4 column emplate - mme partners · enforcement matter separate from trade negotiations with china...

ISSUE 70. JUNE 2018

www.WorldECR.com

WorldECRThe Kim-Trump Summit: a new era? 2

US announces ‘strictest BIS compliance 3requirements ever’ on ZTE

Putin signs counter-sanctions into law 7

Focus: perspectives on the impact of 19US withdrawal from the JCPOA

UK: Sanctions & Anti-Money Laundering 26Act 2018

The UK’s ‘arms brokering’ controls: not 28always understood

Crypto currencies, tokens, smart contracts 30and sanctions

Recent changes in Japanese export controls 32

2 WorldECR www.worldecr.com

News and alerts News and alerts

On 12 June, US presidentDonald Trump met NorthKorea’s Kim Jong-un. Thetwo leaders came toSingapore, shook hands, andlater issued a statement inwhich they pledged torestart relations betweentheir two countries andbuild a lasting and stablepeace on the Koreanpeninsula. The statementalso noted that North Koreareaffirmed the 27 April 2018Panmunjom Declaration –by which it commits to worktoward complete denuclear -isation of the KoreanPeninsula. We also know –because President Trumpsaid so at a subsequent pressbriefing – that the US andSouth Korea are to refrainfrom antagonisingPyongyang with militarydrills or ‘war games’, andthat North Korea (‘DPRK’) isto destroy a major testingsite.

As regards other aspectsof the arrangements, Trumprefused to be drawn onspecifics. Asked whether andhow the denuclearisation ofthe peninsula would beverified, he said, ‘Well, it’sgoing to be achieved byhaving a lot of people there,

and as we develop a certaintrust. And we think we havedone that. Secretary Pompeohas been really doing afantastic job — his staff,everybody. As we do that,we’re going to have a lot ofpeople there, and we’regoing to be working withthem on a lot of other things.But this is completedenuclearisation of North

Korea, and it will beverified,’ adding that those‘people’ would be‘combinations of both[Americans and ‘inter -national’].

Asked what kind of time-frame had been agreed, heexplained: ‘Well, you know,scientifically, I’ve beenwatching and reading a lotabout this, and it does take along time to pull offcomplete denuclearisation.It takes a long time.Scientifically, you have towait certain periods of time,and a lot of things happen.But despite that, once youstart the process, it meansit’s pretty much over; youcan’t use them. That’s thegood news.’

Sanctions statusOn the issue of sanctions,the President told reportersthat they would ‘come off’ atthe point that it becameapparent ‘that the nukes areno longer a factor’.

‘Sanctions played a bigrole,’ he said, ‘but they’llcome off at that point. I hopeit’s going to be soon, butthey’ll come off. As youknow, and as I’ve said, thesanctions right now remain.But at a certain point, Iactually look forward totaking them off. And they’llcome off when we knowwe’re down the road – whereit’s not going to happen,

nothing is going to happen.’ China, however, has

issued a statement to saythat sanctions were always ‘ameans to an end’ – whichhas been interpreted asindicating a willingness tobegin relaxing sanctionsagainst North Korea.

South Korea has issued astatement which reads:‘Regarding PresidentTrump’s comment regardingending of the combinedmilitary drills … we need tofind out the exact meaningor intention behind hiscomments at this point.’

As at time of writing (12June) the think-tankcommunity has yet tomarshal, for the most part,its thoughts on thelandmark agreement intopublishable form. However,in an article for theBrookings Institution, JungPak, K-Korea FoundationChair in Korea Studies,Senior Fellow in the Centerfor East Asia Policy Studiesnoted: ‘For Kim to do this180-degree turn toengagement suggests to methat he’s good at maximumpressure and maximumengagement…So, he’ll talkto China and say the rightthings to the Chinese; he’lltalk to the South Koreansand he’ll say the right thingsto them about blood ties,peace, and unification – allthe things that really appeal

The Kim-Trump Summit: a new era?

to the South Korean publicand its ambitiouspoliticians.

‘With the United States,he’s not looking at the USgovernment overall as anentity to deal with, butrather is focusing on how tomanage Trump. It appearsto me that the NorthKoreans are looking toappeal directly to Trump’spreferences and priorities…He sees a South Koreanpresident who’s willing tolook away from the nuclearand conventional threats.He sees a US president whois really eager to meet withhim for a summit and wantsto prove his internationalstanding as a peacemaker,and a US president who isalso very openly interestedin potentially withdrawingUS troops in the KoreanPeninsula. So, I think Kim

sees these strategicopportunities…’

North Korea remains ofhuge concern to the non-proliferation community,and it’s apparent that NorthKorea’s appalling humanrights track record was atbest skirted around and atworst ignored entirelyduring talks.

Win-win, Kim-win, orTrump-win – there is littleto indicate any compliancetakeaway for the moment.The devil may be in thedetail, and that has yet tomaterialise.

On 12 June Donald Trump and Kim Jong-un met in Singapore in the first

summit meeting between the leaders of their two countries.

China has issued a

statement to say that

sanctions were

always ‘a means to

an end’.

On the issue of

sanctions, the

President told

reporters that they

would ‘come off’ at

the point that it

became apparent

‘that the nukes are no

longer a factor’.



The US Department ofCommerce’s Bureau ofIndustry and Security (‘BIS’)has announced an exactingnew deal with Chinesetelecoms manufacturer ZTE,overturning the seven-yeardenial of export privilegesimposed in April. The banblocked ZTE’s access to vitalUS components whichcomprise around 30% of itssmartphones andnetworking gear, causing itsfactories to close and hugefinancial losses. ZTE’srevival was reportedly raisedby President Xi Jinping ofChina with President Trumpbefore critical US-Chinatrade talks.

Under the terms of thenew deal, which replaces thesettlement agreemententered into in 2017, ZTEmust pay $1bn and place anextra $400m in escrowbefore being removed fromthe Denied Persons List. Thepenalties are in addition tothe $892m paid under the2017 agreement. For thefirst time ever, a UScompliance team answer -able to BIS will beembedded in a company forten years ‘to monitor on areal-time basis ZTE’scompliance with US exportlaws.’ ZTE must also replacethe entire board of directorsand senior leadership. BIShas also imposed a ten-yearsuspended denial order,which can be activated in thecase of export violations.

‘This agreement isremarkable — not onlybecause of the unprecedent -ed size of the monetarypenalty imposed, but alsobecause of the sweepingchanges required withrespect to the company’sboard and managementteam as well as the long-term and direct access thatthe US government will

enjoy in the form ofembedded compliancemonitors,’ said JeremyZucker, co-chair of theinternational trade andgovernment regulationpractice at Dechert LLP.

‘Had this agreement beenannounced originally –instead of the denial order –few would have questionedthe seriousness of the USgovernment’s commitmentto enforcement of exportcontrol laws. It is regrett -able, however, that thisagreement was reached onlyafter the US governmentfirst announced, and thenwalked back, the impositionof a denial order on thecompany. It gives theappearance, whether or notaccurate, that enforcementresults are transactional andsubject to undue politicalinfluence.’

The ZTE deal is the mostsevere penalty ever imposedon a company by BIS, andbrings the total penaltiesassessed on ZTE to $2.29bn.

BIS’s denial of exportprivileges on ZTE in April,citing a ‘pattern ofdeception, false statementsand repeated violations’ inZTE’s dealings with the USgovernment, surprisedsome, including ZTE itself. Asettlement had been reachedbetween BIS and ZTE for

illegal shipments of US-origin electronics to Iranand North Korea (‘DPRK’) in2017, involving the paymentof a $1.2bn penalty and asuspended denial of exportprivileges. BIS changed itsposition following thediscovery that ZTE hadmade ‘false statements’ to

BIS both during thesettlement negotiations andduring the post-settlementprobationary periodconcerning disciplinaryactions taken againstemployees. ZTE retained –and even awarded bonusesto – some of the employeesinvolved in the illegalshipments.

President Trump’s tweeton the eve of trade talks withPresident Xi Jinping in May,promising to get ZTE ‘backinto business fast’, causedshockwaves in the world ofexport control.

Presidential interferencein the work of a US law

US announces ‘strictest BIS compliancerequirements ever’ on ZTE

enforcement agency isunprecedented; it ‘blind -sided’ BIS, ‘placing us inuncharted waters’ accordingto one source. ‘The traditionof the United States is thatthe president does notmeddle in prosecutions,’said Barack Obama, whenpetitioned by FrançoisHollande over theDepartment of Justice’sinvestigation into breachesof US sanctions by BNPParibas in 2014.

In April, after theannouncement of the denialorder, ZTE publicly stated:‘ZTE has been workingdiligently on Export ControlCompliance program andhas invested tremendousresources in exportcompliance and has madesignificant progress since2016. It is unacceptable thatBIS insists on unfairlyimposing the most severepenalty on ZTE even beforethe completion ofinvestigation of facts,ignoring the continuousdiligent work of ZTE and theprogress we have made onexport compliance anddisregarding the fact that (1)ZTE self-identified theissues in the correspondenceand self-reported by ZTEimmediately; (2) theCompany has takenmeasures against theemployees who might havebeen responsible for thisincident; (3) correctivemeasures has been takenimmediately; and (4) aprestigious U.S. law firm hasbeen engaged to conductindependent investigation.’

But ZTE’s argument thatthe denial should be revokedbecause US suppliers suchas Qualcomm andBroadcom were negativelyaffected was dismissed by

A US compliance team answer able to BIS will be embedded in the

company for ten years.

continues over

The ZTE deal is the

most severe penalty

ever imposed on a

company by BIS, and

brings the total

penalties assessed on

ZTE to $2.29bn.



industry insiders: ‘The USgovernment in terms ofsanctions issues doesn’t talkabout collateral negativeimpact on US entities – ifthat was the case, it wouldn’thave embargoed Iran,’ onesaid.

President Trump’s sanct -ions rollback has faced fierceopposition in Congress –both Republican andDemocrat. On the same daythe deal was reached, anamendment was introducedinto Congress seeking to re-instate sanctions on ZTE

unless the president certifiesto Congress that it iscomplying with US law.

‘I assure you with 100%confidence that #ZTE is amuch greater nationalsecurity threat than steelfrom Argentina or Europe,’Republican Marco Rubio, asupporter of the amend -ment, wrote on Twitter.‘#VeryBadDeal’.

Commerce SecretaryWilbur Ross’s assertion in aCBNC interview that theZTE deal is a lawenforcement matterseparate from tradenegotiations with China has

been undercut by PresidentTrump himself, who hastweeted that the move isonly part of ‘a larger tradedeal we are negotiating withChina’.

Inconsistent policyMarket commentators pointout that the Trumpadministration’s stance onZTE is inconsistent with hisdecision to pull the US out ofthe 2015 nuclear deal withIran – the JointComprehensive Plan ofAction (‘JCPOA’) – underwhich Iran is grantedsanctions relief in return for

a scaling down of nuclearcapacity. Secretary of StateMike Pompeo has set out alist of 12 requirements Iranmust meet under any newdeal, or face ‘the strongestsanctions in history’.

ZTE was, after all,sanctioned by the US forexporting US-originelectronics to the DPRK andIran, and the US expects itsIran sanctions to becomplied with by theEuropean powers.

The company has yet tocomment publicly on theterms of the new settlementagreement.

continued

French oil giant Total andChina’s Petrochina haveannounced that, in thewake of the US withdrawalfrom the the JointComprehensive Plan ofAction (‘JCPOA’) andreimposition of secondarysanctions on companiesdoing business with Iran,they will wind down theirparticipation in the SouthPars 11 gas project – unlessthey can secure a specificwaiver to allow them tocontinue.

In a statement, Totalsaid: ‘On 4 July 2017, Total,together with the otherpartner Petrochina,executed the contractrelated to the South Pars 11(SP11) project, in fullcompliance with UNresolutions and US, EU andFrench legislation applic -able at the time. SP11 is agas development projectdedicated to the supply ofdomestic gas to thedomestic Iranian marketand for which Total hasvoluntarily implemented anIRGC-free policy for all

contractors participating inthe project, therebycontributing to theinternational policy torestrain the field of influenceof the IRGC. [The IslamicRevolutionary Guard Corps,IRGC, is sanctioned in theUnited States underExecutive Order 13224 for its‘activities in support of theIRGC-Qods Force… forproviding support to anumber of terrorist groups,including Hizballah andHamas, as well as to theTaliban’.]

‘On 8 May 2018,

President Donald Trumpannounced the UnitedStates’ decision to withdrawfrom the JCPOA and toreinstate the US sanctionsthat were in force before theJCPOA’s implementation,subject to certain wind downperiods.

‘As a consequence and asalready explained before,Total will not be in a positionto continue the SP11 projectand will have to unwind allrelated operations before 4November 2018 unless Totalis granted a specific projectwaiver by the US authorities

with the support of theFrench and Europeanauthorities. This projectwaiver should includeprotection of the Companyfrom any secondary sanctionas per US legislation.’

Total said it had ‘alwaysbeen clear that it cannotafford to be exposed to anysecondary sanctions whichmight include the loss offinancing in dollars by USbanks for its worldwideoperations (US banks areinvolved in more than 90%of Total’s financing operat -ions), the loss of its USshareholders (US share -holders represent more than30% of Total’s shareholding)or the inability to continueits US operations (US assetsrepresent more than 10 billion dollars of capitalemployed),’ and thus, ‘inaccordance with itscontractual commitmentsvis à vis the Iranianauthorities, is engaging withthe French and USauthorities to examine thepossibility of a projectwaiver.’

Total withdrawal from Iran?

Total has said ‘it cannot afford to be exposed to any secondary sanctions

which might include the loss of financing in dollars by US banks’.

WorldECR welcomes your news. Email the editor: [email protected]


The Caribbean islandnation of Jamaica has set upa task force to deal with theimpact on its bauxiteoperations of the US’stargeted Russia sanctions.Jamaica is a supplier toRUSAL, the world’s second-largest aluminiumproducer, which wasdesignated by the US inApril. Jamaica’s Minister ofMining, Robert Montaguetold the country’s House ofRepresentatives on 30 Maythat the task force willinclude representativesfrom his ministry, theMinistry of Finance and thePublic Service, the Ministryof Foreign Affairs andForeign Trade, the AttorneyGeneral’s Chambers and theJamaica Bauxite Institute,according to the JamaicaInformation Service.

‘We are consulting with

the US Government, theRussian Embassy and UCRUSAL. We will update thecountry in a more fulsomeway very soon. Discussionsare at a very delicate stage,’he said.

As has been previouslyreported in WorldECR, on 6April the US Department ofthe Treasury’s Office of

Foreign Assets Control(‘OFAC’) sanctioned sevenRussian oligarchs, a dozenof their companies, and 17senior Russian governmentofficials. Those sanctionedinclude Oleg Deripaska, whocontrols EN+ Group,RUSAL and GAZ Group. Theconsequence of RUSALbeing blocked from thedollar markets was a jump inthe price of aluminium andrepercussions for the rawmaterial supply chain.

