OFAC Issues Revised Guidance Amid Confusion Over Ukraine-Related Sanctions

In the wake of many questions and some confusion highlighted by the recent and ongoing Ukraine-Related Sanctions, this week the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) issued Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked. OFAC states that the Revised Guidance has been issued in response to inquiries it has received.

The Revised Guidance reaffirms that property blocked pursuant to Executive Orders or OFAC regulations is subject to a sweeping definition and includes “any property or interest in property, tangible or intangible, including present, future or contingent interests. A property interest subject to blocking includes interests of any nature whatsoever, direct or indirect.”

OFAC goes on to explain that a blocked person (both individuals and entities) is “considered to have an interest in all property and interests in property of an entity in which such blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest.”

Therefore, OFAC considers an entity “owned in the aggregate,” whether directly or indirectly, 50% or more by one or more blocked persons to be a blocked person as well. In other words, an entity that is not identified on any of the U.S. Government’s “Lists” is a blocked (sanctioned) party if a blocked person (an individual or entity that appears on one of the Lists) owns 50% or more of the unlisted entity.

The practical difficulty in this coping with this broad definition is that it this rule covers aggregated and indirect ownership interests. It is not difficult to consider how even a rather simple ownership structure of a particular entity, say in Russia, might prohibit a U.S. company from accepting a recently received purchase order if that Russian entity is owned by 4 other entities in which a blocked person owns, through other entities or interests, a 50% stake of the Russian entity that submitted the purchase order.

Another unsettling statement in OFAC’s Revised Guidance is the warning to U.S. persons to proceed with “caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest.” So if the non-blocked/unlisted entity is managed by a President/CEO who is a blocked person who also owns a 30% interest in the company, OFAC seems to be strongly suggesting that U.S. companies avoid transactions with such entities.

The OFAC Revised Guidance does not represent a significant new development regarding economic sanctions administered and enforced by OFAC, but it does publicly illustrate the need for U.S. persons (including non-U.S. persons and companies that are subject to U.S. laws) to engage in enhanced due diligence and documenting those efforts before proceeding with a transaction, whether with a customer or other business partner in Russia and other countries where there is a targeted U.S. economic sanctions regime in place.

For assistance with understanding and complying with Ukraine-related and other economic sanctions regulations and Executive Orders, as well as representation before OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile).

Navigating Economic Sanctions Successfully: Yormick will Present Upcoming FCIB Webinar

On April 23, international trade and business attorney, Jon Yormick, will present a webinar on Navigating Economic Sanctions Successfully for The Finance, Credit & International Business Association (FCIB). The 1-hour webinar begins at 11:00 am EST and is open to FCIB members and non-members.

In his presentation, Yormick will provide an update on the recent economic sanctions relating to events in Ukraine, discuss key U.S. economic sanctions regimes, discuss recent OFAC General Licenses and TSRA licenses that give companies certain business opportunities within the U.S. sanctions regimes for Iran and other countries subject to U.S. sanctions, and emphasize economic sanctions compliance, including lessons learned from recent OFAC and BIS civil penalty cases.

Yormick is an experienced international business and trade attorney practicing in the areas Export Controls & Economic Sanctions, Customs & International Trade, and FCPA/Anticorruption. He represents U.S. and foreign clients before the U.S. Department of Commerce, Bureau of Industry and Security (BIS), the U.S. Customs and Border Protection (CBP), the U.S. Department of Homeland Security, Immigration and Customs Enforcement (ICE), the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC), and the U.S. International Trade Commission (ITC) on import and export laws and regulations, including the Export Administration Regulations (EAR), and the International Traffic in Arms Regulations (ITAR).  His clients include those in the advanced manufacturing, advanced materials, aerospace and defense, distribution, electronics, energy, medical device, oil/gas, pharmaceuticals, professional services, steel, textiles and apparel, and transportation/logistics sectors.

For more information about FCIB visit, www.fcibglobal.com, or use this link to register for the webinar, http://bit.ly/1kWK9Q4

International Trade Presentations in Buffalo to Ring in the New Year!

International trade and business attorney, Jon Yormick, will discuss Export Control Reform (ECR) and economic sanctions in 2 separate presentations in Buffalo next month.

