RECENT DEVELOPMENTS IN US ECONOMIC SANCTIONS

Transcription

1 RECENT DEVELOPMENTS IN US ECONOMIC SANCTIONS Margaret M. Gatti, Esq. Louis K. Rothberg, Esq. Timothy M. Rolland, Esq. January 15, Morgan, Lewis & Bockius LLP

2 Information is accurate as of January 15, 2013 Information is subject to change without prior notice due to ongoing diplomatic and political developments. 2

3 Outline Iran Sanctions Inclusion of Foreign Subsidiaries SEC Reporting Requirements Under Iran Threat Reduction Act Iran Certifications for Government Contracts Other Iran Sanction Developments Easing of Burma Sanctions Comparison of Sanction Regimes Recent OFAC Enforcement Actions 3

4 4 Iran Sanctions

5 Foreign Subs Now Fully Subject To Iran Sanctions Regulations 31 CFR provides (Dec. 26, 2012): An entity that is owned or controlled by a United States person and established or maintained outside the United States is prohibited from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in by a United States person or in the United States 5

6 Foreign Subs Now Fully Subject To Iran Sanctions Regulations An entity is owned or controlled by a United States Person if the United States person: (i) Holds a 50 percent or greater equity interest by vote or value in the entity; or (ii) Holds a majority of seats on the board of directors of the entity; or (iii) Otherwise controls the actions, policies, or personnel decisions of the entity 6

7 Foreign Subs Now Fully Subject To Iran Sanctions Regulations Knowingly means that the person engages in the transaction with actual knowledge or reason to know. A person is subject to the jurisdiction of the Government of Iran if the person is organized under the laws of Iran or any jurisdiction within Iran, ordinarily resident in Iran, or in Iran, or owned or controlled by any of the foregoing. 7

8 Grace Period For Certain Transactions By Foreign Subs 31 CFR (Dec. 26, 2012) provides a limited grace period via General License for foreign subs and affiliates to wind down transactions begun before October 9, 2012 : Certain transactions ordinarily incident and necessary to the winding-down of transactions prohibited by 31 CFR are authorized from October 9, 2012, through March 8, 2013, provided that those ordinarily incident and necessary transactions do not involve a U.S. person or occur in the United States but this General License was not available until Dec. 26, 2012! 8

9 Grace Period For Certain Transactions By Foreign Subs What are transactions ordinarily incident and necessary to the winding-down of transactions? No definitions are provided! Winding-down of transactions likely means performance under contracts entered into prior to October 9, Transactions ordinarily incident and necessary likely means making shipments to Iran and receiving payments from Iran for such shipments. 9

10 Grace Period For Certain Transactions By Foreign Subs Open Issues Associated with General License: 1. Dealing with reluctance of banks to make payments, given threat of US and EU sanctions. How can a bank know that a payment is ordinarily incident and necessary to a wind-down transaction as opposed to being a payment for a new transaction? 2. Dealing with terms of pre-existing contracts that provide for open account payments X# days after invoice (i.e. shipping) date. Shipment would be covered by General License but payment is not and therefore a special OFAC license is required for payment. What happens if license not granted? Ship and pray? 10

11 Foreign Subs May Use General Licenses Otherwise Available to US Persons 31 CFR A U.S.-owned or -controlled foreign entity is authorized to engage in a transaction otherwise prohibited by that would be authorized by a general license set forth in or issued pursuant to 31 CFR Part 560 if engaged in by a U.S. person or in the US, provided the U.S.-owned or -controlled foreign entity is authorized to engage in the transaction only to the same extent as the U.S. person is authorized to engage in the transaction and subject to all the conditions and requirements set forth in the general license for the U.S. person. 11

12 Sanctions Imposable Directly On US Parent For Violations Of Foreign Sub Section 218 of the Iran Threat Reduction Act (Pub. L ), states a civil may be directly imposed on a United States person if an entity owned or controlled by the United States person and established or maintained outside the United States violates, attempts to violate, conspires to violate, or causes a violation of the prohibition set forth in 31 CFR [See also 31 CFR (a)(3)] The penalties do not apply with respect to a transaction described in if the US person divests or terminates its business with the FOREIGN entity not later than February 6, 2013, such that the U.S. person no longer owns or controls the FOREIGN entity 12