‘The RUSAL sanctionshave had a huge impact onthe aluminium market. Ifyou add the US “232”regulation changes on steeland aluminium also thisyear, the market has reallybeen in shock,’ said a sourcefrom a metal commoditiestrading house.

Although RUSAL isbased in Russia, it hasbauxite mines in Jamaica,Guinea and Guyana;refineries in Jamaica, Italy,Ukraine, Guinea andIreland; and smelters inSweden and Nigeria. TheAughinish refinery inLimerick, Ireland, employs450 people and is the largestof its kind in Europe,accounting for approx -imately 30% of aluminaproduced in the EU. Irishpoliticians have beenpetitioning the US over the

sanctions through the EU,said the source. Rio Tinto,which supplies Aughinishwith bauxite, is reportedlyreviewing its sales to theIrish refinery in the wake ofthe sanctions, as well asRUSAL’s supply of aluminato Rio Tinto’s smelters inFrance and Iceland. Asmelter in Dunkirk, France,is the largest in the EU,supplying BMW andDaimler, amongst othermanufacturers.

The Trump admin -istration has moved quicklyto mitigate the volatility itunleashed on the marketsthrough the threat ofsecondary sanctions on non-US entities. A series oflicences has been issued byOFAC to allow thecontinuation of contracts forthe ‘winding down andmaintenance’ of businesswith sanctioned Russianentities, including GeneralLicence 14 on 23 April,which allows such dealingswith RUSAL until 23October.

On 22 May, a similarlicence – General License 15– authorised the same withGAZ Group (see box). OFAChas made clear that the pricefor sanctions relief is the‘relinquishment of control’ ofthe sanctioned companies byDeripaska. He resigned fromRUSAL’s board on 25 Mayand is reportedly planning toreduce his stake in EN+Group.

‘Now that Deripaska isclearly trying to reduce hisstake in the company to alevel that the US governmentis comfortable with and hasresigned all executive roles,we expect to see the situationcalm down to a degree whereRUSAL will be able operate,albeit under slightly differentcircumstances than before,’said the source.

Jamaica among countries dealing with fallout from US sanctions on RUSAL

RUSAL chief, Oleg Deripaska, whose designation along with his

company sent shockwaves through world aluminium markets.


OFAC issues wind-down licences

The US Department of the Treasury’s Office of Foreign Assets

Control (‘OFAC’) has issued several licences to aid the

‘maintenance and winding down’ of business with the Russian

entities sanctioned by Washington in April.

General License 15, issued on 22 May, authorises specified

transactions with Russian automotive manufacturer GAZ Group

and its subsidiaries until 23 October 2018, extended from 5

June. GAZ Group is considered by OFAC to be owned (or

controlled) by sanctioned individual Oleg Deripaska. The licence

offers relief similar to that authorised by OFAC under General

License 14 concerning aluminium giant, RUSAL, on 23 April.

General License 13B was issued on 31 May, superseding

General Licence 13A. This licence adds EN+ Group to the list of

entities – which comprise RUSAL and GAZ Group – for which the

divestment, or transfer of debt or equity, is allowed. It extends the

deadline for such activities to 5 August.

General License 16, issued on 4 June, authorises certain

‘maintenance and wind down’ activities with EN+ Group,

EuroSibEnergo (or any entity owned by these companies or in

which they have a direct or indirect 50% or more interest) until

23 October.

OFAC’s General License 13B can be found here:

https://www.treasury.gov/resource-

center/sanctions/Programs/Documents/ukraine_gl13b.pdf

OFAC’s General License 15 can be found here:


center/sanctions/Programs/Documents/ukraine_gl15.pdf

OFAC’s General License 16 can be found here:


center/sanctions/Programs/Documents/ukraine_gl16.pdf


The European Union hasresponded to the threatposed to its businesses ofthe US re-imposingsanctions on Iran bystarting the formal processfor adding these sanctionsto its Blocking Regulation(formerly Regulation2271/96).

Following US with -drawal from the JointComprehensive Plan ofAction (‘JCPOA’) on 8 May,it is not yet clear whethersecondary sanctions will beimposed against EUbusinesses trading withIran, although US nationalsecurity adviser JohnBolton has indicated that

this is ‘possible’. If the re-imposed US sanctions onIran are blocked by theRegulation, this means thatno judgment orrequirements from anauthority outside the EU

concerning this measure willbe recognised, and EUpersons should not complywith any requirements orprohibitions unless thatwould seriously damagetheir interests or that of the

EU. Damages caused by theUS sanctions, including legalcosts, can be ‘clawed back’ bythe affected party. But howlikely is it to be relied on?‘The reinvigoration of theBlocking Regulation is anunwelcome development asit is intended to put EUbusinesses between a rockand hard place,’ commentedRoss Denton of BakerMcKenzie. ‘Unfortunately,the US rock is far morecompelling than the EU hardplace, and very few EUbusinesses will rely on theBlocking Regulation toguarantee their ability tokeep doing business in theUS and Iran.’

EU to use Blocking Regulation responseto US withdrawal from the JCPOA

Few commentators believe a Blocking Regulation will be relied upon.

The US administration isconsidering moving certainfirearms and ammunitionout of the remit of theInternational Traffic inArms Regulations (‘ITAR’).As part of the ongoingExport Control Reform(‘ECR’) programme, theDepartment of Commerce’sBureau of Industry andSecurity (‘BIS’) and theDepartment of State havesimultaneously proposednew rules which will result

in the export licensing ofsome sporting andcommercial firearms andammunition being movedfrom the ITAR-controlled USMunitions List (‘USML’) tothe Commerce Control List(‘CCL’), under the ExportAdministration Regulations(‘EAR’). The move will makeit easier for US gunmakers tosell small arms (such asassault rifles andammunition) abroad andrelieve them of annual fees

required under the ITAR.The BIS proposed ruledescribes how thetransitioned articles wouldbe controlled under the CCL,while that of State discusseshow Categories I, II, and IIIof the USML are to be

revised ‘to describe moreprecisely the articleswarranting continuedcontrol on that list.’ Theproposed rules werepublished on 25 May and theclosing date for comments is7 July.

US considers easing of some arms export controls

For BIS’s proposed rule, see: https://www.bis.doc.gov/index.php/docu-

ments/pdfs/2207-05-4-18-signed-commerce-firearms-proposed-rule-deliv-

ered-to-ofr-for-publication/file

For the Department of State’s proposed rule, see:

http://accurateshooter.net/pix/itarstaterule2018.pdf

The United Nations Security Council has

voted to renew sanctions against officials in

South Sudan, leaving the way open for

further measures to be imposed, including a

possible arms embargo.

Resolution 2418 (2018) renews

sanctions imposed in Resolution 2206 of 3

March 2015 until 15 July. South Sudan has

experienced a bloody civil war since 2013,

characterised by ongoing violence by both

government and armed opposition, despite

a peace agreement brokered in December

2017. Millions of people have been

displaced and an estimated 300,000 killed.

If by 30 June the Secretary General

reports that no progress has been made by

the parties signed up to the peace

agreement towards a cessation of

hostilities, or there is a lack of a ‘viable

political agreement’, then the Council will

consider targeted sanctions on six

individuals, including travel bans and asset

freezes and/or an arms embargo. Those

named are officials considered to have

exacerbated the conflict and blocked

humanitarian access: Koang Rambang Chol,

Kuol Manyang Juuk, Malek Reuben Riak

Rengu, Martin Elia Lomuro, Michael Makuei

Lueth and Paul Malong Awan.

Washington introduced an export policy

of denial – with limited exceptions – for the

export of defence goods and services to

South Sudan in April, at the same time

pushing for other countries to follow its lead

by imposing arms restrictions. The EU has

also imposed unilateral sanctions on three

individuals in response to the escalating

crisis, the first time it has done so in

addition to United Nations’ sanctions.

https://www.un.org/press/en/2018/sc133

61.doc.htm

UN considers further sanctions, including arms embargo, against South Sudan




President Putin has signeda bill into law which allowsthe Kremlin to severrelations or restrict tradewith foreign states viewedas hostile to Russia (4June). Federal Law No441399-7 ‘On Measures(Countermeasures) inResponse to Unfriendly

Actions of the USA and (or)other Foreign States’enables a ban to be imposedon goods from the US andother ‘unfriendly’ states, aswell as preventing citizens ofthose states from taking partin the privatisation ofRussian property.

Two Russian bills were

proposed in response toWashington’s sanctions onprominent Russian oligarchsand quasi-state businesses inApril, labelled as a responseto Russia’s meddling in theUS elections and damagingcyber activities.

Draft Bill No. 464757-7‘On Amendments to the

Criminal Code of theRussian Federation’,criminalising those whorefuse to provide business orservices to a Russianindividual on the grounds ofUS or other sanctions, hasbeen postponed followingpressure from businesslobby groups.

Putin signs counter-sanctions into law

The US has upped itssanctions on Venezuela bybanning ‘certain additionaltransactions’, and alsodesignating a number ofcurrent or formergovernment officials.Venezuela has been subjectto an escalation in both USand EU sanctions attributedto repeated violations ofindividual freedoms by theMaduro government andconcerns that recentelections lack legitimacy.

On 22 May, PresidentTrump signed an executiveorder which prohibits UScitizens from transacting in:

l The purchase of any debtowed to the Venezuelangovernment, includingaccounts receivable;

l Any debt owed to theVenezuelan governmentthat is pledged ascollateral after 21 May2018, including accountsreceivable; and

l The sale, transfer,assignment, or pledging ascollateral by theVenezuelan governmentof any equity interest inany entity in which theVenezuelan governmenthas a 50% or greaterownership interest.

The US Department of theTreasury’s Office of ForeignAssets Control (‘OFAC’)designated four Venezuelanindividuals and threecompanies in Florida forcorruption on 18 May. Threeof the individuals designated

are current or formergovernment officials, whilstRafael Alfredo Sarria Diazwas designated for being the‘front man’ for one of theofficials, Diosdado CabelloRondón.

The three Florida-basedcompanies were designatedfor being owned orcontrolled by Sarria.

‘The Venezuelan peoplesuffer under corrupt

politicians who tighten theirgrip on power while liningtheir own pockets. We areimposing costs on figureslike Diosdado Cabello whoexploit their officialpositions to engage innarcotics trafficking, moneylaundering, embezzlementof state funds, and othercorrupt activities,’ saidTreasury Secretary StevenMnuchin.

US strengthens sanctions on Venezuela

For executive order dated 21 May see:

https://www.whitehouse.gov/presidential-actions/executive-order-pro-

hibiting-certain-additional-transactions-respect-venezuela/

For EO 13692 see: https://www.treasury.gov/resource-center/sanc-

tions/Programs/Documents/13692.pdf

For the US Department of the Treasury’s press release, see:

https://home.treasury.gov/news/press-releases/sm0389

For OFAC’s list of those designated see: https://www.treasury.gov/re-

source-center/sanctions/OFAC-Enforcement/Pages/20180518.aspx

OFSI publishes new sanctions guidance

The UK’s HM Treasury’s Office of Financial Sanctions

Implementation (‘OFSI’) has published a set of FAQs to assist

exporters with financial and trade sanctions.

The FAQs are designed to complement OFSI’s existing

Financial Sanctions Guidance, published in March.

OFSI has previously published a set of FAQs aimed at the

charity sector.

OFSI’s FAQs can be found here:

https://assets.publishing.service.gov.uk/government/uploads/sys

tem/uploads/attachment_data/file/706182/FAQ_guidance_for_t

he_import_and_export_sector.pdf

OFSI’s financial sanctions guidance can be found here:

https://assets.publishing.service.gov.uk/government/uploads/sys

tem/uploads/attachment_data/file/685308/financial_sanctions

_guidance_march_2018_final.pdf

UK sanctions bill receives royal assent

The UK’s Sanctions and Anti-Money Laundering Act has received

royal assent. The Act creates a new domestic framework which will

enable the UK to impose and enforce sanctions after Brexit.

At present, the UK imposes non-UN sanctions through EU laws.

The Act also contains additional powers to stop funding for

terrorists, by making it easier to freeze assets and block access to

bank accounts.

Under the Act, sanctions regulations may be made when

appropriate for: the purposes of compliance with a UN obligation;

the purposes of compliance with any other international

obligation; or for a purpose stated within s1(2) of the Act, e.g. a

‘discretionary purpose’, such as in the interests of national

security or the interests of international peace and security.

The list of ‘discretionary purposes’ set out in the Act also

include providing ‘accountability for or be a deterrent to gross

violations of human rights,’ and to ‘contribute to multilateral

efforts to prevent the spread and use of weapons and materials of

mass destruction,’ as well as other humanitarian concerns.



The UK’s Department forInternational Trade (‘DIT’)failed to pass on a warning tothe Bosnian authorities thata consignment of armsexported to Saudi Arabia waslikely to be destined for ISISfighters in Syria, the Houseof Commons’ Committees onArms Export Controls hasbeen told.

Lloyd Russell-Moyle MPquestioned ministers fromthe DIT and the Joint ExportControl Unit on why, havingrejected an application forexport licences from UK-based arms brokers in 2014because it was possible thatthe end-user was Islamicmilitants in Syria, they didnot inform Bosniancounterparts considering aparallel licence application.The 300m rounds of

ammunition included AK-47assault rifles, which are notcommonly used by the Saudiarmy. Both the US and EUhad warned of the risks ofdiversion. The Bosnian armsexports were revealed in arecent report by the BalkanInvestigative ReportingNetwork.

Graham Stuart MP,minister for investment atthe DIT, confirmed that theBosnians were notcontacted, but stated that‘according to the report thegoods were shipped beforewe turned down the licenceapplications.’ The UK took 15months to reject the licence

UK failed to warn Bosnia of risk ofarms exports being diverted to ISIS

applications, instead of theusual 20 days.

Bosnia is not a MemberState of the EU so has noright to be informed ofdenial notifications byMember States. Both the UKand Bosnia are signatories tothe 2014 Arms Trade Treaty,under which members areobliged to monitor armsexports and ensure thatweapons are not tradedcontrary to arms embargoesor end up in conflict zoneswhere they can be used toperpetrate human rightsabuses or terrorism.

In answer to otherquestions raised, the inquiryalso heard that the UKconducts no audits overseasand there is no practice ofend-use monitoring, as is thecase in the US and Germany.

gvw.com

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Berlin Düsseldorf Frankfurt Hamburg Munich Brussels Istanbul Shanghai

Contact: Dr Lothar Harings, [email protected] Niestedt, M.E.S., [email protected]

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UK rejected an export licence because end-user might be ISIS but

failed to alert Bosnian authorities considering a parallel application.

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Writing for the EuropeanCouncil on ForeignRelations (‘ECFR’), FrançoisGodement, director of theCouncil’s Asia & Chinaprogramme, says that thereare ‘deep and long-standinglinkages’ between thenuclear programmes ofNorth Korea and Iran, whichinvolve ‘mutual help and theuse of each other for cover atcritical junctures,’ – asevidenced in 2017, ‘whenIran tested a ballistic missileat the height of the U.S.stand-off with North Korea.’

