Several important regulatory and enforcement updates took place related to economic sanctions and export controls for the third quarter of 2019. Kirkland & Ellis attorneys discuss these actions, and what they may indicate about trends and takeaways for the rest of 2019.
The View From Washington: Key Takeaways
- The Department of the Treasury Office of Foreign Assets Control (OFAC) continues to assert an expansive view of U.S. sanctions jurisdiction over the activities of non-U.S. persons, even in cases where traditional ties to a U.S. parent company or the U.S. financial system are attenuated.
- Increased sanctions on Venezuela effectively render it an embargoed country, as restricting U.S. persons from dealing with the Venezuelan government and state-owned entities constricts the aperture of permissible trade in a state-controlled economy.
- The Department of Justice’s prosecution of non-U.S. citizens for conspiracy to violate the export control provisions of U.S. sanctions, even in cases that require extradition and other forms of multilateral cooperation, exemplifies the U.S. Government’s commitment to enforcement of those laws.
- The Trump administration’s readiness to impose secondary sanctions—including on parties from China—makes it increasingly necessary for U.S. companies to diligence their counterparties, as even an indirect nexus to sanctioned parties or countries can increase a U.S. company’s own risk exposure.
Policy and Regulatory Developments
On Aug. 5, President Trump issued Executive Order 13884, “blocking” the property and interests in property of the government of Venezuela, essentially imposing comprehensive sanctions against it. This measure cuts off the Venezuelan government from most dealings with the United States and U.S. persons, a measure tantamount to adding the government of Venezuela to the SDN List.
The government of Venezuela is defined broadly to include all state agencies, the Central Bank of Venezuela, Petróleos de Venezuela S.A. (PdVSA), all state-owned entities, and all persons acting on behalf of the government of Venezuela, including individual Maduro regime members.
As the executive order does not prohibit trade with private parties, it does not establish a comprehensive trade embargo on Venezuela. However, given the government’s dominant role in the country’s economy, a broad range of trade is subject to extensive restrictions.
Reflective of this broad scope, OFAC has issued several general licenses authorizing certain dealings with the government of Venezuela under particular circumstances.
For example, General License No. 25 authorizes the export of software, services, hardware, and technology related to the exchange of communications over the Internet. General License No. 30 authorizes dealings ordinarily incident to the use of ports and airports in Venezuela. General License No. 31 authorizes dealings with Venezuelan opposition leader Juan Guaidó and all persons appointed by him to official positions, aimed in part at allowing dealings with PdVSA’s U.S. subsidiary Citgo.
An important corollary is that the executive order provides for “secondary sanctions” against non-U.S. persons who furnish material support to the government of Venezuela, meaning that OFAC may designate such persons on its SDN List.
This would appear to be aimed at China and Russia, which are considered to have provided support for the Maduro regime by continuing to purchase oil, generating revenue to help it offset its debts. Secondary sanctions target non-U.S. persons and disqualify them from the U.S. financial system, placing pressure on both U.S. and non-U.S. financial institutions not to deal with them.
On Aug. 6, OFAC implemented Executive Order 13871, which provides for secondary sanctions against Iran’s steel, aluminum, and copper sectors, one of its primary sources of export revenue. The executive order provides for the blocking of non-U.S. persons that operate in or provide significant goods, services, or support to such sectors, or engage in significant purchases of products of such sectors.
It also provides for the suspension of U.S. correspondent and payable-through account privileges for non-U.S. financial institutions that facilitate significant financial transactions in support of such activity. OFAC’s codification of secondary sanctions indicates the Trump administration is determined to pursue worldwide parties that engage in trade with Iran.
On Sept. 20, the Trump administration imposed sanctions on the Central Bank of Iran and the National Development Fund of Iran, the country’s sovereign wealth fund. In the wake of attacks on Saudi Arabia’s oil facilities seen as linked to Iran, the Treasury Department indicated this action sought to cut off Iran’s last connection points to the global financial system.
Notably, the sanctions were imposed on the grounds these entities provide material support to Iran’s Islamic Revolutionary Guard Corps (IRGC), a designated Foreign Terrorist Organization (FTO). U.S. law provides for seizure of all FTO assets, wherever located worldwide.
The sanctions also have important global implications because the executive order authorizes Treasury, e.g., to block and impose controls on U.S. correspondent accounts of any foreign financial institution it determines has knowingly conducted or facilitated any significant financial transaction on behalf of any person sanctioned under it.
This places Europe and its banks in a difficult position, as they try to salvage the Iran nuclear deal amidst rising tensions, but in so doing may place their own financial systems at risk if they work with key Iran stakeholders.
On Aug. 2, the Department of State announced the imposition of long-awaited sanctions against Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act) for the March 2018 nerve agent poisoning in the UK of Sergei Skripal, a former Russian military intelligence officer. The sanctions were imposed after Congress raised concerns that they had not been imposed within the timeframe required under the CBW Act.
The timing and scope of the sanctions would appear to reflect continuing tensions between Congress and the administration over how severely to sanction Russia, particularly as the 2020 elections approach and concerns about election interference again surface.
The new sanctions provide for U.S. opposition to World Bank and International Monetary Fund financial assistance to Russia, and prohibit U.S. banks from dealing in non-ruble-denominated Russian sovereign debt and lending non-ruble-denominated funds to the Russian sovereign.
They also impose a “presumption of denial” policy for the export to Russian state-owned or state-funded entities of items subject to the Export Administration Regulations controlled for chemical and biological weapons proliferation reasons.
Despite imposition of the above sanctions, President Trump also used his authority under the CBW Act to waive certain sanctions on national security grounds. For example, while the CBW Act calls for a prohibition on all U.S. bank loans to the Russian government, the sanctions actually imposed focus, e.g., on non-ruble-denominated Russian sovereign debt and lending.
