By any metric, measure or perspective, 2017 has been a remarkably active year for developments in U.S. economic sanctions. Among other developments, the U.S. government enacted a sweeping new sanctions law against Russia, strengthened sanctions targeting Venezuela, North Korea and Cuba, and continued to stake out aggressive positions with respect to extraterritorial jurisdiction and interpretation of existing sanctions regulations.
The following section summarizes significant changes in U.S. sanctions policy over the past year.
On Aug. 2, President Donald Trump signed the Countering America's Adversaries Through Sanctions Act, which introduced new sanctions against Russia, North Korea and Iran.
The Russia section of the law, titled "Countering Russian Influence in Europe and Eurasia Act of 2017," expands sectoral sanctions targeting Russia and introduced new secondary sanctions. Among other provisions, CRIEEA required (or requires):
- The Office of Foreign Assets Control to amend Directives 1 and 2 to shorten the maturity date of new debt for targeted Russian financial and energy firms.
- OFAC to amend Directive 4 to expand the scope of prohibitions on exports of goods, services and technology to certain energy projects outside of Russia.
- The president to impose a range of sanctions against any party who the president determines knowingly engages in a significant transaction with or on behalf of the Russian defense or intelligence sectors.1
- The sanctions imposed under CRIEEA significantly complicate efforts by U.S. companies — particularly those operating in the energy or defense sectors — to conduct business with certain Russian counterparties.
The North Korean section of the law, titled "Korean Interdiction and Modernization of Sanctions Act," requires the imposition of sanctions against parties who knowingly engage in a wide range of transactions with North Korea, such as transactions involving North Korean financial institutions or the North Korean defense sector. Prior to CAATSA, U.S. persons already were prohibited from engaging in most dealings involving North Korea or North Korean counterparties. KIMSA is significant because it provides for secondary sanctions against non-U.S. persons who engage in specified dealings with North Korea. As such, U.S. companies that conduct business with potential North Korean trading partners (e.g., counterparties in China and Russia) must reassess the sanctions risk presented by these relationships.
The Iran section of the law, titled "Countering Iran's Destabilizing Activities Act of 2017," had limited impact on U.S.-person activities under existing Iranian sanctions. Of note, CIDAA required (or requires) the president to impose sanctions against (1) the Islamic Revolutionary Guard Corps pursuant to Executive Order 13244, which targets terrorist activity; and (2) any party who knowingly and materially contributes to the development of Iran's ballistic missile program.
On Aug. 24, President Trump issued Executive Order 13808, which prohibits most transactions and dealings involving new debt of the government of Venezuela, as well as certain bonds issued by the government of Venezuela. EO 13808 also prohibits direct or indirect purchases of securities from the government of Venezuela.
OFAC took steps to mitigate the adverse impact of the new sanctions on U.S. business interests. For example, OFAC issued general licenses authorizing U.S. persons to engage in transactions involving (1) specified bonds issued by the government of Venezuela; and (2) CITGO Holding Inc., the U.S.-based subsidiary of Petróleos de Venezuela SA, Venezuela's state-owned oil and gas company. Despite these steps, the new sanctions present significant practical challenges for U.S. companies that conduct business with the Venezuelan government, including how to address the collection of late payments.
The sanctions introduced by EO 13808 are a variation on the sectoral sanctions that the United States imposed against Russia following its 2014 annexation of Crimea. Unlike the Russian sectoral sanctions, however, the new Venezuelan sanctions target the government of Venezuela (as opposed to specific sectors of the Venezuelan economy). Nevertheless, EO 13808 is consistent with the United States' preference for sanctions that target specific actors and categories of transactions over broader comprehensive sanctions.
On Sep. 21, President Trump issued Executive Order 13810, which granted OFAC broad authority to impose sanctions against individuals and entities that conduct or facilitate business with North Korea. In particular, EO 13810 authorizes OFAC to impose sanctions against, inter alia, any person who (1) operates in specified North Korean industries; (2) has engaged in at least one significant import from, or export to, North Korea; or (3) is a citizen of, or organized under the laws of, North Korea. EO 13810 also authorizes OFAC to sanction foreign financial institutions that knowingly conduct or facilitate significant transactions involving trade with North Korea.
EO 13810 marked a significant expansion of U.S. sanctions targeting North Korea, and permits OFAC to impose sanctions against non-U.S. persons who conduct business with North Korea. To date, most parties designated pursuant to EO 13810 have been North Korean nationals or businesses. While OFAC also has imposed sanctions against certain individuals, companies and financial institutions located in China and Russia, OFAC thus far appears to be exercising its new authority under EO 13810 cautiously.
