2020 outlook: trends in international trade compliance · u.s. export controls and sanctions....

2020 Outlook: Trends in International Trade Compliance

WEBINAR

2

Speakers

Kevin Cahill

Dow Jones Risk & Compliance

Vincent Ramundo

E2open

Suzanne Kao

Deloitte

U.S. Export Controls and SanctionsRecent Updates & Rulings

Suzanne Kao

Managing Director Global Trade Advisory

Deloitte Tax LLP

U.S. Export Controls and Sanctions Overview

Copyright © 2020 Deloitte Development LLC. All Rights Reserved.

Overview of U.S. Export Controls and Sanctions

The U.S. Government uses export controls and sanctions to protect U.S. national security and further foreign policy interests. They govern the shipment, transmission, or transfer of certain regulated items, information, or software to foreign persons or entities. The control of exports for items can fall under the jurisdiction of various federal agencies, including but not limited to:

Jurisdiction over economic and trade sanctions (e.g., Iranian

sanctions).

Department of the Treasury, Office of Foreign Assets Control (OFAC)

Responsible for defense services and military equipment under the

International Traffic in Arms Regulations (ITAR).

Department of State, Directorate of Defense Trade Controls (DDTC)

Administers U.S. Export Administration Regulations (EAR),

vast majority of exports.

Department of Commerce, U.S. Bureau of Industry and Security

(BIS)

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Why are export controls and sanctions compliance important to your company?

• Fines often over $1M and can reach $100M or more

• Criminal penalties may include imprisonment

• Department of State fines irregularly but fines are higher with more intrusive corrective actions

• BIS fines more regularly but lower fines and penalties

Financial Risk

• Export control violations are widely publicized due to national security implications

• Can lead to loss of contracts with governments and OEM’s that require compliance with export controls

• Can affect shareholder value

Reputational Risk

Non-compliance can lead to loss of export privileges, including denial of licenses or approvals to export or re-export

Strategic Risk

Mismanagement of export controls can create delays in projects and introduce risk to the supply chain

Operational Risk

Non-Compliance The reason companies are so focused on export control compliance as a strategic issue, as well as an operational imperative, is because of the knock-on effect of non-compliance.

Violations leading to penalties generally include:• Exporting without the required

license or authorization• False statements or omissions of

material fact on any export documentation

• Causing, aiding, abetting the commission of a violation

• Evading the regulations• Violating the terms or conditions of

the regulations and/or a specific license or authorization

• Facilitating a transaction with a sanctioned/embargoed country/entity/person


Recent Updates & Rulings: U.S. Export Controls



■ Agency: Department of State, Directorate of Defense Trade Controls (DDTC)

■ Ruling: Allows storage of ITAR-controlled information outside U.S. with appropriate end-to-end encryption and caveats

■ Impact: Will likely allow greater flexibility to cloud providers and enterprise IT systems to store ITAR technical data

■ Effective Date: March 25, 2020

ITAR Carve-out for Encrypted Data



■ Agency: Department of State, Directorate of Defense Trade Controls (DDTC)

■ Ruling: Clarifies confusion from 2015 proposed rule; the U.S. Person does not have to register simply for working for a non-U.S. “defense” entity

■ Impact: U.S. Persons providing defense services will still need to secure DDTC authorization

■ Publication Date: January 6, 2020

Updated FAQs Related to U.S. Persons Providing Defense Services Abroad



■ Agency: Department of Commerce, Bureau of Industry and Security (BIS)

■ Proposal: Authority to prohibit certain acquisition of information communication technology (ICT) deemed a threat via influence of a foreign adversary.

■ Impact: Due to broad language this could potentially impact a wide-range of foreign software or hardware purchases.

■ Effective Date: Comment period closed December 27, 2019.

Proposed Rule for Protecting the Information and Communications Technology and Services (ICTS) Supply Chain



■ Agency: Department of Commerce, Bureau of Industry and Security (BIS)

■ Ruling: Addition of AI-enabled geospatial analysis software to temporary emerging technology ECCN series 0Y521

■ Impact: ○ Up to three years to issue final classification.○ Future rulings are likely later this year on additive

manufacturing, robotics, bio-engineering, and other AI-enabled technologies

■ Effective Date: January 6, 2020

Geospatial Analysis Software Added to the EAR


Recent Updates & Rulings: U.S. Sanctions



■ Authority: Included in 2019 National Defense Authorization Act (NDAA)

■ Target: Pipe-laying vessels supporting Nord Stream 2, Turk Stream, or a “successor” projects

■ Impact: Potential impact on marine servicing companies supporting pipeline, related entities


New Sanctions Targeting Nord Stream 2 Pipeline



■ Authority: Issuance of Executive Order by the U.S. President on January 10, 2020, and the announcement of additional SDN’s.