But, he argues, ‘thoselinkages do not mean thatthe problems are identical.Iran received importantsanctions relief in the 2015nuclear deal, even thoughthe U.S. is now re-imposingsanctions. North Korea, bycontrast, is under increas -ingly biting sanctions. Iranis only a threshold nuclearpower. North Korea isalready a nuclear weaponstate. Iran has not cheatedon the 2015 nuclear deal, butit remains a major regionalthreat ... financing andarming, including withmissiles, militias in Syria,Lebanon, Iraq and Yemen.By contrast, North Koreahas a long history ofbreaking agreements. But ithasn’t instigated armedfactions in its neighbours’territories, not to mentionarming them with missiles.Its danger to its neighbourslies in its ballistic threatwhich it would only exercise

in a fit of pre-emptive (andultimately suicidal) self-defence.’

The linkage between thetwo problems, he suggests,emerges ‘not from theirsimilarities but from thepotential to proliferate,including to each other,’ andhe points out that theproliferation record of NorthKorea towards Pakistan andthe Middle East implies thatNorth Korea might share thedesigns for its warheads.‘They might also sell thedesign and parts of its morerecent solid fuel ballisticmissiles.’

President Trump’sinitiatives, writes Godement,have built on the differencesbetween Iran and NorthKorea. With Iran, the missileissue now seems to beparamount. Both the US-French-UK strikes on Syria,and the more devastatingIsraeli attack sent themessage that missile sites inIran could be hit easily. Andnukes without missiles areless of an imminent threat.’

As regards North Korea,he says, US policy ‘will riseor fall based on the degree ofquick and intrusiveverification that US canobtain from North Korea.And it is easier to verify thedestruction of missiles thanto search for nuclearwarheads or even uraniumenrichment sites.’

http://www.ecfr.eu/article/commentary_birds_of_different_feathers_why_the_north_korea_and_iran_problem

Iran and North Korea: Links – but not the same

In an editorial published onthe website of the BrookingsInstitution, BrookingsFellow (and Israeli/Venezuelan economist)Dany Bahar writes that whilethe imposition of furthersanctions might be the‘proper response’ to thecurrent situation inVenezuela, ‘it is important tobe extremely careful whendesigning them. The lesstargeted they are, the morelikely they might hurt theVenezuelan people who arealready living under one ofthe worst humanitariancrises the hemisphere hasseen.’

Bahar describes twoavenues which he suggestsare ‘worth exploring for theU.S. administration whendesigning a comprehensiveresponse to the Venezuelandictatorship, which hasbecome a threat not only toits people, but to the entireregion.’

Firstly, he says, there isgreater scope for individual -ised sanctions to be imposed‘on middle- and high-ranking government officialsand military officers whohave effectively hijacked andabused the system in orderto stay in power forever

while enriching themselvesthrough corruption andillegal activities.’ These, hesays, should be expanded toinclude first-degree familymembers where there isevidence of ‘foreign assetsand bank accounts undertheir names,’ – and shouldbe coordinated withcountries in Europe, LatinAmerica and the Caribbean.

Second, he says, theUnited States must ‘lead theinternational communityand find solutions to whatwill continue to be animportant challenge for theregion: the Venezuelanrefugee crisis,’ noting thataccording to the UNMigration Agency, thenumber of Venezuelans inSouth America outside theirhome country ‘rose from90,000 to 900,000 between2015 and 2017.’

He adds: ‘The UnitedStates should also consideraccepting more Venezuelansas refugees, or at the veryleast, provide them anoption to apply fortemporary protected statusso that they can live andwork in the United States.’

https://www.brookings.edu/opinions/

us-sanctions-must-be-precise-in-

order-to-spare-innocent-venezuelans/

Responding to Caracas: a twin-track approach

‘US sanctions on Russian defence

companies may end up hurting an innocent

bystander: India's defence sector.’

So write Amit Bhandari and Kunal

Kulkarni, Fellows of Gateway House – the

Indian Council on Foreign Relations: ‘The

impact of [sanctions] to continued

procurement with Russia could be

substantial. India, which is the world’s

largest importer of arms, is a leading buyer

of Russian military hardware. Between 2012

and 2017, India imported $22.4 billion

worth of weapons, of which 67% was from

Russia. An as yet undetermined amount of

this trade is now in question.’

Bhandari and Kulkarni say it will be hard

to offset the interruption of arms

procurement from Russia – given that the

only comparable portfolio of weaponry is

offered by the United States ‘…but at much

higher prices and with many restrictions and

strings attached.’

US sanctions also could cause problems,

they say, for India’s attempts to indigenise

its defence production: In the short term,

‘India can and must seek waivers to U.S.

sanctions for defence deals with Russia

[though] waivers may not be forthcoming

since the U.S. may see a business

opportunity for its own vendors in disrupting

Russian weapons-supply relationships. So

India needs to find ways to work around the

sanctions. One possibility might be to use

state-owned firms, which don’t have any

business ties in the West and are therefore

less vulnerable to the threat of sanctions, to

partner with Russian firms in critical areas. ’

http://www.gatewayhouse.in/russia-sanctions-

damage-indian-defence/

India’s defence sector to suffer from US sanctions against Russia


Bulletins Bulletins

The European Commission has startedthe process by which it would add USsanctions measures on Iran to the so-called Blocking Regulation (formerlyRegulation 2271/96). This is in directresponse to the US President'swithdrawal of his waiver relating to theJCPOA. The effect of the withdrawalwas to reintroduce US sanctions thatwere in force prior to the JCPOA. USsanctions on Iran not only impact UScompanies and persons, but can, incertain circumstances be applied tonon-US persons. The most importantextension of US jurisdiction relates tonon-US subsidiaries of US companies.

However, the US also has powers toplace so-called ‘secondary sanctions’ onnon-US persons. These can be placedon any person (i.e., including non-USpersons acting wholly outside USjurisdiction) engaging in certain‘sanctionable activities’, as defined bythe relevant US laws and regulations.

These ‘sanctionable activities’ aredetailed in OFAC's recent FAQdocument.1

The US government has aconsiderable degree of discretion indetermining whether to impose‘secondary sanctions’ on non-USpersons engaging in these ‘sanctionableactivities’, and this will likely depend inpart on the nature and scope of theactivities, the parties involved, etc.

Most countries, and all the othersignatories of the JCPOA (UK, Russia,China, France and Iran) plus Germanyhave reaffirmed their adherence to theJCPOA.

What does the BlockingRegulation do?The Blocking Regulation has four mainelements.

l First, it requires any EU person tonotify the Commission of any effects

on the economic and/or financialinterests of that person caused by ameasure blocked in the Annex.

l Second, no judgment of a court ortribunal, and no decision of anadministrative authority locatedoutside the EU that gives effect,directly or indirectly, to the measurein the Annex, or to actions basedthereon or resulting therefrom, shallbe recognised or be enforceable inthe EU in any manner. This is themain blocking measure.

l Third, no EU person shall comply,whether directly or through asubsidiary or other intermediaryperson, actively or by deliberate

omission, with any requirement orprohibition, including requests offoreign courts, based on orresulting, directly or indirectly, fromthe measures specified in the Annexor from actions based thereon orresulting therefrom. EU personsmay be authorised, in accordancewith the procedures provided inArticles 7 and 8, to comply fully orpartially to the extent that non-compliance would seriously damagetheir interests or those of theCommunity.

l Finally, an EU person shall beentitled to recover any damages,including legal costs, caused to thatperson by the application of the

measures specified in the Annex orby actions based thereon orresulting therefrom. This issometimes referred as the ‘clawbackmeasure’.

What is the process now beingundertaken?Based on a 2014 amendment toRegulation 2271/96, the Commissionnow has power, delegated to it from theCouncil, to add measures to the Annexof 2271/96. The process by which it isto do this is as follows: As soon as itadopts a delegated act, theCommission notifies it to the EuropeanParliament and to the Council. Thatdelegated act can enter into force onlyif:

l no objection has been expressedeither by the European Parliamentor the Council within a period oftwo months of notification of thatact to the European Parliament andto the Council; or

l before the expiry of that period, theEuropean Parliament and theCouncil have both informed theCommission that they will notobject.

The two-month period shall beextended by four months at theinitiative of the European Parliamentor of the Council.

We assume that the Commissionhas notified the Parliament andCouncil of the measures to be added tothe Annex, and unless either partyobjects, or both agree to the proposalsooner, the additions will take effectafter two months

What is the practical implicationof the Blocking Regulation?The reinvigoration of the BlockingRegulation is an unwelcome

The EU blocking statute vsOFAC: No contest? By Ross Denton, Baker McKenzie

www.bakermckenzie.com

EU

The reinvigoration of

the Blocking Regulation

is an unwelcome

development as it is

intended to put EU

businesses between a

rock and hard place.


Bulletins Bulletins

development as it is intended to put EUbusinesses between a rock and hardplace. Unfortunately, the US rock is farmore compelling than the EU hardplace, and very few EU businesses willrely on the Blocking Regulation to

guarantee their ability to keep doingbusiness in the US and Iran.

The Blocking Regulation was ofvery little use in curtailing US policyon Cuba, and almost certainly will notcurtail US policy on Iran. The USfinancial system is now so importantto global and EU businesses that itcannot easily be avoided. Even duringthe US adherence to the JCPOA, allWestern banks were reluctant to do

business with Iran, because of the risksposed under US law. This reluctancehas now turned into positive dislike.

As noted above, the US is alsostressing the possibility of secondarysanctions, which in principle forcenon-US businesses to choose betweendoing business in the US and doingbusiness in Iran. The revivification ofthe Blocking Regulation will not affectthat choice.

Links and noteshttps://www.treasury.gov/resource-

center/sanctions/Programs/Documents/jcpoa_windd

own_faqs.pdf

1

Unlike other countries, Russiacurrently does not ban companies fromcomplying with foreign economicsanctions. In particular, there is noadministrative or criminal liability forsanctions compliance under Russianlaw. Further, to date only lighteconomic counter sanctions have beenimposed by Russia in response to theUS and EU sanctions (primarily, animport ban for agricultural productssince 20141).

The Russian State Duma now isworking in parallel on two draft lawswhich are intended to be Russia’sresponse to the latest round of USsanctions of 6 April 2018:

1. draft law No. 464757-7 ‘On Changesto the Criminal Code [...]’ imposingcriminal liability on any individualcomplying with foreign sanctions inRussia (the ‘Blocking Law’); and

2. draft law No. 441399-7 ‘OnMeasures (Counter Measures) inResponse to Unfriendly Actions ofthe United States [...]’ authorisingthe Russian President to imposefurther economic counter sanctionson foreign states and theircompanies (the ‘Sanctions Law’).

In addition, high-ranking politicianshad demanded the introduction ofadministrative liability for legal entities

complying with the latest US sanctionson the Russian territory, with a fine upto RUB 50 million (approximately USD 800,000).2 To date, thislegislative initiative seems to have beenput on hold.

1. Blocking LawFollowing the submission of theBlocking Law to the State Duma on 14May, the Duma members unanimouslyadopted the draft law on the next day(15 May) in the first reading.3 The draftlaw introduces two new sanction-related offences to the RussianCriminal Code:

l Actions performed by anyindividual – i.e., a Russian orforeign citizen – to comply withforeign sanctions shall be punishedby imprisonment of up to fouryears, if they result in theprevention or restriction of theordinary business operations/transactions of Russian persons.

l Deliberate actions performed by aRussian citizen which facilitate theintroduction of foreign sanctions,including by providing recommend -ations and conveying information,shall be punished by imprisonmentof up to three years.

The compliance with US and EU

sanctions in Russia is targeted by thefirst offence. The wording of thisoffence in the Blocking Law is rathervague:

Article 2842. Restriction or refusal to

carry out ordinary business operations

or transactions for purposes of assisting

in the implementation of measures of

restrictive character imposed by a

foreign state, a union of foreign states

or an international organization.

1. The performance of actions

(inaction) for purposes of implementing

the decision by a foreign state, a union

of foreign states or an international

organization on the introduction of

measures of restrictive character, if

these actions (inaction) resulted in the

restriction or refusal of the performance

of ordinary business operations and

transactions by citizens of the Russian

Federation, legal entities registered in

the Russian Federation, the Russian

Federation, subjects of the Russian

Federation or municipal bodies, as well

as persons controlled by them (Russian

private and public subjects, as well as

persons controlled by them) –

shall be punished by a fine in the

amount of up to 600,000 rubles or the

amount of the salary or other income of

the convicted person for a period of up

to four years, or by restraint of liberty for

a term up to four years, or by forced

Russia’s proposed response toUS sanctions: criminal liabilityfor sanctions compliance andcounter sanctionsBy Hannes Lubitzsch, Noerr. www.noerr.com

RUSSIA


Bulletins Bulletins

labor for a term up to four years, or by

imprisonment for a term up to four

years with or without a fine in the

amount of up to 200,000 rubles or the

amount of the salary or other income of

the convicted person for a period of upto one year.

The scope of the protected ‘ordinarybusiness operations and transactions’of Russian persons is intended to bedetermined broadly. According to theexplanatory remarks to this offence inthe Blocking Law, they shall includeany legal actions aimed at theperformance of contractual or statutoryobligations within the ordinary courseof business. In particular, the protectedbusiness operations/transactions shallapparently extend to:

l the entering into agreements whichwould generally – without thesanctioning of the Russiancounterparty – not be refused (e.g.,the opening of bank accounts); and

l the performance of existingcontinuing obligations which wouldusually – without the sanctioning ofthe Russian counterparty – not beterminated.

Given the vague wording of theBlocking Law, the scope of restrictionsactually applicable to companiesoperating in Russia – and the risk of apotential criminal liability for themanagement resulting from a violationof these restrictions – would depend toa large extent on the practicalimplementation of the law by theRussian law enforcement authorities.

Even without such a criminalliability, the winding down of businessrelationships with sanctioned persons

can turn out to be rather complex in theRussian legal environment, inparticular due to civil law restrictionsand antitrust requirements. Theproposed criminal liability wouldfurther limit the room to manoeuvrefor aligning Russian businessoperations with US and EU sanctions.

However, the Blocking Law hasgiven rise to widespread criticism fromlarge Russian businesses which arecategorically rejecting the law: Russian

companies and their managementwould be subject to liability eitherunder US secondary sanctions or theBlocking Law. Further, the BlockingLaw would create risks of unjustifiedcriminal investigations against Russianand foreign citizens.4 To allow forconsultations with the businesscommunity, the law’s second reading inthe State Duma (three readings arerequired) was postponed until furthernotice. It therefore seems that theBlocking Law will be subject tosubstantial changes before enteringinto force.

2. Sanctions LawThe Sanctions Law was adopted by theState Duma in the second reading on 17May.5 While the draft law adoptedunanimously in the first reading on 15May still provided for 16 harsh, mostlyspecific, economic counter-sanctions(including an import ban for foreignpharmaceuticals and a prohibition toemploy foreign nationals in Russia),the current version is – followingsignificant pushback from all sides6 –drafted as a framework law providingfor only very general counter-measures.

