Sanctions Compliance American Petroleum Institute March 27-28, 2017 Alan Kashdan International Trade Department
Hughes Hubbard & Reed LLP Page 2 I. Introduction
Introduction Sanctions are very much in the news What Trump has said: o Russia o Iran o Cuba What will he actually do? Tool of U.S. foreign policy for future events In the meantime.. Hughes Hubbard & Reed LLP Page 3
Hughes Hubbard & Reed LLP Page 4 II. Sanctions and Embargoes
Coverage of Sanctions Rules U.S. tends to have the most extensive sanctions rules of any country U.S. has the strictest penalties for violating sanctions rules U.S. has been the most aggressive in enforcing its sanctions rules and imposing the most aggressive penalties Hughes Hubbard & Reed LLP Page 5
Coverage of Sanctions Rules (cont.) Countries, including U.S., apply sanctions laws to its companies and its citizens wherever they are in the world, and to non-national companies and individuals for their acts taken within the country U.S., alone, in some situations, also imposes its sanctions laws on non- U.S. companies and individuals for their acts taken outside the U.S. Hughes Hubbard & Reed LLP Page 6
Embargoes Countries and Sanctions: The Big Five (Four?)* Cuba North Korea Iran Sudan** Syria *Myanmar revoked October 2016 **Sudan conditionally lifted for six months (Jan. 17, 2017) Hughes Hubbard & Reed LLP Page 7
Embargoed Countries and Sanctions (cont.) Iran has been the subject of the widest scope of international sanctions by the most countries situation has changed, but not for U.S. companies Syria, North Korea still in the deep freeze Sudan soon to be lifted? Crimea near total embargo Russia/Ukraine two kinds of sanctions Hughes Hubbard & Reed LLP Page 8
Sanctions: Iran Will Trump dismantle the Iran nuclear deal (Joint Comprehensive Plan Of Action, or "JCPOA")? What could this mean? o o Not much change for U.S. persons Biggest impact would be on foreign persons, through snap-back of extraterritorial sanctions o Trump could revoke an authorization that currently permits U.S.-owned or - controlled foreign subsidiaries to engage in certain activities involving Iran o Will Trump continue required waivers? Hughes Hubbard & Reed LLP Page 9
Sanctions: Cuba Cuba is only U.S. sanctioned country that no one else sanctions Actions under Obama Administration were only able to affect small areas Embargo is still largely in effect for most commercial activity Hughes Hubbard & Reed LLP Page 10
Sanctions: Cuba The embargo is based on legislation, would require Congressional action for complete lifting of sanctions Because the easing of economic and travel restrictions under the Obama administration was done through executive orders and administrative regulations, Trump can reverse the new policies by executive action o o o Trump has said he will terminate the deal unless Cuba is willing to make a better deal But it is not clear to what extent Trump is actually willing to roll back the U.S. opening to Cuba, given the substantial investments from the airline, travel and other major industries On the whole, Trump has been less vocal about Cuba than other countries where he has stated intent to shift the policy direction (e.g., China, Iran, Mexico, Russia) Hughes Hubbard & Reed LLP Page 11
U.S. Embargoes Embargo rules that apply to specifically identified entities and persons in certain countries. The list of countries, which can change frequently, currently includes: Afghanistan Balkans Belarus Burma (Myanmar) Burundi Central African Republic Cuba Dem. Rep. of Congo Egypt Eritrea Guinea-Bissau Iran Iraq Lebanon Liberia Libya North Korea Russia/Ukraine Sierra Leone Somalia South Sudan Sudan Syria Tunisia Venezuela Yemen Zimbabwe Hughes Hubbard & Reed LLP Page 12
Hughes Hubbard & Reed LLP Page 13 III. Sanctions Rules Details
Coverage of Sanctions Rules Individual entities and persons may be subject to sanctions for their activities, regardless of country affiliation Specially Designated Nations (SDNs) Widely applicable terrorists, terrorist organizations, Al Qaida, Taliban Others activities that further proliferation of weapons of mass destruction; human rights violations; international drug trafficking Hughes Hubbard & Reed LLP Page 14
Coverage of Sanctions Rules (cont.) Persons and entities that are subject to U.S. sanctions are identified in the prohibited parties lists maintained by the Treasury Department s Office of Foreign Assets Control (OFAC). Lists can be updated frequently When updated, sanctions go into effect immediately Hughes Hubbard & Reed LLP Page 15
