Foreign Assets Control Facilitation: g Preparing for Expanded - - PowerPoint PPT Presentation

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Foreign Assets Control Facilitation: g Preparing for Expanded Enforcement in 2013

Identifying and Mitigating Risks for U.S. Persons and Companies Absent Clear Guidance

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUES DAY, JULY 23, 2013

Today’s faculty features:

Ronald I. Meltzer, Partner, WilmerHale, Washington, D.C. Greta Lichtenbaum, Partner, O'Melveny & Myers, Washington, D.C.

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Prohibited Facilitation Under OFAC Regulations OFAC Regulations

Ronald I. Meltzer Wil C tl Pi k i H l d D LLP Wilmer Cutler Pickering Hale and Dorr, LLP July 23, 2013

OVERVIEW

• 1. What is facilitation?
• 2. Exceptions
• 3. Recent legislation and Executive Orders

related to facilitation

WilmerHale

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Part One: What is facilitation? Part One: What is facilitation?

 Circumvention of OFAC requirements by

routing or supporting otherwise prohibited routing or supporting otherwise prohibited transactions through foreign persons

 Aiding or permitting non-US persons to  Aiding or permitting non US persons to

perform activity that would be prohibited if undertaken by US persons

 Explicit and imputed prohibition across all

OFAC sanctions programs

 Broad and elastic: even minor or indirect

actions that support or approve another person’s transaction with OFAC targets can constitute

WilmerHale

transaction with OFAC targets can constitute prohibited facilitation

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Definitions of facilitation: Iran, Sudan and Burma regulations g

 Iran: approving, financing, facilitating, or

guaranteeing any transaction by a foreign guaranteeing any transaction by a foreign person, where the transaction would be prohibited if performed by US person or within the United States (31 CFR §560.208)

 Sudan: action by a US person that assists or

S supports transactions with Sudan by any other person (31 CFR §538.407)

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Definitions of facilitation: Iran, Sudan and Burma regulations g (continued)

 Burma: approving, financing, facilitating, or

guaranteeing a transaction by a foreign person, if such transaction would be prohibited when performed such transaction would be prohibited when performed by US person or within the United States (31 CFR §537.205(a))

 Exception for certain types of new investment in

Burma (31 CFR §537.205(b)), such as certain contracts to sell/purchase goods

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contracts to sell/purchase goods

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Cuba: evasion/avoidance

 CACR prohibits “[a]ny transaction for the

purpose or which has the effect of evading or avoiding any part of the [CACR] prohibitions” (31 avoiding any part of the [CACR] prohibitions (31 CFR §515.201(c))

 Interpreted to prohibit facilitation

p p

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Other examples of facilitation from OFAC regulations g

 Altering policies or operating procedures to

enable a foreign affiliate/subsidiary to perform enable a foreign affiliate/subsidiary to perform OFAC-prohibited transactions

 Altering a foreign affiliate’s/subsidiary’s  Altering a foreign affiliate s/subsidiary s

• perating policies and procedures to facilitate

OFAC-prohibited transactions

 Referring purchase orders, requests for bids,

• r other business opportunities involving OFAC

t t t f i

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targets to a foreign person

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Penalties

For Iran, Sudan and Burma (under IEEPA):

 Civil: $250,000 per violation or twice

transactional value

 Criminal: $1 million per violation and 20 years

For Cuba (under TWEA): Civil: $65 000 per violation

 Civil: $65,000 per violation  Criminal: $1 million per violation and 10 years

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Part Two: Exceptions

• 1. Authorized transactions
• 2. General inventory rule

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Authorized transactions u o ed s c o s

Prohibited facilitation requires that the underlying transaction be unauthorized transaction be unauthorized If the transaction is permitted (either by general authorization or a specific license) then taking authorization or a specific license), then taking action to approve, facilitate or support that transaction is not prohibited Examples:

 Information and informational materials  Transactions covered by OFAC licenses

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General Inventory Rule

 What if a US person sells goods to a foreign  What if a US person sells goods to a foreign

person in a third country that does business in Iran? Does that activity constitute prohibited facilitation?

