In another landmark year for sanctions developments, the U.S. government strengthened sanctions targeting Iran, Russia and Venezuela, in addition to sanctioning an agency of the Chinese government and completing the second largest sanctions-related enforcement action on record.
Regulatory developments have paved the way for continued, aggressive enforcement of U.S. sanctions in pursuit of national policy objectives, and public reporting suggests that additional major enforcement actions are nearing resolution — setting the stage for an equally tumultuous 2019.
The following section summarizes significant changes in U.S. sanctions policy over the past year.
On May 8, President Donald Trump announced the United States' withdrawal from the Iran nuclear deal, the Joint Comprehensive Plan of Action, or JCPOA, and the reimposition of sanctions that the U.S. government had waived pursuant to the JCPOA.
Among other steps, the United States (1) revoked General License H (which previously had permitted foreign-organized companies owned or controlled by U.S. persons to engage in certain dealings with Iran); (2) reimposed secondary sanctions targeting critical Iranian industries; and (3) and redesignated hundreds of Iranian parties on OFAC's List of Specially Designated Nationals and Blocked Persons, known as the SDN list. Consistent with pre-Trump administration guidance, OFAC granted 90- and 180-day grace periods to wind down previously authorized activities, the latter of which expired on Nov. 4.
The above changes had a dramatic effect on non-U.S. entities owned or controlled by U.S. persons, as these entities now are essentially cut off from the Iranian marketplace. The reimposition of broad-based secondary sanctions targeting Iran also presents a conundrum for non-U.S. entities ordinarily outside of OFAC's jurisdiction, which must weigh the benefits of continued Iranian dealings against the risk of being targeted by U.S. sanctions.
To date, no secondary sanctions have been imposed, and the U.S. government has granted temporary waivers to eight countries — including China, India, Japan and South Korea — to continue importing Iranian crude oil (based on these countries' demonstrated and/or pledged reductions of such imports).1 Still, the reimposed sanctions have prompted major European companies — such as French energy giant Total S.A. and Danish shipping conglomerate Maersk — to suspend Iran-related operations due to the heightened regulatory risk.2
Further complicating the picture for multinational companies, in November, the European Union amended Council Regulation (EC) No. 2271/96, known as the "blocking statute," to prohibit EU companies from complying with U.S. sanctions targeting Iran. In many cases, simultaneous compliance with U.S. sanctions and the blocking statute poses a significant challenge. Some EU firms have opted to withdraw from Iran and cited "unspecified issues of 'commercial viability' for their decision to leave Iran," utilizing this carve-out provided in the blocking statute, which may mitigate the risk of EU enforcement of the blocking statute.3
Despite activation of the blocking statute and other EU initiatives — including the contemplated creation of a special purpose vehicle to channel investment to Iran, purportedly beyond the reach of U.S. jurisdiction — the U.S. government has consistently pledged strict enforcement of the reimposed Iran sanctions and "a lot more" activity relating to Iran in the near future.4
In the near term, navigating the Iran sanctions promises to be a challenging and costly endeavor for international businesses and investors.
On April 6, OFAC designated seven Russian oligarchs, 12 oligarch-controlled companies, 17 senior Russian government officials, a state-owned Russian weapons trading company and a Russian bank to the SDN list.5 At the time, several of these parties held significant ownership stakes in major international companies, which resulted in the temporary blocking of certain companies pursuant to OFAC's "50 percent rule."6
The April 6 action caused immediate turmoil across global markets, requiring both U.S. and non-U.S. firms to reassess their sanctions exposure and, in some cases, to divest interests in (or held by) the targeted Russian parties. OFAC granted multiple wind-down licenses to ease the burden of the new designations on U.S. companies, some of which have been extended multiple times. The aftermath of the April 6 designations demonstrates the broad extraterritorial effects of U.S. sanctions policy, as well as the (often unanticipated) difficulties that U.S. and non-U.S. parties may face in extricating themselves from commercial relationships in response to new sanctions designations.