The Russian President is alreadyauthorised to impose broad counter-sanctions – based on the Federal LawNo. 281-FZ On Special Economic

Measures of 2006, which formed thelegal basis for the 2014 import ban foragricultural products from the US andthe EU. The drawback of the 2006 lawis that measures must be limited intime and, if needed, be extended.Under the Sanctions Law, counter-measures can be imposed without sucha time limitation.

After a reading in the Duma on 22May, the amended law now reads asfollows

Counter measures can be taken against

(i) the United States and other foreign

states performing ‘unfriendly’ actions

against Russia, Russian legal entities or

Russian citizens (‘Unfriendly States’), (ii)

organizations under the jurisdiction of

Unfriendly States, (iii) organizations,

which are directly or indirectly controlled

by Unfriendly States or affiliated with

them, and (iv) officials and citizens of

Unfriendly States, provided that the

organizations, officials or citizens under

(ii) to (iv), participated in unfriendlyactions against Russia.

The counter-measures listed in theSanctions Law do not target theimplementation of foreign sanctions inRussia. They are limited to economiccounter-sanctions such as:

l import bans for products and rawmaterials originating fromUnfriendly States, or manufacturedby Unfriendly Organizations andUnfriendly Subsidiaries (except forproducts indispensable to life whichcannot be replaced with productsmanufactured in Russia);

l exclusion of UnfriendlyOrganizations and UnfriendlySubsidiaries from the participationin state procurement on Russianterritory;

l exclusion of UnfriendlyOrganizations and UnfriendlySubsidiaries from the privatizationof Russian state property.

The Sanctions Law does not providefor an automatic sanctions escalation.Taking any specific counter-measureswill require the prior decision of theRussian president and itsimplementation by the Russiangovernment.7

WorldECR welcomes your bulletins. Email [email protected]

Links and notes1 http://www.kremlin.ru/acts/bank/38809

3 http://sozd.parliament.gov.ru/bill/464757-7

5 http://sozd.parliament.gov.ru/bill/441399-7

6 https://www.kommersant.ru/doc/3629453

7 https://www.kommersant.ru/doc/3630415

https://www.vedomosti.ru/business/news/2018/04/2

5/767812-edinaya-rossiya-predlozhila-shtrafovat-za-

soblyudenie-sanktsii-ssha-na-50-mln-rublei

2

https://www.vedomosti.ru/economics/articles/2018/0

5/17/769805-duma-perenesla-rassmotrenie-

zakonoproekta-o-nakazanii-za-soblyudenie-sanktsii

4

The Blocking Law has

given rise to widespread

criticism from large

Russian businesses

which are categorically

rejecting the law.


Bulletins Bulletins

Australia’s export control rules fortangibles have been amended to moreclosely align with the regime forintangible supplies.

As of 21 April 2018, changes to theCustoms (Prohibited Exports)Regulations 1958 (Cth) came intoforce. The amendments are intended,so far as possible, to treat transfer ofthe same controlled subject-matteroutside of Australia in a physical formconsistently with intangible transfers(such as via email or allowing access byanother intangible means).

The Regulations set the rules for

export of controlled goods. The rulesfor controlled intangible supplies arecontained in the Defence TradeControls Act 2012 (Cth). Prior toamending the Regulations, theseparate tangible and intangibleregimes in some instances treated thesame controlled subject-matterdifferently. For example, a person whobrought goods containing controlledsubject-matter into Australia on atemporary basis might have beenrequired to obtain a permit to exportthe goods back out of Australia. Incontrast, a person would not have been

subject to controls for accessing thesame content via their emails or from aserver when the person was physicallyoutside of Australia.

The changes to the Regulationsimpacting when permits to exportgoods are required include:

l A new prohibition on exportingcontrolled technology and softwarestored on an uncontrolled goodwithout a permit. Such items shouldbe treated as controlled goods forexport.

l An exemption to the need for a

Aligning tangible exportcontrols with intangiblesBy Anne-Marie Allgrove, Anne L. Petterd and Simone Bridges,

Baker McKenzie

www.bakermckenzie.com

AUSTRALIA

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On 22 May 2018, the US Departmentof the Treasury’s Office of ForeignAssets Control (‘OFAC’) issued GeneralLicense 151 authorising US persons toengage in specified transactions relatedto maintenance or wind-down ofoperations, contracts or otheragreements involving Russianautomotive manufacturer GAZ Group,a specially designated national (‘SDN’),until 23 October 2018. Previously,General License 12B had imposed a 5June 2018 deadline on such activities.

OFAC’s issuance of General License15 is intended to address the impact ofits 6 April 2018 sanctions designationof GAZ Group, which OFAC reports asbeing owned or controlled by OlegDeripaska, who was separatelydesignated as an SDN on 6 April 2018.

Importantly, General License 15applies to entities in which GAZ Groupowns, directly or indirectly, 50% orgreater interest, but does not extend toother persons sanctioned on 6 April2018, including other entities owned byMr. Deripaska. General License 14,which allows US persons totemporarily engage in similarmaintenance or wind-down activities

with respect to UC RUSAL PLC,another company owned andcontrolled by Mr. Deripaska, wasseparately granted last month.

As with General License 14, GeneralLicense 15 does not authorise thedivestiture or transfer of debt, equity orother holdings in, to or for the benefitof GAZ Group. Further, GeneralLicense 15 does not unblock funds thatwere blocked prior to 22 May 2018, thedate that General License 15 wasissued. However, General License 15authorises the use of blocked funds forthe maintenance and wind-downactivities described in the GeneralLicense, and ‘U.S. persons are notrequired to block transactionsauthorized by General License 15 thatoccur on or after May 22, 2018, exceptfor transactions involving blockedpersons other than GAZ Group or anyother entity in which GAZ Group owns,directly or indirectly, a 50 percent orgreater interest’ (FAQ 5862).

On 22 May 2018, OFAC also issuedamended General License 12C,3 whichcontains minor changes intended toreflect and reference the newauthorisation provided in GeneralLicense 15. General License 12Cauthorises until 5 June 2018 certaintransactions and activities necessary tomaintain or wind down operations,

OFAC issues General License 15extending authorized activitieswith GAZ Group By Wynn Segall, Jonathan Poling, Nnedinma Ifudu Nweke and

Andrew Schlossberg, Akin Gump Strauss Hauer & Feld

www.akingump.com

USA

Bulletins Bulletins

permit to export controlled goodswhen exported temporarily fromAustralia, but not transferred toanother person.

l An exemption to the need for apermit to export controlled goods tothe origin of import after it wastemporarily imported intoAustralia.

The Regulations also containchanges to the basis on whichcontrolled goods export permits will beissued or revoked. The changes largelyenhance the transparency of the permitprocess.

The main changes are the following:

l A new ministerial power to revoke apermit where it is determined thatthe export would prejudiceAustralia’s national security,defence or international relations.

l New criteria that the DefenceMinister may have regard to indetermining whether or not to granta permit.

l New requirements around attachingor varying conditions for a permit.

l A new requirement for the Ministerto notify and give reasons if a permitis refused.

l A new review mechanism for permitdecisions.

The changes bring the control rulesfor tangible exports better in line withthose for intangible supplies providingthe opportunity for businesses tostreamline their controlled suppliescompliance process.

The changes to the Regulationscome into effect just as an independentreview into the operation of theDefence Trade Controls Act 2012commences. The Review aims toidentify if there are any gaps in theAct’s controls or any unintendedconsequences arising from the currentoperation of the Act.

Key Points

n On 22 May, OFAC issued General

License 15, authorising US persons

to engage in specified transactions

related to maintenance or wind-down

of operations, contracts or other

agreements involving GAZ Group or

any entity in which GAZ Group owns,

directly or indirectly, a 50% or

greater interest, until 23 October

2018, extending the previous

deadline of 5 June 2018.

n This is the same type of relief that

OFAC authorised under General

License 14 with regard to UC RUSAL

PLC on 23 April 2018.

n OFAC also issued amended General

License 12C, which contains minor

changes intended to reflect and

reference the new authorisation

provided in General License 15, and

issued Frequently Asked Questions

related to General Licenses 15 and

12C.


contracts or other agreementsinvolving 12 entities designated asSDNs on 6 April 2018, as well asentities owned 50% or more by them.

Related new FAQsOFAC also issued updated FrequentlyAsked Questions (‘FAQs’) related toGeneral Licenses 15 and 12C.

With respect to secondarysanctions, FAQ 5894 clarifies that non-US persons may engage inmaintenance or wind-down activitiesthat are within the scope of GeneralLicense 15 without such activities beingconsidered significant for the purposesof a sanctions designation undersections 226 and 228 of the CounteringAmerica’s Adversaries ThroughSanctions Act. OFAC also clarified thatnon-US persons engaging inmaintenance or wind-down activitieswithin the scope of General License 15are not required to deposit paymentsinto blocked accounts of US financialinstitutions in order to avail themselvesof this stated policy (FAQ 5905).

FAQ 5916 explains that GeneralLicense 15 does not restrict theexportation of goods from the UnitedStates to GAZ Group or any other entityin which GAZ Group owns, directly orindirectly, a 50% or greater interest, solong as the exportation is formaintenance or wind-down andconsistent with the requirements ofother federal agencies, which wouldinclude the Department of Commerce'sBureau of Industry and Security, aswell as the Department of State’sDirectorate of Defense Trade Controls,among others.

Finally, FAQ 5877 specifically statesthat the path for the United States toprovide sanctions relief is throughdivestment and relinquishment ofcontrol of GAZ Group by any speciallydesignated nationals, including OlegDeripaska. This is consistent withOFAC’s guidance with respect to UCRUSAL, and Mr. Deripaska hasreportedly already taken steps torelinquish his control of UC RUSAL8

and its controlling stakeholder (and

SDN) EN+ Group PLC.9 It is unknownat this time whether Mr. Deripaska willtake similar steps with respect to hisrole at GAZ Group.

Bulletins Bulletins

Links and notes1 https://www.treasury.gov/resource-

center/sanctions/Programs/Documents/ukraine_gl

15.pdf

2 https://www.treasury.gov/resource-

center/faqs/Sanctions/Pages/faq_other.aspx#586


center/sanctions/Programs/Documents/ukraine_gl

12c.pdf









8 https://rusal.ru/upload/iblock/8b1/

LTN201805240 53resig.pdf

9 http://www.enplus.ru/en/investors/regulatory-

news-service-and-filings/2018/enplus-deripaska-bo

d-resigns.html

On 21 May 2018, President Trumpissued an executive order prohibitingcertain transactions involving debt ofthe government of Venezuela or equityin entities majority-owned by thegovernment of Venezuela. Theexecutive order follows the recent re-election of Venezuela’s incumbentpresident, Nicolás Maduro, whichSecretary of State Mike Pompeolabeled a ‘sham’.

The executive order specifically barsUS persons from:

l Purchasing debt owed to thegovernment of Venezuela;

l Pledging as collateral, debt owed tothe government of Venezuela; or

l Engaging in transactions involvingany equity interest involving an

entity owned 50% or more by thegovernment of Venezuela.

The executive order targets theMaduro administration’s attempts to

liquidate state-owned assets forpennies on the dollar in what President

Trump called ‘fire sales’ in a statementaccompanying the order.

The 21 May executive order is thethird such order in the past yearresponding to the economic, political,and humanitarian crisis unfolding inVenezuela. On 24 August 2017, thePresident issued Executive Order13808, which prohibits transactionsinvolving long-term (90+ days) debt ofthe state-owned oil company(Petroleos de Venezuela, S.A.), mid-term (30+ days) debt of thegovernment of Venezuela, bondsissued by the government of Venezuela,or dividend payments or distribution ofprofits to the government of Venezuela.On 19 March 2018, the President alsoissued Executive Order 13827, whichprohibits US persons from engaging in

President issues EO prohibitingtransactions involving thegovernment of Venezuela By Ryan Fayhee, Alan G. Kashdan and Tyler Grove,

Hughes Hubbard & Reed LLP

www.hugheshubbard.com

USA

The 21 May executive

order is the third such

order in the past year

responding to the

economic, political, and

humanitarian crisis

unfolding in Venezuela.


transactions involving digital currency‘issued by, for or on behalf of thegovernment of Venezuela.’

All of the executive orders issued bythe Trump administration thus farhave avoided more comprehensive

sanctions on Venezuela’s oil sector,which administration officials warnedcould harm the Venezuelan people orAmerican businesses. However,additional sanctions, including againstthe oil and gas sector, are possible if the

situation in the country continues todeteriorate. In a conference call withthe press after its 19 March order, theWhite House warned that it is‘considering all options, including oilsector sanction options’.

Bulletins Bulletins

The Decree of the President of Ukraineapproving the Decision of the NationalDefence and Security Council ofUkraine ‘On introduction andrepealing of special economic andother restrictive measures (sanctions)of personal nature’ was made public on19 May 2018. It has extended lists ofsanctioned persons and updated theprevious decree of 15 May 2017. Theupdated lists were made public on 24May 2018.

The sanctions are introduced for aperiod of one or three years or withouttime-limit against 1,748 individualsand 756 legal entities, among thembeing Oleg Deripaska, Alexei Millerand the company RUSAL, previouslysanctioned by the US.

Visa restrictions and asset freezesremain the main types of sanctionsapplied against individuals.

Asset freezes and suspension ofperformance of economic and financial

obligations are the most common typeof sanctions applied against legalentities.

This year's sanctions lists includepersons sanctioned by the USgovernment and the governments ofthe Member States of the EuropeanUnion.

Ukraine continues to unify itsnational sanction programme with theUS and EU sanction programmes bythese means.

Ukraine publishes presidentialdecree on sanctions By Alina Plyushch, Sayenko Kharenko

www.sk.ua

UKRAINE

The WorldECR Directory of Experts brings together leading export control

and sanctions advisors in Europe and the Middle East

www.worldecr.com/find-an-expert/


Editorial Editorial

In Alice in Wonderland, the Queenof Hearts informs Alice that as achild she could imagine as many as

‘six impossible things beforebreakfast’.

Such regal powers of credulity maybe ever more in demand, for these areextraordinary times when thepresident of the United States tears upa security arrangement concluded byhis predecessors (the culmination ofover a dozen years of back-channel andtrack one diplomacy), lambasts hisnation’s closest allies, lobbies for there-inclusion into the G7 of a countrythat his own has heavily sanctioned –and goes on to shake hands with a manwith whom he has spent the last yearexchanging brickbats (and who lords itover a nation where torture, gulags,public executions and masssurveillance are routine).

There may be method in theunorthodox approach. The worldappears to be divided between thosecommending a ‘consummate deal-maker’ for dispensing with the

diplomatic chaff, and the moresceptical ‘believe it when they see it’brigade.

The agreement sees the DPRK‘commit to work toward complete

denuclearization of the KoreanPeninsula,’ reaffirming its declarationto do so made on 27 April, but is vagueon specifics (there is no mention ofsanctions relaxation). Informedobservers say this is not necessarily abad thing, for at least a rapport hasbeen established – or as PresidentTrump has described it, a ‘special bond’.

