foreiggn assets control facilitation: for heightened...
TRANSCRIPT
Presenting a live 90‐minute webinar with interactive Q&A
Foreign Assets Control Facilitation: gPreparing for Heightened EnforcementIdentifying and Mitigating Risks for U.S. Persons and Companies Absent Clear Guidance
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, APRIL 7, 2011
Today’s faculty features:
Ronald I. Meltzer, Partner, WilmerHale, Washington, D.C.
Greta Lichtenbaum, Partner, O'Melveny & Myers, Washington, D.C.
The audio portion of the conference may be accessed via the
Erin L. Crockett, Director, Corporate Global Trade Compliance, Dresser, Addison, Texas
p ytelephone or by using your computer's speakers.
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Prohibited Facilitation Under OFAC RegulationsOFAC RegulationsRonald I. Meltzer
Wil C tl Pi k i H l d D LLPWilmer Cutler Pickering Hale and Dorr, LLP
April 7, 2011
OVERVIEW
1. What is facilitation?
2. Exceptions
3. Recent enforcement cases
WilmerHale 5
Part One: What is facilitation?Part One: What is facilitation? Circumvention of OFAC requirements by routing or supporting otherwise prohibitedrouting or supporting otherwise prohibited transactions through foreign persons
Aiding or permitting non-US persons to Aiding or permitting non US persons to perform activity that would be prohibited if undertaken by US persons
Explicit and imputed prohibition across all OFAC sanctions programs
Broad and elastic: even minor or indirect actions that support or approve another person’s transaction with OFAC targets can constitute
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transaction with OFAC targets can constitute prohibited facilitation
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Definitions of facilitation: Iran, Sudan and Burma regulationsg
Iran: approving, financing, facilitating, or guaranteeing any transaction by a foreignguaranteeing any transaction by a foreign person, where the transaction would be prohibited if performed by US person or within the United States (31 CFR §560.208)
Sudan: action by a US person that assists or Ssupports transactions with Sudan by any other
person (31 CFR §538.407)
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Definitions of facilitation: Iran, Sudan and Burma regulations g(continued) Burma: approving, financing, facilitating, or guaranteeing a transaction by a foreign person, if such transaction would be prohibited when performedsuch transaction would be prohibited when performed by US person or within the United States (31 CFR §537.205(a))
Exception for certain types of new investment in Burma (31 CFR §537.205(b)), such as certain contracts to sell/purchase goods
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contracts to sell/purchase goods
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Cuba: evasion/avoidance
CACR prohibits “[a]ny transaction for the purpose or which has the effect of evading or avoiding any part of the [CACR] prohibitions” (31avoiding any part of the [CACR] prohibitions (31 CFR §515.201(c))
Interpreted to prohibit facilitationp p
WilmerHale 9
Other examples of facilitation from OFAC regulationsg
Altering policies or operating procedures to enable a foreign affiliate/subsidiary to performenable a foreign affiliate/subsidiary to perform OFAC-prohibited transactions
Altering a foreign affiliate’s/subsidiary’s Altering a foreign affiliate s/subsidiary s operating policies and procedures to facilitate OFAC-prohibited transactions
Referring purchase orders, requests for bids, or other business opportunities involving OFAC t t t f i
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targets to a foreign person
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PenaltiesFor Iran, Sudan and Burma (under IEEPA):
Civil: $250,000 per violation or twice transactional value
Criminal: $1 million per violation and 20 years
For Cuba (under TWEA):
Civil: $65 000 per violation Civil: $65,000 per violation
Criminal: $1 million per violation and 10 years
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Part Two: Exceptions
1. Authorized transactions
2. General inventory rule
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Authorized transactionsu o ed s c o sProhibited facilitation requires that the underlying transaction be unauthorizedtransaction be unauthorized
If the transaction is permitted (either by general authorization or a specific license) then takingauthorization or a specific license), then taking action to approve, facilitate or support that transaction is not prohibited
Examples:
Information and informational materials
Transactions covered by OFAC licenses
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General Inventory Rule What if a US person sells goods to a foreign What if a US person sells goods to a foreign person in a third country that does business in Iran? Does that activity constitute prohibited facilitation?
