United States: Eased Sanctions Present New Opportunities And Risks

In last month's newsletter, we discussed how developments in 2012 had considerably tightened sanctions against Iran, including through the first-ever application of sanctions to separately incorporated subsidiaries of U.S. multinational companies. In this second part of our year-end review, we discuss how other sanction regimes changed in 2012, including in ways that present both business opportunities (where sanctions have eased) and compliance challenges (where sanctions have been newly imposed or have tightened).

The past two years have witnessed substantial changes in the scope and effect of U.S. economic sanctions. In most instances, such as Iran and Syria, the result has been more aggressive, comprehensive, and extraterritorial regulation. But in other cases, the trend was toward a calibrated easing of restraints in countries undergoing constructive social and political change. From empowering civil society groups in Burma, to supporting to transitional government in Libya, the re-calibration of existing U.S. sanctions regimes presents companies with a distinct set of compliance challenges.

Opening Pathways in Burma

The shift in U.S. policy towards Burma is a case in point. Encouraged by the Burmese Government's domestic reforms and successful parliamentary bye-elections, U.S. Secretary of State Hillary Clinton announced plans to ease restrictions on travel, investment, and other activities in Burma during an April 4, 2012 press conference. Canadian and European regulators suspended their own embargos just three weeks later, opening the Burmese market to Western investment for the first time in more than a decade. With leading business groups calling for change, the State and Treasury Department officials began untangling the complex web of statutes, executive orders, and regulations restricting U.S. trade with Burma.

On July 11, 2012, the Treasury Department's Office of Foreign Assets Control ("OFAC") issued two general licenses authorizing the export of financial services to Burma¹ and new U.S. investment in Burma, respectively.² Together these licenses authorize U.S. companies to provide insurance, brokering, banking, and other financial services to Burma for the first time since 1997. The licenses also allow U.S. persons to enter into contracts to develop natural resources in Burma, provided they do not transact with individuals or entities still designated under the Burma Sanctions Regulations ("BSR").³

The result is a carefully calibrated easing of the sanctions aimed at empowering independent businesses and activists in Burma while incentivizing political reform. Yet the scope of the two licenses proved somewhat narrower than the steps announced by the European Union ("EU") and Canadian Government. Rather than temporarily suspending sanctions on a wholesale basis, the U.S. approach retains the sanctions (albeit in suspended form) while also strengthening a list-based sanctions regime designed to isolate Specially-Designated Nationals ("SDNs") and other repressive elements within the Burmese Government.

On November 16, 2012, OFAC announced a third general license suspending the longstanding ban on importing Burmese-origin goods into the United States.⁴ Notable exceptions include jadeite and rubies, which remain subject to congressionally mandated bans.⁵ Prohibitions on dealing with the Burmese military and its business fronts also remain. In fact, OFAC's decision to use general licenses leaves the entire BSR intact—an approach that will allow U.S. to restore sanctions swiftly in the event that Burmese officials abandon democratic reforms.

Although these license open new pathways for U.S. and multinational corporations, they also demand a diligent approach to compliance. Commercial and financial transactions must still be screened for SDNs and entities owned or controlled by SDNs—a complicated task given the military's influence within the Burmese economy. Parties that invest more than $500,000 in Burma are also required to file annual reports with the State Department detailing the nature of the investment, as well as the steps they took to comply with various labor, human rights, and environmental standards.⁶ With these and other requirements in mind, companies should re-examine their risk profiles and compliance policies before pursuing new prospects in Burma.

Renewing Ties With Libya

A similar logic also informs trade and investment with Libya. Following the start of the 2011 Libyan Civil War, President Obama signed an Executive Order blocking any property or interests in property held by the family of Col. Muammar Gaddafi.⁷ The order also prohibited U.S. persons from engaging in transactions with the Government of Libya or its controlled entities, including the Central Bank of Libya and the Libyan National Oil Corporation.⁸ OFAC memorialized many of these prohibitions on July 1, 2011 in the Libyan Sanctions Regulations ("LSR").⁹ Combined with similar sanctions imposed by the EU and U.N. Security Council, these measures targeted many major Libyan commercial entities due to their significant level of Libya Government ownership or their control by the Gaddafi family.

The Libya sanctions had a broader effect on the world economy, due to the importance of Libyan oil in the world petroleum market. With that impact in mind, the Obama administration closely monitored developments in Libya, so as to tailor the sanctions to the maximum extent possible to the developing situation. As the civil war progressed, U.S. officials issued a series of general licenses aimed at supporting the Libyan opposition and allowing trade with Libya in instances where it would not support the Gaddafi regime.