13 Securities Exchange Commission Mandatory Disclosure For Certain Iran Violations Section 219 of the Iran Threat Reduction Act requires that an "issuer" disclose certain information in either its annual or quarterly report required to be filed with the Securities and Exchange Commission (SEC) if the issuer or any "affiliate" of the issuer ( affiliate as defined for purposes of the Securities Exchange Act of 1934 and Exchange Act Rule 12b-2) has knowingly conducted or engaged in certain Iran-related activity. Knowingly = knew (had actual knowledge) or should have known. In guidance posted Dec. 4, 2012, the SEC issued guidance on reporting under Sec

14 Securities Exchange Commission Mandatory Disclosure For Certain Iran Violations Reports required to be filed mean any periodic report with a due date to SEC after February 6, 2013 An issuer is required to disclose activities that occurred during the period covered by the report, which, for a Form 10-K, is the entire fiscal year. An issuer that files an annual report for the fiscal year ending December 31, 2012 is required to disclose any unlicensed Iran-related activities that took place between January 1, 2012 and December 31, 2012 even though the ITRA containing Sections 218 and 219 was enacted only as of August 10,

15 Securities Exchange Commission Mandatory Disclosure For Certain Iran Violations Disclosure is required only if the issuer or any of its affiliates knowingly engaged in any of the particular Iran-related activities specified in Section 219 during the period covered by the report, including but not strictly limited to, the following: Certain activities involving the development of (a) petroleum resources in Iran, (b) weapons of mass destruction, or (c) other Iranian military capabilities Certain activities involving or destined to Iran's energy sectors 15

16 Securities Exchange Commission Mandatory Disclosure For Certain Iran Violations Iran-related activities specified in Section 219 (cont d) Transactions or dealings with a person or entity identified by OFAC as a Specially Designated National (SDN) or blocked party (not limited to Iran!) Conducting or facilitating certain banking violations supporting Iran s weapons of mass destruction activities/terrorism, or money laundering Transferring sensitive communications jamming or monitoring technology to Iran 16

17 Securities Exchange Commission Mandatory Disclosure For Certain Iran Violations Iran-related activities specified in Section 219 (cont d) Engaging in transactions with entities or instrumentalities acting on behalf of, or representing, the government of Iran Report on unlicensed Iran-related activities : License reference refers to lack of license from US Federal Department / Agency -- not to licenses from foreign governmental agencies as foreign licenses do not obviate disclosure requirement. All periodic reports filed with the Commission under Section 219 will be made public and will be referred for investigation (Wall of Shame and maybe even selfincriminating!) 17

18 Securities Exchange Commission Mandatory Disclosure For Certain Iran Violations Open Issues associated with disclosure of Iran-related activities specified in Section 219 Based on interpretation of knowingly as should have known does Issuer have an affirmative duty to determine if foreign affiliates are engaged in reportable activities? What about a duty to prevent such activities? Do reporting requirements for SDN s encompass SDN s that are unrelated to Iran? Should Issuers consider voluntary disclosure submissions simultaneous with SEC reporting requirements, given selfincriminating nature of SEC reporting requirements? 18

19 Government Contracting Certifications Required for Certain Iran Transactions Section 102 of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) and Section 311 of the Iran Threat Reduction Act (Pub. L ) and their respective implementing regulations require the following two certifications from each offeror : Certification #1 relates to activities described in section 5 of the Iran Sanctions Act. Each offeror must certify that the offeror, and any person owned or controlled by the offeror, does not engage in any activity for which sanctions may be imposed under section 5 of the Iran Sanctions Act. These sanctions relate to the energy sector of Iran and development by Iran of weapons of mass destruction or other military capabilities and include the following activities: (i) Knowingly making an investment of $20,000,000 or more, or a combination of investments of $5,000,000 or more that equal or exceed $20,000,000 in a 12- month period, that directly and significantly contribute to the enhancement of Iran's ability to develop petroleum resources. 19

