Mid-2018 Sanctions Review: A Turbulent Year So Far

This article by partner Ama Adams, counsel Brendan Hanifin and associate Emerson Siegle was published by Law360 on June 21, 2018.

No superlative could aptly describe the magnitude of U.S. sanctions developments through the first six months of 2018. The pace of change has been so intense and complex that, understandably, even the most sophisticated international companies and investors have been challenged to respond to policy and regulatory developments.

Regulatory Developments

During the first half of 2018, the United States has escalated sanctions targeting Russia, Iran and Venezuela, while moving more cautiously with respect to sanctions relating to North Korea. Collectively, these policy developments demonstrate that the U.S. Treasury Department’s Office of Foreign Assets Control is becoming increasingly aggressive, particularly in targeting non-U.S. entities, and that U.S. economic sanctions are growing ever more complex.

Russia

On April 6, OFAC designated to the List of Specially Designated Nationals and Blocked Persons, or SDN list, 7 Russian oligarchs, 12 companies they own or control, 17 senior Russian government officials, a state-owned Russian weapons trading company and a Russian bank.¹ OFAC took this action in response to Russia’s conduct in Crimea and Syria, as well as the country’s alleged malign cyber activities.

Although the April 6 designations were based on existing authorities, the action marked a significant escalation in U.S. sanctions targeting Russia. Prior to April 6, U.S. sanctions generally focused on “new” debt and equity interests in major Russian firms engaged in certain sectors of the economy.

Despite the issuance and multiple amendments of general licenses authorizing the wind-down of certain activities with the newly designated parties, the April 6 designations had a reverberating effect across global markets. As a result of the April 6 announcement, many U.S. and European companies and investors discovered that their Russia-related exposure was much more significant than they had previously appreciated.

• Pursuant to OFAC’s “50 percent rule,” U.S. persons are prohibited from doing business with any entity in which a sanctioned party — or multiple sanctioned parties taken together — hold a 50 percent or greater ownership interest. In practical terms, the 50 percent rule means that U.S. persons are prohibited from dealing with entities — majority-owned by sanctioned parties (including the newly designated Russian parties) — that are not, themselves, included on OFAC’s SDN list.
• Pursuant to the Countering America’s Adversaries Through Sanctions Act, or CAATSA, enacted in August 2017, the president is required to impose sanctions on, inter alia, any non-U.S. person who knowingly “facilities a significant transaction … for or on behalf of” Russian parties on the SDN list or their immediate family members.²

Several of the Russian parties designated on April 6 have — or had — widespread and, in some cases, opaque holdings throughout the global economy. As a result, the April 6 announcement left many companies and investors, within and without the U.S., scrambling to identify and, in some cases, rapidly divest interests in or related to the targeted Russian parties.³

Iran

On May 8, after much anticipation, President Donald Trump announced that the United States would withdraw from the Iran nuclear deal (the Joint Comprehensive Plan of Action, or JCPOA), reinstate sanctions waived as part of the U.S.’s participation in the JCPOA and impose additional sanctions targeting Iran. This decision amounts to a seismic shift in U.S. sanctions targeting Iran, presenting new obstacles for U.S. and non-U.S. companies alike.

Of note, OFAC advised that it intends to revoke General License H — which currently allows foreign-organized companies owned or controlled by U.S. persons to engage in certain dealings with Iran — as soon as administratively feasible, and to give parties currently relying on General License H a period of 180 days (or through Nov. 4, 2018) to wind down such dealings with Iran.

OFAC also intends, after the 180-day wind-down period, to reimpose secondary sanctions targeting critical Iranian industries — such as Iran’s shipping, energy and financial sectors — which means that non-U.S. companies not ordinarily subject to OFAC’s jurisdiction could be targeted by secondary sanctions (and restricted from access to the U.S. marketplace) if they continue engaging in transactions with these sectors of Iran’s economy.

No later than Nov. 5, 2018, the administration will redesignate more than 400 individuals and entities that were “delisted” under the JCPOA from OFAC’s SDN list, Foreign Sanctions Evaders List and other restricted party lists. As such, non-U.S. persons could be subject to secondary sanctions for conducting transactions with these individuals and entities.

Finally, newly reimposed Section 1245 of the National Defense Authorization Act authorizes the imposition of sanctions on foreign financial institutions that knowingly conduct or facilitate significant financial transactions for the purchase of Iranian petroleum or petroleum products with a U.S.-designated Iranian financial institution or with the Central Bank of Iran. After the 180-day wind-down period, the U.S. Department of State will determine whether to issue exemptions to foreign financial institutions based on a determination that the parent country has significantly reduced its purchases of oil from Iran.

