Epsilon Electronics: A Cautionary Tale on Transshipments?

On May 26, 2017, in Epsilon Electronics v. US Department of the Treasury, a split panel of the DC Circuit Court of Appeals partially upheld and partially remanded to the district court a determination by the Treasury Department’s Office of Foreign Assets Control (OFAC) to impose a penalty of over $4 million against Epsilon for violating the Iranian Transaction and Sanctions Regulations, 31 CFR Part 560 (ITSR). (See this link for a summary of the May 2016 district court decision granting summary judgment in favor of OFAC.)

The case, which has been watched with interest by U.S. companies whose products can be found in Iran, considered the meaning and application of an OFAC regulation prohibiting the transshipment of U.S. goods to Iran through third countries. The relevant regulation prohibits U.S. persons from exporting “goods, technology or services to Iran,” including exports to third countries with “knowledge or reason to know” that the exports are “intended specifically” for shipment to Iran.  31 CFR § 560.204.

The transshipment provision is a critical component of the U.S. sanctions program. U.S. sanctions against Iran are far more significant than sanctions that most other countries in the world maintain on Iran, with virtually all trade between the United States and Iran being  prohibited by the U.S. government.  Thus, companies in the United States that must comply with U.S. sanctions on Iran frequently interact with non-U.S. firms that are not similarly restricted under their local law in their dealings with Iran.  For U.S. exporters, this may include trade with wholesalers or distributors in third countries who also do business in Iran. Continue Reading

Senate Moving Forward with Strong Russia Sanctions Bill Targeting Energy and Financial Services

Last night, a key group of bipartisan senators reached agreement on, and introduced, a Russia sanctions amendment to a broader sanctions bill focused on Iran, which could be voted on as early as this week.  It is called the Countering Russian Influence in Europe and Eurasia Act of 2017 (CRIEEA).  The CRIEEA does not adopt the most hawkish provisions of the Countering Russian Hostilities Act, on which we previously advised.  If enacted into law, the CIREEA would significantly expand the current scope of U.S. sanctions against Russia, including targeting non-U.S. persons.  The CRIEEA also incorporates, with some changes, the previously-introduced Russia Sanctions Review Act, on which we have already commented, limiting the President’s ability to lift the sanctions that the Obama Administration imposed on Russia.

Below are some of the most noteworthy provisions of the CRIEEA, mandating that the President expand U.S. sanctions on Russia in the following areas: Continue Reading

Between a rock and a hard place: How to ensure sanction compliance when operating a facility in a sanctions-targeted country

The recently reported resignation of cement manufacturer LafargeHolcim’s CEO has thrown a spotlight on the risks of operating commercial activities in countries targeted by economic sanctions.[1] Without drawing any conclusions on the legal qualification of LafargeHolcim’s conduct in the specific circumstances, the following provides an overview of the principal issues at stake in this case.


In June 2016 the French newspaper Le Monde published allegations against French cement manufacturer Lafarge SA, now part of the merged Franco-Swiss entity LafargeHolcim, concerning its alleged involvement in indirectly financing terrorist groups, chief among them the jihadist so-called ‘Islamic State’ (‘ISIS’) in Syria from 2011 to 2014.

Lafarge had acquired Egyptian cement company Orascom in 2007 and, as a consequence, became involved in the operation of several factories in the Middle East. Its Syrian subsidiary’s (Lafarge Cement Syria – LCS) factory reopened only a year before violent protest, escalating into civil war, erupted in Syria in 2011. LCS’s headquarters were located in Damascus, and the factory in question in the Northern district of Raqqa, which in 2012 came under the control of armed groups and thereafter under the control of ISIS. As the armed groups and rebel forces within the region became increasingly radicalised, it is reported that weekly crisis meetings, of which Lafarge’s Parisian headquarters were apparently kept informed, became daily crisis meetings.

While expatriate employees had been evacuated by 2013, most Syrian employees remained at the factory until it was finally closed at the end of 2014. LCS faced a total of four cases of employees being kidnapped –who were eventually released upon ransom payments. Continue Reading

How Your Smart Watch Illuminates Fundamental Customs Classification Principles

U.S. Customs and Border Protection (“CBP”) recently issued a ruling on the classification under the Harmonized Tariff Schedule of the United States (“HTSUS”) of Apple Watch Bands. In the ruling, CBP concluded that the watch bands properly are classified under heading 9113, which specifically covers “watch bands” and “watch straps”.  CBP declined Apple’s request that the watch bands be classified under heading 8517, for parts of a radio transceiver – or, in other words, parts of an Apple Watch. These HTS classifications have commercial significance because the usual duty rate for products in heading 9113 ranges from 1.8 percent to 11.2 percent, but the duty rate for products in subheading 8517.70 (for parts of a radio transceiver) is zero.

This ruling underscores a key classification principle, from Rule 1 of the General Rules of Interpretation (“GRI 1”) of the Harmonized System. GRI 1 requires that the first place to look when determining an item’s classification is “the terms of the {four-digit} headings and any relative Section or Chapter Notes.”  In other words, to determine classification one must turn first to the four-digit tariff schedule headings, and any section or chapter notes for that heading.  Only then, as CBP reminds in the watch band ruling, “in the event that the goods cannot be classified solely on the basis of GRI 1, and if the headings and legal notes do not otherwise require, GRIs 2 through 6 may then be applied in order.”  In other words, if the language of a heading, at the four digit level, matches the product in its condition as imported, then the product is properly classified somewhere in that heading, without looking at other headings, other subheadings, or other GRIs. Continue Reading

Banamex USA Forfeits $97 Million to Resolve Bank Secrecy Act Violations

Banamex USA (“BUSA”) has agreed to forfeit $97.44 million and enter into a non-prosecution agreement with the US Department of Justice (“DOJ”) to resolve Bank Secrecy Act (“BSA”) violations.  BUSA is owned by Citigroup Inc. and is a leading money transmitter specializing in sending remittances from the US to Mexico.  The agreement, announced on May 22, also obligates BUSA and Citigroup to report any evidence or allegations of BSA or anti-money laundering (“AML”) violations to DOJ for a one year period.  Additionally, Citigroup must report to DOJ on its efforts to enhance BSA compliance at its subsidiaries.