One such measure authorized transactions related to Libyan energy exports organized by Libya's Transition National Council ("TNC"), the coalition of anti-Gaddafi forces.¹⁰ Another authorized certain transactions after the United States recognized the opposition TNC as Libya's legitimate governing authority.¹¹ As the TNC gained control over the instruments of the Libyan state, new licenses authorized transactions with the Libyan National Oil Company and its subsidiaries,¹² the Central Bank of Libya and the newly-reconstituted Government of Libya,¹³ and other entities that had previously been subject to the Gaddafi Regime's control.¹⁴

Framed by these license, the scope of the LSR is now limited to blocked persons and property associated with the Gaddafi Regime and the extended Gaddafi family. Much like the BSR, however, the underlying sanctions regime remains in place. On one level, this ensures continuity with respect to Gaddafi affiliates who remain at large. Yet it also means that sanctions could be reinstated for the new Libyan Government (or perhaps factions within it) by rescinding the current licenses.

The implications for doing business in Libya are similar to those in Burma. While transactions with the Libyan Government are currently authorized, U.S. companies should continue to screen any Libyan parties to a transaction against the SDN list. Given that senior Gaddafi regime officials often maintain links to seemingly private Libyan companies, careful due diligence is necessary to ensure that there are no hidden ties to SDNs. Similar precautions are also necessary with respect to export controls, particularly in light of Libya's porous borders and continued instability across North Africa. Absent strong compliance with end use and end user requirements, U.S.-origin goods and technology risk being diverted to prohibited destinations.

Diplomacy and Deterrence in Yemen

The past year also witnessed the establishment of list-based sanctions designed to deter, rather than punish, foreign persons. On May 16, 2012, President Obama issued an Executive Order authorizing OFAC to impose sanctions on parties who undermine a November 2011 power-sharing agreement between the Yemeni Government and opposition leaders.¹⁵ Set against the backdrop of Arab Spring protests, a simmering secessionist movement in southern Yemen, and a burgeoning al-Qaeda insurgency, the measure was designed to discourage spoilers from exploiting Yemen's chronic political turmoil for personal or political gain.

Subsequently codified in the Yemen Sanctions Regulations ("YSR"),¹⁶ this new regime blocks the property of any designated entity and prohibits U.S. persons from engaging in transactions with them. The regulations also prohibit U.S. persons from dealing with any parties that provide financial, material, or other forms of support to designated persons, or to entities owned or controlled by such persons—including charitable donations. The result is a list-based program similar to those in effect in places like Libya and Belarus. The YSR may also overlap with terrorism-based sanctions programs, raising the possibility that SDNs operating within Yemen could be designated under more than one list-based sanctions regime.

Despite nearly twelve months passing since the YSR came into effect, the U.S. Government has not designated any new Yemeni SDNs. Nor has it indicated when it might make such designations, or how broad such designations might be. Instead, U.S. officials cast the new program as a means of dissuading prominent military and political figures—including former Yemeni President Ali Abdullah Saleh and his extended family—from subverting the country's fragile political transition.

This "shot-across-the-bow" approach to sanctions is novel and untested. Until at least one person is designated, the sanctions have no legal force. Accordingly, the YSR must be understood as a warning and a placeholder, allowing the ready designation of persons should the situation within Yemen deteriorate further. If the YSR prove successful, no designations will ever be necessary. Even if parties are designated, however, the possibility of unblocking an SDN's property may incentivize their return to the negotiating table or, in the case of former President Saleh, a complete withdrawal from politics of any kind.

With Yemen drafting a new constitution, and scheduled to hold new parliamentary elections in 2014, the efficacy of this calibrated, deterrence-based approach to economic sanctions is likely to be challenged. Against that backdrop, U.S. persons doing business in Yemen should monitor the SDN list for future designations. Additionally, any long-term contracts involving Yemen or Yemeni parties should have strong language clearly establishing the U.S. party's right to withdraw should U.S. sanctions or export control laws require that result.

Regulatory and Compliance News

March was a rather quiet month in the export controls and economic sanctions world. No major new sanctions programs or licenses were announced by OFAC, and the export control agencies continued to be consumed by the Obama administration's ongoing Export Control Reform Initiative ("ECRI"). These efforts will be described in greater detail in the third and final part of our 2012 year in review updates, which will be published next month. Until then, major regulatory activity from March includes the following:

