Sanctions and Export Controls: Focus on Medical Devices Presented - - PowerPoint PPT Presentation

Sanctions and Export Controls: Focus on Medical Devices

Presented by: Staci Yablon Francesca Guerrero

May 3, 2018

The Impact of Sanctions

• Sanctions are politically motivated and therefore constantly

in flux.

• Companies must maintain an awareness of trade sanctions

and export controls to reduce risk of costly penalties and

• ther adverse action.
• Risk-based compliance programs and targeted due

diligence are key to avoid sanctions violations.

• Information is intended as an overview of the landscape.

2 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

The Legal Landscape

U.S. Regulation of Exports

• Several government agencies regulate exports of goods and

services from the United States, including:

• Office of Foreign Asset Control (“OFAC”) – a division of the

Department of the Treasury, enforces economic and trade sanctions

• Bureau of Industry and Security (“BIS”) – a division of the

Department of Commerce, oversees export controls of commercial and dual-use items

• Directorate of Defense Trade Control (“DDTC”) – a division of the

Department of State, oversees the export of defense articles and services

4 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Office of Foreign Asset Control (“OFAC”): Promulgates and Enforces Sanctions

• U.S. sanctions prohibit U.S. persons,

wherever located, all persons and entities within the U.S., and all U.S. companies and their foreign branches from engaging in certain transactions with sanctioned countries, individuals and entities. Sanctions also regulate activities with a U.S. nexus.

• Secondary sanctions impose sanctions
• n foreign persons for engaging in

certain transactions with persons already sanctioned by the U.S.

5 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Office of Foreign Asset Control (“OFAC”): Promulgates and Enforces Sanctions

• Primary Sanctions Vary
• Blocking – SDNs and certain countries and

persons therein are blocked, meaning their property and assets are frozen by U.S. persons

• Comprehensive sanctions prohibit nearly all

transactions with the sanctioned party, including the provision of services and exports/imports

• Sectoral sanctions target particular industries in

certain countries (e.g., Russia) by prohibiting certain transactions with companies identified in that sector

• Restrictions on dealing in debt or equity of a listed

entity (e.g., Russia, Venezuela)

6 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Bureau of Industry and Security (“BIS”): Promulgates and Enforces Export Controls

• BIS administers the Export Administration Regulations

governing commercial and dual-use items

• An item is subject to the EAR export controls if:
• It is located in the United States
• It is a product of U.S. origin wherever located
• It is a re-export (U.S. good shipped between non-U.S. countries) of an

item subject to U.S. export controls

• It might be subject to EAR export control laws if:
• It is a non-U.S. origin product wherever located made with significant

levels of U.S. origin parts, components, and materials (% components threshold varies based on destination)

• It is a product of certain U.S. origin technology wherever located

7 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Export Administration Regulations (“EAR”)

• The EAR explicitly cover commodities, software (source or
• bject code), and technology
• Certain items are listed on the “Commerce Control List” and

will have an Export Commodity Classification Number (ECCN); such items will have specific licensing requirements based on destination

• All other items are considered EAR99 and subject to general

prohibitions on end-use and end-user (but not item-specific) controls

• Most medical devices are EAR99

8 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Export Controls on EAR99 Items

• Export to embargoed countries requires a license even for

EAR99 items

• Syria, Iran, Cuba, North Korea, Sudan
• Certain end-users are listed on a restricted list (Entity List,

Unverified List, Specially Designated Nationals, etc.) and require additional licensing requirements for export (often with a presumption of denial)

• BIS requires a license for export to some end-users and end-

uses (generally related to military and weapons)

• Diligence is required even for generally non-sensitive items

such as medical devices

9 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

General Licenses and License Exceptions

• OFAC issues general licenses on BIS issue license

exceptions that authorize transactions that would otherwise violate sanctions.

• General licenses and license exceptions are available to any person for

use without application to OFAC or BIS respectively

• Reporting or other requirements may apply
• If a General License or License Exception does not cover

your export, you may apply to OFAC and BIS for a license.

• We will discuss the licenses for medical devices in detail in the next

section

10 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Sanction Laws Covering Medical Devices

What Is a Medical Device?