The Washington DC WorldECRForum was a fine place to – continuingwith the Carrollian – talk of manythings, and we really covered the

gamut, from the impact of changinginternational nations on businessstrategy, to best practice in factory floorlayout for manufacturers of controlleditems.

Way-points included CFIUS,secondary sanctions compliance, datamanagement and much more. Whatwas evident was that we’re in thethrows of a revolution (televised,tweeted and live-streamed): themarginalisation of multilateral fora(our own excepted), abrupt shifts inforeign policy priorities and new toolsand technologies emerging faster thanit is possible to get to grips with them.

If you’re able to join us in Londonbetween 28-29 June, we exhort you todo so! We can’t promise you sixunbelievable things before breakfast,but we know that you’ll profit from theopportunity to pause, take stock andshare ideas with other leaders in theworld of trade controls – and, perhaps,new and special bonds.

Tom Blass, June 2018

[email protected]

It’s not impossible and it’s special

Raphaël BarazzaAvocat à la Cour33 rue Galilée, 75116 Paris, France

Phone + 33 (0) 1 44 43 54 63

www.customs-lawyer.fr

Customs

Transportation

International trade

Tariff classification

Origin and Duty Preference

regimes

Antidumping

Technical compliance

Dual-use items

Encryption

Counterfeit

Excise tax

International sales contracts

Licences

Representation before the

French and European Courts

A rapport has been

established – or as

President Trump has

described it, a ‘special

bond’.


withdrawal from the agreement, therespective press offices of the keyagencies – OFAC, BIS and StateDepartment – were asked to preparedifferent media statements coveringdifferent eventualities, suggesting thata final decision was only made at thelast moment.)

Whether this momentous decisionaugurs war or peace isn’t in our gift toknow. However, for the benefit of ourreaders, we are pleased to be able tooffer a series of articles exploring theramifications of the post-JCPOAlandscape as relating to differentparties and from widely differingperspectives, written by experts in thefield.

Tom Blass

No surprise that, in the currentaccelerated, generally Trump-driven news cycle, the US

pull-out from the JCPOA has alreadybeen usurped from the top of the tradenews agenda by fresher developments:President Trump’s intervention in theZTE issue, his imposition of tariffsagainst (and lambasting of) key allies,and the Singapore summit with NorthKorea.

Nonetheless, the pull-out (and anysubsequent ‘Plan B’, which has as yetonly been hinted at) is going to haveprofound effects at every level.

While the other signatories to theJCPOA have renewed theircommitment to the agreement – theEU, on 6 June, publishing details of its

JCPOA WITHDRAWAL JCPOA WITHDRAWALFOCUS: JCPOA WITHDRAWAL

Focus: The US quits the JCPOA– the fall-out in perspective

Blocking Regulation – the reality is thatfear of US secondary sanctionsenforcement will have a massivelydissuasive effect on non-US companiesin the absence of specific waiverspermitting them to continue. Formany, the announcement was no morethan they had expected, and for thatreason they had held off frominvesting.

Others may have made the call thatthe President had been bluffing in anattempt to extract from Iran more andgreater concessions while allowing theJCPOA to survive – or that lobbying bythe United States’ ‘key allies’ might besuccessful. (Indeed, there is a rumourthat in the run-up to theannouncement on the United States’


What does the EU Blocking Regulationmean for finance agreements?

An EU Blocking Regulation to counter those USextra-territorial laws perceived to be damagingto European interests raises difficult andconflicting concerns for lenders and borrowers,writes Matt Townsend.

Matt Townsend is a partner and

co-head of Allen & Overy’s

International Trade Practice.

[email protected]

In response to President Trump’sannouncement to withdraw the USfrom the JCPOA, the European

Commission announced on 18 May thatit was launching a process to activatethe so-called Blocking Regulation inrespect of certain US sanctions on Iran.The move is designed to provideprotection against, and counteract theeffect of, those pieces of extra-territorialUS law that are perceived to bedamaging to European interests.

If the EU goes ahead as planned, itwill breathe fire into a largely moribundpiece of European law (Regulation2271/96). Whilst the BlockingRegulation has been in force since 1996,it has very rarely been enforced and, inthe context of commercial contracts,has not been the focus of majorattention (which contrasts with theGerman Trade Regulation). This maybe about to change and, if so, willpresent particular issues in the contextof existing and future financeagreements.

The issue for lenders and borrowersis whether the sanctionsrepresentations and covenants wecommonly see in credit agreements(and which are generally set to requirecompliance with US sanctions) willoffend the Blocking Regulation. In thisregard, Article 5 is the mostproblematic. This prohibits any EUperson, directly or indirectly, and eitheractively or by deliberate omission, fromcomplying with any requirement orprohibition based on or arising from theUS sanctions listed in the Annex to theRegulation (absent an authorisation). Itis anticipated that a wide range of USsecondary sanctions targeting Iran willbe re-introduced and will, therefore, bereferenced in the Annex.

Article 5 states that EU persons willnot comply with any such requirementor prohibition. This can be contrastedwith the German Trade Regulation

which prohibits, and may render void,any declaration to comply with therelevant US sanctions. This is one of thereasons why we often see express carve-out language or a side letter to a financeagreement which involves a German

party – there is valid concern that themere inclusion of a clause whichoffends the German Regulation may beproblematic.

The Blocking Regulation may benarrower in effect but EU-basedborrowers are still likely to beconcerned that the inclusion ofobligations which, in effect, requirecompliance with US sanctions in theircredit agreements may trigger a breachof Article 5 or at least strongly suggestthey are doing so in practice. Borrowerswill argue that they cannot comply withany such provisions in any event.Excluding the application of any suchobligation where it offends the BlockingRegulation may be acceptable to alender with no presence in the US butclearly it will be more problematic forUS banks or any lenders otherwiseseeking compliance with US sanctions.A similar concern arises with acovenant which obliges the borrowerfrom acting in a way that doesn’t breachsanctions applicable to the lender.

The thorniest issue arises in thecontext of the use of proceeds covenant.There is a standard prohibition on theuse of the proceeds for activities inconnection with certain sanctionedcountries (which would include Iran)and/or otherwise in a manner whichwould trigger a liability for the bank. An

EU borrower who wishes to trade withIran may seek to argue that theprovision is unenforceable on the basisthat compliance would breach Article 5.Ironically, this may be moreproblematic for EU lenders than theirUS counterparts as they will be drivenmore by secondary sanctions concerns.

EU-based lenders seekingcompliance with US standards will alsolikely have to make a difficult choice asto whether to continue activelyrequiring their borrowers to givecovenants of the kind as contemplatedabove. The concern, obviously, is thatby proactively compelling borrowersnot to violate the US’s new Iranianregime they could themselves be seenas actively complying with the USsanctions in a manner that is non-compliant with the EU’s regime. Itshould be noted that, in certain cases, itmay be technically impossible tocomply with both regimessimultaneously.

The precise application of Article 5cannot be seen in isolation. Penaltiesthat may arise from a breach aredetermined at a Member State level. Itis important, therefore, to understandhow the applicable penalty regime hasbeen set and whether it adds anynuance to these provisions. That said, itwould be a surprise to many if we sawany real enforcement of Article 5 in theEU, particularly where that Article wasused as a sword against, rather than ashield to protect, European companies.

There are practical solutions to theseissues and much depends on whatunfolds in the coming months asregards potential diplomatic solutions(if any) between the US and its EU allieson the application of secondarysanctions. However, lenders andborrowers should be considering theseissues now in the context of bothexisting and new finance agreements.

The thorniest issue

arises in the context of

the use of proceeds

covenant.

FOCUS: JCPOA WITHDRAWAL


Industry view Industry view

US withdrawal likely to chill EUinvestment in Iran’s energy sector

Despite the EU’s announcement that it will be reactivating a Blocking Regulationto discourage EU companies from pulling out of Iran as a response to the USdecision to withdraw from the JCPOA, it is unlikely that many in the energy sectorwill be committed to staying, writes Jason Wilcox.

Jason Wilcox is a senior associate

in the Washington, DC office of

Baker Botts.

[email protected]

The US withdrawal from the JointComprehensive Plan of Action(‘JCPOA’ or the ‘Agreement’) is

fueling great uncertainty in globalmarkets with respect to the future ofIran and its role in the internationalpolitical and commercial spheres. Inresponse to President Trump’s 8 Mayannouncement, the European Unionquickly reaffirmed its commitment tothe Agreement. EU HighRepresentative and Vice-PresidentFederica Mogherini issued a statementattesting that ‘[a]s long as Irancontinues to implement its nuclearrelated commitments, as it is doing sofar, the European Union will remaincommitted to the continued full andeffective implementation of the nucleardeal.’1

In light of its commitment to theAgreement and the protection of itseconomic interests, the EU is seekingto amend its Blocking Regulation,which prohibits EU entities fromcomplying with US sanctions, toaccount for the re-implementation bythe US of its Iran ‘secondary’ sanctionsprogramme, following the 90- and 180-day wind down periods. However, it isnot clear that this measure will

convince EU firms, particularly in theoil and gas industry, to invest orcontinue investing in Iran’s energyoutput.

The lifting of US secondary

sanctions on 16 January 2016 (JCPOA‘Implementation Day’) provided vastopportunities for non-US companies toengage in activities related to Iran’senergy sector. These included

1. investment, including participationin joint ventures, goods, services,information, technology, andtechnical expertise and support forIran’s oil, gas, and petrochemicalsectors;

2. the purchase, acquisition, sale,transportation, or marketing ofpetroleum, petrochemical products,and natural gas from Iran; and

3. the export, sale, or provision ofrefined petroleum petrochemicalproducts to Iran.

Despite the JCPOA’s removal of thethreat of secondary sanctions on non-US companies that take part in suchactivity, many oil and gas firms,particularly in the EU, remainedhesitant to engage with Iranthroughout the relief period evenbefore the President Trump’s 8 Mayannouncement. In large measure, thelimited investment in Iran’s energysector stemmed from fear that anymisstep by these firms, or the financialinstitutions that fund such projects,would result in exclusion from the USfinancial system, which wouldeffectively cripple any company in thedollarised global marketplace.

For this very same reason, the re-imposition of US ‘secondary’ sanctionsagainst Iran is likely to have a powerfulchilling effect on future investment inIran’s energy sector. Thus, despite theEU’s best overtures at encouragingcompanies to invest in Iran’s energysector, given the international reach ofthe US financial system and theimportance of the US market for manyEuropean companies, such efforts mayultimately prove unsuccessful.

The re-imposition of US

‘secondary’ sanctions

against Iran is likely to

have a powerful chilling

effect on future

investment in Iran’s

energy sector.

Links and notes1 https://eeas.europa.eu/headquarters/headquar-

ters-homepage/44238/remarks-hrvp-mogherini-

statement-us-president-trump-regarding-iran-nucle

ar-deal-jcpoa_en.



Germany’s swooning reactions to theUS withdrawal from the JCPOA

Is Europe’s economic powerhouse experiencing a soft powerblackout? How will Germany respond to US pressure when itscompanies have already invested so much in Iran, askBaerbel Sachs and Carl-Wendelin Neubert.

German companies are greatlyaffected by the looming re-imposition of US secondary

sanctions against Iran. Germancompanies were at the forefront of re-entering the Iranian market afterJanuary 2016.

In 2017, they exported a net worthof Euro 3.4 billion of goods to Iran.However, the majority of Germancompanies trading with Iran – be theylarge or small – will need to avoidfalling under the reinstated sanctionsregime – or risk jeopardising theirbusiness relations with Westerncompanies and access to internationalcapital markets. Many have alreadyannounced their intention to ceasetheir Iran business altogether.

Discussed reactionsAs elsewhere in the European Union,the German public, businesses andpolitics have reacted with disbelief andresignation to the US decision towithdraw from the JCPOA – and inparticular to the US ambassador toGermany’s undiplomatic pronounce -ment that the US would vigorouslyenforce secondary sanctions, callingupon German companies to wind downtheir Iran operations immediately.

There is a political consensus inGermany that the JCPOA should bekept in place, a consensus shared withthe other countries party to the deal.However, when it comes to political,legal, and economic actions to mitigatethe impact of US secondary sanctions,the picture remains blurry. Most high-level government officials, includingthe German minister for economy andenergy, Peter Altmaier, admit thatthere appear to be very few effectivemeasures that could shieldinternationally operating Germancompanies with Iran business from theeffects of US secondary sanctions.

Financial compensationThere have been calls for setting up astate fund to compensate Germancompanies trading with Iran inadherence to the JCPOA for the

negative effects incurred inconsequence of reinstated USsanctions. These calls have not foundsupport among political leaders andgovernment officials in Germany.However, existing debt guarantees, so-called ‘Hermes guarantees’, for exporttransactions with Iran will be kept inplace. The German economic ministryalso issued a statement, on 6 June, thatit is currently reviewing options tomitigate the economic impact of thelooming sanctions for Germancompanies by extending the ‘Hermesguarantees’.

Blocking lawsUpdating and extending existingblocking regulations appears to be themost widely shared means of responseto the reinstated US secondarysanctions for Iran.

German Blocking Law, § 7 Foreign

Trade Ordinance

It should be noted that Germany alreadyhas a blocking law in place, § 7 ForeignTrade Ordinance (Außenwirtschaft -

sverord nung), pro hibiting compliancewith sanctions that go beyond UN andEU sanctions. Although introduced inthe 1970s to counter the Arab world’s

boycott against Israel, it now prohibitsso-called OFAC-clauses. Under Germancivil law, these clauses are null and void.It was already tricky striking a balancebetween, in particular, the financialinstitutions’ need to prevent anyfacilitation of sanctioned business onthe one hand and the need of bothparties to a transaction to comply withapplicable law in Germany on the other.Although this blocking law is not beingvigorously enforced, the GermanFederal Reserve, the DeutscheBundesbank, for example, checkscompliance with the blocking law inroutine audits with banks and insurancecompanies.

EU Blocking Regulation

The EU Commission, on 6 June,adopted a measure to amend EURegulation 2271/96 protecting againstthe effects of the extra-territorialapplication of legislation adopted by athird country (the so-called ‘BlockingRegulation’). The amendment wouldprohibit EU companies fromcomplying with the re-imposed USsecondary sanctions with regard toIran. The Blocking Regulation alsoaims to enable companies to recoverdamages arising from such sanctions,and nullifies the effect that foreigncourt decisions based on the includedsanctions provisions have in the EU.The EU Parliament and the Council ofthe European Union now have twomonths to object to the measure orsignal their support.

EU Member States’ representativesofficially welcomed the Commission’splans to renew the Blocking Regulationin May. However, official Germanreactions to the now proposedamendment to the EU BlockingRegulation have been strikingly

Existing debt

guarantees, so-called

‘Hermes guarantees’, for

export transactions with

Iran will be kept in

place.

continued on page 24



The Asian response to United States’JCPOA withdrawal

Dr Scott Jones considers the impact of the USdecision to leave the JCPOA on Asian countries,many of which are among the biggest buyers ofIranian oil and gas.

