Evolving Legal Compliance Risks in Russia and Iran

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1 Evolving Legal Compliance Risks in Russia and Iran David Lorello Covington & Burling LLP Breakbulk Europe, Antwerp, Belgium 14 May 2014

2 Overview Recent Developments in US and EU sanctions against Iran and Russia Sanctions issues for the logistics sector Key anti-corruption enforcement risks for the logistics sector 2

3 US and EU Sanctions Against Russia Both the US and EU have implemented asset freezing sanctions against designated persons and entities in Russia and Crimea. Those sanctions broadly restrict dealings with the designated parties, or parties that they own or control. The US and EU have also implemented targeted export controls restrictions relating to Russia and Crimea e.g. military and dual use products. 3

4 US Sanctions Against Iran: Who Must Comply? There are two general categories of US sanctions against Iran: Direct prohibition on most dealings with Iran; and Retaliatory measures for specified dealings with Iran. Direct Prohibition on Most Dealings with Iran Applies to US persons, wherever located, and their owned or controlled non-us subsidiaries. A U person is 1 any legal entity organized under US law and its nonus branches; (2) any US citizen or permanent resident anywhere in the world; and (3) any person or entity physically located in the US. Retaliatory Measures for Specified Dealings with Iran Apply to anyone, including non-us persons, wherever located. 4

5 U.S. Sanctions: Iran OFAC s I a ia T a sa tio s a d a tio s Regulatio s IT R 3 C.F.R. Pa t p ohi it U.S. persons from providing any goods, services, or technology to Iran or the government of Iran. Unlicensed U.S. export/import trade in goods and services with Iran generally prohibited. U.S. persons precluded from investing in Iran. U.S. persons cannot deal in Iranian-origin products or services. Iranian-origin goods broadly defined to include goods grown, produced, manufactured, extracted, or processed i I a as ell as [g]oods hi h ha e e te ed i to I a ia o e e 3 C.F.R (a)(2)). Iranian-origin services include, among others, all services performed in Iran by an Iranian entity or person residing in Iran as well as services performed outside Ia a itize, atio al o pe a e t eside t of I a ho is o di a il eside t i I a o a I a ia e tit 3 C.F.R (b)(2)). 5

6 U.S. Sanctions: Iran With limited exceptions, prohibitions cover third-country export trade that involves: Any U.S. person; and/or U.S.-origin products or technologies and foreign items with more than de minimis controlled U.S. content (10% or more content by value). ITSR prohibition does not apply to Iranian-origin materials or components that have been incorporated into manufactured products or substantially transformed in a third country by a person other than a U.S. person. Iran sanctions do not apply to Iranian nationals who are not ordinarily resident in Iran. Additional tightening of sanctions proposed; active area for new legislation. 6

7 U.S. Retaliatory Sanctions The I a a tio s A t I A, adopted i 99, e ui es the President to impose retaliatory sanctions against persons including non-u.s. persons who engage in certain activities involving Iran. The ISA is implemented by the U.S. State Department, not the Treasury Department. In July 2010, the United States enacted the Comprehensive Iran a tio s, A ou ta ilit, a d Di est e t A t CI ADA, hi h amended the ISA to broaden the scope of sanctionable conduct, to add e sa tio s, a d to est i t the P eside t s autho it to waive sanctions when objectionable conduct is found. The retaliatory sanctions regimes authorize (and in some cases require, absent a national security waiver) the US President to impose 5 from a menu of 12 retaliatory measures against persons engaged in sanctionable conduct. 7

8 US: Conduct That Triggers Retaliatory Sanctions Key Retaliatory Sanctions of Note for Genel Energy: Selling or providing to Iran refined petroleum products (e.g. diesel, gasoline, jet fuel and aviation gasoline) with a fair market value of $1 million or more, or an aggregate fair market value of $5 million or more over a 12-month period; Knowingly providing significant support to, or goods or services for the benefit of, any Iranian person on the SDN List (other than certain Iranian financial institutions), or any person determined to be an Iranian port operator, a part of the Iranian energy, shipping, or shipbuilding sectors. Selling, leasing, or providing goods, services, technology, information, or support to Iran that individually have a fair market value of $1 million or more, or an aggregate fair market value of $5 million or more over a 12-month period, and that could directly and significantly contribute to the (1) enhancement of Iran s ability to import refined petroleum products or (2) facilitate the maintenance or expansion of Iran s domestic production of refined petroleum products, including any direct assistance with respect to construction, modernization, or repair of petroleum refineries.

9 US: Conduct That Triggers Retaliatory Sanctions Key Retaliatory Sanctions of Note for Genel Energy: Selling, leasing, or providing goods, services, technology, information, or support to Iran that could directly and significantly: contribute to the maintenance or enhancement of Iran s ability to develop petroleum resources located in Iran, if such goods, services, technology, information, or support individually have a fair market value of $1 million or more, or in the aggregate have a fair market value of $5 million or more over a 12-month period; or contribute to the maintenance or expansion of Iran s domestic production of petrochemical products, if such goods, services, technology, information, or support individually have a fair market value of $250,000 or more, or in the aggregate have a fair market value of $1 million or more over a 12-month period.