Coverage of Sanctions Rules (cont.) Transactions with persons and entities in embargoed countries may be prohibited (Iran, Syria, others) Transactions with persons and entities on an applicable prohibited parties list may be prohibited. The assets and property of such persons are considered to be blocked or frozen. Dealing in such property or property interests is prohibited Hughes Hubbard & Reed LLP Page 16
Sanctions What is Property? The terms property and property interest include, but are not limited to, money, checks, drafts, bullion, bank deposits, savings accounts, debts, indebtedness, obligations, notes, guarantees, debentures, stocks, bonds, coupons, any other financial instruments, bankers acceptances, mortgages, pledges, liens or other rights in the nature of security, warehouse receipts, bills of lading, trust receipts, bills of sale, any other evidences of title, ownership or indebtedness, letters of credit and any documents relating to any rights or obligations thereunder, powers of attorney, goods, wares, merchandise, chattels, stocks on hand, ships, goods on ships, real estate mortgages, deeds of trust, vendors' sales agreements, land contracts, leaseholds, ground rents, real estate and any other interest therein, options, Hughes Hubbard & Reed LLP Page 17
Sanctions What is Property? (cont.) negotiable instruments, trade acceptances, royalties, book accounts, accounts payable, judgments, patents, trademarks or copyrights, insurance policies, safe deposit boxes and their contents, annuities, pooling agreements, services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent. Hughes Hubbard & Reed LLP Page 18
Sanctions U.S. Persons For most U.S. sanctions programs, rules apply to U.S. business entities, U.S. nationals anywhere in the world (citizens and permanent residents), and any person or entity while acting in the U.S. For Cuba, sanctions apply to any entity anywhere that is owned or controlled by a U.S. person For Iran, any entity that is owned or controlled by a U.S. person is subject to the same sanctions rules as a U.S. person, but General License allows much to be done For some sanctions regimes, a foreign person can be held liable for causing a U.S. person to violate the rules (Iran, Russia) Hughes Hubbard & Reed LLP Page 19
Coverage of Sanctions Rules (cont.) Russia/Ukraine sanctions (U.S., EU, Canada, Australia, Japan) are a new paradigm Certain persons and entities are designated as SDNs Crimea embargo Other entities are subject to sectoral sanctions four Directives Hughes Hubbard & Reed LLP Page 20
Coverage of Sanctions Rules (cont.) Directive 1 Dealing in debt of more than 30 days maturity; dealing in new equity Directive 2 Dealing in debt of more than 90 days maturity. Directive 3 Dealing in debt of more than 30 days maturity Directive 4 Exporting goods, services, technology for exploration or production of oil (deep-water, offshore Arctic, shale) Hughes Hubbard & Reed LLP Page 21
Coverage of Sanctions Rules (cont.) If a transaction involves a sanctioned country or a sanctioned person or entity, participation by U.S. company or national anywhere could give rise to a violation (e.g., working at a foreign subsidiary; acting as director of a foreign subsidiary) Hughes Hubbard & Reed LLP Page 22
Coverage of Sanctions Rules (cont.) 50% owned entities all the way down the ownership chain are deemed to be SDNs under U.S. law A is an SDN; it owns 50% of B, B owns 50% of C, C owns 50% of D B, C, and D are all SDNs Combined ownership to get to 50% Hughes Hubbard & Reed LLP Page 23
Facilitation U.S. sanctions regimes also prohibit U.S. persons from approving or facilitating acts by non-u.s. persons that a U.S. person could not do directly Approving and facilitating interpreted broadly: -- U.S. company authorizing foreign sub to do business in a sanctioned country -- U.S. national employee of a foreign company participating in planning meetings by the company for sanctioned country activity -- U.S. lawyer advising foreign subsidiary on legal or business issues in doing business in or with a sanctioned country or person (except for compliance with U.S. law issues) -- U.S. person referring a sanctioned country opportunity to a non-u.s. person Hughes Hubbard & Reed LLP Page 24
Hughes Hubbard & Reed LLP Page 25 IV. Penalties
Penalties for Violations Individual directors, officers and employees may be held accountable for violations including criminal and civil sanctions U.S. historically has the highest penalties, and has been most aggressive in enforcement Hughes Hubbard & Reed LLP Page 26
