Sanctions Enforcement

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On September 17, 2019, OFAC released a settlement with UK-based British Arab Commercial Bank (BACB) in a case regarding offshore use of the dollar, demonstrating how challenging and complex it can be to assess whether offshore transactions in US dollars (USD) that involve US sanctions targets are in all respects outside of OFAC’s enforcement jurisdiction.…

On May 9, 2019, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published long-awaited guidance addressing how FinCEN regulations apply to what the agency calls “convertible virtual currency” (CVC), which covers most types of cryptocurrencies and crypto-tokens. The guidance focuses on:

  • Platforms engaged in exchange transactions involving securities, commodities, or futures contracts and fiat currency, CVC, or other value that substitute for currency;
  • Natural persons providing CVC money transmission as person-to-person (P2P) exchangers;
  • CVC wallets (differentiating among hosted, unhosted, and multiple signature wallet providers);
  • CVC provided through electronic terminals, kiosks, or automated teller machines;
  • CVC services provided through decentralized (software) applications (DApps), including anonymizing services;
  • Payment processing services;
  • Internet casinos;
  • Initial Coin Offerings (ICOs) and the status of creators of CVC;
  • DApp developers, users conducting financial activities, and DApps conducting CVC transactions; and
  • Mining pools and cloud miners.

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Continue Reading FinCEN Issues New Advisory on BSA/AML Obligations Related to Virtual Currency

On April 25, 2019, OFAC announced that Haverly Systems, Inc. (“Haverly”), a New Jersey software company, had agreed to pay $75,375 to settle apparent violations from 2014 related to Haverly’s collection of payments from JSC Rosneft (“Rosneft”), a Russian oil major on OFAC’s Sectoral Sanctions Identifications (“SSI”) list. The key issue was OFAC’s finding that Haverly accepted the payments from Rosneft outside of the then-applicable 90-day window and thereby dealt in the restricted “new debt” of Rosneft. This appears to be the first time OFAC has published a settlement involving violations of the SSI list Directives, and underscores the importance for companies subject to US jurisdiction of monitoring invoicing and payments with SSI list entities and their subsidiaries. Non-US companies may also face “secondary sanctions” risk under Section 228 of CAATSA, on which we have previously advised, for certain types of transactions with SSI list designees. See also our previous advisory on OFAC’s SSI list sanctions, along with our previous discussion of the CAATSA-mandated changes to those sanctions.

Pursuant to Directive 2 under Executive Order 13662 and § 589.201 of OFAC’s Ukraine-Related Sanctions Regulations, US persons are prohibited from transacting or otherwise dealing in “new debt” of longer than certain stated maturity periods of SSI list designees or any entities of which they own 50% or more. At the time of this apparent violation, the relevant maturity period was 90 days.[1] “Debt” is defined broadly to include any “extensions of credit.” OFAC has stated in FAQ guidance that open payment terms, such as the time permitted to pay commercial invoices, also fall within the scope of “new debt.”…
Continue Reading New Jersey Software Company Settles with OFAC for Accepting Late Payments from Rosneft

On February 7, 2019, OFAC fined a Virginia-based company, Kollmorgen Corporation, for business that its recently-acquired Turkish subsidiary allegedly conducted in Iran after determining that Kollmorgen had undertaken “extensive preventative and remedial conduct” both before and after the acquisition in an effort to ensure the subsidiary complied with US sanctions.  OFAC also found that Kollmorgen had “conduct[ed] an effective and extensive internal investigation and submit[ed] a comprehensive voluntary self-disclosure to OFAC.”  Why, then, would OFAC fine this company, if it sounds like they did everything right?  The answer is strict liability.  OFAC’s civil enforcement authority applies on a strict liability basis, meaning if the prohibited conduct occurs, the agency can impose civil penalties, even if there is no negligence, intent, or other finding of fault.  Attorneys often advise their clients that as a technical matter OFAC penalties can apply even if the company does everything that’s feasible to comply with the law, underscoring the potential risk in dealing with sanctioned countries or sanctioned parties.  But OFAC frequently declines to penalize companies under such circumstances, and instead often closes out such cases with a “warning letter”.  While the amount of the fine here was very small ($13,381, quite a downward departure from the statutory maximum of $1,500,000) due to the mitigating conduct of the US parent, other costs of the enforcement process and a finding of violation can still be significant.

The individual at the foreign subsidiary who was found to be culpable for this conduct was added to OFAC’s Foreign Sanctions Evaders (FSE) list under Executive Order 13608, which imposes a broad restriction similar to the Specially Designated Nationals (SDN) list.  This is an interesting approach to sanction an individual employee of a foreign subsidiary of a US company while providing a high degree of leniency to the cooperating US company.  Very likely Kollmorgen provided significant information about this individual’s conduct to OFAC as part of its voluntary disclosure.  OFAC provided some detail about the individual’s role in “directing” the Iran-related violations and attempting to “conceal” that activity, with a senior Treasury official remarking “This action is a clear warning that anyone in supervisory or managerial positions who directs staff to provide services, falsify records, commit fraud, or obstruct an investigation into sanctions violations exposes themselves to serious personal risk.”   OFAC remarked that this coupling of an FSE designation with a civil enforcement action was “unprecedented.”…
Continue Reading Foreign subsidiary trading with Iran? OFAC really means STRICT liability

On January 31, 2019, OFAC announced a $996,080 settlement with e.l.f. Cosmetics, Inc. (“ELF”) for violations of the North Korea Sanctions Regulations arising from the importation of 156 shipments of false eyelash kits that contained materials that were sourced from North Korea and that were purchased from suppliers in China.

