Economic sanctions enforcement and investigations

A half year after the 2016 election, it is clear that sanctions will continue to play a prominent role in American foreign policy for President Trump and the new Congress. Congress has already introduced a number of wide-ranging sanctions bills targeting Russia, Iran and North Korea. As of July, the Trump Administration had announced changes to toughen Cuba sanctions and levied new targeted designations against individuals and companies related to the threats posed by Syria, North Korea, Iran, the Central African Republic, and numerous terrorist groups and narcotics cartels. The complex and ever-changing nature of the US sanctions programmes creates challenges for sanctions compliance; practitioners will need to stay alert and nimble to keep abreast of developments in this arena.

Sanctions enforcement also remains a high priority for regulatory and enforcement agencies, and the increasing levels of fines and penalties show no sign of abating. And, while the Trump Administration has slowed or frozen hiring in certain government agencies, the Administration has exempted the Office of Foreign Assets Control (OFAC) and other national security offices from the freeze.

In light of this focus on sanctions enforcement, it continues to be important for all US persons and those doing business in, through, or with the United States to make sure that they have strong compliance programmes to minimise sanctions exposure. As a general matter, it is rare to see intentional violations - instances where firms affirmatively seek to do business with sanctioned parties and governments. Most sanctions violations arise from weak compliance policies or sloppy implementation. Knowing your customers and counterparties remains one of the most vital - if also the most challenging - pillars of a strong compliance programme, especially for firms doing business in less transparent jurisdictions.

New sanctions programmes developments

Iran

With Secretary Tillerson's July certification that Iran is adhering to its commitments under the Joint Comprehensive Plan of Action (JCPOA) and his issuance of sanctions waivers in mid-May, the Trump Administration has maintained the commitments of the United States under the JCPOA and preserved the general posture of US sanctions vis-à-vis Iran. US nuclear sanctions are held in abeyance as per the JCPOA, while non-nuclear sanctions programmes, such as the general US embargo, as well as authorities targeting Iran's ballistic missile programme, support for terrorism, military activity in Syria and Yemen, and human rights abuses, remain in place. The Treasury Department has pursued new targeted designations against Iranian-related supporters of terrorism and those engaged in missile procurement on Iran's behalf. Meanwhile, on 14 June, the Senate passed an Iran and Russia sanctions bill, which would, if enacted, authorise additional targeted sanctions against Iranian activities outside the nuclear/JCPOA sphere.

There are limited new openings for US businesses as a result of the JCPOA, concentrated in the areas of exports of civil aviation products and imports of Iranian carpets and foodstuffs.

Non-US firms have greater latitude post-JCPOA, and purchases of crude oil from Iran and certain other trade has picked up significantly. That said, investment has been slower to materialise. A principal challenge for non-US potential investors has been performing customer due diligence in an environment that is opaque and where transactions with numerous entities - such as the Islamic Revolutionary Guards Corps and its network of subsidiaries - remain off-limits due to EU sanctions and US secondary sanctions. Financing for potential ventures has also been difficult to secure, as the world's leading banks hesitate to enter an Iranian market that is still subject to US sanctions and that is deemed by the Financial Action Task Force as one of two jurisdictions in the world ‘with strategic deficiencies in anti-money laundering/countering the financing of terrorism measures.' Iran committed in June 2016 to implement an action plan to address the strategic deficiencies in its financial sector but has not yet completed its work.

Russia

Senior officials in the Trump Administration have committed to maintaining the US sanctions imposed against Russia as a result of its interventions in eastern Ukraine until Russia fulfils its commitments under the ‘Minsk II' process. Similarly, the European Union voted in June to extend EU sanctions for another six months. While these developments preserve the status quo in US and EU sanctions for the time being, there has been much debate in both jurisdications as to the direction of sanctions on Russia due to concerns on another front - Russia's interference in US and European elections.

On 14 June, the Senate passed a sanctions bill that would codify existing sanctions, toughen certain aspects of the sanctions regime, and authorise further discretionary sanctions against Russia. The bill would expand the threat of secondary sanctions to (i) firms that make a significant investment in Russia's advanced energy projects, such as deep water, arctic, and shale exploration; (ii) firms investing in or facilitating the expansion of Russian energy export pipelines, such as Nord Stream II; and (iii) those knowingly engaging in significant transactions with the defence and intelligence ‘sectors' of the Russian government. The codification provisions of the bill are particularly extensive and aim to severely constrain the President's discretion to roll back or adjust the sanctions without congressional approval. Finally, the bill would shorten the debt maturity thresholds on prohibited dealings from 30 days to 14 days, and dealings in new debt from 90 days to 30 days.

Should it pass, the impact of the new sanctions in this legislation will be determined in large part by the Trump Administration, which will have to define and give effect to the law and set the level of energy it will devote to implementing the sanctions.

North Korea

With repeated and intensifying provocations by Kim Jong-Un in the form of nuclear and advanced missile tests in violation of UN Security Council resolutions, much attention is being dedicated to possible expansions in sanctions pressure on North Korea. On 4 May, the House passed a bill intended to improve compliance with existing sanctions and to expand sanctions targeting the North Korean shipping industry.

