Developments in Economic Sanctions, Enforcement and Investigations

Over the past year, the US government has relied heavily upon economic sanctions – in particular secondary sanctions that impose consequences on non-US persons for activities that occur outside of US jurisdiction – as a principal instrument of statecraft in responding to foreign policy and national security challenges. In addition to deploying more expansive sanctions against the governments of Iran and Venezuela and implementing more modest policy changes under other sanctions programmes, the US government has also ratcheted up the enforcement of existing sanctions.

This article will look first at the major developments in US sanctions programmes over the past year and then turn to the recent enforcement actions and guidance of the US Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the lessons that they contain.

New sanctions programme developments

Iran

In the past year, the United States has continued its campaign of ‘maximum pressure’ on Iran by reimposing the pre-Joint Comprehensive Plan of Action (JCPOA) sanctions regime and expanding upon that already robust framework. On 4 November 2018, the second phase of the wind-down period that began with the US withdrawal from the JCPOA ended. As a result, beginning on 5 November 2018, significant sanctions targeting Iran’s energy, financial and shipping sectors, as well as its sales of petroleum and petrochemical products, which previously had been lifted pursuant to the JCPOA, were reimposed.

One of the most significant consequences that followed was the return of US secondary sanctions on Iran’s energy sector under section 1245 of the National Defense Authorization Act for Fiscal Year 2012 (section 1245). Section 1245 targets Iran’s oil revenues by threatening foreign financial institutions that knowingly facilitate significant financial transactions with the Central Bank of Iran or any designated Iranian financial institution with losing their access to US correspondent or payable-through accounts. Section 1245 exempts from these sanctions financial institutions that are subject to the primary jurisdiction of countries determined to have ‘significantly reduced’ their oil imports from Iran. Whether a country meets this standard is within the sole discretion of the executive branch of the US government.

After issuing a set of significant reduction exception determinations in November 2018 that allowed eight jurisdictions – including China, India and Japan – to continue importing Iranian oil, the Trump administration declined to renew the determinations in May 2019, voicing an expectation that Iran’s oil exports would go to zero. As of the time of writing, no sanctions pursuant to section 1245 have been imposed though, by some reports, China has continued to receive imports of Iranian oil.

On 5 November 2018, over 700 Iranian individuals and entities – including virtually all of Iran’s major banks as well as numerous energy, shipping and manufacturing companies – were added to OFAC’s list of Specially Designated Nationals and Blocked Persons (SDN List). Many of these individuals and entities had been removed from the SDN List pursuant to the JCPOA, though some listings are new and others have been included under new legal bases. Any non-US person that engages in transactions with such designated persons could be subject to secondary sanctions. Furthermore, in light of US sanctions targeting the provision of specialised financial messaging services to certain Iranian banks, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) has also ceased providing services to such banks – substantially curtailing Iranian banks’ access to the global financial system.

In addition to restoring the major sanctions lifted as a result of the JCPOA, the Trump administration has built upon the prior framework by imposing new sanctions on Iran, including by issuing Executive Order (EO) 13871 of 8 May 2019, which targets Iran’s iron, steel, aluminium and copper sectors through the use of secondary sanctions, and EO 13876 of 24 June 2019, which targets the Supreme Leader of Iran and the Supreme Leader’s Office and expands sanctions authorities targeting Iranian officials and front companies.

Although the effects of these reimposed or new Iran sanctions predominantly fall on non-US persons, they also impact US persons, including those who own or control foreign subsidiaries, who need to continue to be vigilant under the new rules. While limited transactions involving Iran by US-owned or -controlled foreign subsidiaries were permitted under OFAC General License H while the United States was an active participant in the JCPOA, such transactions once again became prohibited on 5 November 2018.

The countries with which the United States partnered to negotiate the JCPOA continue to support the deal and have publicly opposed both the US withdrawal and the reimposition of US sanctions. European governments have announced new legal and financial measures to push back against US secondary sanctions. The most prominent have been:

  • the amendment of Council Regulation (EC) No 2271/96 (the EU blocking statute), which is intended to protect EU operators from the extra-territorial application of third-country laws, to add Iran-related US sanctions to the list of targeted third-country laws; and
  • the creation of the Instrument in Support of Trade Exchanges (INSTEX).

The EU blocking statute includes a prohibition on EU companies complying with certain US primary and secondary sanctions (though it allows for companies to make their own business decision not to deal with Iran for other reasons). INSTEX aspires to serve as a conduit for facilitating permissible trade between Iran and foreign companies, including trade in agricultural commodities, medicine and medical devices. Thus far, neither has persuaded significant EU companies to resume trade or investment in Iran, which largely ceased by 4 November 2018.