20 Government Contracting Certifications Required for Certain Iran Transactions (ii) Knowingly selling, leasing or providing to Iran goods, services, technology, information, or support with a fair market value of $1,000,000 or more, or during a 12-month period with an aggregate fair market value of $5,000,000 or more, that could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries. (iii) Knowingly selling or providing to Iran refined petroleum products with a fair market value of $1,000,000 or more, or during a 12-month period with an aggregate fair market value of $5,000,000 or more. 20

21 Government Contracting Certifications Required for Certain Iran Transactions (iv) Knowingly selling, leasing, or providing to Iran goods, services, technology, information, or support with a fair market value of $1,000,000 or more, or during a 12-month period with an aggregate fair market value of $5,000,000 or more, that could directly and significantly contribute to the enhancement of Iran's ability to import refined petroleum products, including (A) Certain insurance or reinsurance, underwriting, financing, or brokering for the sale, lease, or provision of such items, or (B) Providing ships or shipping services to deliver refined petroleum products to Iran. (v) Exporting, transferring, or otherwise providing to Iran any goods, services, technology or other items knowing that it would contribute materially to the ability of Iran to acquire or develop chemical, biological, or nuclear weapons or related technologies, or acquire or develop destabilizing numbers and types of advanced conventional weapons. 21

22 Government Contracting Certifications Required for Certain Iran Transactions Section 102 of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) and Section 218 of the Iran Threat Reduction Act (Pub. L ) and their respective implementing regulations require the following certifications from each offeror: Certification #2 relates to transactions with Iran's Revolutionary Guard Corps. Each offeror must certify that the offeror, and any person owned or controlled by the offeror, does not knowingly engage in any significant transaction (i.e., a transaction that exceeds $3,000) with Iran's Revolutionary Guard Corps or any of its officials, agents, or affiliates, the property and interests in property of which are blocked pursuant to the International Emergency Economic Powers Act (50 U.S.C et seq.)(see OFAC's Specially Designated Nationals and Blocked Persons List 22

23 Government Contracting Certifications Required for Certain Iran Transactions Remedies for False Certifications ( ) Upon the determination of a false certifications (a) The contracting officer may terminate the contract; (b) The suspending official may suspend the contractor in accordance with the procedures in Subpart 9.4; and (c) The debarring official may debar the contractor for a period not to exceed 3 years in accordance with the procedures in Subpart

24 Government Contracting Certifications Required for Certain Iran Transactions Open Issues associated with disclosure of Iran-related activities in Government Contracting Certifications Based on interpretation of knowingly as should have known does Offeror have an affirmative duty to determine if foreign affiliates are engaged in reportable activities? Should Offeror s certification account for foreign affiliate transactions with Iran that were not illegal prior to October 2012? Should Offerors consider voluntary disclosure submissions simultaneous with FAR certifications, given self-incriminating nature of FAR reporting requirements? 24

25 Government Contracting Certifications Required for Certain Iran Transactions Open Issues associated with disclosure of Iran-related Activities in Government Contracting Certifications Many states have enacted similar certification requirements for state procurement. See Illinois, for example. Need to insure truthfulness. Need to insure comprehension of certifications by government contracts staff. Need to insure consistency of responses (federal and states). Certification requirements also exist with respect to Sudan. 25

26 Other Iran Sanctions Developments: Financial Sector 31 CFR CISADA-based sanctions on foreign financial institutions provide that foreign financial institutions can subject them to CISADA sanctions for: Facilitating the efforts of the Government of Iran (GOI) to acquire or develop Weapons of Mass Destruction (WMD) or delivery systems for WMD or to provide support for terrorist organizations or acts of international terrorism; Facilitating the activities of a person subject to financial sanctions pursuant to UNSCRs 1737, 1747, 1803, or 1929, or any other Security Council resolution that imposes sanctions with respect to Iran; 26

27 Other Iran Sanctions Developments: Financial Sector 31 CFR CISADA-based sanctions (cont d) Engaging in money laundering, or facilitating efforts by the Central Bank of Iran or any other Iranian financial institution, to carry out either of the facilitating activities described above; or Facilitating a significant transaction or transactions or providing significant financial services for: (i) the Islamic Revolutionary Guard Corps or any of its agents or affiliates whose property and interests in property are blocked pursuant to the International Emergency Economic Powers Act (IEEPA), or (ii) a financial institution whose property and interests in property are blocked pursuant to IEEPA in connection with Iran s proliferation of WMD, Iran s proliferation of delivery systems for WMD, or Iran s support for international terrorism. 27

