ofac sanctions on iran, syria, yemen, and burma...

OFAC Sanctions on Iran, Syria, Yemen,

and Burma: Compliance Strategies Meeting Strict and Rapidly Changing U.S. Sanctions Requirements

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TUESDAY, AUGUST 28, 2012

Presenting a live 90-minute webinar with interactive Q&A

John J. Sullivan, Partner, Mayer Brown, Washington, D.C.

Thaddeus R. McBride, Partner, Sheppard Mullin Richter & Hampton, Washington, D.C.

Stevenson Munro, Compliance Leader, Economic Sanctions and Anti-Corruption,

General Electric Capital, Norwalk, Conn.

U.S. Sanctions: Key

Issues Strafford Publications

August 28, 2012

Washington, DC

Thaddeus R. McBride Sheppard Mullin Richter & Hampton [email protected]

Stevenson Munro General Electric Capital [email protected]

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Agenda

• Sanctions overview

• Specific countries

• Syria

• Iran

• Burma

• Yemen

• Compliance best practices

• Questions / Discussion

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Sanctions Overview

• Administered by U.S. Treasury Department,

Office of Foreign Assets Control (OFAC)

• Approximately 25 different U.S. sanctions

programs at present

• Some comprehensive, e.g., Cuba, Iran, and

some selective, e.g., Burma, Zimbabwe

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Key Concept: Jurisdiction

• Sanctions apply to actions by U.S. persons and

persons subject to U.S. jurisdiction, as follows:

• All U.S. citizens and residents, wherever located

• All U.S.-organized or incorporated companies or entities

• All persons in United States, regardless of nationality

• In case of Cuba (and now Iran), sanctions apply

to certain entities owned/controlled by U.S. person

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Jurisdiction (cont.)

• Under recent statutory amendment (IEEPA

Enhancement Act), any person who “causes” a

violation can be subject to liability

• Lloyds - $350 million (2009)

• Credit Suisse - $536 million (2009)

• Barclays - $298 million (2010)

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Key Concept: SDNs

• Specially Designated Nationals (SDNs)

• Listed on OFAC’s SDN List

• List updated regularly

• Individuals and entities are listed by sanctions

programs, e.g., narcotics trafficking, terrorism

• Many SDNs reside in non-sanctioned countries

such as Canada, Mexico, Panama, UAE

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Key Concept: Export of Services

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• U.S. sanctions prohibit direct and indirect

provision of services to sanctions targets

• Providing service anywhere may be prohibited if

benefit of service is received by sanctioned party

or in sanctioned country

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Export of Services (cont.)

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• Marketing services

• Business services

• Consulting services

• Example: Cannot give consulting or marketing advice

to a non-U.S. company related to its business in Iran

• Legal services are permissible in certain cases

Key Concept: Facilitation

• Facilitation is specifically prohibited

• U.S. persons are prohibited from facilitating action

that would be prohibited if performed by U.S. person

• Broadly defined – covers virtually any assistance to

a prohibited transaction

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Facilitation (cont.)

• Specific prohibitions from regulations

• Changing policies or procedures to allow foreign entity to

conduct transaction prohibited to the U.S. person

• Referring prohibited business deals to a foreign person

• Financing / insuring a foreign subsidiary’s trade with

sanctioned country

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Syria

• 2002 - Targeted sanctions imposed under

Terrorism List Government Sanctions Regulations

• 2005 - OFAC imposes asset freezing / blocking

on designated Syrian individuals

• 2011 - Executive Order 13582 establishes

comprehensive economic sanctions on Syria

• 2012 - Iran Threat Reduction and Syria Human

Rights Act extends restrictions on Syria

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Syria (cont.)

• Sanctions introduced in 2011 respond to Syrian

government’s actions against Syrian protests

• Asset freeze expanded to entire government

• Access to U.S. banks is restricted

• U.S. persons blocked from exporting services to Syria

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Syria (cont.)

• ITRSHRA signed on August 10, 2012

• Sanctions on persons engaged in human rights abuses

and censorship

• Restrictions on persons who facilitate transfers of

goods and technology likely to be used to commit

human rights abuses in Syria

• Could be extended to non-U.S. and non-Syrian parties

that sell specified goods / technology to Syria

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Syria (cont.)

