overview of u.s. economic sanctions -...

Cadwalader, Wickersham & Taft LLP New York London Charlotte Washington Beijing

Overview of U.S. Economic Sanctions

Dale Chakarian Turza (202) 862-2261 [email protected] © Copyright 2014 by Dale Chakarian Turza

IIB’s Annual Seminar on Risk Management and Regulatory Examination/Compliance Issues Affecting International Banks October 8, 2014

Cadwalader, Wickersham & Taft LLP 2

• ECONOMIC SANCTIONS GENERALLY

• OFAC’S ENFORCEMENT GUIDELINES

• MITIGATING SANCTIONS RISK


ECONOMIC SANCTIONS GENERALLY


Primary Relevant United States Laws

•  Trading With the Enemy Act (“TWEA”)

•  International Emergency Economic Powers Act (“IEEPA”)


Application of Economic Sanctions

•  The U.S. Government maintains severe restrictions on dealings with certain countries, entities, individuals, and other targets of economic sanctions.

•  These restrictions and prohibitions apply to acts/conduct and/or require the freezing of assets/property.

•  Re: TWEA programs: –  U.S. company and its branches and subsidiaries wherever located; –  all U.S. citizens/permanent resident aliens irrespective of the location; and –  all employees or other agents of U.S. company irrespective of nationality/

citizenship or location are subject.

•  Re: IEEPA programs: –  Bona fide foreign subsidiaries only are not subject (except as to Iran per recent

Iran-specific statute); and –  all others covered by TWEA programs are subject. –  IEEPA Enhancement Act (passed in 2007) makes it unlawful for a any person

(including foreign persons offshore) “to violate, attempt to violate, conspire to violate, or cause a violation of any license, order, regulations, or prohibition issued under [IEEPA].”


Office of Foreign Assets Control (“OFAC”)

• OFAC is an office of the U.S. Department of the Treasury.

• OFAC administers a variety of statutes and their respective regulations imposing sanctions to further the foreign policy and/or national security objectives of the United States. U.S. Department of State advises on foreign policy issues.


OFAC Active Country-Related Sanctions Programs

• Balkans • Belarus • Burma (Myanmar) • Central African Republic • Cote d’Ivoire (Ivory Coast) • Cuba • Democratic Republic of

the Congo •  Iran •  Iraq •  Lebanon

•  Former Liberian Regime of Charles Taylor

•  Libya • North Korea •  Somalia •  South Sudan •  Sudan •  Syria • Ukraine / Russia •  Yemen •  Zimbabwe


OFAC Active Non-Country-Based Sanctions Programs

•  Counter Terrorism •  Counter Narcotics Trafficking •  Magnitsky Sanctions •  Non-Proliferation •  Rough Diamond Trading •  Sectoral Sanctions •  Transnational Criminal Organizations * * *

•  Specially Designated Nationals (“SDN”), Specially Designated Narcotics Traffickers (“SDNT”) and Narcotics Kingpins (“SDNTK”), Specially Designated Terrorists (“SDT”), Specially Designated Global Terrorists (“SDGT”), Foreign Terrorist Organizations (“FTO”) and Sectoral Sanctions Identification (“SSI”)


Types of Assets/Property Subject to Blocking/Freeze

•  Funds/Cash •  Securities • Goods and Technology

•  Property and Services • Accounts •  Lines of Credit

• According to OFAC Guidance, “Blocked Property” is broadly defined to include “any property, tangible or intangible, or any interest therein, including present, future or contingent interests. A property interest subject to blocking includes interests of any nature whatsoever, direct or indirect.”


Persons Whose Property or Assets are Subject to Blocking/Freezing

•  Target Governments and their Agents

•  Individuals

• Companies

•  SDNs, SDNTs, SDNTKs, SDTs, SDGTs, FTOs

•  Targeted Vessels


Specially Designated Nationals

• Denominated as SDNs, these are individuals, entities and vessels which OFAC has determined to be owned or controlled by, or acting for or on behalf of, directly or indirectly, the governments of embargoed countries – or those that a U.S. person has reason to believe are doing so

•  SDNs are fronts for primary sanctions targets

•  SDNs are targets of sanctions as if they are the targeted government


OFAC Guidance on SDNs 50 Percent Rule!