In the upcoming year, the United States is expected to continue its maximum pressure campaign against Iran through sanctions.

Venezuela

The tensions between the United States and Venezuela, stemming from the highly disputed May 2018 Venezuelan national election, have continued to escalate in the past year. In January 2019, President Trump officially recognised the President of Venezuela’s National Assembly, Juan Guaidó, as the Interim President of Venezuela, and declared Nicolas Maduro’s government to be illegitimate. More than 50 other nations have followed suit. The United States accompanied this political move with increasingly robust sanctions targeting Venezuela’s oil and financial sectors.

Most significantly, the United States utilised EO 13850 – issued in November of 2018 in response to massive corruption in the Venezuelan government – to place Petroleos de Venezuela, SA (PdVSA) on the SDN List in January 2019. As a result of this designation, all US-based property and interests in property of PdVSA (including entities that are 50 per cent or more owned by PdVSA, such as CITGO) are blocked and US persons are prohibited from participating in any dealings with these entities unless authorised by OFAC. While a series of General Licenses have been issued to mitigate the impact of the PdVSA designation on US persons – including a General License authorising transactions with CITGO – these General Licenses are limited in scope and require periodic renewal to stay in effect.

In addition to Venezuela’s oil sector, other major sectors of the Venezuelan economy have been targeted for sanctions under EO 13850, including Venezuela’s gold, financial and defence and security sectors. OFAC has utilised this EO to designate the Central Bank of Venezuela, other key financial institutions, and individuals who have participated in Venezuela’s currency exchange practices. In the spring and summer of 2019, OFAC also designated a number of companies and vessels involved in the transportation of Venezuelan oil to Cuba, which OFAC characterised as a lifeline to the illegitimate Maduro regime, pursuant to EO 13850.

Cuba

In accordance with the policy agenda announced by President Trump in June 2017, the Trump administration has continued to increase sanctions pressure on Cuba. The administration’s stance has been further hardened by Cuba’s support of the Maduro regime, leading to several notable changes in US sanctions policy towards Cuba.

Perhaps most significantly, in March 2019, the Trump administration broke with 22 years of bipartisan precedent by announcing it would allow certain lawsuits to proceed under Title III of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996. In April 2019, the Trump administration went further, announcing that, effective 2 May 2019, all lawsuits under Title III of LIBERTAD Act could proceed. Title III of the LIBERTAD Act grants US persons the right to file lawsuits against anyone who ‘traffics in property which was confiscated by the Cuban government’. Under the prior three presidential administrations, the executive branch of the US government had issued twice-annual waivers preventing claims from being filed under this authority. Non-US persons should be cognisant of the potentially far-reaching implications of this policy reversal, given the broad statutory scope of ‘trafficking’. As of the time of writing, several suits have already been filed in US federal courts and, according to estimates from the US State Department (State Department), there are – in addition to the nearly 6,000 claims certified by the Foreign Claims Settlement Commission – as many as 75,000 to 200,000 non-certified claims totalling tens of billions of dollars in value. The administration has also stated that it intends to take action to implement Title IV of the LIBERTAD Act, which authorises the State Department to prohibit entry into the United States of non-US persons who traffic in confiscated property after 12 March 1996, the date of enactment of the LIBERTAD Act, and the family members of such persons.

In June 2019, OFAC announced that it would be curtailing the ability of US persons to engage in travel to Cuba under the auspices of group people-to-people educational exchanges by revoking a 2015 General License that represented one of the most significant elements of the Obama administration’s relaxation of the Cuban embargo and had allowed tour operators to greatly expand their Cuba offerings. At the same time the US Department of Commerce’s Bureau of Industry and Security issued a final rule limiting the types of aircraft and vessels that are authorised to travel to Cuba by removing the authorisation for most non-commercial aircraft and passenger and recreational vessels.

Moving forward, the Trump administration is expected to further increase sanctions on Cuba, especially as tensions between the United States and the Maduro regime escalate. On 17 April 2019, National Security Advisor John Bolton announced that, in addition to the changes with respect to the LIBERTAD Act and Cuba travel discussed above, the United States would be revoking the ‘U-Turn transaction’ General License, which allows for US dollar clearing on behalf of Cuban parties provided that neither the originator nor the beneficiary is a person subject to US jurisdiction, as well as imposing more stringent limits on remittances to Cuba. As of the time of writing, these changes have not been implemented.