• Overlapping sanctions regulations

• SSR, TLGSR, and ITRSHRA (and export embargo)

• Differing restrictions, e.g., more limits on dealing

with government than civilians

• Incremental expansion of sanctions

• Respond to foreign policy imperatives

• Congressional involvement

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OFAC Compliance

IRAN, BURMA, YEMEN – RECENT DEVELOPMENTS

John J. Sullivan Partner

202-263-3004 [email protected]

August 28, 2012 Strafford Webinar

IRAN SANCTIONS – BACKGROUND

• Complex patchwork of legislation, regulations, and Executive Orders implemented in part by OFAC and in part by the State Department

– International Emergency Economic Powers Act

– Iranian Sanctions Act (ISA)

• Amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA)

– Iran Threat Reduction and Syria Human Rights Act (ITRSHRA)

– Iranian Transactions Regulations, 31 CFR Part 560

– Iranian Assets Control Regulations, 31 CFR Part 535

– Executive Orders

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IRAN SANCTIONS – BACKGROUND

• Comprehensive sanctions

• Most transactions by US Persons prohibited

• Facilitation by US Persons prohibited

• Increasing extraterritorial reach

– Foreign subsidiaries of US companies

– Foreign persons who evade US sanctions

– Foreign financial institutions

• Blocking of Government of Iran assets

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IRAN SANCTIONS – IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT (ITRSHRA)

• Signed into law August 10, 2012

• For the first time extends to foreign subsidiaries of US companies the preexisting sanctions against Iran

• Imposes new reporting requirements on firms with securities traded on US stock exchanges

• Expands the scope of ISA/CISADA to target additional activities and impose new sanctions with respect to conduct of non-US companies

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IRAN SANCTIONS –ITRSHRA

Principal Provisions – Section 218

• Previously OFAC sanctions against Iran did not extend to the foreign subsidiaries of US companies, although any US entity, US citizen, or US resident (“US Person”) that facilitated the Iranian business in which the foreign subsidiary engaged could be penalized

• Prohibits any entity owned or controlled by a US Person and established or maintained outside the US from knowingly engaging in any transaction directly or indirectly with the Government of Iran or persons subject to the jurisdiction of Iran if such transaction would violate US sanctions law if a US Person engaged in it

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Principal Provisions – Section 218, cont’d

• A US Company will be subject to civil penalties for the activities of its foreign subsidiaries under this provision unless it divests or terminates the business with the foreign subsidiary within 180 days of enactment

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Principal Provisions – Section 219

• Any company whose stock is traded on US exchanges is required to make public disclosure filings to the SEC if it, or any affiliate, has knowingly engaged in certain activities prohibited by ISA/CISADA or by OFAC sanctions

• The President must initiate an investigation to determine whether penalties should be imposed as a result of reported activities

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Principal Provisions – Sections 201-203, 212-213

• Expands the list of sanctionable activities under ISA/CISADA and increases from three to five the number of mandatory sanctions the President must impose on parties engaged in prohibited activities

• Most of the added activities target Iran’s petroleum industry, including sanctions on firms involved in JV’s with Iran related to the development of petroleum resources outside of Iran

• Provides three additional sanctions that can be imposed for ISA/CISADA violations, including two measures targeting individuals

– Denial of entry into the US of any corporate officer or principal of, or any shareholder with a controlling interest in, a sanctioned person

– Any of the CISADA sanctions can be imposed on the principal executive officers (and any persons performing similar functions) of any sanctioned person, including the freezing all of their assets in the United States

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Other Provisions

• Expands sanctions on the opening or maintenance of correspondent and payable-through accounts in the United States by foreign financial institutions

• Sanctions companies that provide transportation or insurance/reinsurance for transportation of goods contributing to Iran’s WMD program or its support of international terrorism

• Tightens sanctions against Iran’s Revolutionary Guard Corps

• Expands sanctions against persons who supply Iran with items used to commit human rights abuses

• Makes it easier for US victims of terrorism to enforce US judgments for damages against Iran

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IRAN SANCTIONS – EXECUTIVE ORDERS

EXECUTIVE ORDER 13599 (February 5, 2012)

• Blocks all property and interests in property of the Government of Iran, including the Central Bank of Iran

• Blocks any Iranian financial institution

• Blocks all property and interests in property of persons owned or controlled by or acting on behalf of any person whose property is blocked under the order