•  According to OFAC Guidance:

–  “Persons whose property and interests in property are blocked … are considered to have an interest in all property and interests in property of an entity in which such blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest. Consequently, any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive Order or otherwise placed on OFAC’s list of Specially Designed Nationals (“SDNs”).”

–  “U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest. Such entities may be the subject of future designation or enforcement action by OFAC.”


Narcotics Traffickers Narcotics Kingpins

Terrorists

• Denominated as SDNTs, SDNTKs, SDTs, SDGTs and FTOs on OFAC’s SDN List (http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx)

–  All property of the foregoing individuals/entities is blocked

–  This blocking prohibits almost all economic/financial transactions with or involving the foregoing individuals/entities


What Economic Sanctions Program Components Require

•  U.S. Government’s foreign policy and/or national security objectives heavily play into the interpretation and administration programs

•  Each program is different in what is prohibited

•  Almost all prohibitions are strict liability for civil penalties (no knowledge or reason to know is required)

•  Program components: –  freezing and blocking of assets –  broad based prohibitions on trade and commerce –  prohibited “dealings” or engaging in “transactions” –  prohibited imports and exports of goods, technology and services, including legal and

financial services –  prohibited new investment –  prohibited facilitation or brokering –  prohibited travel-related expenses


Background on OFAC’s Ukraine – Related Sanctions

•  In response to actions that have undermined “the democratic processes and institutions in Ukraine,” threatened its “peace, security, stability, sovereignty, and territorial integrity,” and contributed to “the misappropriation of its assets,” President Obama has issued three Executive Orders imposing sanctions on certain Russian and Ukrainian individuals and entities.

•  E.O. 13660 issued on March 6, 2014 (Blocking Property of Certain Persons Contributing to the Situation in Ukraine) – authorized the imposition of sanctions against individuals and entities—including those who have provided material or financial assistance to such persons—who are determined to be responsible for or complicit in 1) activities that undermine the democratic process in Ukraine; 2) activities that threaten the peace, security, stability, sovereignty or territorial integrity of the country; or 3) misappropriation of assets of Ukraine or any "economically significant entity" in the country.


Background on OFAC’s Ukraine – Related Sanctions (cont’d.)

•  E.O. 13661 issued on March 17, 2014 (Blocking Property of Additional Persons Contributing to the Situation in Ukraine) – authorized the imposition of sanctions against certain persons identified by the Secretary of the Treasury, in consultation with the Secretary of State, as well as against Russian government officials, persons (individuals or entities) who operate in the Russian arms sector, those who act for or on behalf of, directly or indirectly, such persons, or those who have materially assisted or provided support for senior Russian officials or any other blocked person.

•  E.O. 13662 issued on March 20, 2014 (Blocking Property of Additional Persons Contributing to the Situation in Ukraine) - authorized the imposition of sanctions against persons identified by the Secretary of the Treasury, in consultation with the Secretary of State, who operate in certain sectors of the Russian economy, “such as financial services, energy, metals and mining, engineering, and defense and related materiel.”

•  The U.K., the European Union and Canada, among others, have also imposed sanctions with varying levels of intensity in response to the situation in Ukraine.


Persons Subject to Sectoral Sanctions Ukraine/Russia only

•  Through four “Directives” issued pursuant to Ukraine-Related E.O. 13662, OFAC authorized sectoral based sanctions targeting the Russian financial services, defense, energy and related materiel sectors believed to be supporting Russia’s efforts to destabilize eastern Ukraine and aid Ukrainian separatists.

•  As of September 25, 2014, 14 Russian entities are subject to sectoral sanctions.