On January 15, the Law Offices of Jon P. Yormick Co. LPA is co-sponsoring a 2-hour workshop, Export Control Reform, Revisited, with Mohawk Global Trade Advisors and Daemen College. The event will be held at Daemen College, with check-in beginning at 8:30 am.  The program will run from 9:00-11:00 am. In addition to Jon, the workshop will feature Jim Trubits of Mohawk Global Trade Advisors, and Rae Perrott of Moog, Inc. They will discuss and share experiences with the recently implemented ECR from the perspectives of a global exporting company, a freight forwarder, and legal counsel. The focus will be on the transition of defense articles from the ITAR to the EAR, new AES documentation requirements, and tips for export compliance based on lessons learned from recent consent decrees. The cost is $35 and includes breakfast. For registration, contact Abby Frank at 315.552.3001 or at afrank@mohawkglobal.com.

Also on January 15, Jon will give a presentation at the Buffalo World Trade Association’s monthly dinner meeting. The BWTA was founded in 1921 and has the mission of expanding international business knowledge and activity of U.S. and Canadian companies in the Buffalo Niagara region.  In his presentation, Navigating Economic Sanctions Successfully, Jon will discuss economic sanctions regimes, OFAC General Licenses and TSRA licenses that give companies certain business opportunities within the U.S. sanctions regimes, and emphasize economic sanctions compliance, including lessons learned from recent OFAC and BIS civil penalty cases.  The meeting will be held at the Millennium Hotel, 2040 Walden Ave., with cocktails beginning at 5:30 and dinner at 6:30 pm. For registration and membership information, visit www.bwta.us.

An OFAC Civil Penalty Settlement Reminder that SMEs Must Perform Due Diligence and have a Compliance Program

This morning’s release from the Department of the Treasury, Office of Foreign Assets Control is a stark reminder that export controls and economic sanctions compliance apply equally to small businesses that export.

Houston-based Stanley Drilling Equipment & Supply, Inc. agreed to pay just over $84,000 to settle a civil penalty case involving alleged violations of the Iranian Transactions and Sanctions Regulations (“ITSR”).  OFAC alleged that in 2008, the company attempted to export 4 shipments and successfully exported 2 shipments of unidentified goods from the U.S. the UAE, “with reason to know that the shipments were intended specifically for supply, transshipment, or reexportation to an oil drilling rig located in Iranian waters.”  The goods were valued at just over $93,000.

Stanley Drilling faced a base penalty amount of $156,000.  Under OFAC’s Economic Sanctions Enforcement Guidelines, it was noted that the company did not have an OFAC compliance program in place at the time of the violations; the transactions were particularly harmful to U.S. sanctions program objectives because they aided the development of Iranian petroleum resources; but the harm to OFAC sanctions program objectives was lessened since 4 of the 6 shipments were detained and did not leave the U.S.  OFAC also noted that Stanley Drilling did not have any prior OFAC violations and is a small company (a check on the World Wide Web did not reveal a company website).

Notably, OFAC found that Stanley Drilling “did not appear to have actual knowledge that the drilling rig was destined for or located in Iranian waters,” but it “had reason to know these facts” because the information was publicly available at the time of the transactions.  In other words, Stanley Drilling failed to perform the necessary due diligence to make these export sales.  It did not follow the “Know Your Customer” mantra.  As the settlement also points out, despite being a small company, an exporter really must have an OFAC compliance program.  Rather obviously, this would be a particularly good practice to follow for companies selling oil/gas equipment to customers in the Middle East.

This penalty settlement clearly shows that small and medium-size enterprises (SMEs) simply cannot believe that U.S. export controls and economic sanctions do not apply to them or that their export sales will “fly under the radar” of government agencies.  They must perform due diligence early in the sales process, at the time of shipment, and even post-sale to avoid even unintentional violations.  To further mitigate the risk of violations, a written export compliance program, including OFAC compliance, is not just a best practice, but truly a necessity.

For assistance with understanding and complying with export controls and economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com  or by calling +1.866.967.6425 (Toll free in Canada & U.S.), +1.216.928.3474, or Skype at jon.yormick.