 General inventory rule: US persons may

ll/t f d t thi d t t sell/transfer goods to a third-country party, even if a small/unidentifiable portion of such goods is destined for or ends up in OFAC targets p g

 Not in the OFAC regulations—established by

longstanding agency practice

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g g g y p

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General Inventory Rule (continued)

Two key limitations:

 Items when shipped from the United States or

b US t th thi d t t t by a US person to the third-country party must not be specifically intended for eventual sale to

• r use in OFAC targets

g

 Third-country party’s inventory must not be

predominantly used for selling/sourcing such p y g g items to OFAC targets

WilmerHale

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Part Three: Recent legislation and Executive Orders related to facilitation

Key developments:

• Executive Order 13606 (Foreign Sanctions

Executive Order 13606 (Foreign Sanctions Evaders)

• Executive Order 13608 (Grave Human Rights

Abuses)

• Executive Order 13622
• Iran Threat Reduction and Syria Human
• Iran Threat Reduction and Syria Human

Rights Act of 2012

• Iran Freedom & Counter-proliferation Act of

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2012

• Executive Order 13645

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EO 13608 (Foreign Sanctions Evaders) ( g )

• Targets foreign individuals/entities who:
• Violate/attempt to violate/cause a violation of sanctions
• n Iran/Syria; or

Facilitate “decepti e transactions” on or behalf of

• Facilitate “deceptive transactions” on or behalf of

persons subject to Iranian/Syrian sanctions.

“Deceptive transactions”: identity of an Iranian or Syrian

– Deceptive transactions : identity of an Iranian or Syrian

sanctions target is withheld or obscured from other parties

• r relevant regulatory authorities (e.g., non-U.S. export

licensing officials)

EO 13608 (FSEs) (continued)

Allows OFAC to impose sanctions on non-U.S. persons for facilitation C f b i li t d d EO 13608 Consequences of being listed under EO 13608:

• U.S. persons may not provide goods,

i t h l t li t d FSE services, or technology to listed FSEs, or entities owned/controlled by, or acting on behalf of, such FSEs

• Effectively, listed FSEs are cut off from access

to the U.S. market and financial system

• However, no blocking requirements under this

EO

EO 13606 (Grave Human Rights Abuses Via IT)

• Targets parties that operate/direct the
• peration of computer or network disruption,

it i t ki th t ld f ilit t monitoring, or tracking that could facilitate serious human rights abuses by the governments of Iran/Syria g y

• Also targets parties that provide

goods/services/technology likely to facilitate such activities

• Targeted individuals/entities put on SDN list

with the tag [HRIT]

EO 13622 (July 2012)

• Authorizes imposition of sanctions on foreign

financial institutions determined to have knowingly conducted or facilitated any knowingly conducted or facilitated any significant financial transaction:

• With the National Iranian Oil Company (NIOC) or

p y ( ) Naftiran Intertrade Company (NICO) (with limited exceptions); or

• For the purchase or acquisition of petroleum, petroleum

products, or petrochemical products from Iran.

“Significant” transaction

• OFAC has stated that it will determine whether

a transaction is “significant” by considering a number of factors related to the transaction, number of factors related to the transaction, including size, number, and frequency; type, complexity, and commercial purpose; the level f i l t b th b k’

• f awareness or involvement by the bank’s

management; whether the activity or payment illustrates a pattern or practice; the ultimate p p ; economic benefit to Iran; and whether the transaction involved the use of deceptive financial practices financial practices.

Iran Threat Reeducation and Syria Human Rights Act of 2012 (ITRA) g ( )

• Expanded scope of CISADA Sec. 104 by

targeting foreign financial institutions that: targeting foreign financial institutions that:

• Knowingly facilitate various proscribed activities; or

Act on behalf of another person ith respect to s ch

• Act on behalf of another person with respect to such

activities.

• Notably also expanded scope of U S
• Notably, also expanded scope of U.S.

sanctions by making U.S. parents liable for their foreign subsidiaries’ activities with Iran, even if there is no facilitation, approval, or support

Iran Freedom & Counter- proliferation Act of 2012 (IFCA) p ( )

• Provided for CISADA-style sanctions on

financial institutions that knowingly conduct or financial institutions that knowingly conduct or facilitate:

• Significant financial transactions involving targeted

g g g sectors (energy, shipping, shipbuilding) or products (precious and other metals); or

• On behalf of a blocked Iranian person

EO 13645 (June 2013)

• Authorizes imposition of sanctions on a

foreign financial institution determined to have: have:

• Knowingly conducted or facilitated any significant

transaction related to the purchase or sale of Iranian p rials or a derivative, swap, future, forward, or other similar contract whose value is based on the exchange t f th i l rate of the rial; or