General inventory rule: US persons may ll/t f d t thi d t tsell/transfer goods to a third-country party, even
if a small/unidentifiable portion of such goods is destined for or ends up in OFAC targetsp g
Not in the OFAC regulations—established by longstanding agency practice
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g g g y p
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General Inventory Rule (continued)
Two key limitations:
Items when shipped from the United States or b US t th thi d t t tby a US person to the third-country party must not be specifically intended for eventual sale to or use in OFAC targetsg
Third-country party’s inventory must not be predominantly used for selling/sourcing such p y g gitems to OFAC targets
WilmerHale 15
Part Three: Recent Enforcement Cases
Trans Pacific National Bank (Jan. 2011)
Aon Energy (Jan. 2011)gy ( )
Stena Bulk LLC (Jan 2009) Stena Bulk LLC (Jan. 2009)
WilmerHale 16
Trans Pacific National BankTrans Pacific National Bank(Jan. 2011) Trans Pacific (a San Francisco bank) processed two wire transactions to transfer $35,600 to a foreign person in September 2007$35,600 to a foreign person in September 2007
The two wire transfer requests referenced “Iranian material” and “Iran material”
No voluntary disclosure
Trans Pacific settled the case for $12 500 Trans Pacific settled the case for $12,500
WilmerHale 17
Aon Energy (Jan. 2011) Aon Energy (a Houston-based subsidiary of Aon Energy (a Houston-based subsidiary of Aon Corporation) brokered reinsurance retrocession deals (i.e., reinsurance for reinsurers) on behalf of European reinsurer and retrocessionaires (policy sellers) in October 2005
Th i $62 883 d d The premium was $62,883 and covered construction risks associated with petroleum project in Iranp j
No voluntary disclosure
Aon settled the case for $36 000
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Aon settled the case for $36,000
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Stena Bulk LLC (Jan. 2009)
Stena Bulk LLC is a US subsidiary of a Swedish shipping company
I 2003 d 2007 2008 i d St B lk In 2003 and 2007-2008 period, Stena Bulk provided “transportation related services” for shipment of oil to/from Sudan p
Stena Bulk voluntarily disclosed the violations
Settled for $426 486 Settled for $426,486
WilmerHale 19
Greta L.H. Lichtenbaum
U S Economic Sanctions Laws:U.S. Economic Sanctions Laws:How Risks of Facilitation Violations Typically Arise
Facilitation – General Basic principle: A U.S. person may not facilitate
activities of a non-U.S. person that the U.S. person could not engage in directly A risk for ALL sanctions programs This provision refers to facilitating the activities of anyThis provision refers to facilitating the activities of any
foreign person (including an affiliate), and can create many challenges
It can prevent U S companies and persons fromIt can prevent U.S. companies and persons from supporting transactions with sanctioned countries initiated outside the United States, even where the U.S. company’s role is limited
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Facilitation – Foreign Affiliate Risks Risks arise with foreign subsidiaries that are not independent
Divergence of functional structure from legal structure
Interlocking officers directors or employeesInterlocking officers, directors or employees
Lack of maintenance of separate corporate formalities
Transaction-specific facilitation of non-U.S. affiliates’ activities in sanctioned countries can arise in many ways, including:
P idi i t f fi i l i t Providing various types of financial assistance Exercising mandatory approval for contracts Changing a subsidiary’s processes and procedures to permit a transaction to occur without U.S.
participation is facilitation Brokering, financing, guaranteeing a contract Assisting on exportation or re-exportation of goods and services Insuring a subsidiary’s trading activities with Iran Referral of purchase orders, requests for bids, or similar business opportunities to which the U.S.
person would not directly respond Transporting or warranting the quality of goods sold by a subsidiary to Iran Business or legal planning relating to the trade in goods, technology, or services between Iran and
any other location
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Facilitation – Foreign Affiliate Risks
Shared Support Services – Human Resources/PersonnelResources/Personnel U.S. involvement in hiring process or requirements
for personnel responsible for sanctioned country p p ybusiness
Multiple employment contracts for individuals Secondment of staff to foreign subsidiaries of U.S.