U.S. and Non-U.S. Parties Beware (Again): Latest U.S. Sanctions on Iran go into Effect 1 July 2013

The Iran Freedom and Counter-Proliferation Act of 2012 (IFCA) and Executive Order (EO) 13645 become effective on 1 July 2013. IFCA was signed into law on 2 January 2013, as a part of the National Defense Authorization Act (NDAA) for Fiscal Year 2013 and authorizes broad sanctions aimed at Iran’s energy, shipping, and shipbuilding sectors, the sale and supply of precious and certain other metals, graphite, coal, and industrial software, and targets providing insurance and other financial services to sanctioned Iranian parties.  EO 13645 was signed on 3 June 2013 and implements and expands upon IFCA, significantly targeting Iran’s automotive sector.  IFCA marks the fourth U.S. Iran sanctions statute to go into effect since 2010, while EO 13645 is the sixth Iran-focused EO since 2012.

This latest round of U.S. sanctions again applies extraterritorially, reaching non-U.S. parties (including trading companies) that do business with Iranian-owned entities.  They are, in effect, “secondary sanctions.”  In general, IFCA presents sanctions liability exposure for “any person” (including entities) knowingly providing support or selling, supplying, or transferring to or from Iran significant goods or services to Iran’s energy, shipping, and shipbuilding sectors or port operations.  Similarly, IFCA sanctions can be imposed against “any person” that sells, supplies, or transfers, directly or indirectly, to or from Iran precious metals, graphite, aluminum, steel, and coal (all if used in certain ways), and software used for integrating industrial processes.  Financial institutions facilitating final transactions and insurance underwriting, relating to such activities, are likewise sanctionable.  IFCA also poses sanctions risk for “any person” knowingly providing support to any Iranian party on the Specially Designated National (SDN) List maintained by the Department of the Treasury, Office of Foreign Assets Control (OFAC).

Certain exceptions apply to IFCA, most notably for the sale of agricultural commodities, food, medicine, medical devices, and providing humanitarian assistance to the Iranian people.

EO 13645 presents additional significant sanctions risks for foreign parties.  The EO expands the reach of U.S. sanctions to the Iranian automotive industry so that sanctions can be imposed against “any person” that sells, supplies, or transfers significant goods or services to Iran’s automotive sector, including goods used to manufacture or assemble trucks, cars, motorcycles and other vehicles in Iran.  In addition, financial institutions that conduct or facilitate any significant transactions related to the purchase or sale of Iranian Rials or maintaining significant accounts denominated in Iranian Rials, are subject to sanction.

To assist U.S. and foreign parties understand and comply with this latest round of U.S. sanctions against certain Iranian sectors, OFAC has added Frequently Asked Questions (FAQs) as guidance, http://1.usa.gov/128MxDA.

For assistance with understanding and complying with IFCA, EO 13645, other Iran sanctions laws, regulations, and Executive Orders, and other economic sanctions regimes, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com  or by calling +1.866.967.6425 (Toll free in Canada & U.S.), +1.216.928.3474, or Skype at jon.yormick.

U.S. Parties Authorized to Transact Business in Burma’s Largest Banks

Today, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC), issued General License No. 19, authorizing additional U.S. economic activity in Burma.  The general license permits individuals, companies, and financial institutions to conduct business with Burma’s four major banks:  Asia Green Development Bank, Ayeyarwady Bank,  Myanma Economic Bank, and Myanma Investment and Commercial Bank.  This new General License will ease the ability with which U.S. companies can do business in and with Burma.  Last year, the U.S., the EU, and other countries eased economic sanctions against Burma to authorize investment and greater economic activity with Burma.

While General License No. 19 allows U.S. companies to transact business with these banks, there are restrictions.  General License No. 19 can be found here, http://1.usa.gov/YIl6jV.  This serves as a reminder that U.S. companies must carefully conduct business in Burma to comply with the remaining OFAC sanctions and the State Department’s Reporting Requirements for Responsible Investment in Burma.

 

A Tale of Two Recent OFAC Settlements

In recent weeks, the Department of Treasury, Office of Foreign Assets Control (“OFAC”) announced civil liability settlements with two U.S. companies.  Both cases involved alleged violations of the Iranian Transactions Regulations (the “ITR”), but one case was viewed as egregious, while the other was non-egregious.  Both cases offer insight as to activities and factors weighed by OFAC in concluding civil settlements for violations of the ITR.