Shortly after the US announcedits plans to withdraw from the2015 Joint Comprehensive

Program of Action (‘JCPOA’),European Union CommissionPresident, Jean-Claude Juncker,announced that the EU plans toreactivate a 1996 regulation that wouldseek to prevent European companiesfrom complying with any sanctions theUS may reintroduce against Iran.Specifically, Juncker said: ‘As theEuropean Commission, we have theduty to protect European companies.We now need to act, and this is why weare launching the process to activatethe “blocking statute” from 1996.’

The practical merits of the revisedregulation (2271/96) notwithstanding,the reaction from Europeangovernments has been unequivocal andrelatively uniform. The reaction fromAsian governments has been less inevidence, certainly to the extent thatthey are planning counter-measures tothe reimposition of sanctions.

Asian government responsesThe reversion of US secondarysanctions potentially impacts non-UScompanies involved in primary Iranianmarkets; i.e., oil and gas and thefinancing thereof. The reality of

returning sanctions is particularlyrelevant to Asian economies. China,India, South Korea, and Japan aremajor Iranian oil importers, whereasEuropean transactions with Iran areprimarily investment and export-

related. If past is prologue, then wecould reasonably expect to seeincreased secondary sanctionsenforcement by Washington inmarkets tightly wedded to Iranian oil.

For example, the B Whale andTransTel Office of Foreign AssetControl (‘OFAC’) cases, both involvingAsia-origin companies, illustrate therisks of oil and/or dollar-denominatedtransactions.

After announcing the withdrawal,President Trump declared that ‘Anynation that helps Iran in its quest fornuclear weapons could also be stronglysanctioned by the United States.’

Indeed, the withdrawal decision wasostensibly based on the perception thatTehran was not abiding by the terms ofagreement in general and that theincreased revenue from sanctions reliefwas being directed to the military formissile development and regionalprovocations.

Correspondingly, economicpressure would force Tehran back tothe negotiation table and, morepractically, minimise the Iranianadventurism abroad. This scenariodepends of course on several variables,including stable world oil markets and

the cooperation of major economicactors, particularly those in Asia.Therefore, what can we expect?

ChinaAfter the US announcement, foreignministry spokesman Geng Shuang saidChina would ‘maintain communicationwith all parties and continue to protectand execute the agreement fully.’Unlike most other Asian countries,China has more experience with USsecondary sanctions, particularly thoserelating to Iran (e.g., ZTE). In thiscase, as the primary importer ofIranian oil, the possibility of secondarysanctions are unlikely to thwart China’sbuying attitude. Furthermore, Chinaviews Iran as an important player in itsBelt and Road initiative. However,Beijing may exercise greater discretionas trade talks continue with the US.

IndiaLike China, India is heavily reliant onIranian oil and energy imports. As aJCPOA hedge, India, for the first timebeyond Bhutan and Nepal, startedinvesting in Iran through its ownnational currency to bypass any troublearising out of impending US sanctions.Delhi will most likely seek toaccommodate the reality of secondarysanctions while devising work-aroundsand waivers. For example, underprevious Western sanctions againstIran, India imported Iranian oil via abarter-like system through a smallstate bank.

Japan and South KoreaAs major US allies and economicpartners, Japan and South Korea willhave less incentive to ignore or rebutWashington’s current Iran policy. In2012, for example, Japan and SouthKorea banned energy-invested projectsin Iran and restricted trade financing inresponse to mounting economicpressure on Iran. However, after theJCPOA, Japan and South Koreaincreased their investment profile inIran. In February 2016, Japan and Iransigned an investment agreement, andin May 2016, South Korea and Iransigned memorandums ofunderstanding for 30 joint projects in

Unlike most other Asian

countries, China has

more experience with

US secondary sanctions,

particularly those

relating to Iran.



restrained. This appears to be due tothe fact that amending the EU BlockingRegulation does not offer an effectivemeasure to mitigate the negativeeconomic effects of the US withdrawalfrom the JCPOA as EU companies inconsequence are caught between a rockand a hard place: Either they complywith the EU Blocking Regulation andviolate US sanctions or they complywith US sanctions and violate the EUBlocking Regulation, thus risking beingfined by EU Member States – there isno middle ground. The protectionoffered by the EU Blocking Regulationis thus merely theoretical.

Exemptions and alternativesOn 4 June, the EU High Representativefor Foreign Affairs and the foreign,economic and finance ministers ofGreat Britain, France and Germanysent a letter to the US administrationurging the US administration to put inplace secondary sanctions exemptionsfor EU companies doing business withIran in line with the JCPOA but inconflict with reinstated US sanctions.The exemptions should be granted forautomotive, banking, civil aviation,energy, healthcare, infrastructure andpharmaceuticals. So far, there has beenno response from the US side.

Against this background, themeasures taken by the German

government and the European Unionwith the aim of mitigating the impactof reinstated US secondary sanctionswith regard to Iran and of sustainingthe JCPOA’s economic lifeline as of yetappear feeble. Effective alternatives arehard to come by.

As in the past, the US secondarysanctions will hit the transfer of fundsand financial services to and from Iranthe hardest. This is why alternatives,particularly with regard to keepingopen functioning financial channels toIran, are being sought out at themoment.

One measure aimed to address thisissue is the extension of the EuropeanInvestment Bank (‘EIB’)’s ExternalLending Mandate, concluded on 6June, making Iran eligible forinvestment activities by the EIB. EIBofficials, however, dismissedexpectations that the EIB could financeIran business transactions on a largescale, underscoring that the EIB itselfoperates within the restraints ofinternational capital markets.

In a similar fashion to the EIBproposal, representatives of theGerman machine-building industryassociation have suggested processingfinancial transactions with Iran forGerman companies through theDeutsche Bundesbank. As of yet, therehave been no official reactions.

Dr. Scott Jones is a Non-Resident

Fellow at the Stimson Center in

Washington, DC and a principal

at TradeSecure, LLC.

http://tradesecure.net

energy and infrastructure. Withcontractual obligations in place, bothgovernments are likely to pursuewaivers, extensions, and renegotiat -ions.

Asian companiesIran has been a known risk quantity fordecades. Despite the JCPOA, theIranian economy has improvedmarginally. The limited growth has as

much to do with internal factors (e.g.,corruption and mismanaged capitalaccounts) as with de-risking trends.Many banks and other companies,including foreign subsidiaries of USbusinesses, are wary of doing businessin Iran for fear of incurring fines orbeing barred from the US commercialand financial markets. With thepossible exception of Chinese state-driven investment, Asian companies

will manage risk accordingly and limittheir exposure in the Iranian market.

Baerbel Sachs is a partner and

head of Noerr LLP’s trade

compliance practice.

Carl-Wendelin Neubert is an

associate and member of the

firm’s regulatory and

governmental affairs group.

[email protected]

[email protected]/e-Seminars

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continued from page 22



Aviation and humanitarian exportsin the post-JCPOA world

Two industry sectors that stand to be impacted by the US’s withdrawal from theJCPOA and the reimposition of the sanctions that it had lifted are thehumanitarian products (agricultural commodities (including food), medicaldevices, and medicines) and aviation sectors – albeit in very different ways,writes Doug Jacobson.

Douglas N. Jacobson is a founder

of Jacobson Burton Kelley PLLC

in Washington, DC.

[email protected]

On the face of it, there should befew changes related to thehumanitarian sector. The big

picture is that under the TradeSanctions Reform Act of 2000 (‘TSRA’),exports of food and medicines –humanitarian goods – by UScompanies and their affiliates areexempt from sanctions, subject toreasonable one-year general or specificlicensing requirements. This wasneither altered by the coming into forceof the JCPOA, or by the 8 Mayannouncement of the withdrawal.

In the years leading up to theJCPOA, US companies faced difficultiesgetting the specific licences theyrequired, and processing payment,which led OFAC to issue additionalgeneral licences. Ironically, when OFACmoved from a specific to a generallicence requirement, to ease things forexporters, it became harder to arrangefinancing with risk-averse EU bankswhich wanted the assurance of aspecific licence before processingpayments for humanitarian goods.

Things eased up afterImplementation Day because severallarge Iranian banks involved ininternational transactions, such asBank Tejarat, were removed from theSDN list and onto the Executive Order13599 list, which allowed non-US banksto work with these banks. Starting on 5November, however, Bank Tejarat willbe placed back on the SDN list and thepool of Iranian banks that will bepossible to process payments forhumanitarian products will be reduced.There will be some compliant work-arounds – for example, using smallernon-SDN banks and UAE banks –whether companies resort to them ornot will very much depend on thecommercial imperative.

Another challenge of course, will liein shipping – especially if EU shipping

companies continue to follow Maersk’slead and announce that they will ceaseshipping to Iran.

Grounded?Aviation was the one sector where theJCPOA created significant opportun -ities for US companies. On 16 January

2016, OFAC issued a statement oflicensing policy (‘SLP’) establishing afavourable licensing policy towards thesale of commercial passenger aircraftand related parts and services to Iran,provided such transactions did notinvolve any person on OFAC’s SpeciallyDesignated Nationals List (‘SDN List’).

It meant that both US, and non-USpersons could receive a licence to sell orlease US commercial aircraft and partsto non-designated Iranian entities.

Rivals Airbus and Boeing bothsought to take advantage of the relaxedsanctions regime – and each signeddeals worth upwards of $15bn withIranian entities, licences for which havenow been revoked.

While the 2016 change was met withenthusiasm by the aviation sector, evenduring the first year of the JCPOAunder the Obama administration,OFAC was very slow in grantinglicences to US and EU companies –since licence applications required agreat deal of vetting that led to manylicences not be issued.

Looking forward, there a number ofthings to watch for. The chances ofcompanies now receiving a licence for

the export or reexport of aircraft subjectto US jurisdiction will be nearlyimpossible. As regards licences for theexport of commercial aviation-relatedparts and services, that will beproblematic. Before the withdrawalthere was a presumption that theywould be granted. But now it will be ona case-by-case basis, and only likely tosucceed on ‘safety of flight’ grounds –for example, for the servicing of oldBoeing 747s which Iran has had in itsfleets since before the 1979 Revolution– but there would have to be acompelling case and a need toovercome the presumption of denial.

As for the enforcement of secondarysanctions, the focus is going to be onaviation service providers. It’s worthnoting that Iran Air will be back on theSDN list on 5 November. Whether ornot OFAC will enforce secondarysanctions on non-US companiesproviding services to purely commercialflights, it’s too early to tell, althoughthere is already pressure from the USgovernment for the European aviationsector not to provide services to Iran’sMahan Air, which has been on theOFAC SDN List and BIS Entiy Lists formany years.

As regards European airlines whichhave resumed flights to Iran, that trafficis not likely to be affected. GeneralLicense J permits non-US airlines touse US aircraft – and has done sincebefore the JCPOA. Is it likely to berevoked? I don’t think so.

As for the enforcement

of secondary sanctions,

the focus is going to be

on aviation service

providers.



BREXIT BREXIT

The Sanctions & Anti-MoneyLaundering Act 2018

Maya Lester QC discusses the sanctions parts of the Sanctions andAnti-Money Laundering Act 2018, which received Royal Assent (i.e.became law in the United Kingdom) on 23 May 2018.

This is the first substantive piece ofBrexit-related legislation to havebeen enacted. It sets up a whole

new framework for United Kingdomsanctions.

First, some context...At present, the UK does most of itssanctioning via the European Unionand United Nations. Most sanctionsimplemented in the United Kingdomare derived from United NationsSecurity Council resolutions andEuropean Union ‘restrictive measures’.The EU implements UN sanctionsresolutions collectively (although theobligation falls on each of the 28Member States) and in additionimposes its own ‘autonomous’ EUmeasures as part of the EU’s CommonForeign and Security Policy.

The United Kingdom’s onlysignificant power to impose ‘unilateral’sanctions (as opposed to UN/EUregimes) is for terrorist asset freezing,which the UK currently undertakespursuant to the Terrorist AssetFreezing Act 2010. For almost all othersanctions, the UK implements UN andEU sanctions regimes. This amounts toaround 30 regimes in the UK, roughlyhalf of which are UN and half EU,which the UK now implements in orderto comply with its international and EUlaw obligations. And like other EUMember States, the UK is alsoresponsible for imposing penalties forsanctions breaches, and for grantinglicences (exceptions) to sanctionsprohibitions on the grounds permittedby the relevant UN or EU legalinstrument.

Why the need for a new Act?Because the UK needs new sanctionspowers of its own post-Brexit. If andwhen the UK withdraws from theEuropean Union, it will no longer be

part of the EU institutions that makesanctions. It will no longer be obligedto implement EU law, and will (via theEU Withdrawal Bill currently makingits way through Parliament) repeal theEuropean Communities Act 1972. Thisis significant for UK sanctions becausethat act (which gives EU law legal effectin the UK) is the current legal basis forUK implementation of UN and EUsanctions (UN as well as EU, becausethe UK Supreme Court in HM

Treasury v Ahmed [2010] UKSC 2

decided that the United Nations Act1946 could not be used to implementasset freezing measures).

This means that the UK needs newlegal powers in order to continue toimplement UN sanctions (aninternational legal obligation) and EUsanctions (which will presumably nolonger be a legal obligation but may beseen as desirable in some cases), and inorder to impose new UK sanctions afterBrexit. That is why the Queen’s Speech(the government’s legislative agendafor the year) in June last yearannounced that the government wouldintroduce an international sanctionsbill among the new Brexit-related draftlegislation, in order to ‘return decision-making powers on non-UN sanctionsto the UK, and enable the UK’scontinued compliance withinternational law after the UK’s exitfrom the EU’.

Why isn’t the EU (Withdrawal)Bill enough?Because the Withdrawal Bill transposesinto UK law existing EU law (‘retainedEU law’) as it exists at a particular pointin time. As the excellent House ofCommons briefing paper on theSanctions Bill puts it, the WithdrawalBill will ‘copy existing EU-derivedsanctions measures into law but theywill be “frozen”.’ Sanctions measurescannot be frozen because they changeso regularly, in particular amendmentsto the lists of sanctions targets.

Hence the need for a separateSanctions Bill. Parts of the Bill werepublicly consulted on, then scrutinisedin detail and significantly amended inboth Houses of Parliament. Variousparliamentary committees expressedconcerns about aspects of the Bill (theJoint Committee on Human Rights, theConstitution Committee and theDelegated Powers Committee, inparticular).

Concerns included the fact that somuch is left to government ministers todecide in future regulations rather thanbeing set out in the Act, including apower to create new criminal offences.Lord Judge, former Lord Chief Justice,described the Bill as ‘a vast, greatsuperstructure of secondary legislationbeing erected on virtually non-existentprimary legislation. It is, in truth, abonanza of regulations.’ Lord PannickQC noted the ‘disturbing irony when aBrexit that is said to be justified by adesire to restore to Parliament powerscurrently enjoyed in Brussels results inMinisters seeking to confer extensivepowers on themselves.’