According to DOJ’s press release, between 2007 and 2012 BUSA’s monitoring system issued alerts on more than 18,000 transactions totaling over $142 million.  Despite these alerts, BUSA initiated less than 10 investigations and filed just nine suspicious activity reports (“SARs”).  No SARs were filed on remittance transactions from 2010 to 2012.  Additionally, BUSA had only two employees with responsibility for BSA/AML compliance and those employees had other time-consuming responsibilities as well.  The DOJ press release further notes that BUSA was aware of the need to improve its BSA/AML compliance program for years, but failed to implement needed enhancements such as adding additional staff.  As part of the agreement, BUSA admitted to willfully failing to maintain an effective AML compliance program and willfully failing to file SARs.  In resolving the matter, DOJ took into account Citigroup and BUSA’s robust remedial actions and cooperation with the investigation.   Continue Reading

BIS Updates Encryption Export Controls Guidance

The Bureau of Industry and Security at the US Department of Commerce has updated the information on its website to incorporate changes made to its encryption export rules in September of 2016.  The new information includes a helpful reference guide for Category 5, Part 2 of the Export Administration Regulations, flowcharts, and guidance on license exception ENC and its requirements.  The updated website is found here.


Former MoneyGram CCO Settles with FinCEN and U.S. Attorney’s Office

On May 4, 2017, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury and the U.S. Attorney’s Office for the Southern District of New York announced an agreement with former MoneyGram Chief Compliance Officer Thomas Haider to settle claims under the Bank Secrecy Act (“BSA”). FinCEN initially assessed a $1 million civil monetary penalty against Mr. Haider in December of 2014, which the U.S. Attorney for the South District of New York then sought to enforce in federal court. The case was transferred to the U.S. District Court for the District of Minnesota, where Mr. Haider settled the allegations for $250,000. Under the agreement, Mr. Haider will also be barred from similar jobs for three years. The settlement marks the end of a long running and closely watched money laundering case and, according to a FinCEN spokesman, is one of the largest fines ever imposed against an individual related to failures or omissions under BSA requirements for a financial institution. In November 2012, MoneyGram entered into a separate deferred prosecution agreement with the U.S. Department of Justice, in which it agreed to forfeit $100 million and retain an independent compliance monitor. Continue Reading

OFAC Extends Belarus Sanctions Relief

On April 28, 2017, the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”) issued a general license extending sanctions relief, which authorizes U.S. persons to engage in certain transactions with nine Belarus-based entities that have been designated as Specially Designated Nationals (“SDNs”), as well as other entities in which the nine entities have a 50% or greater ownership interest. The general license (No. 2C) is the third in a series of identical licenses authorizing such transactions for a renewable period of six months.  The first general license was issued on October 30, 2015, following President Lukashenko’s decision to welcome election monitors and free certain political prisoners (see our advisory here).

OFAC’s issuance of the general license is especially notable in light of some doubt that had existed regarding continued sanctions relief due to the Belarusian government’s crackdown on dissent in the country in recent months. Continue Reading

Trump Administration Uses New Approach in Syria Sanctions Action

On April 24, 2017, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned 271 employees of Syria’s Scientific Studies and Research Center (“SSRC”) pursuant to Executive Order 13582 (targeting the Syrian government and its supporters).  The designations are part of the Trump Administration’s response to the April 4, 2017 chemical weapons attack in Khan Sheikhoun, Syria, carried out by the Syrian government.  According to the OFAC press release, the targeted individuals “have expertise in chemistry and related disciplines and/or have worked in support of SSRC’s chemical weapons program since at least 2012.” The new designations come on the heels of a U.S. missile strike against the Syrian airbase from which the chemical attack was launched.

Pursuant to the designations, the property and interests in property of the sanctioned individuals, to the extent located in the United States or in the possession or control of a U.S. person, are blocked. Essentially, this means that all U.S. persons worldwide are required to freeze the sanctioned persons’ assets and are cut off from all transactions and dealings with them. Continue Reading

Trump Administration Considers National Security Implications of Steel Imports

On April 19, the Trump administration took action under a rarely-used provision of the Trade Expansion Act of 1962, allowing the United States to impose tariffs if it determines that certain imports pose a national security threat.  Acting under section 232 of the Trade Expansion Act, the Department of Commerce announced the start of an investigation to assess whether steel imports threaten US national security and should be curtailed accordingly.  Under the statute, the Department of Commerce has 270 days to submit to the President its findings and any recommendations for action.  However, the process may go considerably faster than that, as President Trump has signaled he wants the Commerce Department to move expeditiously.  Section 232 has not been invoked since 2001 and has not resulted in the imposition of tariffs since 1975. 

During the campaign, President Trump repeatedly promised to take a tough line on international trade issues, particularly where he believed American jobs were at stake.  He also frequently alleged that China, one of the principal sources of US steel imports, engages in unfair trade practices.  The initiation of a Section 232 investigation can be seen as another step in following through on those campaign promises.    Continue Reading