactions are part of a pattern of conduct The nexus between the financial institution and the blocked party The impact of the transaction or financial service on the objectives of the sanctions against Iran Whether the transaction/financial service is part of deceptive practices 37

38 Limitations on Correspondent Accounts Treasury may impose the following sanctions on banks engaged in sanctionable activity Complete ban on U.S. correspondent accounts; Prohibition of, or restrictions on, any trade financing through the correspondent account; Restrictions on transactions processed through the account to certain types of transactions, like personal remittances; Monetary limits on the transactions that may be processed through the correspondent account; Requiring pre-approval from the U.S. financial institution for all transactions processed through the account; or Prohibition of, or restrictions on, the processing of foreign exchange transactions through the account (only with respect to sanctionable activities under the NDAA) 38

39 Regulatory Requests regarding Correspondent Accounts Treasury has also adopted regulations requiring U.S. banks and branches to make inquiries regarding their foreign correspondents upon request Applicable to US branches and agencies of foreign banks Upon written request from the U.S. government regarding a specified foreign financial institution for which a correspondent account is maintained, a financial institution in the U.S. must request from the foreign financial institution information about sanctionable activities with Iran that may have been recently carried out by that foreign financial institution. 39

40 Recent Executive Orders Targeting Iran and Syria

41 Foreign Sanctions Evaders and Use of IT in Human Rights Abuses Foreign Sanctions Evaders Executive Order Targets (1) facilitators of deceptive transactions for or on behalf of any sanctioned person and (2) violators of U.S. sanctions not susceptible to prosecution as a practical matter A deceptive transaction includes any transaction in any currency involving persons sanctioned by the U.S. under the Iran or Syria sanctions in which the identity of the sanctioned party is withheld from another participant in the transaction GHRAVITY Executive Order Targets (1) operators of IT that facilitate computer or network disruption, monitoring or tracking related to human rights abuses by the Government of Iran or Syria and (2) suppliers of goods, services or technology likely to be used to facilitate computer or network disruption, monitoring or tracking related to human rights abuses by the Government of Iran or Syria Represents an expansion of U.S. sanctions to the IT and telecommunications sector Both orders authorize the imposition of U.S. sanctions against targeted parties Consequences are not automatic; these orders are only authority to impose sanctions 41

42 Future Developments

43 Pending developments: Iran, Syria, and Burma Additional proposed sanctions against Iran are likely to be adopted Expanded targeting of foreign companies doing business with Iran is likely Strong political pressure for increased enforcement Proposals to require banks with correspondent accounts or listed securities in the U.S. to publicly disclose all dealings with Iran Syrian sanctions may follow Iran Possible that stronger measures will be taken to target companies doing business with Syria FSE E.O. and GHRAVITY E.O. both treat Iran and Syria equally Burma sanctions expected to be lifted at a slow pace Political developments have prompted EU and Canada to suspend most sanctions against Burma, but initial steps by the U.S. have been modest 43

44 Other Sanctions Programs

45 Export Controls OFAC coordinates with Commerce s Bureau of Industry and Security ( BIS ) and State s Directorate of Defense Trade Controls ( DDTC ) in administering U.S. export controls. Even if OFAC does not control trade with a particular country or for a particular good or end-use, BIS or DDTC may. BIS administers broad export and re-export controls generally focused on dual-use goods and technology (e.g., encryption, optics, computers). However, certain BIS regulations may restrict virtually all exports to a particular country (e.g., North Korea, Syria), regardless of dual-use classification. BIS controls are complex and require an item-by-item evaluation of several factors, including the item being exported, the destination of the item, the end-use of the item, and the identity of the end-user. Exports do not require sales (e.g., taking a laptop with Microsoft software to Iran). DDTC administers export and re-export controls covering goods and technology with military applications. 45

46 Independent Sanctions Helms-Burton Act ( HBA ). Targets any entity found to be trafficking in property confiscated by the Cuban government. As with ISA, sanctions under HBA may be imposed on non-u.s. persons. Key provisions of HBA also have been effectively waived by the President, but certain measures have been used (e.g., visa denials). The potential extraterritorial application of U.S. sanctions has led Canada and some E.U. countries to adopt blocking legislation designed to prohibit their nationals from complying with such sanctions. 46

47 Securities Disclosure & Divestment The SEC has created the Office of Global Security Risk (the OGSR ) in the Division of Corporate Finance, which uses existing disclosure laws and regulations to require registrants of securities in the United States to include disclosure about any dealings with state sponsors of terrorism (e.g., Iran, Syria). The SEC asserts that U.S. investors want to know about such activities and effectively requires disclosure on the basis of qualitative materiality, even when the dealings are not quantitatively material to the registrant. After withdrawing an earlier system, the SEC is again considering adopting mechanisms to facilitate investors access to these disclosures. Significant divestment movements are also underway against Iran and Sudan, with legislation pending to support both movements by publishing lists of companies with certain interests in those countries. OGSR was also created in part to facilitate such movements. 47

48 U.N. and E.U. Sanctions U.N. sanctions are adopted by Security Council resolution and generally are not directly effective in the United States. U.S. sanctions programs are fundamentally unilateral and often exceed U.N. sanctions in their scope (e.g., Iran) or are unconnected to U.N. programs (e.g., Cuba). The U.S. government s general position is that no approval, authorization or coordination with the United Nations is required in implementing its national sanctions programs. E.U. sanctions are adopted in common positions that are binding on member states, their nationals, and their territory. Common positions typically implement U.N. Security Council resolutions. Similar to the SDN list, the E.U. maintains a consolidated list of persons, groups, and entities subject to E.U. sanctions. Member states may adopt sanctions that exceed those set forth in a common position, and may also need to adopt measures for the appropriate enforcement of common positions (e.g., criminal penalties). 48

49 NEW YORK WASHINGTON PARIS BRUSSELS LONDON MOSCOW FRANKFURT COLOGNE ROME MILAN HONG KONG BEIJING BUENOS AIRES SÃO PAULO