Does the Act change anything asfrom today?No. Although the Act has receivedRoyal Assent and is already law in theUK, it isn’t yet in force (other than

If and when the UK

withdraws from the

European Union, it will

no longer be part of the

EU institutions that

make sanctions.


some requirements, e.g., for thegovernment to report to Parliament),and we don’t know when it will be (‘onsuch day as the Secretary of State mayby regulations appoint’). Curiously, the‘interpretation’ section, which isalready in force, refers to the EU(Withdrawal) Act 2018 which does notyet exist (that’s the Withdrawal Bill stillbeing debated in Parliament).

What will the Act do?Key aspects to be aware of (in over-simplified form) are as follows:

1. New broad powers for the UK tomake/suspend/revoke sanctionsregimes, either to implement UNsanctions or for other purposesincluding the prevention ofterrorism, international peace andsecurity: The regimes may consist ofa broad range of measures (targetedand sectoral) including shipping,trade and aircraft restrictions aswell as financial sanctions andtravel restrictions.

2. New powers for the UK to add andremove people/entities/organisat -ions from targeted sanctions lists(‘designations’) where there are‘reasonable grounds to suspect’involvement (of defined kinds) incertain specified activities: The‘reasonable grounds to suspect’threshold reflects the UKgovernment’s current standardwhen proposing designations to theEU or UN. The EU has no publishedstandard for its listings, althoughthe European Court has requiredthere to be a ‘sufficiently solidfactual basis’. The new powersinclude the potential to list by‘description’ where it isn’t possibleto name someone.

3. New ‘Magnitsky’ sanctions powers,to freeze and seize assets ongrounds of gross human rightsviolations (an amendment made tothe Bill in the aftermath of theSkripal poisoning).

4. Due process requirements fordesignations including notifyingdesignated people and entities, and

automatic reviews of designationsevery three years (currently everyyear), and the need forproportionality. The Act requiresdesignations to be ‘appropriate’,having regard to the purpose of theregulations, and ‘the likelysignificant effects of the designationon that person’.

5. New wider UK licensing powers: Atthe moment, the grounds on whichthe Office of Financial Sanctions

Implementation (‘OFSI’) may grantexceptions and licences to sanctionsprohibitions in the UK are for themost part limited to the specificgrounds set out in the relevant EUor UN regime. The Sanctions Actallows regulations that createexceptions to any prohibition,including general and specificlicences, on far wider grounds (i.e.,powers potentially more akin to USOFAC licences).

6. New framework for UK courtreview: Certain sanctions decisions(including UK designations) will besubject to judicial review in the UKcourts, with new rules of court tofollow. Judicial review in the UKwas previously limited becausesanctions were imposed by the UNand EU rather than the UK. Newcourt reviews will include closedmaterial procedures in some cases,and damages for cases of negligentdecision making; and differentremedies available for those listedon UN rather than EU lists (for legalreasons connected with the Kadi

and Al Jedda cases).

7. New UK terrorist asset freezing

regime: The Act repeals theTerrorist Asset Freezing Act 2010,the current regime for terrorist assetfreezing in the UK. This means theAct brings together terrorist assetfreezing and other forms ofsanctions into one piece oflegislation. The Sanctions Actmakes it easier to freeze terroristassets (on a ‘reasonable grounds tosuspect’ threshold as opposed to‘reasonable belief’ plus ‘necessity’).There will still be an independentreviewer of terrorism designations(but not other sanctionsdesignations).

8. Powers to make UK regulations forenforcement and breach ofsanctions, both civil and criminal, inrelation to conduct in the UK or byUK nationals/incorporated bodies.

9. Increased powers to require theprovision and sharing ofinformation and for search, entryand seizure. And obligations on thegovernment to issue guidance aboutprohibitions and requirements andthe report on use of sanctionspowers.

10.New registers of beneficialownership in overseas territories tobe published by 2020.

What will happen during the‘transitional period’?The Act is silent on this issue, so wedon’t know. However, it does containpowers for the UK to amend EUsanctions (which, as mentioned above,will initially be transposed into UK law‘frozen’ in time if the Withdrawal Bill isenacted) for up to two years after theAct comes into force, to allow the UK asmooth transition from EU sanctionsto the new world of UK sanctions...

The Act requires

designations to be

‘appropriate’, having

regard to the purpose of

the regulations, and ‘the

likely significant effects

of the designation on

that person’.

BREXIT BREXIT

Maya Lester QC is a barrister at

Brick Court Chambers and co-

author of europeansanctions.com

[email protected]

WorldECR back issues are available.

Visit www.worldecr.com for details


The UK’s ‘arms brokering’ controls:not always understood

Be aware that under UK law, there are a host of ways in which someone can become anarms broker, writes Martin Drew.

In May 2003, the UK governmentchanged the rules on the supply ofmilitary equipment, and many

operators and companies then became‘arms brokers’. These new laws wereofficially known as ‘trade controls’ ormore commonly ‘trafficking andbrokering’ regulations.

Up until that time, exporting(including in-passenger baggage)military equipment from the UKrequired an export licence from the (aswas) Department of Trade andIndustry (‘DTI’). But this created asupposed ‘loophole’ whereby UKpersons could move militaryequipment overseas without any over -sight from the British government; theexception to this being arranging thesupply of military equipment to nationssubject to an arms embargo (UN, EU,OSCE) which was already restricted.

The new trade controls created arequirement for British persons/companies and/or people based in theUnited Kingdom to obtain a DTI tradelicence if they wanted to arrange thetransfer of military equipment fromone third country to another (nevertouching the UK).

Military equipmentWhat does the UK government classifyas military equipment? Well, it’sanything ‘specially designed for oradapted for military use’.

The UK publishes its Military List(‘ML’) which provides a definitiveschedule of those items which requireboth export and trade licences. Itincludes small arms and light weapons,ammunition, sights, armoured vehicles(4x4s), riot-control equipment(including CS gas), explosives,ships/vessels, aircraft, jammingequipment, comms, demolition, bodyarmour/plates/helmets, trainingsimulators, night vision, stun guns,shackles, and a plethora of otherequipment and technologies.

Current positionIn time, the controls evolved, and theconcept of extra-territoriality was

between two third countries, you comewithin the trade controls.

There are different requirementsplaced on you depending on:

1. the nature of the goods beingsupplied (they must be on the UKmilitary list for the law to apply)

2. the end-user of the goods – e.g., arethey subject to any restriction/embargo?

3. the part you played (somesubsections of the trade controlsexclude financial and transportationservices)

In the following scenarios, the ruleswould apply:

l whilst providing training overseas,you supplied military list equipmentto your trainers/trainees

l where you have supplied youroverseas security or private militarycompany (‘PMC’) personnel withmilitary list equipment, or

l where you have provided bombdisposal suits and CIED equipmentto trainers/practitioners.

They would also apply where youhave been:

l arranging or negotiating contractsl arranging intra-company transfersl introducing third parties to an

‘arms’ deal for a fee.

UK arms exports UK arms exports

introduced, meaning that the situationas it stands is that the law can apply toBritish persons wherever they arelocated.

Occasionally companies work underthe assumption that what is out of sightis out of mind. But the government ofthe United Kingdom – and its friends

– possess considerable reach, and it isnot unknown for individuals who havebreached trade controls to have landedat UK airports to find themselvesfacing arrest by officers of HerMajesty’s Revenue & Customs(‘HMRC’). Given that the penalty forbreaching the trade controls is up to 10years’ imprisonment (and that theProceeds of Crime Act may also apply),the resulting scenario thus faced can bescary.

It is thus worth understanding thatif you are a UK person,and you areinvolved in activity (includingmatching up contacts for a fee) whichmay result in ML goods moving

What does the UK

government classify as

military equipment?

Well, it’s anything

‘specially designed

for or adapted for

military use’.


Or if you are:

l a banker providing financialservices for a transfer

l supplying onboard maritimesecurity personnel (see below).

l a UK airline/shipping line whichhas shipped military goods to alocation subject to a UK embargo ortranshipped small arms/lightweapons through the UK.

These controls were drafted prior tothe explosion in maritime securityconsiderations precipitated by theincrease in modern security – and weredesigned for shipments betweencountries, not for transfer of goods onand off vessels.

To alleviate the problem, the UKgovernment, in concert with others,formulated an open licence designedfor the maritime security sector calledthe ‘Open General Trade ControlLicence Maritime Anti-Piracy’.

This, while helpful, has its ownproblems in attendance: as with all UKopen licences, it comes with a largeamount of small print, which if notfully complied with, invalidates thelicence and threatens to render the useran illegal arms broker.1

You can also apply to theDepartment of International Trade fora single licence, and there are a rangeof other open licences available,including one for small arms, whichagain, have a long list of exemptionswhich can invalidate their use.

Be well advisedIn my experience as a (former)employee of Her Majesty’sGovernment, the following pattern wasnot uncommon – and illustrative ofsome of the examples shown above:

Former members of the armedforces – typically ex-special forces –would go on to work in the risk andsecurity industry. It would not beunusual for their work to include theacquisition of military equipment, andthereafter the supply of kit to others,and it is here that they fell foul.

Unlike, for example, South Africa,the UK does not legislate for the

regulation of private militarycompanies, but it does vigorouslycontrol the supply of equipment.

The key messages here are:

l The trade controls cover arranginga sale – no transfer needs to havetaken place for a breach to haveoccurred

l It is imperative to have the requiredlicence from the Department ofInternational Trade in place beforeyou agree a relevant transaction

l The prospect of a prison sentencefor breaching the trade controls ismore than theoretical – it hashappened on numerous occasions.

UK arms exports UK arms exports

Links and notes1 Floating armouries also create licensing

requirements – but that’s beyond the scope of this

article.

Martin Drew is a member of the

EU’s and UN’s panels of experts

providing guidance on

implementing the United Nations

Arms Trade Treaty and is a

special advisor to the UK

Parliament on export controls.

www.britishexportcontrol.co.uk


Crypto currencies, tokens, smartcontracts and sanctions

OFAC and Switzerland’s SECO have confirmed therelevance of crypto currencies/tokens for sanctionscompliance, write Prof. Dr. Andreas Furrer, Peter Henschel and Chris Gschwend.

Both the US Office of ForeignAsset Control (‘OFAC’) and theSwiss State Secretariat for

Economic Affairs (‘SECO’) haveconfirmed that transactions involvingdigital currencies (also known as cryptoor virtual currencies, or tokens) aresubject to US and Swiss sanctions andembargo law. It is important to notethat crypto currencies are not only usedfor payment purposes but also forexecuting so-called smart contracts(executable code) on the blockchain.

At the request of these authors,SECO has confirmed the relevance ofdigital currencies for sanctioncompliance purposes1 and clarifiedthat digital information units withpotential value are considered to befunds or economic assets in the contextof sanctions in Switzerland. Theprohibitions laid down in the differentregulations and ordinances (inparticular, bans on the provision offinancing) must therefore be compliedwith accordingly.

Similarly, in a recent update of itsSanction Compliance FAQs, OFACannounced its intent to alert the publicto specific digital currency identifiers(also known as ‘wallets’ or ‘public keys’)associated with blocked persons byadding the individual’s wallet addressand associated digital currency (e.g.,Bitcoin (‘BTC’), Ether (‘ETH’), Litecoin

5. and does not have legal tenderstatus in any jurisdiction’.

Additionally, the FAQ clarifies thatOFAC sanctions are also applicable toa sovereign cryptocurrency, virtualcurrency and a digital representation offiat currency which are described as‘digital currencies’. OFAC maytherefore not only exercise jurisdictionover any form of decentralised cryptocurrency, such as Bitcoin or Ether, butalso over digital currencies issued bythird countries’ sovereign centralbodies.

This was demonstrated on 19 March2018, when President Trump expandedthe scope of the Venezuelan sanctionregime with an executive order (‘EO’)prohibiting US persons from dealing inany digital currency issued by, for, oron behalf of the government ofVenezuela on or after 9 January 2018.This action targeted the ‘petro’ and‘petro gold’, two digital currenciesissued by the government of Venezuelawhich, according to the US, could beused to circumvent US sanctionsagainst Venezuela.

Impact for companies Any company dealing with or involvedin crypto currency transactions byreceiving, storing, exchanging ortransferring tokens must ensure

Crypto currencies Crypto currencies

(‘LTC’), etc.) to the profile of speciallydesignated nationals (‘SDNs’).

Persons and entities subject toSECO and/or OFAC jurisdiction,including users of virtual currency orsmart contracts, as well as cryptoexchanges, will be responsible forensuring that they do not engage intrade or other transactions withblocked persons or assets, including bymeans of virtual currencies or tokens.

BackgroundOFAC has been taking a closer look atthe overall development of blockchainor distributed ledger technology(‘DLT’), in particular the ability ofvirtual currencies to store and transfervalue or property, and the relevance forsanctions compliance.

In March 2018, OFAC published aguidance on crypto currencies in asection of its Sanction ComplianceFAQs entitled ‘Questions on VirtualCurrency’.2 In it, OFAC confirms thatexisting sanctions are applicable to allforms of virtual currencies, which aredefined broadly as ‘a digital representa-tion of value that functions as

1. a medium of exchange, 2. a unit of account, and/or 3. a store of value,4. is neither issued nor guaranteed by

any jurisdiction,


compliance with local sanctionsregime, however, companies must alsoconsider compliance with US sanctionsif their activities fall under US juris-diction due to the involvement of USpersons, US parts, US dollars or USinfrastructure, even though thetransaction may take place abroad.Under the Countering America’sAdversaries Through Sanctions Act(‘CAATSA’), US sanctions go evenfurther; US authorities may penalisenon-US companies if they conductsignificant transactions with USsanctioned persons, even if thesetransactions have no US nexus orconnection.

Companies must therefore reviewtheir exposure to digital currencies andshould develop necessary walletscreening capabilities as part of aninternal risk-based compliancemanagement programme (‘ICP’). Suchscreening may prevent the indirectinvolvement of sanctioned individualswho operate under the guise of a non-sanctioned individual or stolen identitythat would otherwise pass compliancescreening.

Likewise, the OFAC listing of walletswill provide a much-needed

authoritative resource for theidentification of blacklisted walletsassociated with sanctioned individuals.In particular, wallet-screening serviceproviders who automate compliancechecks should include the OFAC wallet

listing in their services, thereby furtherreducing the likelihood that the cryptocommunity indirectly engage withsanctioned individuals and weakeningthe ability of sanctioned individuals totransact anonymously using virtualcurrencies. This preventative actionwill not stop malicious activity fromtaking place via private digitalcurrencies or blockchains, but it’s astep in the right direction.

It should also be noted that thegrowing use of smart contracts inbusiness transactions will in most casesnot be possible without the use ofcrypto currencies or tokens.Companies developing business

solutions involving blockchain andsmart contracts will therefore need toensure that sanction and embargocompliance are built into their businessprocesses to prevent restricted partiesfrom transacting with their businessplatform or application.

While public keys have not yet beenadded to the SDN List, it can beassumed that the listing of public keyswill become a standard instrument ofOFAC and other regulatory bodiesaround the world. We also assume thatthe rules regarding KYC (know yourcustomer/client) and moneylaundering will soon be adapted torequire a more explicit screening ofsource of crypto funds as part of athorough KYC process. Both willprobably converge, requiringcompanies to perform an end-to-endDLT screening prior to acceptingvirtual currencies or dealing withtokens.