company with sanctioned activities Employment of foreign nationals resident in Sudan Employment of foreign nationals resident in Sudan
or Iran
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Facilitation – Foreign Affiliate Risks U.S.-based Enterprise Resource Planning (“ERP”)
systems ERP systems are designed to integrate all data and
processes of multinational companies into a unified system, using various components of computer software and hardware to achieve the integration.g
Can A U.S. parent be deemed to facilitate a foreign subsidiary’s transactions with sanctioned countries if those transactions are effected through an ERP system based in the United States?the United States?
OFAC precedent is limited on questions of U.S.-based, automated support. Cuba travel service provider precedent from 2002 (020416-FACRL-EU-10) is somewhat on point, suggesting that there is some risk of facilitation from U Ssuggesting that there is some risk of facilitation from U.S.-based ERP systems that provide operational support.
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Facilitation Risk: Unrelated Parties
Facilitation risk exists with relationships with unrelated non-U.S. parties (e.g., joint development p ( g , j pprojects, joint ventures, agents, clients and customers) Includes the referral of business to non-U S personsIncludes the referral of business to non U.S. persons Level of risk depends on how much business there is in
sanctioned countries, and what U.S. company’s role is in the shared activitiesshared activities
Risk should be assessed on a case-by-case basis Expectations vis-à-vis sanctioned countries should be set at
the beginning of the relationshipthe beginning of the relationship Due diligence and advance planning are critical
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Facilitation: Mergers & Acquisitions
If there is a revenue stream from a sanctioned country, can change terms of the dealy, g Significant revenue from sanctioned countries can be
problematic If business is Cuba-related may need an OFAC license priorIf business is Cuba related, may need an OFAC license prior
to closing, and business may need to cease if interest of U.S. person is controlling
If asset purchase, may need license prior to closingp , y p g If stock purchase of non-U.S. entity, may have to choose
between: (1) retaining revenue stream and allowing new sub to operate independently; and (2) foregoing revenue stream
consider post-closing compliance audit
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Facilitation: Mergers & Acquisitions
If there is a revenue stream from an embargoed country planning about theembargoed country, planning about the following issues is essential: Placement of U S persons in management Placement of U.S. persons in management
positions of foreign subsidiary, including the Board Modifications to operating proceduresod cat o s to ope at g p ocedu es Delegations of authority from new parent Integration, especially IT, business supportIntegration, especially IT, business support
functionality and finance/treasury
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Strategies For Overcoming Facilitation Challengesg
Mitigating RisksMitigating Risks
Understanding Your Company’s Risk!Understanding Your Company’s Risk!
• Company’s Risk Profile impacts facilitation concerns– Higher OFAC standards for Banks and Financial Institutions
Products or technology desired in sanctioned countries– Products or technology desired in sanctioned countries– Mix of US and Non-US origin products and/or technologies– Expats population– Reliance on US Parent
• Policies and procedures, i.e. Grants of Authority• US Persons board members
– Heavy Letter of Credit financing– Large global operation– Strong focus on “collaborative” centers of excellenceStrong focus on collaborative centers of excellence– Wide distributor or third-party network
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Policy Versus Law . . .Policy Versus Law . . .