On Oct. 12, the U.S. government formally revoked the Sudanese Sanctions Regulations, the final step of a nine-month process initiated by the Obama administration.2 Although the revocation of the SSR creates new opportunities for U.S. companies — particularly, within the oil and gas industry — to pursue business opportunities in Sudan, significant challenges remain. Most exports to Sudan still require a license from the U.S. Department of Commerce pursuant to the Export Administration Regulations, and certain Sudanese individuals and entities (as well as parties in neighboring South Sudan) remain on the "specially designated nationals and blocked persons" list.
On Oct. 13, President Trump declined to certify Iran's compliance with the terms of the Joint Comprehensive Plan of Action. President Trump also threatened to withdraw the United States from the JCPOA if Congress and other parties to the JCPOA (collectively, the "P5+1") did not address his concerns with respect to the Iran nuclear agreement. The announcement triggered a 60-day window during which the U.S. Congress could decide whether to reimpose nuclear-related sanctions suspended by the JCPOA. Congress did not act, and the 60-day window expired on Dec. 14. President Trump still has the opportunity to act unilaterally to narrow the scope of U.S. sanctions relief that Iran secured pursuant to the JCPOA. Among other steps, President Trump could instruct OFAC to (1) revoke, or narrow the scope of, General License H;3or (2) impose new, non-nuclear-related sanctions targeting Iran's petrochemical industry.
As a result, there is significant uncertainty regarding the future of U.S. sanctions targeting Iran. If the United States were to impose new sanctions against Iran — or to limit the scope of sanctions relief accorded under the JCPOA — the remaining members of the P5+1 appear unlikely to follow suit. Further, Iran may claim that such unilateral action by the United States violates the JCPOA, justifying Iran's withdrawal from the agreement. Against this uncertain geopolitical climate, companies required to comply with the Iranian sanctions — including non-U.S. companies owned or controlled by U.S. persons — would be well-advised to proceed with caution in pursuing business opportunities in Iran that currently are authorized pursuant to general or specific licenses (as their scope could change in the relatively near future).
On Nov. 8, the U.S. government announced changes to the Cuban Assets Control Regulations and the EAR that implement President Trump's June 2017 national security memorandum, "Strengthening the Policy of the United States Toward Cuba." Among other changes, OFAC added a new provision to the CACR that prohibits persons subject to U.S. jurisdiction from engaging in "direct financial transactions" with parties designated by the U.S. State Department as being controlled by, or acting on behalf of, the Cuban military, intelligence or security services.4 In addition, OFAC revised existing general licenses to narrow the scope of authorized travel to Cuba in an effort to curb unauthorized tourist travel to Cuba.
The Nov. 8 changes to the CACR are relatively modest, but will continue to complicate U.S. businesses' pursuit of commercial opportunities in Cuba (and may dissuade some companies from pursuing such opportunities altogether). In addition, U.S. companies can expect Cuba-related license applications to be subject to increased scrutiny under the Trump administration.
As of Dec. 18, OFAC has announced 18 enforcement actions that have collectively resulted in $118,307,445 in penalties,5 as compared to nine enforcement actions in 2016 that collectively netted $21,609,315 in penalties. OFAC has pursued enforcement actions in 2017 under a wide range of sanctions programs, including programs targeting Cuba, Iran, Sudan, Ukraine/Russia, weapons of mass destruction proliferators, and narcotics traffickers. The uptick in enforcement activity suggests that OFAC is actively pursuing violations of its sanctions regulations, and that sanctions compliance will continue to be a significant risk area for U.S. and non-U.S. companies. The following are a few of the notable enforcement actions:
On Mar. 7, China-based Zhongxing Telecommunications Equipment Corp. entered into a settlement agreement with OFAC, the Bureau of Industry and Security, and the U.S. Department of Justice, agreeing to pay a combined penalty of at least $892 million to resolve alleged violations of U.S. sanctions and export control laws related to dealings with Iran and North Korea.
ZTE Corp. allegedly developed a companywide strategy to evade U.S. sanctions and export control laws in order to build and service telecommunications networks in Iran using U.S.-origin equipment and software through code names, the concealment of the ultimate country of origin, and altering references to Iran. Moreover, the company resumed its Iran-related activities after coming under investigation and representing to the U.S. government that all violative conduct had ceased.