Crypto currencies Crypto currencies

The OFAC listing of

wallets will provide a

much-needed

authoritative resource

for the identification of

blacklisted wallets

associated with

sanctioned individuals.

Links and notes1 Email correspondence with the author

2 http://www.treasury.gov/resource-

center/faqs/Sanctions/Pages/faq_compliance.aspx

Prof. Dr. Andreas Furrer is a

legal partner at MME in

Switzerland, where Peter

Henschel is managing director of

compliance and Chris Gschwend

is a senior compliance advisor.

[email protected]@mme.ch [email protected]

from the publisher of WorldeCr

The export Compliance

manager’s handbook (published

May 2017).

For full information go to

https://www.worldecr.com/wp-

content/themes/worldecr-child/ECMH-inf

ormation.pdf

Dual-use export Controls of

the european union (published

December 2015)

For full information go to

https://www.worldecr.com/wp-

content/uploads/eu-dual-use-export-co

ntrols.pdf


Japan Japan

Recent changes in Japanese exportcontrols: a review

Japan’s export control regime is especially unique. While it seeks to draw onthe different multilateral regimes, variations in classification nomenclature andin the definitions of export, among other things, make the export of controlleditems from the country more challenging than recent reform efforts have aimedfor, writes George Tan.

The world’s third-largest economyafter the United States and China,Japan has implemented security

trade controls for decades, beginning inthe Cold War era in the 20th Century.Japan’s Ministry of Economy, Tradeand Industry (‘METI’) has imposedstrict controls on the export of certainitems from Japan and implementssuch controls rigorously, alongsideJapan’s customs authority. WhileJapan’s export controls adhere tointernational regimes, such as theWassenaar Arrangement, its policy,regulation and practice have somewhatunique aspects compared with othercountries.

This article looks at those uniqueaspects, as they relate to the controlleditems list, arms export policy, andtechnology transfer.

Control list and a move towardsEU-type nomenclatureAs Japan is a member of the fourinternational trade regimes – theNuclear Suppliers Group (‘NSG’),

Australia Group (‘AG’), MissileTechnology Control Regime (‘MTCR’),and the Wassenaar Arrangement(‘WA’) – its dual-use control list followsand reflects the items controlled inthose regimes.

The list is diligently revised andupdated by METI each year, with theprevious updated list implemented on7 January 2017. On 30 October 2017,METI announced its draft update ofthe list for public comment – to bereceived by 11 November 2017. Theupdate is to reflect revisions of the listsof international regimes in recent years– e.g., the dual-use list of WA as ofDecember 2016. Therefore, this updatedraft is an annual opportunity todiligently track the revision ofcontrolled items listed under theinternational regimes.

The new control list waspromulgated on 22 November 2017,and implemented on 22 January 2018as scheduled. The information isavailable in the New Arrival （新着情報）corner of the METI Export Control

Web site (only in Japanese). This canbe found at the following address:http://www.meti.go.jp/policy/anpo/index.html

More substantial changes to thecontrolled items list nomenclaturehave been discussed with METI andthe industry association, the Center forInformation on Security TradeControls (‘CISTEC’), for more than 10years. When these are finallyimplemented, it is expected thatJapan’s export control list will movetowards an ‘EU dual-use type’nomenclature. To date, however, therehas been no announcement as to whensuch a development can be expected.

The current Japanese export controllist reflects government orders,ministerial ordinance, and METInotifications. It has a uniquenumbering structure, written only inJapanese characters, using noalphabetic words in the code, andadopting a numbering scheme which isdifferent both from the US ECCN andthe EU dual-use code. Although


basically compatible with the EU dual-use code (because it likewise reflectsinternational regimes), theidentification of controlled goods andtechnology means global companiesshould ascertain for themselves therelevant category into which items fall,in order that they can oversee the sameitems in different jurisdictions.

In an effort to reduce the challengestherein, the following recommend -ations to the government have beenmade publicly by CISTEC, aftercollecting industry opinion, consultingwith METI, and providing substantialworking resources to achieve this listnomenclature change:

l Laws, orders, and ministerialordinances are NOT changed forthis purpose, and will continue toreflect the current list of controlleditems.

l In addition to the current list, itwould be beneficial to create andmaintain a ‘conversion list’ of items,so that current Japanese listeditems can be matched, one-to-one,to the EU dual-use code.

l In export licence applications, an

exporter should be allowed to useEU-type dual-use code fordocumentation filing.

Below is a sample of the draft screenshot of the ‘conversion list’. Thisconversion list on the CISTEC web site

currently shows only goods, and thetechnology conversion list (e.g., codesuch as 1D001, or 1E001) has not yetbeen developed. Therefore, furtherstructural review of the conversion list,particularly for technology, will berequired to realise a change innomenclature. Once the conversion listscheme has been realised, there will beconsiderable benefits for traders, asregards the compatibility of controlleditems globally. Classification and

licensing work should certainly becomeeasier than before.

On the other hand, from aregulatory authority point of view,having controlled items ‘doubly’ listedin different places could increaseregulatory administration work. Theideal status in the future will be anentire restructuring of the exportcontrol law to keep a single EU-typelist. In the meantime, a conversion listapproach could represent a meaningfulcompromise both for industry andgovernment.

Defence equipment exportcontrols – issues and challengesThe Japanese government announcedchanges to its long-standing policy forarms exports in April 2014. Whatfollowed was basically a relaxationwhich aims to help potentialcollaboration in military technicaldevelopment with the United Statesand other allies. Until April 2014, theexport of arms was in effect prohibitedwith the exception of certain casesmade with ministerial authority. Thispolicy was amended to allow armsexport based on three principles as

The ideal status in the

future will be an entire

restructuring of the

export control law to

keep a single EU-type

list.

Japan Japan

A sample of the draft screen shot of the ‘conversion list’.The draft list is available in CISTEC web site for reference.

http://www.cistec.or.jp/service/eu_taihi.html


Industries Bureau, together with theMinistry of Defense (‘MoD’), try topromote and encourage the defenceindustries, Japanese exporters muststill have their licence applicationsthoroughly reviewed by METI’sSecurity Export Control Policy Divisionas before. Naturally, the METI exportcontrol team’s stance is not to promotearms exports, but to reviewtransactions very cautiously undercurrent regulations. In the end,Japanese exporters are advised byMETI that their applications areunlikely to be granted, and they tend towithdraw from the deal against abackground of unclear regulatorycircumstances and potential risk.

Although export control is just oneof the reasons there have been so fewarms exports, there are other issuesand operational challenges, as outlinedbelow.

Classification of the goods as arms:

Should our product be classified as

‘military’ or ‘dual-use’?

As stated above, export controlregulation for arms has yet to beamended to reflect the governmentpolicy change. The structure of thearms control list has not changedsubstantially for several decades anddoes not reflect the internationalregime of the Wassenaar Arrangementmunitions list. The Japanese controllist (Category 1 – arms) is very simple

and its definitions are vague. Thetechnical specifications provided arevery limited. This is a big differencecompared with the WA munitions listand dual-use items list. The only keyguidance on interpretation is, ‘if this isdesigned or used for civil use, it can beregarded as non-arms’. Although someFAQs are provided by METI, they aregeneral in nature and the illustrativecases are very limited. While METI hasa consulting process on armsclassification for exporters, theexporter has to provide a number ofdocuments for determination by METIand the whole process and timeframetends to be unpredictable.Unfortunately, METI’s reply is notmade in writing, but only through averbal call to the exporter.Consequently, the time and costintrinsic to the process discouragesexporters who often tend to abandontheir attempts.

If METI were to incorporate the WAmunitions list into the Japanesecontrol list, the definition of arms couldbe made much clearer and transparent,to the benefit of exporters.

‘Arms technology’ sharing with non-

Japanese nationals at exhibitions and

shows: Not allowed to say anything?

As per the definition of goods as statedabove, the definition of ‘armstechnology’ is similarly broad andvague.

Japan Japan

shown in the graphic ‘Three principlesgoverning the transfer of defenceequipment and technology 2014’,above.

However, since the relaxation, thechange has not resulted in the increasein exports that was expected and hopedfor. Indeed, there has not been a singlesuccessful arms export since: the high-profile failure of an estimated $40bndeal to sell submarines to Australia,when French company DCNS securedthe agreement at the last minute, beingan illustrative case in point.

As background, it is important toemphasise that export control law andregulation governing arms exportswere not amended with the change ofpolicy in April 2014. That means allpractical aspects (excluding policy) ofregulatory interpretation and licensingpractice remain, with the assumptionof prohibition.

Although METI’s Manufacturing

Three principles governing the transfer of defence equipment and technology 2014

If METI were to

incorporate the WA

munitions list into the

Japanese control list,

the definition of arms

could be made much

clearer and transparent.


Japan Japan

It reads: ‘Technology pertaining tothe design, manufacture, or use of thegoods listed in the middle column ofrow 1 of appended table 1 of the ExportTrade Control Order’.

‘Pertaining to’ implies somethingdifferent from ‘necessary to’ which isthe wording commonly used in thedual-use technology list. Also thedefinition of ‘use’ reads: ‘Use is all thestages other than design andmanufacture’.

The consequence of a lack ofprecision in these definitions is thatinformation about arms is practicallylimitless in scope and includes any kindof technical information. Based on this,unless the discussion about the armsproduct is ‘publicly available’,exporters must obtain export licencesto enable discussion at exhibitions ortrade shows with potential foreigncustomers.

Of course, it is nigh on impossible toapply for export licences as the names

of potential buyers are unavailable inadvance, and export licences requirecertification of all end-users and theirprofile as part of supportingdocuments.

For example, one company wasadvised by a METI officer to restrictdiscussions with customers at anexhibition to information that was‘publicly available’. But salesdiscussions naturally tend to includethe sharing of information that is moredetailed than that that is publiclyavailable. In the event, the informationgiven by the Japanese seller topotential customers was restricted togeneralities such as, ‘it flies very far’and ‘it is very strong’. The situation wasespecially ironic as a top Japanesegovernment official spoke at the event,referencing the new ‘three principals’,and encouraging greater engagementwith Japanese industry – which stoodto lose credibility, on account of therestrictions placed upon it.

ConclusionJapanese export control rules havesome unique aspects, and in-depthrules and implications are providedonly in Japanese materials. Englishlanguage information provided byMETI and CISTEC is really in high-level summary format only, and onlyrarely are control list updates ordefence item license interpretationprovided in English. Global traderswho seek solutions for issues areencouraged to contact local expertswith a solid understanding of localregulation.

George Tan is an experienced

export controls practitioner and

principal at Global Trade

Security Consulting, based in

Singapore.

[email protected]

In line with the international regimes, Japan is obliged to implement

robust controls for technology transfer. Below are a few points for

global traders to consider:

Residential status is a key factor in technology transfer, NOT

nationality

An export of technology from Japan to a foreign country is

prescribed in Article 25 (1) of Foreign Exchange and Foreign Trade

Law (‘FEFTL’) which describes a technology export as ‘the

transaction from (Japanese) resident to non-(Japanese) resident.’

Unlike US export control regulation, nationality is not mentioned at

all, and not included in the criteria in technology transfer. As a

concrete example, if a foreign national is hired by a Japanese

company, or has stayed in Japan more than six months, he/she is

treated as a Japanese resident. On the other hand, if a Japanese

national works in a foreign country as an expat, he/she is treated

as a non-resident. The technology transfer from resident to non-

resident is then in the scope of exports, and if the technology is a

list-controlled one, then it requires a licence.

Thus (asks a smart reader) what would happen if a deemed

Japanese resident who is a foreign national leaves Japan, after

acquiring controlled technology in Japan via a domestic transaction

without a licence, and then makes use of such controlled

technology in a foreign country?

Such a situation did, indeed fall through a loophole in

technology transfer rules under FEFTL until November 2009. Article

25 of FEFTL has since been amended to fix this kind of problem, so

that virtual cross-border transactions can be captured as

technology exports, regardless of the residency. METI may impose

licence requirements upon the sending of controlled technology by

email, through the internet, by hand carry, or by whatever method of

cross-border transaction, under Article 25 (3), in order to prevent

the possible misuse of this loophole.

A technology licence is a different kind of export licence from a

licence for goods export

Because Japanese export of technology is prescribed in a different

order (Foreign Exchange Order) from the export of goods (Export

Trade Control Order), a different export licence is required for

technology exports from the one for the goods. If the technology

and/or software is embedded in the goods, and both goods and

technology/software are controlled items, a separate technology

export licence is required in addition to the goods licence. In other

words, an exporter must file two different export licences, one each

for goods and technology. This is a common pitfall in licence

preparation, and will increase administrative effort and time for

supporting documentation for the exporter. The licence application

forms are totally different for goods and technology, and separate

kinds of supporting documents are requested, e.g., end-user

profiles, and end-user certificates.

Cloud computing guidance

METI published guidance as a notification in June 2013 on cloud

computing, and it has been implemented since September 2013. It

is an advisory. If the purpose of the cloud is ‘data storage only’ and

no technology transfer happens to a non-resident, it is out of the

scope of export of technology. On the other hand, if a trader uses

software applications in the cloud, e.g., for SaaS (software as a

service) and if the software provides substantial support or service

through a cloud computer, so that non-residents can make use of it,

it may be regarded as a technology export transaction. However, if

such support or service is done through publicly available software

(so-called ‘mass market’) software, it is exempted in the same

manner as mass market software itself. The thinking in the new

notification is generally consistent with existing export control

regulation and no significant contradiction is seen in this

notification.

Technology transfer – Japanese interpretation

WorldECRThe journal of export controls and sanctions

Contributors in this issueMatt Townsend, Allen & Overy

www.allenovery.com

Jason Wilcox, Baker Botts

www.bakerbotts.com

Baerbel Sachs and Carl-Wendelin Neubert, Noerr LLP

www.noerr.com

Dr. Scott Jones, TradeSecure, LLC.

http://tradesecure.net

Douglas N. Jacobson, Jacobson Burton Kelley PLLC

www.jbktradelaw.com

Maya Lester QC, Brick Court Chambers

www.europeansanctions.com

Martin Drew

www.britishexportcontrol.co.uk

Prof. Dr. Andreas Furrer, Peter Henschel and Chris

Gschwend, MME

www.mme.ch

George Tan, Global Trade Security Consulting

[email protected]

WorldECR Editorial BoardMichael Burton, Jacobson Burton Kelley PLLC

[email protected]

Larry E. Christensen,

The Law Offices of Larry E. Christensen.

www.larryechristensenpllc.com

Jay Nash, Nash Global Trade Services

[email protected]

Dr. Bärbel Sachs, Noerr, Berlin

bä[email protected]

George Tan, Global Trade Security Consulting, Singapore

[email protected]

Richard Tauwhare, Dechert

[email protected]

Stacey Winters, Deloitte, London

[email protected]

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ISSN 2046-4797. Refer to this issue as: WorldECR [0070]

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ISSUE 70. JUNE 2018

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