By Johanna Reeves, Esq.
A Word to the Wise— Don’t Forget About OFAC!
Oh, who? OFAC. It is the Office of Foreign Assets Control, a small but extremely powerful agency in the U.S. Department of the Treasury charged with administering and enforcing the economic and trade sanctions of the United States. OFAC’s mission is based on U.S. foreign policy and national security goals against certain foreign countries and regimes, terrorists, international narcotics traffickers, weapons proliferators and other threats to the national security, foreign policy or economy of the United States. Its primary statutory authorities are the International Emergency Economic Powers Act (IEEPA), Trading with the Enemy Act (TWEA) and the United Nations Participation Act (UNPA). These laws are implemented principally through presidential executive orders and OFAC regulations, codified at 31 C.F.R. Ch. V. In certain instances, Congress may legislate certain sanctions. This is true for the sanctions against Cuba, Iran, Venezuela and Russia. Most recently, Congress passed the Countering America’s Adversaries Through Sanctions Act (CAATSA), which imposes new sanctions on Iran, Russia and North Korea.
All too often, U.S. companies engaged in international trade focus on the export license requirements and restrictions of the U.S. Departments of State and Commerce, but fail to appreciate the swift and harsh repercussions that can come about, usually first in the form of blocked or frozen funds or enforcement penalties, when U.S. sanctions are violated. It is important to remember that OFAC sanctions apply regardless of whether an export license has been obtained from either the U.S. Department of Commerce or the U.S. Department of State.
A. U.S. Sanctions—What Are They and Who Is Subject?
OFAC implements approximately 30 sanctions programs, which range from comprehensive to limited, through blocking (freezing) assets and implementing trade restrictions. Because the sanctions are imposed, modified or lifted depending upon the foreign policy and national security objectives of the U.S. Government, each program has different levels of restrictions and can vary significantly depending on the target.
1. Comprehensive Sanctions
The comprehensive sanctions, so termed because of their broad scope of coverage and geographic orientation, generally prohibit the following activities: direct and indirect exports and imports of goods, technology, services, trade brokering, financing or facilitation, as well as any attempt to evade or avoid the sanctions. These restrictions apply to most goods, technology and services; although there are certain limited exceptions. North Korea, Iran, Syria and Cuba are examples of comprehensive sanctions.
2. Limited Sanctions
OFAC also implements limited sanctions that target individuals and companies owned or controlled by, or acting on behalf of certain regimes, as well as individuals, groups and entities, that engage in certain activity, such as terrorists and narcotics traffickers, so-designated under sanctions programs that are not country-specific. These sanctions are “list-based,” meaning the targeted entities and individuals are listed on any one of OFAC’s sanctions lists, such as the Specially Designated Nationals and Blocked Persons List (“SDN List”), the Non-SDN Iran Sanctions Act List and the Sectoral Sanctions Identifications List (“SSI List”), implemented pursuant to the Russian-Ukraine Sanctions. These sanctions generally prohibit transferring, paying, exporting, withdrawing or otherwise dealing in blocked property.
The SDN List is the largest list of sanctioned and blocked persons that OFAC maintains. It contains over 5800 entries, including individuals, entities, vessels and aircraft designated or identified as blocked under a particular sanctions program. All property and interests in property of a SDN that comes under U.S. jurisdiction is immediately blocked or frozen, which imposes an across-the-board prohibition against transfers or transactions of any kind involving the property. When a corporation, including a bank, blocks a prohibited payment it must report the action to OFAC within 10 days.
OFAC defines “property” in sweeping terms to include anything of value. This includes money, checks, drafts, debts, obligations, notes, warehouse receipts, bills of sale, evidences of title, contracts, negotiable instruments, trade acceptance, goods, wares, merchandise and anything else real, personal or mixed, intellectual property and intangible assets. “Property interest” is defined as any interest whatsoever, direct or indirect.
OFAC offers a Sanctions List Search application to the public that enables searches against all the OFAC lists. This tool is available at sanctionssearch.ofac.treas.gov. The sanctions lists are updated frequently, so it is critical that U.S. companies and individuals wishing to engage in international business check the transaction parties against the OFAC lists early and often. Many of the individuals and entities named on the list are known to move from country to country and may end up in unexpected locations. Furthermore, OFAC’s sanctions programs are constantly changing, so it should be checked frequently and before each new international transaction.