On Sept. 20, the U.S. State Department and OFAC coordinated to impose broad sanctions and additional restrictions on China's Equipment Development Department — a major component of the Chinese military — and its director, Li Shangfu, pursuant to the Countering America's Adversaries Through Sanctions Act, or CAATSA. The Sept. 20 action marked the first time that the U.S. government has exercised its authority to impose sanctions under section 231 of CAATSA, which authorizes the U.S. government to target parties that knowingly engage in a significant transaction involving the Russian defense or intelligence sectors.
Collectively, these developments suggest that the U.S. government intends to continue aggressively countering perceived malign activities of the Russian government through economic sanctions. This aggressive posture, and the extraterritorial reach of CAATSA's secondary sanctions provisions, means that both U.S. and non-U.S. companies face significant Russia-related sanctions risk.
Since August 2017, Venezuela has been the subject of "quasi-sectoral" sanctions implemented pursuant to Executive Order 13808, which prohibits certain transactions involving new debt of the government of Venezuela, as well as certain transactions involving securities of, or certain bonds issued by, the government of Venezuela. Throughout 2018, the United States has strengthened sanctions targeting Venezuela through the issuance of executive orders, including:
Executive Order 13827 (March 19), which prohibits dealings in government of Venezuela-backed cryptocurrencies;
Executive Order 13835 (May 21), which prohibits dealings in debt owed to the government of Venezuela, such as accounts receivable; and
Executive Order 13850 (Nov. 1), which authorizes OFAC to designate to the SDN list, inter alia, individuals and entities who operate in Venezuela's gold sector or engage in "transactions involving deceptive practices or corruption and the Government of Venezuela."
On its face, the language of Executive Order 13850 is remarkably broad. In particular, Executive Order 13850 authorizes OFAC to designate "any person determined ... to operate in the gold sector of the Venezuelan economy or in any other sector of the Venezuelan economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State."
In an accompanying FAQ, OFAC advised that the agency "expects to use its discretion to target ... those who operate corruptly in the gold or other identified sectors of the Venezuela economy, and not those who are operating legitimately in such sectors."7 Still, Executive Order 13850 accords OFAC significant discretion to target additional sectors of the Venezuelan economy, and thereby may have laid the groundwork for further sanctions targeting the beleaguered country.
Less than a month after Executive Order 13850, Trump issued Executive Order 13851, creating a new sanctions program targeting Nicaragua. On the same day, OFAC designated Nicaragua's vice president and first lady to the SDN list.
Although the Nicaragua sanctions program is in its infancy, national security advisor John Bolton recently grouped Nicaragua with Cuba and Venezuela, which he collectively referred to as the "Troika of Tyranny,"8 possibly portending further sanctions activity involving one or more of these countries in the near future.
As of Dec. 4, OFAC had announced five enforcement actions in 2018 that netted $60,963,487 in penalties, as compared to eighteen enforcement actions and $118,307,445 in penalties last year. The 2018 penalty total is misleadingly low, however, as it reflects only a small portion ($53,996,916.05, or approximately 4 percent) of Société Générale SA's $1.34 billion global settlement with OFAC and other U.S. regulators to resolve apparent violations of U.S. sanctions targeting Cuba, Iran and Sudan.
Financial Institutions Remain Under Scrutiny
Following a 10+ year sweep of the financial services industry, recent sanctions enforcement activity largely has focused on nonfinancial institutions, including enforcement targets in the energy, life sciences and telecommunications industries. In 2018 to date, however, financial institutions have accounted for the two largest enforcement actions, including the massive Société Générale settlement and a $5.26 million settlement with JPMorgan Chase Bank NA. And, based on public reporting, Standard Chartered and CBZ Bank of Zimbabwe are the subject of potential multimillion dollar enforcement actions currently pending before OFAC.9
At this juncture, it is too soon to assess whether these enforcement actions are holdovers from the previous industry sweep, or early indications of a new wave of enforcement activity targeting the financial industry. On the one hand, most of the violations in the Société Générale action occurred over five years ago, and were similar in nature (e.g., wire stripping) to the conduct at issue in previous enforcement actions targeting financial institutions, suggesting that the Société Générale settlement is part of the prior wave of enforcement activity.10
On the other hand, Standard Chartered and JPMorgan have both previously been the targets of enforcement actions, suggesting that OFAC may be renewing its focus on financial institutions' sanctions compliance (or merely reflective of the fact sanctions compliance continues to present significant practical challenges, even for large, well-resourced financial institutions).