28 Other Iran Sanctions Developments: Financial Sector 31 CFR NDAA-based sanctions on foreign financial institutions. For private financial institutions, the Act mandates that the President sanction those institutions that are found to knowingly conduct or facilitate any significant transactions with a U.S.-designated Iranian financial institution or with the CBI whether for the purchase of petroleum or otherwise unless the transaction is for the sale of food, medicine, or medical devices to Iran. For all transactions with the CBI other than petroleum purchases, this provision takes effect on February 29, 2012, i.e., 60 days after the enactment of the Act. The timing of the petroleum purchase sanctions is discussed immediately below. 28

29 Other Iran Sanctions Developments: Financial Sector 31 CFR NDAA-based sanctions on foreign financial institutions. For private financial institutions, the Act mandates that the President sanction those institutions that are found to knowingly conduct or facilitate any significant transactions with a U.S.-designated Iranian financial institution or with the CBI whether for the purchase of petroleum or otherwise unless the transaction is for the sale of food, medicine, or medical devices to Iran. 29

30 Other Iran Sanctions Developments: Financial Sector Executive Order issued May 1, 2012 Targets Foreign Sanctions Evaders, who are persons that engage in deceptive practices that result in the obscuring or withholding of information about an Iranian (or Syrian link) to a given transaction. For example, deleting references to Iran in a funds transfer transiting the U.S. banking system would be unlawful under current regulations, but may now earn the initiating foreign institution additional sanctions as an evader. 30

31 Iran: Equal Opportunity Sanctions General prohibition on all transactions Prohibit all financial transactions and all financial dealings with Iran or with a Iranian national without an OFAC license Prohibit US Persons and their foreign affiliates from approving, guaranteeing and / or brokering any transaction involving Iran or an Iranian national without an OFAC license. 31

32 Prohibitions re: SDNS Prohibit US Persons and their foreign affiliates from transferring, paying, exporting, withdrawing or otherwise dealing in property and interests in property of any person or entity that is blocked. Certain property of Iran and Iranian nationals are blocked as required by Executive Orders. Such transactions are declared null and void and have no legal effect in US 32

33 No Facilitation No US Person or its foreign affiliates may facilitate any transaction by a foreign person that they are prohibited From doing. 33

34 No Imports From Iran No goods or services of Iranian origin may be imported into US either directly or through third country Import of foodstuffs and carpets of Iranian origin was revoked pursuant to section 103 of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of Exception for information or informational materials or certain artwork 34

35 No Exports To Iran GENERAL PROHIBITION ON EXPORTS No products, technology or services may be exported to Iran from the US or from third countries by foreign affiliates of US person without an OFAC license 35

36 Transfers Outside Us To Iran s Petroleum or Petrochemical Sectors CISADA and E.O prohibit transfers outside US to Iran s petroleum, gas or petrochemical sectors. Applicable to: Persons not otherwise subject to US Jurisdiction Foreign companies with no US parent or US nexus Goods not otherwise subject to US Jurisdiction Foreign-made products, technology, services that contain no US content (or < 10% US origin content) when >$1,000,000 / $250,000 per transaction or > $5,000,000 / $1,000,000 p.a. 36

37 Burma [Myanmar] 37

38 Burma / Myanmar: Who 1. US citizens and permanent resident aliens, wherever located 2. Foreign nationals present in US 3. Corporations/entities organized under any US laws including their foreign branches 4. US-based Branches & subsidiaries of foreign companies Does not include foreign subsidiaries of US Corporations 38

39 Burma [Myanmar]: Prohibitions Eased OFAC General License # 16 for Burma/Myanmar authorizes the exportation or reexportation of financial services effective July 11, 2012, effectively revoking the prior ban on financial services. No SDN involvement GL # 16 authorizes exportation or reexportation of financial services to Burma, directly or indirectly, from the US or by a US person wherever located for any purpose, with only a few restrictions involving Burmese Ministry of Defense, its procurement office, or of any state/non-state armed group or any entity in which any of the foregoing own a 50% or greater interest. 39