Russia

The United States has continued to utilise sanctions as a means of pressure in response to many of Russia’s malign activities, including interference with US and western elections, destabilisation of Ukraine, occupation of Crimea and chemical weapons usage.

In the past 12 months, the United States has begun to make use of the authorities provided in the Countering America’s Adversaries Through Sanctions Act (CAATSA), which went into effect in 2017. In particular, in September 2018, the State Department invoked section 231 of CAATSA for the first time to target foreign persons determined to have engaged knowingly in significant transactions with a person who is part of, or operates for or on behalf of, the defence or intelligence sectors of the government of the Russian Federation, as identified on the State Department’s CAATSA section 231(d) List. Pursuant to section 231 of CAATSA, the State Department imposed secondary sanctions on China’s Equipment Development Department of the Central Military Commission and its director for their transactions with Rosoboronexport, Russia’s largest arms exporter. As suggested by this action, non-US persons, including individuals, who engage in significant transactions with any of the entities on the CAATSA section 231(d) List are vulnerable to US secondary sanctions. The State Department continues to update the CAATSA section 231(d) List, which as of the time of writing includes more than 80 individuals and entities associated with the Russian defence and intelligence sectors.

Another noteworthy development in the Russia sanctions regime came at the end of 2018, when OFAC announced its intent to delist three commercially significant Russian entities: En+ Group plc (En+), UC Rusal plc (Rusal) and JSC EuroSibEnergo (ESE). These three entities were first designated in April 2018 due to their connections with the Russian oligarch Oleg Deripaska, who remains on the SDN List. OFAC proposed to remove these entities based upon the companies demonstrating that Oleg Deripaska had sufficiently reduced his shareholder stake and control and agreeing to provide enhanced transparency to OFAC on their corporate structure going forward. Pursuant to section 216 of CAATSA, OFAC provided notice of the intended delisting to Congress, whereupon Congress had 30 days to review and, if it so chose, pass a joint resolution of disapproval to block the delisting. The US Senate fell three votes short of the 60 votes needed to move a resolution of disapproval forward and the delistings were effected in early January 2019.

The United States has also continued to enforce Ukraine-related sanctions against Russia. In March 2019, OFAC sanctioned six Russian individuals and eight Russian entities for their involvement in Russia’s aggression towards Ukraine.

In August 2018, the United States determined that Russia’s attack on Sergei Skripal and his daughter, which took place in the United Kingdom in March 2018, constituted a violation of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW). Based on and simultaneous with this finding, the State Department imposed a first wave of sanctions, which were largely symbolic. In November 2018, the State Department announced that it would be imposing a second round of sanctions as required under the CBW, which it expected to be commercially significant – potentially reaching Russia’s financial, trade and air transportation sectors. As of the time of writing, the State Department has not imposed the second round of sanctions, nor has it provided a timeline for any future sanctions pursuant to the CBW.

Finally, pending congressional bills, such as the Defending American Security from Kremlin Aggression Act of 2019 and the Defending Elections from Threats by Establishing Redlines Act of 2019, would have significant financial and commercial impacts if enacted, as they threaten broad new sanctions against Russia’s energy and financial sectors.

North Korea

In the past year, against the backdrop of two meetings between President Trump and North Korea’s Kim Jong-un and sporadic working level talks, the United States has maintained its sanctions against the North Korean regime. The United States has also made creative use of existing authorities to target North Korean activity. Notably, in May 2019, the United States undertook a forfeiture action against a North Korean cargo vessel for violating international sanctions – an unprecedented move touted by US officials as part of a larger effort to maintain pressure on North Korea in response to its nuclear programme.

In March 2019, OFAC sanctioned two Chinese shipping companies (Dalian Haibo International Freight Co Ltd and Liaoning Danxing International Forwarding Co Ltd) for violating US sanctions with respect to North Korea. These sanctions, which came less than a month after the US–North Korea summit in Hanoi, Vietnam, underscored that Chinese entities – due to their financial and trade relations with North Korea – remain particularly susceptible to US secondary sanctions.

Notable recent enforcement cases and trends

Over the past 12 months, OFAC enforcement actions increased significantly as compared to the preceding year. From 1 July 2018 to 30 June 2019, there have been 25 published OFAC enforcement actions as compared to nine enforcement actions in the preceding 12-month period. In addition to the increase in the number of published enforcement actions, the level of civil penalties increased as well, from a total of approximately US$17.1 million, from 1 July 2017 to 30 June 2018, to a total of approximately US$1.35 billion from 1 July 2018 to 30 June 2019. Nine enforcement actions in the most recent 12-month period carried a penalty of over US$1 million, including two of OFAC’s largest civil penalties in its history, each surpassing US$600 million.