• Maintained significant funds or accounts outside Iran

denominated in the Iranian rial denominated in the Iranian rial

Ronald I. Meltzer

WilmerHale WilmerHale (202) 663-6389 ronald.meltzer@wilmerhale.com

WilmerHale

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Greta L.H. Lichtenbaum

U S Economic Sanctions Laws: U.S. Economic Sanctions Laws: How Risks of Facilitation Violations Typically Arise

Facilitation – General

• Basic principle: A U.S. person may not facilitate

activities of a non-U.S. person that the U.S. person could not engage in directly

• A risk for ALL sanctions programs
• This provision refers to facilitating the activities of any

This provision refers to facilitating the activities of any foreign person (including an affiliate), and can create many challenges

• It can prevent U S companies and persons from

It can prevent U.S. companies and persons from supporting transactions with sanctioned countries initiated

• utside the United States, even where the U.S. company’s

role is limited

28

Facilitation – Non-U.S. Affiliate Risks

• How do you manage risks when a foreign affiliate has business

with a Sanctions Target?

• Risks arise with foreign subsidiaries that are not independent
• Divergence of functional structure from legal structure
• Interlocking officers, directors or employees
• Lack of maintenance of separate corporate formalities
• Significant involvement by U.S. parent in foreign subsidiary’s

business

• Key to risk mitigation: Identify all areas where U S -based entity
• Key to risk mitigation: Identify all areas where U.S. based entity
• r U.S. persons may support non-U.S. affiliates, and assess

facilitation risk

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Facilitation – Non-U.S. Affiliate Risks

• Transaction-specific facilitation of non-U.S. affiliates’ activities with a

Sanctions Target can arise in many ways, including:

P idi i t f fi i l i t

• Providing various types of financial assistance
• Exercising mandatory approval for contracts
• Changing a subsidiary’s processes and procedures to permit a transaction

to occur without U.S. participation is facilitation

• Brokering, financing, guaranteeing a contract
• Assisting on exportation or re-exportation of goods and services
• Insuring a subsidiary’s trading activities with Iran
• Referral of purchase orders requests for bids or similar business
• Referral of purchase orders, requests for bids, or similar business
• pportunities to which the U.S. person would not directly respond
• Transporting or warranting the quality of goods sold by a subsidiary to Iran
• Business or legal planning relating to the trade in goods, technology, or

i b t I d th l ti services between Iran and any other location

30

Facilitation – Non-U.S. Affiliate Risks

• Shared Support Services – Human

Resources/Personnel Resources/Personnel

• U.S. involvement in hiring process or requirements

for personnel responsible for sanctioned country p p y business

• Multiple employment contracts for individuals
• Secondment of staff to foreign subsidiaries of U.S.

company with sanctioned activities

• Employment of foreign nationals resident in Sudan
• Employment of foreign nationals resident in Sudan
• r Iran

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Facilitation – Non-U.S. Affiliate Risks

• U.S.-based Enterprise Resource Planning (“ERP”)

systems

• ERP systems are designed to integrate all data and processes
• f multinational companies into a unified system, using various

components of computer software and hardware to achieve the integration integration

• Can a U.S. parent be deemed to facilitate a foreign subsidiary’s

transactions with sanctioned countries if those transactions are effected through an ERP system based in the United States? effected through an ERP system based in the United States?

• OFAC precedent is limited on questions of U.S.-based,

automated support. Cuba travel service provider precedent from 2002 (020416-FACRL-EU-10) is somewhat on point, from 2002 (020416 FACRL EU 10) is somewhat on point, suggesting that there is some risk of facilitation from U.S.-based ERP systems that provide operational support

32

Facilitation Risk – Ongoing Business with Unrelated Non-U S Business Partner Unrelated Non-U.S. Business Partner

• How do you manage risk if an unrelated non-

U S business partner has business with U.S. business partner has business with Sanctions Target?