• Some companies have withdrawn from conductingfrom conducting business with one or more of theor more of the U.S. economic sanctioned countries
Companies should make an honest selfCompanies should make an honest self--appraisal of how appraisal of how aggressive or conservative it is willing to be in regards to aggressive or conservative it is willing to be in regards to sanctioned countries opportunitiessanctioned countries opportunities
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Internal Compliance Programp g
• An effective ICP – a complete OFAC program– Formalized policies and procedures– Controls and testing– Due Diligence path
P id dProvides road map
Detects and prevents violations
Mitigates penaltiesMitigates penalties
BenefitsBenefits33
A Strong ICP FoundationA Strong ICP Foundation
• Upper management support– Cannot succeed without management’s support
Tone at the top middle bottom– Tone at the top – middle – bottom
• Custom-fit to your company– One size does not fit all – tailored to company’s risk profilep y p– Thoughtful application to businesses, products, customers,
geographies
• Flexible and evolving• Flexible and evolving– Be alert to OFAC changes – dynamic program– Increased programs or existing programs strengthened
• Manageable– Reduce complex regulations to workable steps
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Due Diligence Due Diligence –– Essential Companies KnowEssential Companies Know
• Which employees are U.S. Persons or Persons Subject tothe Jurisdiction of the United States . . . And the employeesknow they are subject to the sanction regulationsy j g
• The members of their Supply Chain– Customers and other third parties are properly screened and vetted
before entering into a business relationship – not a listed SDN orowned/controlled by a listed SDN
– Extension of the member’s supply chain – do they have business,directly or indirectly, in a sanction country?
– Educate and raise awareness – ensure they are inadvertently referring– Educate and raise awareness – ensure they are inadvertently referringbusiness or causing your company to refer business
– Is an audit or monitoring program needed – what triggers one?• Companies with a global customer base or extensiveCo pa es a g oba cus o e base o e e s e
network of agents or traders should consider implementingformal or structured due diligence procedures
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Due DiligenceDue DiligenceOFAC March 31, 2011 NoticeOFAC March 31, 2011 Notice
Practices used by thePractices used by thePractices used by the Practices used by the Islamic Republic of Islamic Republic of Iran Shipping Lines Iran Shipping Lines (IRISL) d(IRISL) d(IRISL) and (IRISL) and companies acting on companies acting on its behalf to evade its behalf to evade U.S. and international U.S. and international economic sanctionseconomic sanctions
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Due Diligence Due Diligence –– ContinuedContinuedOFAC March 31, 2011 NoticeOFAC March 31, 2011 Notice
1. Using container prefixes registered to another carrier; 2. omitting or listing invalid, incomplete or false container
fi i hi i t i b d/prefixes in shipping container numbers; and/or 3. naming non-existent ocean vessels in shipping
documentsdocuments
• Do not unwittingly process fraudulent shipping documents or f ilit t hibit d ti itifacilitate prohibited activities
• Be alert to the presentation of fabricated vessel names in trade documents and check the bona fides of unfamiliar entities issuing hi i d tshipping documents
• Verify the accuracy of container numbers, particularly when unfamiliar with the issuer of the shipping documents
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Parent Versus SubsidiariesParent Versus Subsidiaries
• Important to understand company structure including any subsidiaries structure . . .
• Despite the fact that a wholly owned and incorporated European company• Despite the fact that a wholly-owned and incorporated European companymay, under U.S. law, legally conduct business with sanctioned countries, thefollowing factors can result in the company being subject to jurisdiction in theU.S.:– The company’s senior management is comprised of U.S. Persons– The company’s senior management is based in the United States and
essentially runs the company from there – tight control over subs– There are U.S. Persons working within the business that have dealings
with sanctioned countries and have not properly recused themselves– Foreign persons use the mail or wires to communicate with a U.S.
P di d li t ti ith ti d tPerson regarding a dealing or transaction with a sanctioned country
CISADA CISADA -- Understand transactions in which subs participate!Understand transactions in which subs participate!38
Recusal Policyy
• Do we need one?– Example: Placement of U.S. employees within or U.S.
officers/directors on boards of foreign subsidiariesofficers/directors on boards of foreign subsidiaries
• Procedures for U.S. Persons and Persons subject to the economic sanctions to formally recuse themselves
• Receiving, initiating or forwarding any correspondence,documents or other materials related to business with asanctioned country
• Attending meetings where there are discussions related toAttending meetings where there are discussions related tobusiness in sanctioned countries
• Participating in any conversations or telephone calls wherebusiness with sanctioned countries is discussed
M k R l F dil il bl• Make Recusal Forms readily available
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Education and TrainingEducation and Training
• Scope – should receive training on how to properly respond to inquiries
• May not refer any sanction matters or business opportunities
U.S. U.S. PersonsPersons ppPersonsPersons
• Should notNonNon-- • Should notinadvertently include a U.S. Person
NonNonU.S. U.S.