Through these enforcement actions, the agency clarified its expectations in terms of the responsibilities of US parents with foreign subsidiaries, foreign companies with US offices and senior officers, and US importers with foreign supply chains.

Some of the most high-profile actions were civil settlements with non-US financial institutions – Standard Chartered Bank, UniCredit Group and Société Générale SA – in which these banks settled with OFAC for US$657 million, US$611 million and US$53 million, respectively, as part of larger multi-agency enforcement actions.

The Standard Chartered Bank action contained a number of valuable lessons. In April 2019, Standard Chartered Bank agreed to an OFAC penalty of US$639 million as part of a broader US$1.1 billion settlement with US federal and New York state authorities, as well as the United Kingdom’s Financial Conduct Authority, stemming from the bank’s processing of hundreds of millions of dollars in transactions related to Burma, Cuba, Iran, Sudan and Syria. This action followed Standard Chartered Bank’s December 2012 settlement with many of the same agencies, which included the entry into deferred prosecution agreements with US federal and New York state authorities and the appointment of an independent compliance monitor. OFAC found that Standard Chartered Bank did not voluntarily self-disclose the violations that led to the April 2019 penalty and viewed this as an egregious case. The majority of the conduct in the April 2019 action concerned Iran-related accounts maintained by Standard Chartered Bank’s Dubai, UAE branches, wherein Dubai-based general trading companies and a petrochemical company were transacting with or on behalf of Iranian parties.

OFAC also announced in April 2019 that Standard Chartered Bank had entered into a separate US$18 million settlement concerning certain Zimbabwe-related transactions, including transactions in which the parties were not themselves on the SDN List, but were owned 50 per cent or more, directly or indirectly, by persons on the SDN List at the time the transactions occurred.

In November 2018, Société Générale agreed to an OFAC penalty of almost US$54 million as part of a broader US$1.34 billion settlement and deferred prosecution agreement with US federal and New York state authorities stemming from the bank’s processing of billions of dollars in transactions related to Cuba, Iran and Sudan. In particular, the OFAC penalty related to 1,077 transactions totalling more than US$5.5 billion dollars, which were often processed by Société Générale in a non-transparent manner that removed, omitted, obscured or otherwise failed to include references to OFAC-sanctioned parties in the information sent to the US financial institutions involved in the transactions. The vast majority of the violations at issue in this case related to Société Générale’s operation of credit facilities that provided significant money flow to Cuban banks, entities controlled by Cuba, and Cuban and foreign corporations for business conducted in Cuba, including a US dollar credit facility designed to finance oil transactions between a Dutch commodities trading firm and a Cuban corporation with a state monopoly on the production and refining of crude oil in Cuba.

With respect to US financial institutions, OFAC entered into a US$5.3 million settlement with JPMorgan Chase Bank, NA (JPMC). The primary lesson from this action involves aggregated or net settlement payments. JPMC had moved funds on behalf of its non-sanctioned client, an airline industry organisation, whose role was to settle net obligations of member airlines to one another. Among the member airlines were a number of airlines sanctioned under OFAC’s Iran and Cuba programmes. JPMC did not process any transactions directly on behalf of these sanctioned airlines, but a ‘very small’ portion (less than 0.2 per cent) of the overall settlement payments was attributable to the sanctioned airlines. Nevertheless, OFAC assigned liability to JPMC as it found that it knew or should have known the identities of the member airlines of its client.

Outside the financial sector, OFAC highlighted its expectations when it comes to supply chain due diligence in the case of e.l.f. Cosmetics (ELF). ELF had imported Chinese false eyelash kits containing North Korean-origin materials in violation of the North Korean Sanctions Regulations. OFAC faulted ELF for not maintaining an adequate OFAC compliance programme despite sourcing products from ‘a region in which [North Korea], as well as other comprehensively sanctioned countries or regions, is known to export goods.’ The remedial measures noted by OFAC were far-reaching and included implementing enhanced supplier audits to verify country of origin information for product inputs and review supplier bank statements. OFAC also encouraged importers to conduct mandatory OFAC sanctions compliance training for their suppliers. ELF resolved the matter with a US$996,080 payment.