■ Target: Iranian construction, manufacturing, textiles, steel, iron and mining industries

■ Impact: Increase the U.S’s “maximum pressure” campaign against Iran to deny the Iranian government trade revenue.


New Iran-related Designations and Sanctions on Additional Sectors



■ Authority: “Caesar Amendment” Included in 2019 National Defense Authorization Act (NDAA)

■ Target: Syrian Government and any person/entity supporting Syrian natural gas development, aircraft, military, or construction sectors

■ Impact: Further restrictions on the Syrian Government and Syrian Central Bank

■ Effective Date: After June 19, 2020

New Syria (Caesar) Sanctions



Expansion of North Korea Sanctions

2019 National Defense Authorization Act (NDAA) U.S

CoalSeafood

Textiles Iron OreCrude Oil Refined products

Any transaction with North Korean persons that would be prohibited under IEEPA.

North Korea

Sanctions

Expanded Sanctioned Activities New Secondary Sanctions

Authority Potential Exposure

2019 National Defense Authorization Act (NDAA)

■ U.S. Financial Institutions

■ Foreign Financial Institutions


Recent Updates & Rulings: Other


Recent Updates & Rulings: Other

Department of Justice Revises Voluntary Self-Disclosure (VSD) Policy

DOJ announced on December 13, 2019 the release of a revised policy for voluntary disclosures of export control and sanctions violations (VSD Policy) for companies that voluntarily disclose a violation, fully cooperate with DOJ, and timely and appropriately remediate.

Absent aggravating factors, there is a

“presumption that the company will receive a

non-prosecution agreement and will not be

assessed a fine”

Disclosures made to regulatory

agencies, and not to DOJ, will not qualify for the

benefits provided in the VSD Policy.

Places the burden on disclosing companies to determine if conduct is

potentially criminal.


U.S. Export Controls and Sanctions – Consequences of Non-Compliance


Case Studies – U.S. Export Controls and Sanctions Consequences


US Raw Materials Sourcing Firm (2019)

Between 2014 and 2015, Company A, a US firmfocused on supplying and marketing cementand raw material markets, purchased more than250,000 metric tons of Iranian-sourced cementmaterials over five separate transactions inviolation of OFAC sanctions on Iran. CompanyA had conducted limited due-diligence andreceived assurances from the UAE-basedsupplier that the cement materials were notsourced to Iran. Upon realizing themisrepresentation of the source of the cementmaterial, Company A voluntarily disclosed theviolation to OFAC.

Company A was charged with violations ofthe Iranian Transactions and SanctionsRegulations and agreed to a civil penalty ofover $500,000.

Freight Forwarder (2018)

In 2018, BIS found a leading freight forwarder, Company B, to be in violation of the EAR for delivering shipments on behalf of the exporter to entities in France and Pakistan which were designated on the BIS Entity List. Exports to the members of the BIS Entity List require a license, but none was obtained.

Upon further investigation, it was found that the DRPL screening software failed to flag these entities due to slight differences in the names of the entities, despite the addresses being identical.

Under the settlement agreement, Company B agreed to pay $500,000 in civil penalties and commit to three years of external compliance audits.

Case Studies – U.S. Export Controls and Sanctions Consequences

Copyright © 2020 Deloitte Development LLC

Online Payment Platform (2015)

Over the course of several years, an online payment platform, Company D, processed almost five hundred payments involving members of multiple OFAC lists.

OFAC’s investigation revealed that Company D did not use “adequate” screening technology and thereby failed to identify parties in Cuba, Iran, Sudan, and other countries that were targets of U.S. sanctions regulations.

Company D was fined approximately $7.7 million for the violations, avoiding even higher penalties by self-reporting and cooperating fully with government officials.

Multinational Investment Bank (2014)

Between 2006 and 2009, a leading multinational bank, Company C, processed over 200 transactions for six individuals designated by OFAC as Specially Designated Narcotics Trafficking Kingpins (SDNTKs). The Company C also failed to report accounts holding the blocked property of four additional SDNTKs.

OFAC concluded that Company C’s DRPL screening tool was deficient and gave rise to egregious violations of the applicable sanctions regulations. Although Company C claimed that many of the violations were self-disclosed, OFAC concluded that the reports did not qualify as voluntarily self-disclosures based on OFAC’s Economic Sanctions Enforcement Guidelines.

Company C agreed to pay over $16.5 million in civil penalties.

Copyright © 2020 Deloitte Development LLC. All rights reserved.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

2020 Outlook: Trends in International Trade Compliance

Vincent Ramundo

Complex and rapidly shifting landscape affecting supply chains every day

■ Exponential changes to regulations, duties and export/import controls increase the complexities of managing supply chains

■ Multilateral governing bodies are losing their ability to resolve disputes

■ Climate legislation is adding additional complexities

■ Brexit■ Ongoing US-China Trade Dispute ■ Airbus / Boeing EU-US Dispute ■ China Export Controls Reform

The impact of trade restrictions

Dealing with additional duties and challenging trade conditions

■ US blocking key reappointments, preventing the WTO's crucial Dispute Settlement Body from resolving issues

■ Impact on global business?

