Written By: Alan M. Dunn, Jennifer M. Smith & Jumana M. Misleh
Stewart and Stewart
This is the second in a series of articles by Stewart and Stewart on Best Practices in International Transactions and Trade. Last month’s article covered U.S. Export Control laws. In this month’s article, we address issues every company engaged in international transactions and trade needs to know about U.S. economic sanctions laws and best practices for compliance with these laws. Please watch for future articles covering best practices for compliance with the Foreign Corrupt Practices Act (FCPA), Antiboycott Regulations, and other customs and foreign trade laws.
By participating in international markets, businesses can enjoy expanded opportunities but with increased opportunity comes increased risk of running afoul of stringent economic sanctions regulations. U.S. businesses should exercise caution because recent trends indicate that the U.S. Government is increasing enforcement activity of economic sanctions laws. Below are the five things you need to know now about U.S. economic sanctions laws and the best practices for complying with them.
Five Things Every Company Engaged in International Transactions and Trade Should Know About U.S. Economic Sanctions Laws
1. The Office of Foreign Assets Control (“OFAC”) in the Department of the Treasury is responsible for the economic sanctions programs that block assets and restrict trade with certain countries, organizations, and individuals that have taken actions counter to U.S. foreign policy. In addition to the sanctions programs targeting individuals and entities, OFAC administers a variety of country specific sanctions programs covering:
- Burma (Myanmar)
- Western Balkans
- Cote d'Ivoire
- Democratic Republic of the Congo
- Liberia (Former Regime of Charles Taylor)
- Persons Undermining the Sovereignty of Lebanon or Its Democratic Processes and Institutions
- North Korea
2. Prohibitions can apply to U.S. persons and organizations (wherever located), foreign subsidiaries owned or controlled by U.S. persons, as well as all transactions by persons or organizations of any nationality within the United States.
- In some cases, prohibitions extend to foreign subsidiaries if (1) the subsidiary is more than 50% owned by the U.S. parent; (2) the U.S. parent firm holds a majority on the Board of Directors; or (3) the U.S. parent firm directs the operations of the subsidiary.
- In addition, facilitation of prohibited transactions also constitutes a violation.
3. OFAC’s sanctions program on Iran is one of the most comprehensive. While sanctions on Iran have been eased due to the recent Joint Plan of Action, they have not been eliminated.
- In November 2013, the EU and the so-called P5+1 - the United States, UK, France, China, Russia plus Germany, agreed to an interim deal to suspend certain sanctions on Iran in exchange for its commitment to limit uranium enrichment activities for six months. The Joint Plan of Action (“JPOA”), which was implemented on January 20, 2014, includes numerous actions that Iran must take over the next six months to stop the advance of its nuclear program. Some of these actions include halting production of enriched uranium, not commissioning or fueling the Arak reactor, refraining from construction of reprocessing facilities, and enhanced monitoring, among others, with the IAEA providing close monitoring and verification of these activities.
- In exchange for Iran’s cooperation, sanctions were suspended on trade in petrochemicals, gold and precious metals, and provision of goods and services to Iran’s automotive sector. In addition, the EU and P5+1 committed to establish a financial channel to facilitate humanitarian trade for Iran’s domestic needs using Iranian oil revenues held abroad. The U.S. Department of Treasury and the U.S. Department of State issued guidance relating to the provision of temporary sanctions relief which can be found here.
- Extensive sanctions remain with respect to U.S. and non-U.S. persons pertaining to the purchase of Iranian crude oil and investment in Iran’s energy and petrochemical sectors.
4. Economic sanctions regulations change often.
- Aside from the changes on Iran described above, OFAC has recently announced changes to the sanctions programs on the Balkans, Burma, and others.
- In addition, OFAC regularly adds names to the list of individuals and entities sanctioned for counter narcotics trafficking, counter terrorism, and non-proliferation. The most recent changes to the Specially Designated National (“SDN”) List can be found here.
5. Violations of economic sanctions laws can result in severe civil and criminal penalties that can reach into the hundreds of millions of dollars, and can lead to debarment and other exclusions.
- Some of the largest penalty actions lately have been against foreign banks that have engaged in transactions in violation of U.S. sanctions laws. Most recently, in December 2013, The Royal Bank of Scotland (“RBS”) agreed to pay more than $33 million to settle potential civil liability with OFAC for apparent violations of multiple sanctions programs, even though RBS voluntarily self-disclosed all of its apparent violations. Other recent examples include a $619 million penalty against ING Bank, N.V. in 2012 and a $500 million fine in 2010 against the former ABN AMRO Bank N.V., now named the Royal Bank of Scotland N.V., for violations of U.S. economic sanctions laws.
- In addition, bad publicity from enforcement actions can adversely affect future business.
Best Practices for Compliance with Economic Sanctions Laws
1. Screen every transaction against the list of blocked persons and entities, even if it includes parties you have previously screened.
2. Establish and implement a tailored, but comprehensive economic sanctions compliance program in order to deter and detect potential violations. (This compliance program would be part of the export controls compliance program described in last month’s article.) To ensure success of the compliance program, companies also should:
- Foster a culture of compliance at all levels and in all international divisions and subsidiaries of the company.
- Require proper training for all employees including new employee training, dissemination of written materials, and annual (at a minimum) refresher courses to keep employees abreast of changes to current regulations.
- Periodically assess and update the compliance program to keep up with rapidly changing regulations and identify and eliminate weak spots.
3. Know your company. Do you engage in international financial transactions? Does your company have subsidiaries or affiliated companies in other countries? If so, extra precaution must be taken, especially if your company has subsidiaries or affiliates in any of the sanctioned countries noted above.
4. Know your customer. Knowing your customer can prevent your company from inadvertently facilitating banned transactions. Extra caution should be used when your customer base changes often, when your transactions involve numerous or varied countries, and/or when transacting business with countries with a recent history of OFAC enforcement actions.
5. Use technology to your advantage. Companies with significant international transactions should strongly consider including advanced screening software to supplement manual screenings of international transactions. However, companies should never rely solely on automated tools.
6. Monitor OFAC Federal Register Notices for the most recent changes to economic sanctions regulations.
7. If you need outside help, get it.
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