40 Burma [Myanmar]: Prohibitions Eased OFAC General License # 17 for Burma/Myanmar authorizes new investment effective July 11, 2012, effectively revoking the prior ban on new investment in Burma. No SDN involvement Restrictions involving Burmese Ministry of Defense, including the Office of Procurement, or any state or nonstate armed group, or any entity in which any of the foregoing own a 50% or greater interest New Investment shall be reported to Department of State as set forth in GL #

41 Exports To Burma [Myanmar] Are NOT Prohibited No general prohibition on exports or re-exports of goods Standard export license analysis Burma is in EAR Country Group D:1 EAR imposes license requirements for exports and reexports for items subject to EAR 41

42 Imports From Burma: Prohibitions Eased OFAC General License # 18 for Burma/Myanmar authorizes imports from Burma provided no SDN involvement, effective Nov. 16, Exception in GL 18 does not allow import of jadeite or rubies mined or extracted in Burma, or items containing jadeite or rubies, mined or extracted in Burma or imports from SDN. 42

43 Syria: Executive Order of May 1, 2012 Authorizes imposition of sanctions on a foreign person upon determining that the foreign person: has violated, attempted to violate, conspired to violate, or caused a violation of any OFAC license, order, regulation, or prohibition contained in or issued pursuant to certain Executive Orders or has facilitated deceptive transactions for or on behalf of any person subject to US sanctions concerning Iran or Syria 43

44 Comparison of US Sanction Regimes 16 countries sanctioned by OFAC across the board or selectively Cuba Syria Iraq Libya Iran Burma/Myanmar Ivory Coast Somalia North Korea Belarus Lebanon Western Balkans Sudan D.R. Congo Liberia Zimbabwe 44

45 US Sanction Regimes SDN List Based Sanctions on 9 countries: Western Belarus DR Congo Balkans Iraq Ivory Coast Lebanon Liberia Somalia Zimbabwe 45

46 SDN List Based Sanction Regimes There are no general prohibitions on imports of goods or services. There is no general prohibitions on exports of goods or services. Standard export license analysis US Persons are prohibited from engaging in any transaction with certain designated persons / entities who are owned by, controlled by or acting on behalf of governments or groups whose interests are adverse to the list-based sanctioned countries or to the interests of democracy in the list-based sanctioned countries. These persons / entities: May be subject to asset freezes or asset blocks by USG; May or may not be domiciled in list-based sanctioned country; Are listed by USG on the SDN List; Constitute prohibited parties with whom US Persons may not have any dealings. 46

47 US Sanction Regimes Selective sanctions on 2 countries: Burma Libya 47

48 US Sanction Regimes Comprehensive sanctions on 5 countries Cuba Iran North Korea Sudan Syria 48

49 Sanctions Consider Who Is Subject? US PERSON must comply with OFAC Sanctions US PERSONS includes foreign subsidiaries for OFAC s CUBA SANCTIONS PROGRAM (TWEA) and OFAC IRAN SANCTIONS (Iran Threat Reduction Act of 2012, P.L , Sec. 218 and 31 CFR ) FOREIGN SUBSIDIARIES ARE NOT US PERSONS UNDER OTHER OFAC SANCTION PROGRAMS (IEEPA) BUT SPECIAL RULES RE IRAN (e.g., energy, etc.) 49

50 Summary Sanction Regimes US Person Imports Prohibited 5 countries: Cuba: Yes Syria: Yes Iraq: No Libya: No Iran: Yes Burma: No Ivory Coast: Somalia: No [minor No exceptions] North Korea: Yes Belarus: No Lebanon: No Western Balkans: No Sudan: Yes D.R. Congo: No Liberia: No Zimbabwe: No 50

51 Summary Sanction Regimes US Person EAR Exports Prohibited 5 countries: Cuba: Yes Syria: Yes Iraq: No Libya: No Iran: Yes Burma: No Ivory Coast: Somalia: No No North Korea: Yes Belarus: No Lebanon: No Western Balkans: No Sudan: Yes D.R. Congo: No Liberia: No Zimbabwe: No Where No, apply standard export license analysis. 51