As part of the global settlement, ZTE Corp. agreed to pay OFAC a civil penalty of $100,871,266, representing the largest settlement that OFAC has entered into with a nonfinancial entity for sanctions violations. The ZTE Corp. settlement underscores that U.S. regulators — including OFAC — are committed to actively enforcing violations of the Iranian sanctions, whether committed by U.S. or non-U.S. companies.
OFAC's July 30 enforcement action against ExxonMobil Corp. for alleged violations of the Ukrainian sanctions attracted significant attention. In 2014, Exxon executed eight legal documents with Rosneft, a Russian oil company, that were countersigned by Rosneft's president, Igor Sechin. While Rosneft has not been designated on the specially designated nationals list, Sechin was added to the list in 2014.
OFAC determined that Exxon's execution of the legal documents with Sechin constituted a violation of U.S. sanctions and issued a $2 million penalty. OFAC dismissed Exxon's arguments that its dealings with Sechin were consistent with previous public statements by Treasury Department officials.6 Exxon filed a lawsuit in federal court challenging OFAC's penalty, and the litigation is pending. The Exxon enforcement action demonstrates some of the challenges for U.S. companies that transact business with companies whose senior executives are specially designated nationals.
On Jul. 27, OFAC announced a settlement agreement with Singapore-based CSE TransTel Pte. Ltd., which agreed to pay over $12 million to resolve allegations that it had violated the Iran sanctions by originating over 100 wire transfers from a U.S. dollar-denominated account to various third parties for services provided in support of Iranian oil and gas projects. OFAC alleged that these wire transfers were processed through the United States, causing both U.S. and non-U.S. financial institutions to inadvertently violate the Iranian sanctions.
The TransTel settlement marked the first time that OFAC has brought an enforcement action against a non-U.S., nonfinancial entity for causing violations of the Iran sanctions (and underscores OFAC's expansive view of its extraterritorial jurisdiction). In addition, the settlement highlights the risk to non-U.S. entities of conducting transactions involving sanctioned countries in U.S. dollars, which are routinely cleared through correspondent accounts located in the United States or accounts at non-U.S. branches of U.S. financial institutions.
The past 12 months have been an extraordinarily active period and, given recent international developments, the pace of change for U.S. sanctions policy is unlikely to slow in the foreseeable future. Further changes to country-based sanctions programs reportedly are under consideration, and sources have reported that OFAC currently is negotiating a potential multimillion-dollar settlement with Zimbabwean bank CBZ Bank.7 For these reasons, monitoring developments in U.S. sanctions policy and enforcement has never been more important.
Originally published by Law360 on December 20, 2017.
1 Pursuant to CRIEEA, the U.S. Department of State has published a list of over 30 entities that are part of, or operate on behalf of, the Russian defense or intelligence sectors.
2 On Jan. 17, OFAC issued a general license authorizing all transactions prohibited under the SSR.
3 General License H permits non-U.S. entities owned or controlled by U.S. persons to conduct certain types of transactions involving Iranian counterparties or Iranian-origin items, subject to restrictions.
4 Concurrently, the State Department published a List of Restricted Entities and Subentities Associated With Cuba, which currently identifies over 100 Cuban entities controlled by, or acting on behalf of, the Cuban military, intelligence, or security services.
5 OFAC resolved two enforcement actions by issuing a "Finding of Violation" without imposing a monetary penalty. Notably, a single enforcement action, discussed below, has accounted for nearly 85% of total sanctions penalties collected in 2017 to date
6 In 2014, The Wall Street Journal published at least two articles reporting that Treasury Department officials had opined that BP CEO Bob Dudley's interactions with Mr. Sechin in their capacities as corporate directors were permissible. See Justin Schenk, BP's American CEO in Uncomfortable Place: Rosneft's Boardroom, Wall Street Journal (May 15, 2014), http://www.wsj.com/articles/SB10001424052702304547704579563650637193392; Liam Moloney, Pirelli Names Rosneft Chairman Igor Sechin to Board, Wall Street Journal (Jul. 11, 2014), http://www.wsj.com/articles/pirelli-names-rosneft-chairman-igor-sechin-to-board-1405072159.
7 Clif Burns, OFAC and Zimbabwe Bank Negotiating over Penalties, ExportLawBlog (Oct. 30, 2017), http://www.exportlawblog.com/archives/8761.
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