In mid-January OFAC announced that Dal-Tech Devices, Inc., of Boca Raton, Florida, agreed to pay $10,000 to settle its potential civil liability for apparent violations of the ITR.  Dal-Tech distributes microwave radio frequency devices.  While under prior ownership and management, the company apparently violated the ITR by selling and exporting radio frequency measurement devices (“RF devices”) to Austria, knowing the products were ultimately destined for Iran.  The total value of the shipment was under $3,500.  When the company learned the shipment had been returned from Austria without delivery, it re-exported the same RF devices to Slovenia for transshipment to Iran.   The OFAC announcement explains the civil settlement coincides with a Deferred Prosecution Agreement (the “DPA”) between Dal-Tech and the U.S. Attorney’s Office for the District of Delaware.  Dal-Tech did not voluntarily disclose the apparent violations to OFAC.  The alleged violations constitute an egregious case.

Dal-Tech faced a base penalty of $500,000 for its apparent violations.  The relative minimal settlement resulted from OFAC’s consideration of the facts and circumstances of the case, assessed pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines.  Specifically, OFAC considered the following facts and circumstances: the criminal charges set forth in the DPA reflect knowing and willful conduct by an employee that is attributable to the company; Dal-Tech’s prior management at least had reason to know that the company’s goods were ultimately destined for Iran; Dal-Tech has not been the subject of any prior OFAC enforcement action; Dal-Tech lacked a sanctions compliance program at the time of the apparent violations; pursuant to the DPA, the company will implement a compliance program that includes sanctions and export compliance training of all employees; the settlement with OFAC is part of a comprehensive settlement with other federal law enforcement agencies; and the enforcement response is proportionate to the nature of the violations, given the totality of the circumstances.  Clearly, the factors considered were a combination of positive and negative factors.  The nature of the goods involved and repeated efforts to complete the sale via transshipment appear to have caused this case to be egregious.

On February 1, OFAC then announced that Offshore Marine Laboratories (“OML”), of Gardena, California, agreed to pay $97,695 to settle potential civil liability for alleged violations of the ITR and Executive Order 13382, “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters” (“EO 13382”).  Despite the more substantial settlement amount, this was a non-egregious case.

It was alleged that between July 2007 and July 17, 2008, OML exported eight shipments of spare parts and supplies to a company in the UAE.  The goods were intended for an offshore oil drilling rig located in Iranian waters.   OFAC explained the rig owner and operator were located in Iran, and five of the shipments occurred after the rig owner’s property and interests in property were blocked pursuant to EO 13382.  That Executive Order was signed in 2005 by President Bush and is aimed at freezing the assets of proliferators of weapons of mass destruction and their supporters. Importantly, EO 13382 prohibits all transactions between those designated under it and any U.S. person and freezes any assets the designees may have under U.S. jurisdiction.

Similar to the Dal-Tech case, OML did not voluntarily disclose this matter to OFAC.  OML faced a base penalty in the amount $167,000 for its alleged violations.  OFAC considered the following facts and circumstances in this case to reach the settlement with OML: OML harmed sanctions program objectives because the transactions aided the development of Iranian petroleum resources; OML had no OFAC compliance program in place at the time of the alleged violations; OML has no history of prior OFAC violations; OML demonstrated substantial cooperation with OFAC throughout the investigation, including entering into a statute of limitations tolling agreement; and OML took remedial measures by implementing an OFAC compliance program.

When comparing the facts and circumstances considered by OFAC in each case, it is understandable why Dal-Tech was an egregious case.  The seeming disparity in the settlement amounts of an egregious versus non-egregious case appears to be explained by the parallel criminal case in Dal-Tech.

The DPA details how an initial arrest and conviction of an Iranian national arms dealer and search of his laptop uncovered emails with a former Dal-Tech employee regarding the attempted shipments of RF devices.  None of the shipments reached Iran because it was part of an undercover investigation by Immigration & Customs Enforcement (“ICE”).  A search of the laptop uncovered thousands of emails with hundreds of U.S. companies.  The DPA also details the cooperation and significant remedial measures that Dal-Tech will undertake, including ongoing cooperation with investigators who, no doubt, are interested in learning the full scope of the arms dealer’s efforts to procure U.S. military equipment for Iran.

The Dal-Tech case provides insight on how those seeking to procure goods for Iran will contact hundreds of U.S. companies in an effort to find someone within a company willing to make a sale.  Companies of all sizes and in all sectors must have internal controls and robust export compliance measures in place to avoid the potential to become involved in those illicit efforts.  The OML case additionally shows that a robust export compliance program that screens potential transactions early can avoid even non-egregious export and economic sanctions violations that are financially costly to companies and cause reputational harm.