It is important to note there are several U.S. Government lists in addition to the OFAC lists that U.S. persons should check before proceeding with any transaction involving the export, reexport or import of goods, services or technical data, to ensure no parties are debarred or require special licensing. These lists are maintained by other federal agencies, including the U.S. Departments of Commerce and State. The Consolidated Screening List (CSL) is a list of parties for which the U.S. Government maintains restrictions on exports, reexports or transfers of items. The CSL is accessible at build.export.gov/main/ecr/eg_main_023148, and there is a CSL search engine, downloadable CSL files and other tools to aid industry in conducting party screening.
3. The 50% Rule
U.S. persons are prohibited from dealing with SDNs wherever they are located and all SDN assets are blocked. In addition, entities that a person on the SDN List owns (defined as a direct or indirect ownership interest of 50% or more in the aggregate) are also blocked, regardless of whether that entity is separately named on the SDN List. This is known as the 50% Rule and can be quite daunting from a compliance and due diligence perspective.
For example, under the Ukraine Related Sanctions Regulations (examined more closely below), OFAC regulations at 31 C.F.R. § 589.406 state: “[a] person whose property and interests in property are blocked pursuant to §589.201 has an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50 percent or greater interest. The property and interests in property of such an entity, therefore, are blocked, and such an entity is a person whose property and interests in property are blocked pursuant to §589.201, regardless of whether the name of the entity is incorporated into OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List).“
OFAC’s 50% Rule speaks only to ownership, not to control. Consequently, transactions with a company in which a sanctioned entity owns 50% or more interest are prohibited in the same way as transactions directly with the sanctioned entity, regardless of whether that company itself is listed on any of OFAC’s lists. According to its Frequently Asked Question No. 40, “OFAC urges persons considering a potential transaction to conduct appropriate due diligence on entities that are party to or involved with the transaction or with which account relationships are maintained in order to determine relevant ownership stakes.” This means that U.S. exporters and importers should conduct thorough due diligence to determine whether the 50% rule applies to any party to a transaction.
B. OFAC Jurisdiction
OFAC has sweeping jurisdiction over U.S. persons and persons subject to U.S. jurisdiction. This includes U.S. citizens and permanent resident aliens (“green card” holders) whether in the United States or abroad, entities organized and formed under U.S. law, including foreign branches, and any individual or entity physically located in the United States at the time of the activity, regardless of nationality. Under certain sanctions programs (Iran and Cuba), entities owned or controlled by a U.S. person and established or maintained outside the United States are also subject to OFAC’s jurisdiction.
OFAC sanctions also prohibit the facilitation of foreign trade with targets of U.S. sanctions. The facilitation prohibitions prevent U.S. persons from undermining sanctions through indirect support and apply to approving, financing, guaranteeing or otherwise assisting foreign trade with a sanctions target, changing policies or procedures to permit foreign affiliates to engage in activities with a sanctions target that previously required U.S. approval and even referring declined business opportunities to a foreign party.
C. The Ukraine/Russia-Related Sanctions Program
In 2014, President Obama issued four Executive Orders in response to the Russian Federation’s actions against Ukraine. These Executive Orders had a significant impact on the firearms and ammunition export/import industries. It started with EO 13660 (March 6, 2014), which declared a national emergency to deal with the threat posed by the actions and policies of certain persons who had undermined democratic processes and institutions in Ukraine, as well as threatening peace, security, stability, sovereignty and territorial integrity of Ukraine.
The scope of the Russian sanctions were subsequently expanded by EO 13661 (March 16, 2014), 13662 (March 20, 2018) by adding persons/entities to the SDN or prohibiting transactions with certain Russian sectors. Kalashnikov Concern was one such entity added to the SDN List on July 16, 2014, pursuant to EO 13662.
These sanctions, known as the “Sectoral Sanctions,” were introduced in EO 13662 and are implemented through Directives. They impose prohibitions on U.S. persons for certain specified transactions with entities identified in the Sectoral Sanctions Identification List (“SSI List”). Under Directive 3, which applies to the defense and related materiel sector of the Russian Federation economy, U.S. persons are prohibited from transacting in, providing financing for and other dealings in new debt of longer than 30 days maturity of persons determined to be subject to this Directive, their property or their interests in property. OFAC also applies the 50% Rule to entities on the SSI List. All other activities with these persons or involving their property or interests in property are permitted, provided such activities are not otherwise prohibited pursuant to Executive Orders 13660, 13661 or 13662 or any other sanctions program implemented by the Office of Foreign Assets Control.
In December 2014, the President issued and EO 13685, which prohibits U.S. persons from exporting or importing any goods, services or technology to or from the Crimean region of Ukraine or from undertaking new investment in the Crimea region.