OFAC Quietly Resolved a Long-Standing and Contentious Enforcement Action
On Sept. 13, OFAC and Epsilon Electronics Inc., a California-based auto electronics company, finally settled their long-standing dispute over purported violations of the Iran sanctions. In July 2014, OFAC fined Epsilon over $4 million, alleging that Epsilon knew — or should have known — that a Dubai-based purchaser would re-export the company's products to Iran. Epsilon challenged the penalty notice in federal district court arguing, inter alia, that OFAC had not proven that Epsilon's products ever reached Iran.
OFAC prevailed in district court, and the U.S. Court of Appeals for the District of Columbia upheld the district court's findings with respect to 34 of 39 violations (reasoning that Epsilon had "reason to know," based on publicly available information, that its Dubai-based purchaser was linked to Iran).11
Pursuant to the September 2018 settlement, Epsilon agreed to pay $1.5 million (approximately 37 percent of the penalty initially imposed by OFAC) to resolve the company's apparent sanctions liability. Notwithstanding the decrease in final penalty amount, OFAC's successful defense of an expansive assertion of jurisdiction may encourage the agency to pursue similar, aggressive enforcement theories in the future.
OFAC Has a Long Memory
Two 2018 enforcement actions (Société Générale and Ericsson Inc./Ericsson AB) involved alleged violations of the since-revoked Sudanese Sanctions Regulations that occurred in 2012 or earlier, and a third enforcement action (JPMorgan) involved conduct that occurred prior to 2015. The general statute of limitations for violations of U.S. sanctions is five years from the date of violation. However, enforcement targets routinely enter into tolling agreements with OFAC, in an effort to secure full cooperation credit, that extend the applicable statute of limitations (in some cases, significantly).
OFAC's enforcement guidelines state that an enforcement target's "entering into a tolling agreement" will be deemed "a basis for mitigating the enforcement response or lowering the penalty amount," but clarify that "refusal to enter into a tolling agreement will not be considered an aggravating factor in assessing ... cooperation or otherwise."12 The fact that OFAC enforcement targets routinely enter into tolling agreements suggests that companies (and sanctions practitioners) continue to view cooperation with OFAC as a worthwhile proposition (likely due, at least in part, to the comparatively transparent way in which such cooperation factors into penalty determinations).
Screening Gaps Can Lead to Liability
As discussed above, OFAC's April 6 designation of Russian companies and oligarchs prompted many international companies and investors to reassess their sanctions compliance protocols (including, in particular, with respect to OFAC's 50 percent rule).
On Nov. 27, OFAC announced a relatively modest settlement ($87,507) with Cobham Holdings Inc. on behalf of Cobham's former subsidiary, Aeroflex/Metelics Inc., for three apparent violations of the Ukraine Related Sanctions Regulations. Notwithstanding the limited penalty imposed, the settlement illustrated some of the most common — and easily overlooked — gaps in multinational companies' sanctions compliance programs.
The Cobham/Metelics settlement involved three indirect shipments, via distributors, to Russia. In connection with the first shipment, Metelics screened its Russian end user; however, the company's screening protocol did not account for OFAC's 50 percent rule, which generally prohibits transactions with parties majority owned (individually or in the aggregate) by blocked parties on the SDN list. According to OFAC's enforcement notice, the Russian end user was 51 percent owned by a sanctioned Russian party (and therefore also blocked pursuant to OFAC's 50 percent rule).