• Varies across programs, but for Iran is:
• A “device” under the Federal Food, Drug, and Cosmetic Act

AND

• Designated as EAR99

12 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Medical Devices Are Given Special Treatment

• Under certain country-based

sanctions, exports of medical devices are authorized or subject to favorable policies that other products are not. These rules change frequently.

• Both BIS and OFAC restrictions must

be considered for embargoed countries.

13 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Regions of Concern for Medical Devices

14 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

OFAC and BIS Divergence

• Each country is different with respect

to the coordination between OFAC and BIS

• For some, either BIS or OFAC will

issue an authorization that automatically permits exports authorized by the other agency

• Countries that require applying to

both BIS and OFAC are:

• Sudan
• North Korea
• Crimea

15 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

The Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”)

• The TSRA provides that the President shall terminate any

unilateral medical sanction in effect as of the date of enactment of the TSRA. It does not include items subject to export controls.

• Certain embargoes are covered by the TSRA (Iran, Sudan,

Cuba) while others (Syria) are not because of timing of the start of the embargo.

16 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Iran – Exporting Medical Devices

• Currently, the general license in 31 C.F.R. § 560.530 permits

the export of all medical devices that are EAR99, unless the medical device is on a list of exceptions.

• Strict Control of the Exportation of Replacement Parts
• Must be an actual replacement and not an extra spare part
• Broken parts must be shipped to a non-Iranian entity outside of Iran
• For Iran, if a shipment is authorized by OFAC, it is

automatically authorized by BIS.

17 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Iran – The Evolution of the General License

• The General License was originally issued in February 2012.
• The GL originally listed the types of devices that were

covered by general license – all others required authorization by specific license.

• The list was updated several times
• The 2017 amendment switched to listing the small number of EAR99

devices not covered by the GL

18 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Syria – Exporting Medical Devices

• Parties must apply for a license to export medical devices
• No available OFAC general license or BIS license exception
• Primary licensing authority is BIS; applications are reviewed
• n a case-by-case basis (15 CFR § 746.4)
• If a party obtains a license from BIS, it is automatically authorized by

OFAC (31 CFR § 542.510)

19 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Cuba – Exporting Medical Devices

• Parties must apply for a license to export medical devices
• No available OFAC general license or BIS license exception
• Primarily licensing authority is BIS, which reviews licenses

under a policy of general approval with limited exceptions (e.g., product could be used in making a biotechnological product) 15 CFR § 746.2

• If a party obtains a license from BIS, it is automatically authorized by

OFAC (31 CFR § 515.533)

20 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Sudan – Exporting Medical Devices

• In 2017, the United States revoked most sanctions against

Sudan and embargo generally lifted, however Sudan is still designated as a state sponsor of terrorism (see TSRA)

• OFAC General License A permits the exportation and re-

exportation of medical devices to Sudan if the items are shipped within the 12-months from the signing of the contract

• However, companies must still apply for a BIS license

21 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

North Korea – Exporting Medical Devices

• Parties must apply for a license to export medical devices
• No available OFAC general license or BIS license exception
• BIS reviews License Applications under a general policy of

approval 15 CFR § 746.4

• OFAC must separately authorize an export of medical

devices

22 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Russia/Crimea – Exporting Medical Devices

• OFAC issued Ukraine GL 4 that authorizes the exportation or

reexportation of medical supplies and replacement parts

• OFAC has published a list of medical supplies that are authorized

under GL 4 (it does not mirror the Iran list)

• A BIS license is required for export to the Crimea region;

items authorized under OFAC Ukraine-Related GL 4 are reviewed on a case-by-case basis (instead of a policy of denial)

23 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Compliance and Diligence

OFAC’s enforcement priorities for corporate violations:

“Failure to address risks or respond to warning signs.”

– Andrea Gacki, Deputy Director, OFAC ACI Economic Sanctions Conference, April 26, 2018

25 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Update Compliance Program

• Target resources at highest risks
• Policies and procedures
• Training
• Roles and responsibilities
• Management support and tone

from the top and middle

• Assessment and audit

26

Assess Compliance Risk

• International operations
• Third parties
• Supply chain
• Sales and marketing
• Type and frequency of

transactions

• Internal processes (finance,

procurement, vendor management)

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Compliance Case Study

• Compliance officer from the U.S. headquarters of a

multinational company receives a question during training at a foreign subsidiary – is it a problem if they sell basic medical devices to a company that bundles them for sale to Syria?