Further complicating sanctions compliance, the EU members to the JCPOA — France, Germany and the United Kingdom — have announced their continued support for the Iran nuclear accord and, in recent weeks, have explored strategies for maintaining the deal.⁴ On May 17, the EU announced plans to reactivate a 1996 “blocking statute” that would prohibit parties subject to EU jurisdiction from complying with U.S. sanctions targeting Iran. If the blocking statute is reinstated (and enforced in practice), simultaneous compliance with U.S. sanctions and the EU blocking statute would be impossible, placing many multinational organizations in a precarious position.

Neither the U.S. nor EU has yet acted to address the current state of uncertainty. In the interim, several leading European companies — including Allianz, Maersk Tankers and Siemens — already have announced plans to wind down their operations in Iran.⁵ For its part, the Trump administration has publicly announced that is willing to impose secondary sanctions against companies of friendly countries that continue to conduct business with Iran.⁶

Venezuela

Executive Order 13808, issued in August 2017, prohibits U.S. persons from engaging in most transactions and dealings involving new debt of the government of Venezuela, as well as certain bonds issued by the government of Venezuela. In 2018, the U.S. has continued to expand the scope of sanctions targeting Venezuela, in an effort to ratchet up pressure on the Maduro regime.

• On March 19, President Trump issued Executive Order 13827, which prohibits all transactions related to, the provision of financing for, and other dealings in, any digital currency, digital coin or digital token issued by, for or on behalf of the government of Venezuela.
• On May 21, President Trump issued Executive Order 13835, which prohibits all transactions related to, provision of financing for and other dealings in (1) the purchase of debt owed to the government of Venezuela, including accounts receivable; (2) any debt owed to the government of Venezuela that is pledged as collateral after May 21, including accounts receivable; and (3) the sale, transfer, assignment or pledging as collateral by the government of Venezuela of any equity interest in any entity in which the government of Venezuela has a 50 percent or greater ownership interest.

The new executive orders do not affect the validity of general licenses issued in August 2017, including general licenses authorizing dealings with Citgo Holding Inc. or in specified bonds. However, absent significant political changes, it is foreseeable that the U.S. government may impose additional sanctions targeting Venezuela in the near future.

North Korea

CAATSA, passed in August 2017, requires the imposition of sanctions against parties who knowingly engage in a wide range of transactions with North Korea, such as transactions involving North Korean financial institutions or the North Korean defense sector. In addition, in September 2017, President Trump issued Executive Order 13810, which afforded OFAC broad authority to impose secondary sanctions against non-U.S. parties that conduct or facilitate business with North Korea.

OFAC has thus far exercised its expanded authority under CAATSA and Executive Order 13810 cautiously. While OFAC has targeted a handful of Chinese and Russian companies and financial institutions, the agency has not yet sanctioned a significant player in the global economy for its North Korea-related dealings. Significant North Korea-related sanctions activity — including sanctions targeting other Chinese and Russian entities for engaging in dealings with North Korea — will likely remain on pause, pending further developments and negotiations relating to several high-priority foreign policy objectives for the Trump administration, including (1) North Korea’s nuclear missile program; and (2) the China-U.S. trade relationship.

Should these negotiations stall, it is possible that the Trump administration may move quickly to impose new sanctions targeting North Korea and/or Chinese or Russian companies that conduct business with North Korea, in an effort to exert economic pressure in support of the administration’s broader foreign policy objectives.

Enforcement Developments

There has been only one publicly announced enforcement action in 2018 to date, which represents a significant decrease in enforcement activity as compared to recent years. On June 6, OFAC announced a settlement agreement with Ericsson Inc. and Ericsson AB to resolve an apparent violation of the Sudanese Sanctions Regulations that occurred between 2011 and 2012.⁷

According to the settlement agreement, Ericsson personnel conspired with a non-U.S. subcontractor to supply a U.S.-origin satellite hub and U.S.-origin satellite-related services to a Sudanese entity. The Ericsson employees allegedly “ignored warnings from Ericsson’s compliance department that the transaction at issue was prohibited.”⁸

To resolve the apparent violation, Ericsson agreed to pay a civil penalty of $145,893 to OFAC. The penalty was lower than either the statutory maximum or the base civil monetary penalty, reflecting credit Ericsson received for, inter alia, the strength of its compliance program and the additional enhancements it made to the program as part of its cooperation with OFAC.