• General Licenses A and B exclude certain transactions from scope of order

– Previously licensed transactions , including TSRA-licensed ones

– Noncommercial, personal remittances to or from Iran

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IRAN SANCTIONS– EXECUTIVE ORDERS

EXECUTIVE ORDER 13606 (April 22, 2012)

• Targets the provision and use of information and communications technology to carry out human rights abuses in Iran and Syria

• Blocks the property of persons involved in human rights abuses by the Iranian and Syrian governments

• Prohibits any transaction by a US Person or within the US that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the regulations established in the order

• Excludes any contract or license in effect prior to the order

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EXECUTIVE ORDER 13608 (May 1, 2012)

• Targets foreign individuals and entities that have evaded US economic sanctions on Iran and Syria, i.e., foreign sanctions evaders

• Authorizes Treasury to publicly identify and penalize those foreign persons and entities that

– Violate, attempt to violate, conspire to violate, or cause a violation of US sanctions against Iran or Syria

– Facilitate deceptive transactions for or on behalf of any person subject to these sanctions

– Are owned or controlled by, or acting on behalf of, another party that engages in these activities

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IRAN SANCTIONS – EXECUTIVE ORDERS

EXECUTIVE ORDER 13608 (May 1, 2012), cont’d

• Allows Treasury to identify a foreign company as a foreign sanctions evader if it facilitates a deceptive transaction, even if it was unaware of the identity of the sanctioned party

• Prohibits US Persons from dealing with foreign persons and entities identified as foreign sanctions evaders

• US Persons are not required to block the property of foreign sanctions evaders

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EXECUTIVE ORDER 13622 (July 31, 2012)

• Tightens sanctions on Iran's oil and petrochemical sectors as well as its shipping trade

• Targets foreign financial institutions found to have knowingly conducted or facilitated any significant financial transaction with the National Iranian Oil Company (“NIOC”) or Naftiran Intertade Company (“NICO”)

• Goal is to deter work-around financial transactions involving NIOC or NICO

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BURMA SANCTIONS– BACKGROUND

• US sanctions imposed in 1997 in response to the Burmese government’s crack-down on the country’s pro-democracy opposition

• Burmese Sanctions Regulations, 31 CFR Part 537

• Before 2012

– No financial services to Burma

– No US investment in Burma

– No imports of Burmese goods

– Exports and transactions unrelated to financial services allowed

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BURMA SANCTIONS– RECENT DEVELOPMENTS

• Easing of sanctions in 2012 in recognition of political reforms in Burma

• At same time, tightening certain other constraints on US business dealings with Burma

• April 17, 2012 - General License 14-C issued

– Authorized certain financial transactions in support of humanitarian, religious, and other not-for-profit activities in Burma

• Three months later new general licenses issued, General Licenses 16 and 17, that further ease sanctions

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General Licenses 16 and 17 (July 11, 2012)

• General License 16

– Replaces General Licenses 14-C and 15, which granted a limited exception for non-commercial personal remittances

– Authorizes direct or indirect exportation and reexportation of financial services to Burma

• General License 17

– Permits new investment in Burma

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Two Limitations on General Licenses 16 and 17

• No transactions with (i) the Burmese Ministry of Defense, (ii) any state or nonstate armed group, or (iii) any entity in which any of the foregoing owns a 50-percent or greater interest

• No transactions with any person whose property and interests in property are blocked (i.e., on the SDN List), including entities in which such blocked person owns a 50-percent or greater interest

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General License 16

• Carves out a limited exception to allow for transfers of funds to or from an account of a blocked Burmese financial institution

• US financial institutions are still prohibited from dealing directly with blocked Burmese banks; however, payments in US dollars may be routed through correspondent accounts of these blocked entities at non-US banks, provided that the payment concerned does not involve a debit to a blocked account

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General License 17

• Incorporates into its compliance obligations the State Department’s new “Reporting Requirements on Responsible Investment in Burma”

• Apply to any new investment in Burma “whatever corporate form it might take”

• Two reporting requirements

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General License 17, cont’d

• Annual Reporting Requirement

– Any US individual or entity that engages in new investment in Burma that exceeds an aggregate of US$500,000 is required to file an annual report with the State Department

• Myanma Oil and Gas Enterprise (MOGE) Notification

– US individuals or entities undertaking new investment pursuant to an agreement with MOGE must notify the State Department in writing within 60 days of the new investment