New York Dental Supply Company “Acting with Knowledge” Settles Iranian Transactions Regulations Charge

Last month, a family-owned dental supply company in New York settled a civil penalty with the Department of Commerce, Bureau of Industry and Security (BIS).  The amount of the civil penalty settlement was rather minimal – $8,750 – but the case is noteworthy nonetheless.

BIS proposed charging the company with a single count of violating the Export Administration Regulations (EAR), specifically 15 CFR § 764.2(e) – acting with knowledge that a violation of the EAR was about to occur or was intended to occur.  The settlement agreement explained that in 2008, the company sold dental products for export to Iran, via the UAE, without the required authorization to do so from the Department of the Treasury’s Office of Foreign Assets Control (OFAC).  The dental supplies were valued at $12,950 and were EAR99 items, meaning they were subject to the EAR, but not on the Commerce Control List (CCL).  Products designated as EAR99 generally do not require an export license from the U.S. Government; however, a license is required to certain destinations and Iran is certainly one such destination.

For companies and their legal counsel who may not be well-versed in this complex area of export controls and economic sanctions law, it should be noted that although the shipment was to be delivered in the UAE, because the supplies were ultimately destined for Iran, the Iranian Transactions Regulations (ITR) control this export transaction and others like it.  As stated in the settlement agreement, “an export to a third country intended for transshipment to Iran is a transaction that requires OFAC authorization.”

The settlement agreement went on to explain a frequently heard scenario in which the company initially made contact with the Iranian buyer at a trade show in Dubai.  In this instance, the New York company subsequently began to complete an OFAC license application to obtain authorization to export the products to Iran.  However, the application was never completed and submitted, so the company never obtained an OFAC license.  The company’s VP for Sales and Marketing explained to BIS Office of Export Enforcement (OEE) agents that the “OFAC license application was too complicated and time consuming,” so it was decided to proceed with the sale and attempt to export the products without the license.  Intentionally abandoning the OFAC license application, knowing that a license was required, led BIS to propose charging the company with one count of “acting with knowledge” in this instance.  Wisely, the company resolved the case by agreeing to pay the civil penalty within 30 days.  No other sanctions were imposed under the settlement agreement.

This settlement offers some instructive points for U.S. exporters and exporting foreign companies with a U.S. nexus.  First, it is a violation of the EAR and the ITR to sell and export products to an Iranian party via a transshipment destination, whether the UAE, Singapore, or any other country.  Second, certain EAR99 products can be sold and exported to Iran, provided a license from OFAC is obtained and the terms of that license are followed carefully.  Under the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), companies can export certain EAR99 agricultural commodities, medicines or medical devices to Iran.  While the specific dental supplies in this case are not listed, other dental supplies are provided in BIS guidance (implants, dentures, crowns, instruments).  This means that the potential sale would likely have qualified for a TSRA license from OFAC.  While somewhat time-consuming for SMEs, has this New York company followed-through on completing the license application and submitting it, the outcome in this case likely would have led to an export success, rather than becoming another BIS civil penalty settlement to read and comment upon.

For assistance with understanding and complying with the Export Administration Regulations, the Iranian Transactions Regulations, or other export controls and economic sanctions, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosure matters, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com  or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

OFAC Authorizes Imports of Products of Burma

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has issued General License No. 18, authorizing the importation of products from Burma.  The General License can be relied on by U.S. and non-resident importers into the U.S. to increase U.S.-Burma trade.  The only items not authorized for importation under General License No. 18 are jadeite or rubies mined or extracted from Burma or jewelry containing jadeite or rubies mined or extracted from Burma, unless these items are being reimported to the U.S. by the same party that exported them and they are reimported in the same condition and are of the same value as when exported from the U.S.

Importantly, General License No. 18 states that “product of Burma” has the meaning ascribed to it under the rules of origin set forth by U.S. Customs and Border Protection (CBP).  The rules of origin for Customs purposes can require a complex analysis of the imported article and should be carefully addressed by importers of products from Burma so as to not violate the terms of General License No. 18.

For questions or assistance with importing products of Burmese origin into the U.S., including rule of origin questions, and other assistance with OFAC regulations, sanctions, and licenses and Customs issues, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com.

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