Penalties for Violations (cont.) U.S. Civil penalties of approximately $290,000 per violation; criminal penalties of up to $1 million per violation and/or up to 20 years imprisonment Very large penalties have been assessed Strict Liability No de minimis value below which a violation would not be found Hughes Hubbard & Reed LLP Page 27
Penalties for Violations (cont.) Weatherford International -- $91,026,450 penalty for violations by the U.S. company and foreign subsidiaries in exports of the Cuban, Iranian and Sudanese sanctions regulations through exports of oilfield equipment and services, and facilitation by U.S. persons of actions by foreign subsidiaries Hughes Hubbard & Reed LLP Page 28
Penalties for Violations (cont.) BNP Paribas -- $963,619,900 penalty for violations of sanctions against Burma, Cuba, Iran and Sudan Credit Suisse -- $536,000,000 penalty for violations of sanctions against Burma, Cuba, Iran, North Korea and Sudan Most recent (March 7) ZTE Corp. -- $430,488,798 (including $143,496,266 criminal penalty) for illegal exports of goods and technology to Iran Hughes Hubbard & Reed LLP Page 29
Hughes Hubbard & Reed LLP Page 30 V. Extraterritorial Reach of U.S. Controls
Sanctions Extraterritorial reach of U.S. sanctions has two aspects o o o o Traditional activities with some(arguable) connection with the United States Actions over past few years against EU banks Export control component of sanctions regimes Country sanctions SDN sanctions Iran No connection with the United States Hughes Hubbard & Reed LLP Page 31
Sanctions (cont.) Series of laws from 1996 to 2012 authorizing imposition of sanctions on non-u.s. persons for certain kinds of activities targeting Iran s ability to fund nuclear program and promote terrorism Transactions need not have any connection with the U.S. to be sanctionable Note these are largely but not entirely suspended as part of 2015 Joint Comprehensive Plan of Action (JCPOA) Hughes Hubbard & Reed LLP Page 32
Sanctions Iran Limited initially to persons making substantial investments in exploration and development of Iranian oil and gas resources Expanded to cover activities involving entire Iranian petrochemical sector, energy, transport of oil, gas and petrochemical products, ports, shipping underwriting Iranian sovereign debt or financing activities of Iranian government-owned businesses Sanctionable activities can extend to provision of services, including professional services, insurance and reinsurance, that benefits these sectors Hughes Hubbard & Reed LLP Page 33
Sanctions Iran Entire Iranian Government, governmentowned businesses, financial sector targeted Iran Revolutionary Guard Corp Iranian shipping Separate sanctions regime for foreign financial institutions Extraterritorial sanctions focus on being cut off from commercial activity with the United States; can include being treated as an SDN Hughes Hubbard & Reed LLP Page 34
Sanctions Iran After the JCPOA Under JCPOA, U.S. agreed to suspend most of its extraterritorial sanctions against Iran. However Non-U.S. persons who engage with Iranian SDNs may still be subject to U.S. sanctions Non-U.S. persons who engage with entities affiliated with the Islamic Revolutionary Guard Corps may still be subject to U.S. sanctions Non-U.S. persons who engage in Iran transactions payable in U.S. dollars can be subject to U.S. sanctions Prohibitions continue on exporting and reexporting U.S. items to Iran U.S. persons continue to be prohibited from approving or facilitating transactions with Iran Hughes Hubbard & Reed LLP Page 35
Sanctions Iran After the JCPOA (cont.) Activities of Foreign Subsidiaries General License H Foreign subs may conduct many activities with Iran if foreign sub has authority to act independently with respect to Iran U.S. parent, and U.S. nationals, may not be involved in activities of foreign sub in Iran U.S. export controls continue to apply U.S. parent may make available automated and globally integrated computer, accounting, email, telecom, or other business support system, platform, database, application, or servers necessary to store, collect, transmit, generate, or otherwise process documents or information Hughes Hubbard & Reed LLP Page 36
Sanctions What Next? Steady as she goes? Still high degree of uncertainty Reluctance by foreign companies to go too deeply into Iran Hughes Hubbard & Reed LLP Page 37
Hughes Hubbard & Reed LLP Page 38 Questions?
Contact Information Alan Kashdan Hughes Hubbard & Reed LLP 1775 I Street, NW Washington, DC 20006 P: +1 (202) 721-4630 alan.kashdan@hugheshubbard.com Hughes Hubbard & Reed LLP Page 39