•  U.S. persons (or those within the U.S.) are prohibited from transacting in, providing financing for, or otherwise dealing in: a) new debt of longer than 30 days maturity or new equity for those designated (financial institutions), their property or interests in property under Directive 1; b) new debt of longer than 90 days maturity for those designated (energy companies) under Directive 2; and c) new debt of longer than 30 days maturity for those designated (holding company for defense industry) under Directive 3.

•  U.S. persons (or those within the U.S.) are prohibited from providing, exporting or reexporting, directly or indirectly, goods, services (except financial services) or technology in support of certain oil-related activities to those designated (energy companies), their property or interests in property under Directive 4.


Penalties for Violations of U.S. Economic Sanctions

•  Trading With the Enemy Act (“TWEA”) –  Cuba –  Civil: up to $65,000 per violation –  Criminal: up to 10 years imprisonment; up to $100,000 per violation for

individuals (including corporate officers, directors and agents) and subject to up to $250,000 under other provisions of law; $1 million for corporations

•  International Emergency Economic Powers Act (“IEEPA”) –  Balkans, Belarus, Burma, Central African Republic, Cote d’Ivoire (Ivory Coast),

Democratic Republic of the Congo, Iran, Iraq, Lebanon, Former Liberian Regime of Charles Taylor, Libya, North Korea, Somalia, South Sudan, Sudan, Syria, Ukraine / Russia, Yemen, Zimbabwe and other targets

–  Civil: up to $250,000 per violation or twice value of transaction –  Criminal: up to $1,000,000 per violation and/or if a natural person up to 20

years imprisonment •  Additional penalties may be levied for failure to respond to OFAC or to provide

certain records.


How Risk Averse Are You?

•  If you have the time and money to plead guilty, skip this section •  Aggressive Prosecution – multiple agencies – coordinated investigations

–  OFAC, DOJ, NY DA, NY DFS, USAOs, Federal Reserve, OCC, SEC •  Parallel enforcement by foreign regulators (UK) and cooperation with U.S.

authorities •  Targets

–  large multinational financial institutions – domestic and foreign –  focus on systemic failures –  deliberate circumvention – stripping

•  Substantial costs to defend •  Threats of withdrawing or restricting banking licenses •  Substantial fines/remediation efforts •  More than penalties to consider


Cost of Non-Compliance

•  Trouble with sanctions countries – some eye catching fines: 2014 - BNP/Paribas – $8.9 billion

Clearstream Banking SA - $151.9 million Bank of Moscow - $9.5 million 2013 - Royal Bank of Scotland - $33 million

Weatherford International Ltd. - $91 million American Express Travel Related Services Company, Inc. - $5 million

2012 - ING Bank, NV - $619 million Standard Chartered Bank - $340 million (NY DFS) Standard Chartered Bank - $327 million (Federal Reserve, Department of

Justice and New York District Attorney’s Office) HSBC - $1.921 billion (Federal Reserve, DOJ, NYDA, OFAC and other

Department of Treasury agencies) Mitsubishi UFJ Financial Group - $8.6 million (OFAC) 2011 - JP Morgan Chase - $88.3 million (largest OFAC penalty for U.S. bank) 2010 - ABN Amro Bank forfeits $500 million to settle with DOJ

Barclays Bank plc - $298 million Balli Aviation and Balli Group - $15 million

2009 - CreditSuisse AG - $536 million aggregate settlement Lloyds TSB Bank plc: Forfeit $350 million to U.S. federal and state regulators)

ANZ Bank: $5.75 million to U.S. OFAC DHL: $9.4 million to U.S. OFAC 2005 - ABN Amro Bank: $80 million to U.S. federal and state regulators 2004 - UBS: $100 million to U.S. Federal Reserve


More Than Penalties to Consider

•  Multiple agencies/entities can be involved –  U.S. Government, state, municipal and local authorities –  Required disclosure to state and/or federal agencies –  Foreign country issues

•  Internal and external costs –  Investigations and legal actions –  Mitigation activities –  Shareholder complaints/actions –  Customer withdrawal

•  Transactions and licenses may be at risk •  Import, export, and sanctions licenses •  Certain sanctioned countries and certain types of transactions may trigger

further scrutiny under other provisions of law •  Reputational harm/adverse publicity


OFAC’S ENFORCEMENT GUIDELINES


Why Enforcement Guidelines?