Given the absence of commercial ties between the United States and North Korea, there has been especially sharp focus on how US sanctions might place pressure on China, where North Korean trade and financial activity is heavily concentrated. The Trump Administration has drawn upon its existing authorities to impose sanctions and restrictions on actors in China that are facilitating trade and transactions on behalf of sanctioned parties in North Korea. Most notably, on 29 June 2017, the Financial Crimes Enforcement Network issued a finding that the Bank of Dandong, a small Chinese bank that services North Korean financial activity, is a primary money laundering concern and proposed to cut off its correspondent account access to the United States.

The current trajectory suggests that tensions between the US and China over North Korea may worsen in the coming months, with potential sanctions implications for larger Chinese entities doing business with North Korea and potential spill-over into other areas of the broader US-China relationship.

Cuba

On 16 June 2017, President Trump announced a toughening of Cuba sanctions. In a Presidential Memorandum, he directed the State Department to publish a list of entities under the control of the Cuban military, intelligence, or security services. US persons will generally be prohibited from engaging in financial transactions with these entities. In addition, the President instructed the Treasury Department to cease licensing educational travel to Cuba not under the auspices of an organisation (so-called individual ‘people to people' travel). These changes have not yet been implemented. Notably, the Administration left in place many of the changes that President Obama made, including opening diplomatic relations, expanding permissible banking and financial ties, loosening travel allowances, and allowing Cuban pharmaceutical exports to enter the United States.

Sudan

In the closing days of the Obama Administration, citing progress by the government of Sudan in a number of areas, the Treasury Department issued a broad general licence relieving the US trade and economic embargo on Sudan. That authorisation remains in place, and most transactions with Sudan are now permitted, although transactions with certain designated individuals and entities in Sudan remain off-limits. President Obama also set in motion the permanent revocation of the embargo's underlying executive orders. That revocation was due to occur on 12 July 2017 should the Secretary of State, in consultation with other federal agency heads, certify by that date that the government of Sudan has ‘sustained the positive actions that gave rise to' President Obama's executive order. On 12 July, President Trump issued an executive order extending this deadline until 12 October.

Notable recent enforcement cases

Epsilon Electronics, Inc (Epsilon)

In May 2017, in a rare appeals court ruling on OFAC enforcement proceedings, the DC Circuit Court of Appeals issued a decision partly upholding and partly remanding a lower court's grant of summary judgment in favor of OFAC in a challenge to an OFAC penalty notice. In 2014, OFAC had issued a final penalty notice for over US$4 million to Epsilon, having determined that Epsilon exported car audio and visual equipment from the United States to a distributer in the UAE with knowledge or reason to know that the goods would be re-exported to Iran. These activities were found to be in violation of section 560.204 of the Iranian Transactions and Sanctions Regulations (ITSR, 31 CFR section 560), which prohibits US persons from exporting goods technology or services to third countries when those persons have ‘knowledge or reason to know' that the exports are ‘intended specifically' for onward shipment to Iran. Epsilon filed suit in federal court challenging the penalty notice on several grounds, including that OFAC had not established that the goods in question had ultimately arrived in Iranian territory and that such a finding is required in order to hold a party responsible for a violation of section 560.204. The DC district court granted summary judgment for OFAC, upholding the agency's findings and the penalty amount in full. On appeal, in a 2-1 decision, the DC Circuit panel largely upheld the lower court's ruling, but remanded to have OFAC revisit five of the 39 counts of illegal exportation for the reasons discussed below.

On the only substantive issue of sanctions law, the DC Circuit sided with the government in ruling that OFAC need not determine that the goods arrived in Iran in order to assess a violation of section 560.204. The majority affirmed OFAC's interpretation that section 560.204 is violated upon the export of the goods from the United States with the requisite knowledge or reason to know that the goods are intended for export to Iran. The DC Circuit Court further found that the circumstances in this case - including the fact that the UAE importer exclusively listed Iranian distributors on its website at the time of the exports - supported OFAC's conclusion that 34 of the 39 exports at issue violated section 560.204.

The court remanded with respect to the final five shipments because it found that OFAC had failed to adequately consider evidence that Epsilon had submitted to OFAC in response to administrative subpoenas and that could support an argument that the distributor did not distribute exclusively to Iran during the period in which these shipments were made. At the same time, the court refused to consider certain potentially mitigating evidence that Epsilon submitted to the court because Epsilon had not submitted it to OFAC in response to OFAC's administrative subpoenas.

There are a number of lessons here for practitioners. First is the core ruling of the case, namely that a US exporter can violate section 560.204 in exporting goods to a third country based on what it knows or should know of its third country counterparty irrespective of the goods actually arriving in Iran. Here, as elsewhere, it is therefore critical to know one's customer and to pay careful attention to the information that is uncovered during due diligence. Second, firms receiving an OFAC subpoena should respond in a fulsome manner, as they may be unable to submit further evidence once OFAC has reached its final determination.