In January 2017, ELF discovered that approximately 80% of its false eyelash kits contained materials from North Korea, and ELF voluntarily disclosed the violation to OFAC. Among other aggravating factors, OFAC alleged that funds for the materials came under the control of the North Korean government and that ELF was a large and commercially sophisticated company engaged in a substantial volume of international trade with a “non-existent or inadequate” sanctions compliance program.

Ultimately, OFAC found that the violations were non-egregious and provided substantial mitigation against the $2,213,510 base penalty level. OFAC credited a number of specific steps that ELF undertook to prevent the risk of future violations:…
Continue Reading OFAC Enforcement Action Highlights Sanctions Risk in Supply Chain

Steptoe partners Meredith Rathbone and Brian Egan authored an article on US secondary sanctions published in WorldECR’s special report, “The Global Agenda.” The article discusses how US secondary sanctions seek to target and restrict the activities of non-US persons and explains how best to deal with those sanctions.

More information is available here.

On August 10, 2017, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) announced a settlement with IPSA International Services, Inc. (“IPSA”) to resolve apparent violations of the Iranian Transactions and Sanctions Regulations (“ITSR”).   The apparent violations include importation of Iranian-origin services in violation of § 560.201 and engagement in transactions or dealings related to Iranian-origin services in violation of § 560.206 and § 560.208.  IPSA is a “risk mitigation” firm that specializes in providing regulatory-related due diligence services, among other offerings.  IPSA agreed to pay $259,200 to resolve the matter.

According to OFAC, the apparent violations stem from two contracts entered into by IPSA and one of its subsidiaries. IPSA (the US parent) entered into the first contract (“contract one”) with a third country, presumably a government agency or entity, regarding its “citizenship by investment program,” which may be a program similar to the EB-5 Immigrant Investor Visa Program in the US.  IPSA’s Canadian subsidiary entered into the second contract (“contract two”), which involved a similar immigration-related investment program, with a government-owned financial institution based in a different third country.

Some of the applicants to both of these programs were Iranian nationals whose personal information could not be appropriately vetted by sources outside Iran. In an effort to verify information about these applicants, IPSA’s Canadian subsidiary and IPSA’s subsidiary in the UAE hired subcontractors to conduct due diligence, and those subcontractors then hired third parties to obtain and validate information within Iran. …
Continue Reading Settlement Points to Potentially Expansive View of Importation of Iranian Services by OFAC

On June 26, 2017, American International Group, Inc. (AIG) agreed to a $148,698 civil settlement with OFAC based on a voluntary disclosure of 555 apparent violations of OFAC’s Iran, Sudan, Cuba and Weapons of Mass Destruction Proliferators economic sanctions programs.  AIG processed approximately $396,530 in premiums and paid claims on policies covering maritime shipments of goods destined for or transiting through Iran, Sudan, or Cuba, or that involved a person on OFAC’s Specially Designated Nationals (SDN) list.  455 of the 555 transactions involved Iran, and 33 involved shipments aboard “blocked” vessels belonging to Islamic Republic of Iran Shipping Lines (IRISL).  IRISL was an SDN at the time, but was delisted as a result of the Iran nuclear deal in January 2016 (although IRSL remains subject to sanctions for US persons and in limited circumstances also for non-US persons).

OFAC’s Frequently Asked Questions (FAQs) concerning the Insurance Industry make clear that OFAC’s regulations trump state insurance law, and that the mere issuance of a policy or coverage to a prohibited person or for a prohibited activity constitutes a “service” that would violate US law, assuming the insurer is subject to OFAC’s jurisdiction. Furthermore, an insurance policy that involves a restricted government, SDN, or entity owned 50 percent or more by an SDN, could be treated as “blocked” property, in which case the insurer essentially cannot take any action on the policy without a license from OFAC.

The standard practice for insurance companies operating with global scope to cope with these restrictions (in addition to screening the names of parties against the relevant sanctions lists) is to include “exclusionary clauses” in their policies to carve out from coverage any provisions that would violate US economic or trade sanctions. There is no “one size fits all” exclusion clause that OFAC has published or officially endorsed, but the clause should be written in such a way and operate so as to put the insured on notice and legally exclude the sanctioned activity or party from the coverage. …
Continue Reading OFAC Penalizes AIG’s Voluntary Disclosure of Overly “Narrow” Exclusion Clauses and Single Shipment Policies

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 US companies whose products can be found in Iran, considered the meaning and application of an OFAC regulation prohibiting the transshipment of US goods to Iran through third countries. The relevant regulation prohibits US 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 US sanctions program. US 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 US government.  Thus, companies in the United States that must comply with US sanctions on Iran frequently interact with non-US firms that are not similarly restricted under their local law in their dealings with Iran.  For US exporters, this may include trade with wholesalers or distributors in third countries who also do business in Iran.…
Continue Reading Epsilon Electronics: A Cautionary Tale on Transshipments?

Following up on our previous post, yesterday the UK Office of Financial Sanctions Implementation (OFSI) issued regulations formally implementing the civil penalties framework set out in the Policing and Crime Act 2017.  OFSI has issued a press release, regulations regarding civil penalties, responses received to OFSI’s request for consultation regarding draft guidance…