• What inquiry should compliance officer make? What steps should be

considered for immediate or near-term?

• Is underlying activity permissible without a license? Does U.S. person

involvement make a difference or cause facilitation?

• If legally permissible, is this worth the risk, compliance cost? Is the

activity compliant with existing procedures? Is it worth applying for a license?

• Reassessment of existing procedures - is there an internal control

weakness? Revisit to ensure compliance with direction given.

27 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Due Diligence on Investments

• Companies considered for investment or purchase should be

subjected to careful, risk-based review.

• Even foreign targets can run afoul of U.S. export controls and

sanctions laws. They are often unaware that U.S. law may apply.

28 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Due Diligence Case Studies

• A U.S. company acquiring a foreign medical

device company that exports devices to sanctioned countries

• Consider business impact - even if permissible currently,

can this activity continue (perhaps with a license)? If not, how much does this impact revenue?

• Did past transactions have a U.S. nexus? U.S.

components?

• If violations discovered, what is liability exposure?
• A U.S. company receives subpoenas regarding its

sales to Iran while in process of divesting business

• How clear is it that products are currently covered?

Were they covered in the past?

• Can the parties manage the liability risk contractually?

29 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Investigations and Remediation

Investigations

• If violations have already occurred, an investigation can

determine the extent of the company’s exposure.

• Outside counsel with expertise in sanctions can analyze the

company’s dealings with sanctions countries to determine whether or not violations have actually occurred.

32 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Dealing with Violations

• If an investigation uncovers a violation, the company must

decide whether or not to voluntarily disclose the violation to the U.S. government.

• Voluntarily disclosing violations has both pros and cons.

32 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

BIS Voluntary Disclosure Outcomes 2017

33

80% warning letters issued <1% penalty levied 19% no action (determination that no violation apparent)

*Information reported by BIS officials at ACI Economic Sanctions Conference. OFAC 2017 details not available.

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Penalties

Base Penalties

• As of March 19, 2018, the base statutory penalty for a single

violation of the export controls and sanctions laws overseen by OFAC or BIS is $295,141, or twice the amount of the transaction, whichever is greater.

• The base amount increases periodically. Prior to this

increase the base penalty was $284,582 and prior to that it was $250,000.

35 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

OFAC and BIS Guidance: Penalty Matrix

36

Non-Egregious Egregious Voluntary One half the transaction value, capped at $125,000 One half the statutory maximum Non-Voluntary Applicable schedule amount Statutory maximum (currently $295,141 or twice the value of the transaction, whichever is greater)

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

OFAC and BIS Guidance: Non-Egregious, Non-Voluntary Schedule

37

Transaction Value Penalty Less than $1,000 $1,000 $1,000 to $9,999 $10,000 $10,000 to $24,999 $25,000 $25,000 to $49,999 $50,000 $50,000 to $99,999 $100,000 $100,000 to $169,999 $170,000 More than $170,000 $250,000*

* Unless the specific statute violated has a penalty cap below this amount

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Factors that Impact the Penalty Amount

Aggravating Factors

• Willful or reckless violation
• Awareness of conduct at

issue

• Harm to regulatory

program objectives

• Individual characteristics
• Existence or strength of

compliance program

38

Mitigating Factors

• Remedial response
• Cooperation with

investigation

• Likelihood license would

have been approved

• Other:
• Related violations
• Deterrent effect

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Case Study: Selling Medical Devices to Iran

• From 2016 to 2018, a company sells medical devices to Iran

in violation of sanctions laws in four separate transactions.

• The transactions violate both OFAC and BIS regulations, so

the company’s total possible exposure is $2,367,446.