Zhongxing Telecommunications Equipment Corp (ZTE)

The largest sanctions settlement in the past year concerned ZTE, a large Chinese telecoms firm, and its violations of the ITSR. On 7 March 2017, ZTE pled guilty to conspiring to violate the International Emergency Economic Powers Act (IEEPA), obstructing justice, and making a material false statement to federal investigators. ZTE entered into a settlement with the Justice Department, OFAC, and the Commerce Department's Bureau of Industry and Security, and accepted fines and a criminal forfeiture of over US$800 million. OFAC's portion of this settlement, just over US$100 million, makes it the largest settlement for a non-financial institution in OFAC's history.

OFAC pointed to a number of factors in explaining the seriousness of the monetary settlement, which approached the maximum penalty available to OFAC in this matter. First, the highest level of management within ZTE was witting of the sanctions violations and in fact developed a plan to conceal the activity. Second, the scope of the violations was large, encompassing transactions with a total value of nearly US$40 million. Third, ZTE continued to violate sanctions laws even after OFAC's investigation provided ZTE with actual notice of its wrongdoing. ZTE also deleted evidence and provided doctored information to US authorities to conceal its activities. Finally, ZTE provided Iran with high-value, US-origin goods, including items subject to the Commerce Control List for anti-terrorism, national security, regional stability and encryption reasons.

While, as noted above, it is rare to find senior management intentionally directing sanctions violations, such cases do occur. Where this has occurred, it is imperative to put an immediate stop to the violative conduct, self-disclose to relevant agencies, cooperate with the ensuing investigations, and implement a swift and effective remediation plan.

Department of Justice voluntary disclosure guidance for export control and sanctions investigations

On 2 October 2016, the Justice Department promulgated new written guidance (Guidance) describing how it will assess and credit voluntary self-disclosure, cooperation with investigations, and remediation in investigations of ‘wilful' violations of export control and sanctions laws by non-financial institutions. The Guidance makes clear that the National Security Division of the Justice Department (NSD) will prioritise sanctions and export control cases for investigation and prosecution. It describes the ultimate goals of the Guidance as ‘to further deter individuals and companies from engaging in export control and sanctions violations in the first place, encourage companies to implement strong export control and sanctions compliance programs to prevent and detect such violations, and, consistent with the [Deputy Attorney General Yates] Memo on Individual Accountability [(the Yates Memorandum)], increase the ability of NSD and US Attorney's Offices to prosecute individual wrongdoers whose conduct might otherwise have gone undiscovered or been impossible to prove.'

According to the Guidance, to receive voluntary self-disclosure credit in these cases, a company must disclose the conduct within a reasonably prompt time after learning of the offence and prior to an imminent threat of disclosure or government investigation. The disclosure must also be complete, including all relevant facts known to the company as well as ‘all relevant facts about the individuals involved in any export control or sanctions violation.' This requirement calling for companies to detail the involvement of specific individuals in the company builds on the Yates Memorandum.

To receive full credit for cooperation with a sanctions or export control investigation, the Guidance generally calls for the following, on top of the general factors set out in the US Attorneys' Manual:

  • proactive, timely and fulsome disclosure of all relevant facts, including all facts relevant to criminal activity by individuals in the company;
  • timely updates on any internal investigation, rolling production of information and documents, and de-confliction with the government's investigation as requested;
  • making relevant overseas documents, officers and employees available to the government to the extent permitted by law;
  • assistance in identifying and obtaining relevant third-party documents and witnesses from domestic and foreign jurisdictions; and
  • provision of all facts relevant to potential criminal conduct by third-party companies and individuals.

The Guidance clarifies that companies are not required to waive attorney-client privilege or work product protections to qualify for cooperation.

In terms of remediation, the Guidance sets forth the following steps as generally required, on top of the cooperation elements described above:

  • implementation of an effective compliance programme (with key elements detailed in the Guidance);
  • appropriate discipline of responsible employees and, as appropriate, of supervisors of those employees; and
  • any additional steps demonstrating recognition of the seriousness of the conduct and working to preclude a repetition of such misconduct.

Where a company voluntarily self-discloses its violations, fully cooperates, and remediates appropriately, the company may be eligible for a significantly reduced fine and forfeiture, a non-prosecution agreement, a reduced period of supervised compliance, and no imposition of a monitor. Partial fulfilment of the factors set out in the Guidance can yield partial credit. There is no mention of the possibility of a declination of prosecution, however.

The Guidance carries a number of messages to practitioners. First, it emphasises an increased interest in sanctions and export control cases, an arena that historically saw far more attention from regulatory agencies such as OFAC and BIS than from the Justice Department. Second, to enable investigation of such cases, the Justice Department is seeking more frequent and more fulsome disclosures. And, finally, the Justice Department is specifically soliciting information about culpable officers and employees to allow for the prosecution of individuals, in line with the Yates Memorandum.

With a new Attorney General and new political appointees taking over the reins at the Justice Department, it will take some time to discern the new Justice Department's priorities and outlook with respect to sanctions enforcement and, more broadly, individual criminal liability in cases of corporate malfeasance.

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