D. OFAC Compliance and Enforcement
OFAC may learn about violations in a number of ways, including self-disclosures, blocked and rejected property reports, current investigations, referrals from other U.S. agencies as well as foreign government agencies, informants, disgruntled employees, public interest watch dog groups, competitors and other publicly available information.
The penalties for violating OFAC sanctions are substantial and depend on the sanctions program. Treasury imposes civil penalties, while criminal cases are prosecuted by the Department of Justice. Under IEEPA, civil penalties can be up to $250,000 per violation or twice the transaction value, whichever is greater, but OFAC must adjust penalties upward pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Federal Civil Penalty Inflation Adjustment Act Improvements Act of 2015.
It is also important to note that OFAC violations are subject to strict liability. This means that OFAC only has to prove a violation occurred. OFAC does not have to prove the U.S. person intentionally or knowingly violated the sanctions. In addition, OFAC violations also lead to denial or debarment of export privileges under the International Traffic in Arms Regulations.
In evaluating whether to impose civil penalties, OFAC looks at the characteristics of the violation, including whether the violation was willful or reckless, what was the harm to the sanctions program, the extent of remediation and the awareness of the conduct. OFAC also takes into consideration the characteristics of the violator, including the presence of an effective compliance program, cooperation with OFAC, previous enforcement actions and steps to ensure future compliance/deter similar actions. OFAC publishes a base civil penalty calculation matrix which takes into consideration (1) whether there was a voluntary self-disclosures; and (2) whether the violation was egregious.
OFAC’s responses to violations can range from a no-action letter, a cautionary letter, a finding of a violation or a civil penalty. Violations may also result in referrals to the Department of Justice for criminal enforcement, blocked funds and seized goods, license revocation, as well as negative publicity or loss of business.
E. Illustrative Enforcement Case—JPMorgan Chase
In October 2018, JPMorgan Chase Bank, N.A. (“JPMorgan”), settled potential civil liability for apparent violations of multiple sanctions programs, including the Cuban Assets Control Regulations, the Iranian Transactions and Sanctions Regulations and the Weapons of Mass Destruction Proliferators Sanctions Regulations. The cost of the settlement to JPMorgan was $5,263,171. It should be noted, (1) the settlement amount does not include the amount paid in attorney’s fees to negotiate the settlement; and (2) the total base penalty amount for the violations was $7,797,290, but the amount was reduced in part because JPMorgan voluntarily self-disclosed the apparent violations, which OFAC also found to be non-egregious case.
OFAC took into consideration several facts and circumstances, some of which were aggravating factors, and others were mitigating. Among the aggravating factors, OFAC determined JPMorgan appears to have acted with reckless disregard for its sanctions compliance obligations when it failed to screen participating entities in particular settlement transactions even though the bank had the necessary information to enable screening. Further, OFAC found JPMorgan engaged in a pattern of conduct in missing red flags and other warning signs on several occasions, including two separate occasions in 2011 when the bank received express notification from its client regarding OFAC-sanctioned entities participating in a settlement mechanism.
Included in the mitigating factors was the fact that JPMorgan cooperated with OFAC’s investigation of the apparent violations, including by entering into a retroactive tolling agreement (and multiple extensions thereof) to toll the statute of limitations. Also, the bank took several steps as part of a risk-based sanctions compliance program to prevent similar apparent violations in the future.
Among other things, this case exemplifies the significant risks when a U.S. person fails to take adequate steps to ensure transactions in which it engages or processes are compliant with OFAC sanctions, and the aggravating factor when a U.S. person has actual knowledge or reason to know, prior to the transaction being effected, of an SDN’s past, present or future interest in such a transaction. Likewise, the case also underscores the importance of a compliance program and the mitigating weight proactive measures may have if properly implemented in the wake of discovering violations.
The information contained in this article is for general informational and educational purposes only and is not intended to be construed or used as legal advice or as legal opinion. You should not rely or act on any information contained in this article without first seeking the advice of an attorney. Receipt of this article does not establish an attorney-client relationship.
About the author
Johanna Reeves is the founding partner of the law firm Reeves & Dola, LLP in Washington, DC (reevesdola.com). For more than 15 years she has dedicated her practice to advising and representing U.S. companies on compliance matters arising under the federal firearms laws and U.S. export controls. Since 2011, Johanna has served as Executive Director for the Firearms and Ammunition Import/Export Roundtable (F.A.I.R.) Trade Group (http://fairtradegroup.org). She has also served as a member of the Defense Trade Advisory Group (DTAG) since 2016. Johanna can be reached at firstname.lastname@example.org or 202-715-9941.
|This article first appeared in Small Arms Review V23N2 (February 2019)|