39

Transaction Date Value of Transaction OFAC Statutory Penalty BIS Statutory Penalty Total Possible Exposure #1 4/27/2016 $11,000 $250,000 $250,000 $500,000 #2 8/1/2016 $177,000 $354,000 $354,000 $708,000 #3 11/24/2016 $16,500 $284,582 $284,582 $569,164 #4 4/2/2018 $5,150 $295,141 $295,141 $590,282 Total: $2,367,446

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Case Study: Selling Medical Devices to Iran

• The actual amount of the penalty can be estimated by

determining whether the violations were voluntarily disclosed and whether the violations will be considered “egregious”

40

Transaction Non-Egregious Egregious #1 Voluntary Self Disclosure $5,500 $125,000 #2 $88,500 $177,000 #3 $8,250 $142,291 #4 $2,575 $147,570 Totals: $104,825 $591,861 #1 Non-Voluntary Self Disclosure $25,000 $250,000 #2 $250,000 $354,000 #3 $25,000 $284,582 #4 $10,000 $295,141 Totals: $310,000 $1,183,723

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Enforcement Measures

Recent Notable Enforcements

• Dentsply Sirona, Inc. (Dec. 2017) fined $1,220,440 for dental

equipment that ultimately was sold to Iran

• United Medical Instruments, Inc. (Feb. 2017) settled 56

alleged violations of the Iran sanctions for $515,400

42 These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship.

Staci Yablon

Partner Litigation +1 (212) 294-4703 syablon@winston.com

Staci focuses her practice on white collar and internal investigations, FCPA, sanctions, and regulatory

• defense. An experienced investigator, she regularly handles matters for diverse clients including

international banks and Fortune 500 companies. Staci is a member of the firm’s White Collar, Regulatory Defense & Investigations Practice and her clients include financial institutions, public and private companies, corporate executives and other individuals in all aspects of white collar criminal and regulatory matters, government and internal investigations and complex commercial litigation. Her matters involve a wide range of issues including alleged violations of the Foreign Corrupt Practices Act (FCPA), economic and trade sanctions as well collusion/antitrust cases. Staci regularly represents clients undergoing investigations conducted by the U.S. Securities and Exchange Commission, the United States Department of Justice, the Commodity Futures Trading Commission and the United States Department of Treasury, Office of Foreign Asset Control. Staci also focuses her practice on compliance counseling, recommending enhancements to clients’ compliance programs to avoid government investigations or remediate after any such investigations. In addition, she regularly advises companies in regard to potential acquisitions, serving as the FCPA and sanctions/trade control expert for potential deals, assisting both in the diligence as well as the creation of new comprehensive compliance policies. Staci regularly writes and publishes thought leadership on topics including compliance programs.

Practice Banking Litigation Compliance Programs Corporate & Finance Federal Tax Controversy Financial Services Financial Services Regulatory / Compliance Litigation Tax White Collar, Regulatory Defense & Investigations Education University of Pennsylvania, JD, 2005 Bar Admissions New York

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship. 44

Francesca Guerrero

Of Counsel Corporate +1 (202) 282-5647 fguerrero@winston.com

Francesca concentrates her practice on international trade and anti-bribery compliance and national security. Francesca regularly counsels clients on compliance with export controls such as The International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR), sanctions administered by the Office of Foreign Assets Control (OFAC) and other agencies, import regulations administered by Customs, including NAFTA, and anti-boycott compliance requirements. She assists clients in developing internal procedures and compliance manuals, as well as in applying for licenses and regulatory rulings. Her experience also includes conducting internal investigations and audits and assisting clients through the voluntary disclosure of violations. She regularly advises clients on compliance with the U.S. Foreign Corrupt Practices Act (FCPA). Her experience includes: performing due diligence on agents, consultants, and distributors; advising clients regarding gifts and hospitalities; reviewing potential acquisitions and joint venture partners; and conducting internal investigations of potential FCPA violations and advising clients regarding voluntary disclosure. Francesca also counsels clients regarding national security issues relevant to acquisitions of U.S. businesses by foreign acquirers. In particular, she advises clients on the Exon-Florio provisions and related filings before the Committee on Foreign Investment in the United States (CFIUS). She has represented both U.S. businesses and foreign acquirers before CFIUS. Her experience includes advising clients on cross-border investments, joint-ventures, mergers and acquisitions, private equity transactions, overseas business registration and reporting requirements, and commercial transactions.

Practice Compliance Programs Mergers & Acquisitions White Collar, Regulatory Defense & Investigations Education Harvard University, JD 2006 Bar Admissions Virginia District of Columbia

These materials have been prepared by Winston & Strawn LLP for informational purposes only, and these materials do not constitute legal advice. Receipt of this information does not create an attorney-client relationship. 45