The multilateral trading system at paralysis

The WTO at Crossroads

■ Restrictive legislation driven by the greening initiatives around the world

■ Impact of the “European Green Deal” ■ CO2 emission reduction targets by IMO & IATA impact global

trade

Climate Action

Climate Legislation

Impact for global business & supply chains

Complexity

Red Tape

Risk of Non-Compliance

■ Trade Documents

■ Duties, Taxes and Fees

■ Import Export Regulations

■ Restricted Party Lists

■ Trade Agreements

Conclusion

Conclusion

■ More legislation■ Higher complexity■ Great vigilance needed■ Firm commitment to trade compliance a must

○ Focus on data compliance○ Expand to cover green legislation

■ Complexities of 2020 are best managed with global trade management software

Sanctions Control & Ownership

Kevin Cahill

Director of Companies Ownership ResearchDow Jones Risk & Compliance Research

The OFAC 50% Rule

“Any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person.”

Sanctions Control & Ownership

■ Companies owned or controlled by people or entities sanctioned by the U.S. Office of Foreign Assets Control (OFAC) or the European Union:○ Minimum ownership stake of 10%○ A sanctioned individual has a possible controlling interest

We take into account: Individual

Ownership by Sanctioned

Subject

Aggregated Ownership:

Multiple sanctioned

subjects own 50% or more


SSI sanctioned subjects if part

of same Directive

Second level subsidiaries: Subsidiary

of subsidiary of sanctioned

subject

Comprehensively Sanctioned Regions

Companies owned or controlled by people or entities sanctioned by the U.S. Office of Foreign Assets Control (OFAC) or the European Union:

■ Minimum ownership stake of 10%■ A sanctioned individual has a possible controlling interest■ Companies owned/controlled by comprehensively sanctioned

regions (Iran, North Korea, Syria, Cuba, Crimea)

Individual Ownership by Sanctioned

Subject


Multiple sanctioned

subjects own 50% or more


SSI sanctioned subjects if part

of same Directive

Second level subsidiaries: Subsidiary

of subsidiary of sanctioned

subject

21,457 Entities in 180+ countries

COSCO Sanctions

On September 25th, OFAC directly sanctioned two entities that are part of an immense corporate structure.

■ Cosco Shipping Tanker (Dalian) Co., Ltd.■ Cosco Shipping Tanker (Dalian) Seaman and Ship Management Co., Ltd.

China LNG Shipping (Holdings)

Limited

COSCO Shipping Tanker (Dalian)

Dalian COSCO Shipping Oil Transportation Xiyun Automation

Dalian COSCO Shipping Oil Transportation Electronics

Dalian Huachang Shipping

Korea Da-In Ferry

Offshore Oil (Yangpu) Shipping

Pan Cosmos Shipping & Enterprises

Shenzhen Zhongyuan Longpeng Liquefied Gas Transportation

ICRIS

COSCO Shipping Tanker (Dalian) Seaman and Ship

Management

Annual report

OFAC

As of 25 September 2019

SCO

SCO

SCO

SCO

SCO

SCO

SCO

SCO

50%60%

57.5%

100%

15% 43%

100%

70%

SOLD

COSCO Shipping

Tanker (Dalian)

China LNG Shipping

(Holdings) Limited

Hong Kong Stock Exchange

21 October 2019

FORMERLY SCO

COSCO Shipping Tanker (Dalian) divested its shares in China LNG Shipping (Holdings) Limited.

China LNG Shipping (Holdings)

Limited

COSCO Shipping Tanker (Dalian)

Dalian COSCO Shipping Oil Transportation Xiyun Automation

Dalian COSCO Shipping Oil Transportation Electronics

Dalian Huachang Shipping

Korea Da-In Ferry

Offshore Oil (Yangpu) Shipping

Pan Cosmos Shipping & Enterprises

Shenzhen Zhongyuan Longpeng Liquefied Gas Transportation

ICRIS

COSCO Shipping Tanker (Dalian) Seaman and Ship

Management

Annual report

OFAC

25 September 2019

SCO

SCO

SCO

SCO

SCO

SCO

SCO

SCO

50%60%

57.5%

100%

15% 43%

100%

70%

The Cautionary Zone

“U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership

interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest. Such entities may be the

subject of future designation or enforcement action by OFAC.”

From Sanction Owned to Directly Sanctioned

SCO SAN501

We have found over 501 companies as SCO before they got directly sanctioned by the regulators.

Thank you