Also, the restrictions are focused on government ministries, agencies, and sovereign wealth funds, but not on any state-owned enterprise, such as Gazprom.
Resellers and Subsidiaries of Foreign Subsidiaries
On Aug. 6, OFAC announced a $1.7 million settlement with truck manufacturer PACCAR Inc. (PACCAR) for 63 apparent violations of the Iranian Transactions and Sanctions Regulations by its Netherlands-headquartered subsidiary, DAF Trucks N.V. (DAF) and DAF’s Germany subsidiary (DAF Germany) and DAF Trucks Frankfurt, a wholly owned German dealer (collectively, the DAF Entities).
Between October 2013 and February 2015, the DAF Entities sold 63 trucks valued at $5.4 million to European dealers and resellers with knowledge or reason to know that the trucks were for ultimate resale to customers in Iran. PACCAR voluntarily disclosed the apparent violations, which OFAC determined not to be egregious.
OFAC found the DAF Entities ignored red flags, including invoices with references to Iranian buyers, and that DAF Germany failed to conduct sufficient inquiry after it rejected one of the dealer’s requested sales to an Iranian party, but then accepted a request from the same dealer later in the day that contained matching specifications and delivery destinations but listed a Russian customer.
Consistent with its enhanced focus on compliance, OFAC specifically noted DAF’s hiring of a full-time compliance director, commitment to annual in-person training, revision of contractual terms and certifications, and related program enhancements as significant mitigating factors.
U.S. Dollar-Denominated Correspondent Accounts
On Sept. 3, OFAC entered into a $4 million settlement with the British Arab Commercial Bank plc (BACB), for 72 apparent violations of the now-rescinded Sudanese Sanctions Regulations (SSR) that occurred from 2010 to 2014.
Between September 2010 and August 2014, BACB processed transactions involving Sudanese financial institutions and individuals through a series of internal book transfers and payments from one of the bank’s U.S. dollar-denominated correspondent accounts held at another non-U.S. financial institution (known as a “nostro” account).
Though the transactions themselves were never routed through a U.S. financial institution, OFAC took issue with the process of funding the nostro account with U.S. dollars, which required a series of bulk funds transfers from other non-U.S. financial institutions. Because the bulk funds transfers required the non-U.S. financial institutions to engage in parallel transactions with U.S. financial institutions that were unaware of the ultimate sanctioned country connection, OFAC found they violated the SSR.
OFAC found that the violations constitute an egregious case, and were not voluntarily disclosed. In finding that BACB acted with reckless disregard for sanctions, the agency cited knowledge that the payment process would involve U.S. dollar-denominated nostro accounts, as well as management awareness of the bulk funding mechanism, despite recognizing that BACB had “no offices, business or presence under U.S. jurisdiction.”
As such, the case represents a high water mark in OFAC’s assertion of jurisdiction over non-U.S. persons in the financial services context, under which the use of U.S. dollar-denominated accounts at non-U.S. banks may lead to liability under U.S. sanctions, even without additional touchpoints with the United States.
Conspiracy to Transship Export-Controlled Items to Iran
On Aug. 29, Iranian national Behzad Pourghannad pled guilty to one count of conspiracy to violate the International Emergency Economic Powers Act (IEEPA) by making unauthorized exports of controlled carbon fiber, a material with nuclear, military, and aerospace applications, from the United States to Iran via third countries.
Following extradition from Germany, the Department of Justice (DOJ) charged that Pourghannad, along with co-conspirators in Iran and Turkey, arranged to purchase carbon fiber from U.S. suppliers, which would be transshipped to Iran via Dubai and or other European locations. To avoid detection, the co-conspirators requested that the shipping labels be changed to reference “acrylic” or “polyester,” not “carbon fiber.”
On Sept. 24, Iran-based Negar Ghodskani was convicted on one count of conspiracy to illegally export U.S.-controlled technology to Iran through a front company in Malaysia. Together with Alireza Jalali, who was convicted in March 2018, Ghodskani established Green Wave Telecommunication Sdn Bhn (Green Wave), a Malaysian front company for Iranian entity Fanavar Moj Khavar, and falsely presented herself to U.S. companies as a Green Wave employee to obtain export-controlled U.S. technology.
Fana Moj Khavar provides microwave radio systems and wireless broadband access to customers in Iran, including the Islamic Republic of Iran Broadcasting (IRIB), an Iranian state-owned entity on the OFAC SDN List.
Both cases demonstrate DOJ’s continued focus, in coordination with U.S. export control agencies and foreign government counterparts, on holding non-U.S. citizens or residents accountable for violations of the export provisions of the U.S. sanctions on Iran.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Mario Mancuso is a partner at Kirkland & Ellis and leads the firm’s International Trade and National Security practice. A former member of the president’s national security team, he specializes in counselling clients on international trade and national security matters, guiding clients through the CFIUS process, and resolving crises involving economic sanctions and export control-related investigations by the U.S. government.
Sanjay Mullick, a partner in Kirkland’s Washington, D.C., office, regularly represents clients on investigative, regulatory and transactional matters related to economic sanctions, export and import controls, anti-money laundering, and anticorruption.
Anthony Rapa, a partner in Kirkland’s Washington, D.C., office, counsels companies, financial institutions, and private equity sponsors worldwide regarding U.S., UK, and EU economic sanctions and export control issues.
Abigail Cotterill, of counsel in Kirkland’s Washington, D.C. office, regularly provides legal advice to companies, financial institutions, and private equity sponsors on the regulatory and other risks of operating or investing across international borders, with a focus on economic sanctions, export controls, and anticorruption.