By the time of the second and third shipments, the Russian end user was itself included on the SDN list and, as a result, the shipments should have been flagged by Metelics' interdiction software. According to the enforcement notice, the company's interdiction software did not detect the second and third shipments, as the software "used an all word match criteria that would only return matches containing all of the searched words."13
The Cobham/Metelics settlement is a useful reminder that restricted party screening protocols should be periodically reviewed and tested, to ensure that they are sufficiently broad and functioning appropriately (particularly where an organization has operations in, or sales to, jurisdictions that present elevated sanctions risk).
Sanctions developments continued to evolve at a rapid pace in 2018, and there is no indication that the pace of change will be different in 2019. U.S. and non-U.S. companies must continue to monitor sanctions developments, and adjust their related controls, to remain in compliance with a constantly evolving regulatory regime.
1 Gardiner Harris, U.S. Reimposes Sanctions on Iran but Undercuts the Pain With Waivers, The New York Times (Nov. 2, 2018), https://www.nytimes.com/2018/11/02/world/middleeast/us-iran-sanctions-oil-waivers.html.
2 Jonathan Eyal, Europe appears to buckle under US sanctions on Iran, The Straits Times (Nov. 6, 2018, 8:17 PM), https://www.straitstimes.com/world/europe/europe-appears-to-buckle-under-us-sanctions-on-iran/.
3 European companies will struggle to defy America on Iran, The Economist (Nov. 8, 2018), https://www.economist.com/business/2018/11/08/european-companies-will-struggle-to-defy-america-on-iran.
4 Guy Faulconbridge, U.S. not concerned by Europe's idea for Iran trade as companies moving out, Reuters (Nov. 12, 2018, 11:37 AM), https://www.reuters.com/article/us-usa-iran-sanctions/u-s-not-concerned-by-europes-idea-for-iran-trade-as-companies-moving-out-idUSKCN1NH208.
5 Press Release, U.S. Department of the Treasury, Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity (Apr. 6, 2018), https://home.treasury.gov/news/press-releases/sm0338.
6 Pursuant to OFAC's "50 percent rule," U.S. persons are prohibited from doing business with any entity in which a sanctioned party — or multiple sanctioned parties taken together — hold a 50 percent or greater ownership interest. In practical terms, the 50 percent rule means that U.S. persons are prohibited from dealing with entities — majority-owned by sanctioned parties (including the newly designated Russian SDNs) — that are not, themselves, included on OFAC's SDN list.
7 FAQ #629, OFAC FAQs: Other Sanctions Programs, https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.
8 Rafael Bernal, Bolton dubs Cuba, Venezuela and Nicaragua the "Troika of Tyranny", The Hill (Nov. 1, 2018, 1:47 PM), https://thehill.com/latino/414333-bolton-dubs-cuba-venezuela-and-nicaragua-the-troika-of-tyranny.
9 Margot Patrick and Aruna Viswanatha, Standard Chartered Seeks Resolution With U.S. Over Iran Sanctions Breaches, The Wall Street Journal (Oct. 9, 2018, 2:08 PM), https://www.wsj.com/articles/standard-chartered-seeks-resolution-with-u-s-over-iran-sanctions-breaches-1539108505; CBZ not worried by OFAC penalty, Business Daily (Sept. 7, 2018), http://www.businessdaily.co.zw/index-id-business-zk-47020.html.
10 Likewise, the violations described in the JPMorgan settlement occurred prior to 2015.
11 Epsilon Elecs. v. U.S. Dep't of the Treasury, Office of Foreign Assets Control, 857 F.3d 913, 926-27 (D.C. Cir. 2017).
12 Economic Sanctions Enforcement Guidelines, 74 Fed. Reg. 57593, 57598 (Nov. 9, 2009).
13 OFAC, Cobham Holdings, Inc. Settles Potential Civil Liability for Apparent Violations of the Ukraine Related Sanctions Regulations (Nov. 27, 2018), https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20181127_metelics.pdf.
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