•  Implement IEEPA Enhancement Act •  Provide clarity with respect to enforcement process (internal and

external) •  Provide guidelines which are universally applicable •  Increase transparency of enforcement process •  Increase perceived fairness and ensure that violations receive

“proportional responses” •  Reward compliance and voluntariness of disclosures •  Deterrence •  Improve the efficiency of OFAC’s internal decision-making •  Provide flexible framework that can apply in all cases


International Emergency Economic Powers Enhancement Act

•  Enacted on October 16, 2007 •  Increased maximum civil penalties for all IEEPA programs to $250,000 per

violation or twice the value of the transaction •  The new guidelines, published on September 8, 2008 implement the new

penalties and withdraw the 2003 and 2006 guidelines –  Note: where: a) a Pre-penalty notice was issued or b) OFAC staff

recommended a proposed settlement that was memorialized in writing between parties, after October 16, 2007, but before September 8, 2008, OFAC will honor the terms and will process the case in accordance with the prior Enforcement Guidelines.

•  New guidelines apply to all programs except –  The Cuban Assets Control Regulations-maximum civil penalty $65,000 –  Foreign Narcotics Kingpin Sanctions Regulations-maximum civil penalty

$1,075,000 –  Rough Diamonds Control Regulations-maximum civil penalty $10,000


Enforcement Actions

•  No Action Letter –  Insufficient evidence to conclude that a violation has occurred or no administrative

response is warranted •  Request for Additional Information (.602 request) •  Cautionary Letter

–  No finding of violation but conduct could lead to a violation. Final enforcement action but no finding of a violation.

•  Finding of Violation –  Final action but no assessment of a penalty

•  Finding of Violation and Imposition of Penalty –  Final agency action.

•  Other administrative action –  License denial –  Suspension, modification or revocation –  Cease and desist order

•  Criminal Referral –  May be in addition to finding of a violation and/or imposition of penalty


General Factors

•  Willful or reckless violation of law –  Conduct with knowledge that the action was a violation of law –  A failure to exercise minimum degree of caution or care

•  Awareness of conduct at issue –  Actual knowledge of the violative conduct –  Reason to know –  Senior Management’s knowledge

•  Harm to sanctions programs objectives –  Economic benefit to a sanctions target –  Implications for U.S. Policy –  License eligibility (a mitigant) –  Humanitarian activity


General Factors (cont’d.)

•  Individual Characteristics of the Subject Person –  Commercial sophistication –  Size of operation –  Volume of transactions –  Sanctions violation history

•  Compliance program –  Views of regulator for regulated or non-regulated industry

•  Remedial response –  Steps taken to stop the activity –  Investigation –  Notification to Management –  New remediation processes implemented (training) –  Identification of other violations


General Factors (cont’d.)

•  Cooperation with OFAC –  Voluntary disclosure –  Provision of information –  Disclosure of other apparent violations –  Agreeing to waive the statute of limitations (tolling agreement)

•  Timing of apparent violation –  Recent designation

•  Other enforcement actions –  Other actions by federal or state agencies

•  Future compliance/deterrence effect on industry •  Other relevant factors


Definition of Voluntary Disclosure

•  Self initiated notification to OFAC of an apparent violation

•  Exception: a disclosure is not considered a voluntary disclosure if – –  A third party is required to notify OFAC of the apparent violation

because a transaction was blocked or rejected by that third party (regardless of whether or when OFAC actually receives such notice from the third party and regardless of whether the Subject Person was aware if the third party’s disclosure) or

–  Disclosure is materially incomplete or –  Disclosure is not self-initiated.