• This can arise in a variety of contexts
• This can arise in a variety of contexts
• Joint venture relationships
• Production sharing arrangements in exploration

g g p and production context

• Agents, freight forwarders, transport companies,

distributors distributors

• Clients (law firms)

33

Facilitation – Ongoing Business with Unrelated Parties Unrelated Parties

• Level of risk depends on how much business

there is with Sanctions Target and what U S there is with Sanctions Target, and what U.S. company’s role is in the shared activities

• Risk should be assessed on a case-by-case
• Risk should be assessed on a case by case

basis

• Key to Risk Mitigation: Expectations vis-à-vis

y g p sanctioned countries should be set at the beginning of the relationship

D dili d d l i i i l

• Due diligence and advance planning are critical
• Contractual protections are a must

34

Facilitation Risk: Unrelated Parties

• Facilitation risk exists with relationships with

unrelated non-U.S. parties (e.g., joint development p ( g , j p projects, joint ventures, agents, clients and customers)

• Includes the referral of business to non-U S persons

Includes the referral of business to non U.S. persons

• Level of risk depends on how much business there is in

sanctioned countries, and what U.S. company’s role is in the shared activities shared activities

• Risk should be assessed on a case-by-case basis
• Expectations vis-à-vis sanctioned countries should be set at

the beginning of the relationship the beginning of the relationship

35

Facilitation: Mergers and Acquisitions

• If there is a revenue stream from a sanctioned

country, can change terms of the deal y, g

• Significant revenue from sanctioned countries can be

problematic

• If business is Cuba-related may need an OFAC license prior

If business is Cuba related, may need an OFAC license prior to closing, and business may need to cease if interest of U.S. person is controlling

• If asset purchase, may need license prior to closing

p , y p g

• If stock purchase of non-U.S. entity, may have to choose

between: (1) retaining revenue stream and allowing new sub to operate independently; and (2) foregoing revenue stream

• consider post-closing compliance audit

36

Facilitation: Mergers and Acquisitions

• If there is a revenue stream from an

embargoed country planning about the embargoed country, planning about the following issues is essential:

• Placement of U S persons in management
• Placement of U.S. persons in management

positions of foreign subsidiary, including the Board

• Modifications to operating procedures
• d cat o s to ope at g p ocedu es
• Delegations of authority from new parent
• Integration, especially IT, business support

Integration, especially IT, business support functionality and finance/treasury

37

Recent Enforcement Cases

• Intesa Sanpaolo S.p.A. (June 2013)
• ATP T

I (J 2013)

• ATP Tour, Inc. (June 2013)
• HSBC (December 2012)
• ASF, Inc. (November 2011)
• JP Morgan Chase (August 2011)

38

Intesa Sanpaolo S.p.A. (“Intesa”) (June 2013)

• Intesa, an Italian bank, settled with OFAC

regarding violations of Cuba Sudan and Iran

(June, 2013)

regarding violations of Cuba, Sudan and Iran

• sanctions. Intesa “failed to take appropriate

measures to prevent the bank from processing transactions for or on behalf of an Iranian GOI entity that terminated in the United States or with U S persons ” U.S. persons.

• Also processed multiple transactions involving

Cuba and Sudan Cuba and Sudan

• Assessed a penalty of $ 2.9 million

39

ATP Tours (June 2013)

• ATP allegedly violated the Iran rules by approving,

facilitating and in some instances making salary facilitating and in some instances making salary payment to a tennis official ordinarily resident in Iran

• OFAC noted the fact that ATP is a non-profit
• rganization but also that ATP “demonstrated

reckless disregard for the sanction as 8 of the 18 payments were made after receipt of a warning letter p y p g

• Case settled for $48,600

40

HSBC (December 2012)

• Department of Justice settlement agreement

addressing widespread violations of economic addressing widespread violations of economic sanctions and money laundering laws

• Among other allegations, HSBC “may have

facilitated, or were at least aware of, the resubmission of cancelled payments in U.S. dollars which initially contained references implicating U.S. y p g sanctions.”

• Settlement for $1.2 billion, including a requirement for

l t it long-term monitor

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ASF, Inc. (November 2011)

• OFAC settlement alleging that ASF facilitated the

transportation of goods by a non-U S person to Iran transportation of goods by a non U.S. person to Iran without a license, even where ASF had “no knowledge or reason to know” that the goods were b i t t d t I being transported to Iran

• Settlement for $5,400

42

JP Morgan Chase (August 2011)

• OFAC settlement regarding alleged violations of the

Sudanese Iranian and Cuba sanctions regimes by Sudanese, Iranian, and Cuba sanctions regimes by processing electronic funds transfers to those countries

• OFAC alleged violations of the prohibition on

exporting services and the facilitation provision in the Iran regulations when it processed an electronic g p funds transfer involving an Iranian organization

• Case settled for $88.3 million

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Greta L H Lichtenbaum Greta L.H. Lichtenbaum O’Melveny & Myers LLP 1625 E St t N W 1625 Eye Street, N.W. Washington, D.C. 20006 202-383-5249 glichtenbaum@omm.com

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