Export Controls and Economic Sanctions Compliance: Navigating the New Rules
Greg Husisian Chair, Export Controls & National Security Practice Foley & Lardner LLP
[email protected] 202.945.6149
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Sanctions Overview
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Overview • Economic Sanctions - Purpose & Scope • Recent Developments – – – –
Iran Nuclear Negotiations Eased Cuba Sanctions Enhanced Russia Sanctions Other Programs & Enforcement Actions
• Sanctions Program Comparison • Managing Sanctions Risk • Twelve Steps to Compliance
Purpose & Scope • U.S. Economic Sanctions programs target foreign policy and national security threats: – Bad Countries (Comprehensive Sanctions) • Rogue States (Cuba, Iran, Sudan) • One region: Crimea
– Bad Governments • Hostile Governments (North Korea, Russia, Syria, etc.).
– Bad Actors • • • • •
Terrorist Syndicates (Al-Qaeda, Hamas, Taliban, ISIS). Weapons Proliferators. Narcotics Kingpins. Transnational Criminal Syndicates. Human Rights Violators.
Purpose & Scope • Most sanctions programs prohibit: – Engaging in any sort of commercial or financial transactions with designated countries, governments, entities, or persons – Making payments, entering into contracts, or holding any kind of property in which a sanctioned person has an interest – Dealing with any company or entity that is at least 50 percent owned or controlled by a sanctioned person
• Some sanctions programs target specific areas: – Central Banks & Other Financial Institutions (Iran, Syria) – Business & Commercial Sectors (Iran, Russia) – Disputed Regions (Crimea)
Broad Jurisdiction • OFAC’s jurisdiction applies both domestically and internationally – – – –
U.S. citizens & permanent residents (wherever located) Business or organizations incorporated under U.S. Law Commercial or financial transactions in the United States Export or re-export of U.S. goods, services, or technology • Overlap with export controls
– Using the U.S. financial system, whether directly or indirectly • Dollar transactions
• The same rules apply to foreign entities that are owned or controlled by U.S. companies. – Any nexus with the United States or a U.S. person is sufficient – Being a “foreign” company or subsidiary of a U.S. company is not a protection; in fact, subs/JVs in foreign countries are a prime risk point
Export Controls • Export Administration Restrictions (“EAR”) – Application • Applies to all goods that are of U.S. origin • Applies to downstream products made from U.S.-origin goods, if greater than de minimis U.S. content • Applies to goods that transit the United States
– Dovetail with OFAC sanctions • Can violate both in same transaction • Increasingly prosecuted together
– Restrictions on goods shipped to embargoed persons or countries • Even non-controlled goods are subject to end-use/end-user controls
Recent Developments: Iran • Iran Nuclear Negotiations do not change most U.S. sanctions programs. – The JCPOA does not revoke most sanctions • Moderate easing of primary sanctions – general licenses/receptiveness to license requests • Easing of specific secondary sanctions tied to Iran’s nuclear program • All other sanctions will remain. Does not repeal the Iran Transactions & Sanctions Regulations (“ITSR”), which are the backbone of U.S. sanctions on Iran
– Follow the law, not the headlines. • Most U.S. companies and their affiliates will see no change at all
Recent Developments: Cuba • Although recent Changes in the Cuba sanctions open opportunities in certain sectors… – Banking & Financial Services (including credit cards, debit cards, and some forms of medical insurance) – Telecommunications & Consumer Electronics (including telephone, television, Internet, and devices to connect Cubans to the world) – Agriculture, Construction & Small Business (for family farms, private residences, and Cuban entrepreneurs)
• Most of the Cuba Embargo still remains in place. – The 1996 Helms-Burton law remains on the books; Congressional action is necessary for wholesale easing – Further, targeted easing likely will occur
Continuing Challenges • Cuba’s Economy is controlled by blacklisted parties. – The General Licenses do not authorize transactions with: • The Cuban Government of Government Officials (except diplomatic missions) • Entities owned by the Cuban Government (except certain banks) • Members of the Cuban Communist Party • Cuban persons or companies appearing on the SDN List • Entities that are owned or controlled by Cuban SDNs
– Even is a transaction appears to be authorized, U.S. and multinational corporations still need to screen their Cuban counterparts • Recent reforms are designed to empower Cuba’s private sector, not the Castro regime and its allies • Known your customers and business partners
Recent Developments: Russia • Enhanced Russia Sanctions constrain business – Some banks, companies, and individuals with ties to the Kremlin now appear on OFAC’s SDN List – “Sectoral Sanctions” limit long-term arrangements with many top Russian defense and energy companies – Sectoral Sanctions also place 30-day terms on financial transactions involving many prominent Russian banks – Comprehensive, territorially-based sanctions on Crimea
• Additional Sanctions May Occur – The Ukraine Freedom Support Act gives the President broad authority to sanction entities that interfere in Ukraine, Georgia, or Moldova
Program Comparison Issue
Iran
Cuba
Russia
Burma
Territorially Based Sanctions
Yes
Yes
Some
Suspended
Government-Based Sanctions
Yes
Yes
Some
Suspended
Sectoral Sanctions
Yes
No
Yes
No
List-Based Sanctions
Yes
Yes
Yes
Yes
Extraterritorial Sanctions
Yes
Some
No
No
State & Local Government Sanctions
Yes
No
No
No
Restrictions on U.S. Dollar Transactions
Yes
Some
No
Suspended
Restrictions on U.S. Export Licensing
Yes
Yes
Yes
Some
Arms Embargos
Yes
Yes
Some
Yes
Import Bans
Yes
Some
No
Some
Travel Bans
Some
Some
Some
Some
* This chart briefly summarizes four of more than twenty distinct OFAC and U.S. State Department sanctions programs.