52 Summary Sanction Regimes Foreign Subsidiary Exports Prohibited Cuba: Yes Syria: No unless subject to EAR Iraq: No Libya: No Iran: Yes Burma: No Ivory Coast: No Somalia: No North Korea: No unless subject to EAR Sudan: No unless subject to EAR Belarus: No Lebanon: No Western Balkans: No D.R. Congo: No Liberia: No Zimbabwe: No 52

53 Penalties for OFAC Sanction Violations Civil monetary fines - up to the greater of $250,000, or twice the dollar value amount of the transaction at issue, per violation [strict liability] and/or Statute of Limitations is 5 years from date of violation; Denial of Export Privileges [Denial Order] For willful or knowing violations - criminal prosecution Criminal monetary penalties -up to $1,000,000 per violation Imprisonment - up to 20 years in Federal prison, per violation Non-Monetary Reduction or elimination of US banking privileges! Strict Restrictions or Prohibitions 53

54 Recent Cases Expansion Of Jurisdiction OFAC has expanded assertion of extraterritorial jurisdiction against foreign persons apparently via International Emergency Economic Powers Act IEEPA language penalizes any person that violates, attempts to violate or causes a violation of U.S. export control or OFAC based regulations that rely on IEEPA OFAC appears no longer limited to U.S. persons only OFAC will enforce extraterritorially for conduct occurring outside the U.S., if such activity causes others to violate OFAC regulations in the US. See 50 USC

55 Recent Cases Major Japanese Bank( Bank ), Tokyo, Japan, agreed Dec. 12, 2012, to pay $8.6 million in a settlement with OFAC to settle charges that it violated the Burmese Sanctions Regulations; Iranian Transactions Regulations; Sudanese Sanctions Regulations; and Cuban Assets Control Regulations The Bank handled at least 97 funds transfers, with an aggregate value of approximately $5.9 million, between April 2006 and March

56 Recent Cases Bank s Tokyo operations engaged in practices designed to conceal the involvement of countries or persons subject to U.S. sanctions in transactions that Bank processed through financial institutions in the United States. Pursuant to written operational instructions utilized in a Tokyo operations center, Bank employees systematically deleted or omitted from payment messages any information referencing U.S. sanctions targets that would cause the funds to be blocked or rejected, prior to sending the transactions through the United States," OFAC noted. 56

57 Recent Cases Standard Chartered Bank: On Dec. 10, 2012 OFAC announced a $132 million agreement with Standard Chartered Bank ( SCB ) to settle the bank s potential liability for apparent violations of U.S. sanctions. OFAC investigated SCB s removal or omission by SCB s London head office and Dubai branch of material references to U.S.-sanctioned locations or entities from payment messages sent to U.S. financial institutions, in apparent violation of the Iranian, Burmese, Sudanese and the now-repealed version of the Libyan Sanctions Regulations 57

58 Recent Cases Major UK-Based Bank agreed on December 10, 2012 to pay $375 million to OFAC to settle potential civil liability on behalf of it and certain of its affiliates for apparent violations of: the Cuban, Burmese, Sudanese, Libyan and Iranian sanctions The case involved thousands of banking transactions using banks in the US, where the nature of the involvement of the sanctioned country was deliberately camouflaged by this bank, so as to permit the transactions to proceed undetected 58

59 Enforcement Trends: Sanctions & Anti-Money Laundering Company Office of Foreign Assets Controls [OFAC] Penalty Date Voluntary Disclosure? Bank A $375 million Dec. 11, 2012 No Bank B $132 million Dec. 10, 2012 Yes Bank C $619 million Jun. 12, 2012 Yes Bank D $176 million Aug. 8, 2010 Yes Bank E $217 million Dec. 23, 2009 Yes Bank F $536 million Dec. 16, 2009 Yes 59 59

60 COUNTRY SANCTIONS QUESTIONS? COMMENTS? 60 60

61 CONTACT INFO Margaret Gatti or Louis Rothberg Tim Rolland