OFAC underscored the potential liability of non-US companies under primary sanctions where their US subsidiaries become involved in transactions with sanctioned parties. In one notable case, OFAC reached a US$146,000 settlement with Ericsson, a Swedish headquartered company, for services and goods provided to a Sudanese telecommunications company that OFAC determined had been ‘facilitated’ by Ericsson’s US subsidiary. In this case, a number of Ericsson employees had expressly noted their awareness of US sanctions prohibitions, but the company nevertheless arranged for the delivery of a US-origin satellite hub to Sudan using false documents.

OFAC has also emphasised US parent liability for sanctions violations by foreign subsidiaries. In two recent cases – Kollmorgen Corporation and Stanley Black & Decker – a US parent was held liable following a merger or acquisition for the post-acquisition activities of its subsidiary. In both cases, the US parent company had engaged in due diligence prior to the acquisition. Indeed, OFAC penalised Kollmorgen despite finding that it undertook ‘extensive efforts’ post-acquisition to ensure that its subsidiary complied with US sanctions. In the Kollmorgen case, OFAC also broke new ground by imposing sanctions under EO 13608, which targets foreign sanctions evaders, on the manager of the non-US subsidiary who directed employees to violate US sanctions against Iran and then attempted to conceal those violations.

The Zoltek matter also held a US parent liable for activities primarily undertaken by its foreign subsidiary. In this case, a Hungarian subsidiary sold chemicals to a sanctioned Belarusian entity. While the actual sales were made by the Hungarian subsidiary, senior executives at the US parent company were extensively involved in the sale approval process and possessed actual knowledge of the entity’s sanctioned status. OFAC resolved the matter for US$7.7 million.

Finally, OFAC highlighted the importance of effective screening tools in Cobham Holdings Inc. Cobham’s subsidiary had utilised third-party OFAC screening software configured to only catch all-word matches. As a result, it failed to detect numerous sales to a Russian sanctioned party. Cobham settled its liability for US$87,507 and agreed to implement new screening software with ‘fuzzy-logic’ capabilities as well as a screening and business intelligence tool to identify companies owned 50 per cent or more by Specially Designated Nationals but not appearing on the SDN list.

These enforcement actions, coupled with the recent OFAC Framework (discussed below), underscore OFAC’s emphasis on the maintenance of robust and effective compliance programmes that address, among other items, compliance with US sanctions in the acquisition and integration context.

New compliance guidelines

On 2 May 2019, OFAC published a ‘Framework for OFAC Compliance Commitments’1 (the Framework), which outlines what OFAC considers to be the five essential components of a sanctions compliance programme (SCP):

  • management commitment;
  • risk assessment;
  • internal controls;
  • testing and auditing; and
  • training.

Among other points of emphasis, the Framework identifies management commitment as ‘one of the most important factors’, highlights the importance of risk assessment and sanctions-related due diligence with respect to mergers and acquisitions and draws attention to the significance of robust training. The Framework also outlines 10 common root causes of apparent violations identified in OFAC’s published enforcement actions and further elaborates on how the presence or absence of an effective SCP may impact OFAC’s enforcement response in a particular matter.

The Framework was issued shortly after the Criminal Division of the US Department of Justice (DOJ) published a parallel guidance document (the Guidance) on 30 April 2019. The Guidance tracks the major themes emphasised in OFAC’s Framework. Although the Guidance does not materially diverge from previously articulated policies of the DOJ, it puts new emphasis on risk assessment, codes of conduct, employee discipline for compliance infractions and the culture of compliance.

In light of the broader trend towards more vigorous sanctions enforcement, both US and non-US entities should be aware of OFAC’s Framework and the DOJ’s Guidance and their emphasis on companies maintaining robust sanctions compliance programmes.

New approach to OFAC’s penalty collection

In June 2019, OFAC Director Andrea Gacki announced a change in how OFAC collects payments for penalties in multi-agency enforcement cases, stating that, going forward, ‘[t]he only payments for penalties being charged by another agency that OFAC deems to satisfy its own penalties will be those that fit the same pattern of conduct over the same period of time that gave rise to OFAC penalty’. Prior to this change, OFAC generally ‘deemed satisfied’ its own penalties in multi-agency settlements by a payment in that amount to one or more other federal authorities. This new approach was applied in OFAC’s April 2019 settlement with UniCredit Group, with the majority of the US$611 million OFAC penalty deemed satisfied by payments to DOJ and the Federal Reserve and only US$105.9 million being paid to the Treasury Department to cover violations not included in the DOJ portion of the case.

The authors wish to acknowledge the valuable assistance of Pardis Gheibi, who contributed to this article as a summer associate.


Notes

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