Methodology for Calculating Penalties

•  Non Egregious Violations –  Voluntary Disclosure

•  Base is one half the value of the transaction capped at $125K –  No Voluntary Disclosure

•  Base will not exceed $250K and may be reduced

•  Egregious Violations-typically willful and/or reckless –  Voluntary Disclosure

•  Base is one half of the statutory maximum of $250K or twice the value of the transaction

–  No Voluntary Disclosure •  Base amount is statutory maximum of $250K or twice the

value of the transaction


Value of a Transaction

•  Defined as “dollar value of the subject transaction”

•  Value in export and import violations

•  Where value is not ascertainable, OFAC will consider --

–  The market value of goods or services

–  The economic benefit conferred on the sanctioned party

–  The economic benefit derived by the subject from the transaction


Steps to Settlement

•  When can you settle?

–  Prior to Issuance of a Pre-penalty notice

–  Following Issuance of a Pre-penalty notice

–  Settlement of Multiple Violations

•  What should the settlement cover?

–  Amount

–  Description of Violation


MITIGATING SANCTIONS RISK


Sanctions Compliance Program

•  Policy – Code of Conduct •  Procedures –

–  Good Internal Controls –  Company Risk Assessment –  Due Diligence Procedures –  Screening –  Monitoring –  Conflict of Laws –  Training –  Audit/Oversight –  Timely Reporting –  Accurate Books and Records

•  Harmonize with Export Control Policy/Procedures •  Certain sanctioned countries (e.g. Iran) demand screening that requires “thinking

outside the box”


International Business

•  Consider sanctions risk in all types of international business –  Trade – Goods, Technology, Licenses, etc. –  Activities of Subsidiaries, Branches, Joint Ventures and Distributors –  Business Development Efforts/Trade Shows –  Mergers and Acquisitions –  IPOs –  Bond Issuances –  Syndicated Finance –  Trade Finance –  Correspondent Banking –  Insurance/Reinsurance Products –  Individual Accounts –  Any type of product or service (including financial products and

services) could be international in nature


Sanctions Risk Assessments

•  Due Diligence is key! •  Know the Business and Know Your Customer/Third Party (Business Partners/

Beneficial Owners) •  Search for connections to sanctions targets/countries •  Search for sanctions targets’ investments (OFAC Guidance - >50% alone or in

aggregate = target by operation of law; <50% = apply control test) •  Identify direct and indirect sanctions risks early on

–  Direct sanctions risk should be identified and dealt with up front. –  How should indirect sanctions risk be identified? How is it defined?

•  What about activity that indirectly facilitates activity that would be in breach of sanctions?

•  How is facilitation defined? •  Customer/Third Party Risk Assessments

–  For financial institutions, process typically starts with anti-money laundering process

–  Sanctions screening –  Other compliance policies –  Initial and periodic reviews


Risk Assessments (cont’d.)

•  Geography/footprint of Customer/Third Party and transaction at hand –  Review all aspects

•  Product Risk Assessments –  Transaction types –  Value

•  Deal/Transaction Assessments –  business partners, affiliates, and other entities involved –  owners, including beneficial owners and interests of all parties and

entities involved –  related business transactions, or past similar transactions


Risk Assessments (cont’d.)

•  Source/Use of funds •  Local Law Requirements/Restrictions •  Engagement of external experts, advisors and consultants, as appropriate

–  Embassies –  Local investigators –  Local regulators, if appropriate –  Outside and/or local counsel

•  Strategy for Red Flags –  lack of or refusal to provide information or agree to restrictions –  inability to confirm source of funds –  compliance costs are “too high”


Reducing Sanctions Risks

•  Good Due Diligence Documentation •  Contractual Provisions/Other Agreements •  Representations and Warranties •  Use of funds restrictions •  Indemnities •  Events of Default

•  All helpful but not a cure if a violation of law occurs.

•  Enhance Due Diligence •  Enhance Sanctions Compliance Program •  Enhance Compliance Training


Bottom Line

•  Laws and Economic Sanctions Programs are dynamic and respond to world events

•  Sometimes changes in existing programs can be anticipated/sometimes not

•  Be ever vigilant to all interactions to spot potential issues

•  Breaking the law can be costly!

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