While OFAC’s enforcement priorities are not a matter of public record, there are at least two very plausible explanations for the below-average enforcement activity through the first six months of 2018. First, and as detailed above, OFAC has been unusually busy implementing complex new sanctions policy changes, and may therefore have been utilizing fewer resources to focus on enforcement actions. Second, between 2016 and 2017, there was an uptick in OFAC enforcement activity, which may have cleared a backlog of pending enforcement matters. Because OFAC enforcement matters frequently take years to resolve,⁹ it is possible that the since-cleared backlog has given way to a new pipeline of enforcement actions that are proceeding towards resolution.

Looking Ahead

Recent changes to U.S. sanctions underscore the importance of conducting fulsome sanctions-related due diligence of counterparties, as well as the importance of keeping abreast of regulatory developments (which have been occurring at an unprecedented pace over the past 12 to 18 months).

The pace of sanctions developments is unlikely to slow in the near future, as countries assess their responses to the U.S.’s withdrawal from the JCPOA, the U.S. pursues nuclear diplomacy with North Korea (and trade diplomacy with China), economic and political instability persist in Venezuela and U.S. investigations related to Russian interference in the 2016 U.S. presidential election continue to unfold. In a constantly changing geopolitical environment, marked by significant uncertainty, a comprehensive and effective sanctions compliance strategy has never been more imperative.

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¹ Press Release, U.S. Department of the Treasury, Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity (Apr. 6, 2018), https://home.treasury.gov/news/press-releases/sm0338.

² OFAC FAQs #542. While OFAC has provided guidance on factors that may lead to a transaction being deemed “significant,” it assesses “the totality of the facts and circumstances” and ultimately makes such a determination on “a case-by-case basis.” Relevant factors include (1) the size, number and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) other factors deemed relevant. Id.

³ In one case, European company Sulzer went as far as to announce that it had ensured the divestment of sufficient shares of Renova Group, a Russian entity added to the SDN List on April 6, to ensure that Sulzer was not itself blocked pursuant to the 50 percent rule. Press Release, Sulzer, Transfer of shares completed — Renova ownership below 50% — Sulzer free from US Sanctions (Apr. 12, 2018), https://www.sulzer.com/en/shared/news/2018/04/12/03/58/sulzer-free-from-us-sanctions.

⁴ Raf Casert, EU foreign ministers seek to keep Iran nuclear deal alive, ABC News (May 28, 2018), https://abcnews.go.com/Politics/wireStory/eu-foreign-ministers-seek-iran-nuclear-deal-alive-55483234. Interestingly, Poland has expressed opposition to any EU action that would weaken the effect of U.S. sanctions targeting Iran. Iran has seized upon the United States’ announced withdrawal as an opportunity to attempt to secure concessions from the JCPOA’s remaining participants.

⁵ Allianz making plans to wind down Iran business, Reuters (May 15, 2018), https://www.reuters.com/article/us-iran-nuclear-usa-allianz/allianz-making-plans-to-wind-down-iran-business-idUSKCN1IG1QE; Maersk latest company to shun Iran as EU scrambles to save nuclear deal, Reuters (May 17, 2018), https://www.reuters.com/article/us-iran-nuclear-maersk/maersk-latest-company-to-shun-iran-as-eu-scrambles-to-save-nuclear-deal-idUSKCN1II0YR; Alanna Petroff, Siemens CEO: We can’t do new deals with Iran, CNN Money (May 14, 2018), http://money.cnn.com/2018/05/14/investing/iran-sanctions-siemens-europe/index.html.

⁶ Gregg Robb, Mnuchin says European allies will have to comply with re-imposed Iran sanctions, MarketWatch (May 22, 2018), https://www.marketwatch.com/story/mnuchin-says-european-allies-will-have-to-comply-with-re-imposed-iran-sanctions-2018-05-22.

⁷ OFAC formally revoked the Sudanese Sanctions Regulations in October 2017.

⁸ OFAC, Ericcson Inc. and Ericsson AB Settle Potential Civil Liability for an Apparent Violation of the Sudanese Sanctions Regulations (June 6, 2018), https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20180606_ericsson.pdf.

⁹ By way of example, the conduct underlying the Ericsson settlement announced on June 6, 2018, occurred between 2011 and 2012, and Ericsson received mitigating credit for entering into a statute of limitations tolling agreement.