10 Retaliatory Sanctions: Executive Order 13,662 While not part of the ISA, Executive Order also authorizes retaliatory measures similar to the ISA s retaliatory measures against any person that knowingly engages in the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran (though the purchase of petroleum and petroleum products may be exempt if there is an applicable NDAA exemption). 10

11 US: Other Conduct That Triggers Retaliatory Sanctions Making an investment of $20 million or more, or a combination of investments in a 12month period of at least $5 million which in the aggregate equals or exceeds $20 million, that directly and significantly contributes to the enhancement of Iran s ability to develop petroleum resources in Iran. Providing goods, services, technology, and support to Iran s weapons proliferation program. Providing support to Iran s infrastructure related to domestic production of refined petroleum products, e.g., construction of port facilities, railways, and roads, the primary use of which is to support the delivery of such products; Engaging in censorship or curtailment of free expression and assembly in Iran; Engaging in corruption or other activities related to the diversion of goods including medicine and other humanitarian products meant for the Iranian people. Supplying Iran with technologies and equipment likely to be used in human rights abuses, e.g., weapons, rubber bullets, tear gas, jamming, or surveillance equipment.

12 US: Other Conduct That Triggers Retaliatory Sanctions Knowingly supplying, selling, or transferring to or from Iran significant goods or services used in connection with the Iranian energy, shipping, or shipbuilding sectors. Knowingly supplying or selling to Iran precious metals, certain other materials, including aluminum, steel, and coal, or software for integrating industrial processes, subject to certain conditions; or Knowingly providing underwriting services or insurance for various activities involving Iran that are the target of existing and new sanctions. Assists in the purchase of US bank notes by the Government of Iran. knowingly engages in any significant transaction related to the supply to Iran of significant goods or services used in connection with Iran s automotive sector. Additional sanctions on foreign financial institutions associated with dealings in Iranian rial.

13 Foreign anctions Evaders A foreign sanctions evader is any person who violates, attempts to violate, conspires to violate, or causes a violation of US sanctions against Iran (also applicable to Syria) US Treasury Secretary is authorized to prohibit transactions or dealings by US persons involving foreign sanctions evaders. Such a prohibition effectively cuts off such parties from the US market. Individual sanctions evaders may also be denied entry to the US. 13

14 EU Sanctions: Iran Background: adopted in 2006; regularly expanded since Currently in Regulation 267/2012. Key elements include: Prohibitions on dealings with designated parties. Currently over 600 individuals and entities designated, including most commercial banks and IRISL/subsidiaries. Prohibitions on the supply/transfer/export/import of various goods, including dual-use goods and technology, to/from Iranian parties or for use in Iran. Sector-specific restrictions, including on oil, gas & petrochemical sector, banking and insurance. Restrictions on transfers of funds to/from Iranian parties and other financial services restrictions. Additional customs notifications. 14

15 EU Sanctions: Iran I a ia pa ties : State of Iran or any Iranian public authority; Natural person in or resident in Iran; Legal person with registered office in Iran; Any entity in or outside of Iran owned or controlled directly or indirectly by any of the above. 15

16 EU Sanctions: Iran Oil & Gas restrictions prohibit: Purchasing/importing to the EU/transporting crude, petroleum, petrochemical products and gas originating in or exported from Iran (and related financial assistance/provision of insurance/reinsurance). Supply of e tai listed key equipment and technology fo the oil, gas a d petrochemical sectors to Iranian parties or for use in Iran, and financing/technical assistance/brokering in relation to these items. Annexes VI and VIa Investments in Iranian parties engaged in the exploration or production of crude oil and natural gas; the refining of fuels or the liquefaction of natural gas; the petrochemical industry. Limited grandfathering clauses allow certain transactions, subject to notification requirement. 16

17 EU Sanctions: Iran Funds transfer restrictions: Transfers of funds to/from Iranian parties equal to or over 10,000 EUR must be notified. Transfers equal to or over 40,000 EUR must be authorized. Iranian parties may be outside of Iran. Extends to electronic and nonelectronic transactions (e.g., set-offs). Extends to linked payments. Obligation in the first place on EU banks. 17

18 EU Sanctions: Iran Additional banking restrictions: Transfers between EU and Iranian banks are prohibited unless authorized. P ohi itio o suppl of spe ialized fi a ial essagi g se i es used to e ha ge fi a ial data with DPs (e.g., Swift messaging). 18

19 Anti-Bribery Laws: The International Landscape U Foreign Corrupt Practices Act 1977 First transnational anti-bribery law Model for international standards FCPA OECD Anti-Bribery Convention (1997) UN Convention Against Corruption (2004) Regional Conventions CoE Criminal Law Convention (1998, Additional Protocol 2001) CoE Civil Law Convention (1999): EU Convention (1997) Inter-American (1996) and African Union (2003) Conventions 19

20 Top Corporate Recoveries $400m in 2010 $365m in 2010 $800m in 2008 $219m in 2011 $185m in 2010 $338m in 2010 $137M in 2010 $95m in 2011 $398m in 2013 $579m in 2009

21 Enforcement Trends Increasing prosecutorial activity in Europe and in host countries Aggressive enforcement techniques and more enforcement resources Coordinated international enforcement Multi-jurisdictional prosecutions Large penalties More prosecution of individuals Industry sweeps Focus on third parties (distributors, agents, consultants, JV partners) Whistleblowers Debarment and other collateral consequences 21

22 Anti-Corruption Risks in the Logistics Sector Customs Transportation: e.g. rail car allocation, highway weight restrictions. Port-related charges Personal security Taxes and local staff regulatory requirements 22