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Tightening of sanctions by Executive Order and Legislation

• Executive Order 13619 was issued on the same day as General Licenses 16 and 17

– Authorizes the designation as SDNs those individuals and entities that

• Threaten the peace, security, or stability of Burma

• Are responsible for or complicit in the commission of human rights abuses in Burma

• Conduct certain arms trade with North Korea

• Legislation signed into law on August 10, 2012 extends the import ban for additional three years

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YEMEN SANCTIONS– RECENT DEVELOPMENTS

Executive Order 13611 (May 16, 2012)

• Blocks the property of persons or entities that

– Have engaged in acts that directly or indirectly threaten the peace, security, and stability of Yemen

– Are political or military leaders of an entity that has engaged in such acts

– Have provided support for such acts or support to a person blocked by the order

– Are owned or controlled by, or are directly or indirectly acting for or on behalf of any person blocked by the order

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YEMEN SANCTIONS– RECENT DEVELOPMENTS

Executive Order 13611 (May 16, 2012), cont’d

• Does not impose broad-based sanctions against the country of Yemen, its government, or people

• Persons and entity blocked pursuant to this order are put on the SDN List

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Compliance Best Practices

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Key Elements of Compliance Program

1. Risk Assessment

• Review risk factors

• Where you are exposed to sanctions risks

• How exposure arises

• What types of sanctions risks exist

• What indicators of exposure look like

• It is fundamental to design and implementation of

appropriate, relevant compliance control processes

• Do not underestimate the difficulty in producing a clear,

complete, and precise risk assessment

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Compliance Program (cont.)

2. Policies and Procedures

• Documented, coordinated set of instructions setting out:

• Who is responsible for which tasks

• How tasks are performed

• Standards of performance

• Dedicated compliance personnel

• Compliance officer should be senior enough to bind

company, maintain credibility with management

• Contact for questions, reporting on compliance issues

• Seems obvious; but often very difficult to maintain.

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3. Transaction / Business Activity Monitoring,

Screening, Surveillance • Core to any compliance program are the control processes

themselves

• In an economic sanctions context, these typically require

“screening” of relevant business activities to detect indicators of

potential sanctions risk exposure

• Know Your Customer: Conduct diligence on new partners, existing

partners on periodic basis and identify compliance “red flags”

• Review, address red flags before proceeding with transaction

• Do not limit this to “SDN List” screening; this is often too limited

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4. Compliance Control Process Monitoring

• Often confused with the prior program element

• This is a process to ensure the control processes and

procedures implemented to ensure compliance are

being performed properly

• Pay particular attention to technology related

procedures

5. Metrics and Management Information

• Reporting on both process and risk

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6. Regulatory Reporting and Communication

• Timely filing of reject and block reports

• Respond to .602s

• Engage with OFAC on licensing, compliance, and

enforcement actions

• Ensure necessary records are maintained, available

for inspection by government

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7. Training

• Senior leaders need to:

• Understand the risks

• Be committed to, demonstrate commitment to compliance

• Businesses need to:

• Know what risks or exposure they face within their specific

activities and operations

• Understand red flag indicators they may encounter and how

to detect and report them

• Compliance control process owners need to:

• Know how to perform the procedures correctly

• Be able to identify process failures

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8. Advice and counsel

• Business needs timely, accurate guidance on both

strategic issues and discreet questions that arise

• Program needs to be built and resourced so that

issues can be identified and addressed quickly

without incapacitating business by hand-wringing

• Ensure there are appropriate reporting mechanisms

• Email, phone, fax, mail, etc.

• Include anonymous option to extent possible

• Review reports promptly

• No retaliation in case of good faith reports

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9. Program change management

• The regulatory environment is one of the most

consistently dynamic you will encounter

• Compliance controls have to react immediately

• Compliance program needs to have mechanisms to

implement changes consistently, comprehensively,

immediately, and repeatedly

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10. Independent Testing / Audit • Required in some industries, good practice for others

• Ensure adequate resources

• Written plan outlining reasonable scope of review

• Final report with summary of review conducted, key

findings, and specific duties for corrective action

• Helps identify weaknesses (and strengths)

• Provides senior management / board level focus

• Can serve as evidence of responsible, well-designed

and well-executed program

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