PersonsPersons• Ongoing – education and outreach efforts
PersonsPersons
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Education and Training continuedEducation and Training continued
• Non-U.S. Persons should not inadvertently include a U.S.Person
Provide or forward any correspondence documents or other• Provide or forward any correspondence, documents or othermaterials related to business with a sanctioned country to aU.S. PersonRefer any matters or opportunities related to a sanctioned• Refer any matters or opportunities related to a sanctionedcountry to a U.S. Person
• Discuss any matters or opportunities with a U.S. Person, inmeetings telephone calls or private conversationsmeetings, telephone calls or private conversations
• Request any assistance from a U.S. Person
Example: Non-US engineer calling an engineer in the U.S. with a p g g gtechnical question and believing it is okay as long as he does mention the question involves an Iranian project
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Understand Exemptions . . .p
• “Activity of a purely clerical or reporting nature that does not further trade or financial transactions with [sanctioned parties] is not considered prohibited[sanctioned parties] is not considered prohibited facilitation.”
• For exampleFor example– reporting on the results of a subsidiary's trade with Sudan
is not prohibited, hil fi i i i th t t d ti th– while financing or insuring that trade or warranting the
quality of goods sold by a subsidiary to the Government of Sudan constitutes prohibited facilitation.”
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Third Party RisksThird Party Risks
• Channel Members – distributors, agents and reps, Trading Houses, Customs Brokers and Freight Forwarders, Financial Institutions, Joint Ventures, etc.
3rd Party Agreements and Contracts:• Consider contract wording:
– Minimally, include wording that all parties to the contract are in compliance with applicable law
– Ideally, include more specific wording addressing compliance with TWEA IEEPA and OFAC RegulationsTWEA, IEEPA and OFAC Regulations
• Potential benefits of contract wording– Mitigation factor in event of violation
Di l i h b i di OFAC C li– Dialogue with business persons regarding OFAC Compliance– Due diligence
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Third Party Risks Third Party Risks –– Joint VenturesJoint Ventures
– Annual Reviews– Who has majority ownership?
Is there an agreement regarding export control compliance?– Is there an agreement regarding export control compliance?– What is the structure of the JV board?– Do any board members need to sign a Recusal to ensure no
facilitation actions? – Agreement Clauses
• Compliance with U.S. laws and local lawsp• Right to Audit• Terms and Conditions
– Education Often includes AntiOften includes Anti--Corruption Corruption ––B ib (FCPA) Dili ll!B ib (FCPA) Dili ll!Often includes AntiOften includes Anti--Corruption Corruption ––B ib (FCPA) Dili ll!B ib (FCPA) Dili ll!Education
• Not Legal advice• Not acting as their Compliance group
Bribery (FCPA) Diligence as well!Bribery (FCPA) Diligence as well!Bribery (FCPA) Diligence as well!Bribery (FCPA) Diligence as well!
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MonitoringMonitoring
• Review and audit routinely – program and transactions• Test samples based on risks and supply chain complexities• Incorporate monitoring activities into Internal Audit program and other• Incorporate monitoring activities into Internal Audit program and other
risk-base approaches• Ensure a process for open communication and then for reporting
inquiries from sanction countriesinquiries from sanction countries• Use sanctions-compliance clauses• Build within 3rd party agreements “Triggers” permitting reviews and
audits as neededaudits as needed• Develop policies and procedures oversight – to ensure not changing to
evade the regulationsP f i di h k f h OFAC i b ib h OFAC• Perform periodic checks of the OFAC site or subscribe to the OFAC alerts
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Questions?Q
• Thank you!Erin CrockettDirector, Corporate Global Trade ComplianceDresser, Inc.972-361-4752972 361 [email protected]
– Comments are those of the presenter and do not necessarily– Comments are those of the presenter and do not necessarily reflect those of any one company.
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