Program Comparison • Every Sanctions Program is different. – Policymakers tailor sanctions programs to specific challenges and conditions, and countries. – Sanctions can be much more comprehensive than export controls. Consider every export with both sets of laws in mind. – There is no “one size fits all.” Effective compliance means adapting to risks in the places where you conduct business.
• Sanctions Programs constantly change. – Policymakers implement new sanctions and revise old programs in direct response to changing world events. – There is no “one and done.” Companies cannot afford to let their compliance program run on auto-pilot.
Moving Forward • Compliance is the best business strategy. – Ensure than your business activities are authorized. • Review the new General Licenses carefully and stay within scope • Apply for Specific Licenses to cover any grey areas
– Screen customers, business partners, and other parties • SDNs/blocked persons • Check for entities owned or controlled by sanctioned persons
– Implement risk-based solutions to avoid liability: • Policies, procedures, internal controls, and internal audits • Coverage for agents, distributors, and other third parties • Employee training and certification – from top to bottom
Moving Forward • Follow the law, not the headlines. – Diplomatic developments may not translate into business opportunities – at least not at first – Media reports tend to focus on announcement and controversies, not the substantive regulations
• Manage your foreign affiliates. – Foreign subsidiaries, joint ventures, and other affiliates can expose you to significant risks, especially if they don’t know or follow U.S. law
• When in doubt, seek legal counsel
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Managing Risk • Implement or Update Your Compliance Program – Establish en Export Controls/Economic Sanctions Compliance Program to address sanctions and other related risks (Anti-Boycott, etc.) – Implement policies, procedures/internal controls, and training procedures tailored to how and where you do business – Ensure that all policies, procedures, and training materials appear in plain English so there is no ambiguity
• Update your compliance program regularly to reflect changes in your business, changes in the law, and changes in the world – Don’t let your sanctions compliance program run on auto-pilot – Legal changes – The importance of audits
Managing Risk • Know your Customers and Business Partners – Screen customers, business partners, and other transaction parties against the SDN list and other U.S. Government blacklists. • Treasury Dept. - SND List, SSI List, Magnistky List, etc. • Commerce Dept. - Denied Parties Lists, Entity List, Unverified List • State Dept. - AECA Debarred List, Nuclear Proliferation Sanctions Lists
– Perform reasonable due diligence to ensure that they are not owned or controlled by sanctioned entities • Many major Russian companies have ties to SDNs, or else to the Russian defense and energy sectors • Many Cuban companies also have ties to SDNs, or are run by the Cuban Government or Cuban Communist Party
Managing Risk • Engage Third Parties – Share your policies and procedures with agents, consultants, distributors, and other third parties acting on your behalf • Third parties operating overseas can be a hidden source sanctions risk, particular those selling U.S.-origin goods or technology
– Train agents and distributors in U.S. economic sanctions, particularly those located outside the United States • Monitor third-party training the same way you would monitor training in your own organization
– Conduct periodic sanctions compliance audits to ensure that third parties comply with U.S. sanctions • New parties • Make part of contract renewal
Managing Risk • Write Compliance into your Contracts. – Require third parties to provide end-use and end-user statements certifying compliance with U.S. economic sanctions • Make sure they implement the same safeguards that you would implement if you were exporting directly from the Unite States.
– Prohibit re-exports to high-risk regions and known diversion countries without your prior authorization • China, Hong Kong, Mexico, Singapore, United Arab Emirates.
– Secure audit rights to ensure compliance with sanctions and other international regulatory risks • If you audit for any reason, you should also audit for sanctions compliance
– Add indemnity clauses for sanctions and export control violations
Twelve Steps to Compliance • • • • • •
Step 1: Secure Buy-in at the Top Step 2: Conduct a Risk Assessment Step 3: Survey Current Controls Step 4: Assess Local Oversight Step 5: Identify Compliance Resources Step 6: Create a Written Compliance Policy
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Twelve Steps to Compliance • Step 7: Create Internal Controls Tailored to Organization and Risk • Step 8: Training, Training, Training • Step 9: Integrate Outsiders Into Program • Step 10: Compliance Audits • Step 11: Monitor Red Flags • Step 12: Communication with Compliance Stakeholders 22
Questions? GREGORY HUSISIAN Chair, Export Controls & Nat’l Security Practice 3000 K Street, N.W. Washington D.C. 20007 Tel. + 1 202 945 6149
[email protected]