• President Continues National Emergency on Zimbabwe. On March 1, 2013, President Obama issued a notice extending the 2003 national emergency declaration on Zimbabwe issued by President George W. Bush under the International Emergency Economic Powers Act. The move continues current U.S. sanctions against designated members of the Zimbabwean government who have undermined democratic processes and engaged in human rights abuses.
• White House Updates Export Control Authorities. On March 8, 2013, President Obama issued an Executive Order reallocating authorities to various government agencies involved in export and import regulation. Coming as part of the ECRI, the move lays the institutional foundation for significant changes in the U.S. export control regime, including the proposed migration of items from the U.S. Munitions List ("USML") to the less-stringent Commerce Control List ("CCL"). The step is also aimed at eliminating the need to obtain separate export license from the State and Commerce Departments.
• State Department to Revise USML Categories. Speaking at the 2013 Satellite Conference on March 19, 2013, Assistant Secretary of Commerce Kevin Wolf reported that the U.S. State Department will announce plans to streamline four USML categories in the coming weeks. According to Mr. Wolf, congressional notifications are currently being prepared for Categories VI (warships and naval equipment), VII (tanks and military vehicles), XIII (auxiliary equipment) and XX (submarines). The move is part of the Obama administration's ERCI. Next month we will provide a summary of all issued USML revisions.
• Japan Joins TTP Negotiations. On March 19, 2013, Japanese Prime Minister Shinzo Abe's announced that Japan will join talks on the Trans-Pacific Pacific Partnership ("TPP"). Together with Canada and Mexico's entry in October 2012, the decision could transform the TPP into a major trade pact spanning some of the largest economies on the Pacific Rim. The outcomes for U.S. companies are still uncertain, however. With Japanese lawmakers pushing to preserve protections for certain domestic producers, U.S. exporters may see only modest changes in terms of foreign market access.

Footnotes

1. Office of Foreign Assets Control, "Burmese Sanctions Regulations General License No. 16, Authorizing the Exportation or Reexportation of Financial Services to Burma" (July 11, 2012), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/burmagl16.pdf

2. Office of Foreign Assets Control, "Burmese Sanctions Regulations General License No. 17, Authorizing New Investment in Burma" (July 11, 2012), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/burmagl17.pdf.

3. Burmese Sanctions Regulations, 31 C.F.R. Part 537, available at http://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=d80aa581902482d3024f9165e22fc91c&r=PART&n=31y3.1.1.1.6.

4. Office of Foreign Assets Control, "Burmese Sanctions Regulations General License No. 18, Authorizing the Importation of Products of Burma" (Nov. 16, 2012), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/burmagl18.pdf.

5. See, e.g., Tom Lantos Block Burmese JADE Act of 2008, Pub. L. 110-286, 122 Stat. 2632 (Jul. 29, 2008), available at http://www.gpo.gov/fdsys/pkg/STATUTE-122/pdf/STATUTE-122-Pg2632.pdf.

6. U.S. Dep't. of State, "Reporting Requirements on Responsible Investment in Burma" (Jul. 11, 2012), available at http://www.humanrights.gov/wp-content/uploads/2013/02/Burma-Reporting-Requirements.pdf.

7. See Executive Order 13,566, 76 Fed. Reg. 11,315 (Mar. 2, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/2011_libya_eo.pdf.

8. Id.; see also 31 C.F.R. §§ 570.201 and 570.304.

9. Office of Foreign Assets Controls, "Libyan Sanctions Regulations," 76 Fed Reg. 38,562 (Jul. 1, 2011); 31 C.F.R. Part 570, available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/2011-16621.pdf.

10. Office of Foreign Assets Control, "General License No. 5, Authorizing Transactions Related to Certain Oil, Gas, of Petroleum Products Exported From Libya" (Apr. 26, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/libya2_gl5.pdf.

11. Office of Foreign Assets Control, "General License No. 6, Guidance and General License with Respect to the Transitional National Council of Libya as the Legitimate Governing Authority for Libya" (Aug. 19, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/libya2_gl6.pdf.

12. Office of Foreign Assets Control, "General License No. 7A, General License with Respect to the Libyan National Oil Corporation and its Subsidiaries" (Sept. 19, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/libya2_gl9.pdf.

13. See Office of Foreign Assets Control, "General License No. 8A, General License with Respect to the Government of Libya, its Agencies, Instrumentalities, and Controlled Entities, and the Central Bank of Libya" (Sept. 23, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/libya2_gl8a.pdf; and Office of Foreign Assets Control, "General License No. 11, General License Unblocking the Government of Libya, its Agencies, Instrumentalities, and Controlled Entities, and the Central Bank of Libya, With Certain Exceptions" (December 16, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/libya2_gl11.pdf.

14. See, e.g., Office of Foreign Assets Control, "General License No. 9, General License with Respect to the General National Maritime Transport Company" (Nov. 18, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/libya2_gl9.pdf; Office of Foreign Assets Control, "General License No. 10, General License with Respect to Arab Turkish Bank and North African International Bank" (December 1, 2011), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/libya2_gl10.pdf.

15. Exec. Order No. 13,611, "Blocking Property of Persons Threatening the Peace, Security, or Stability of Yemen," 77 Fed. Reg. 29,533 (May 18, 2012), available at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/yemen_eo.pdf.

16. See generally Yemen Sanctions Regulations, 31 C.F.R. Part 522.

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