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SanctionsAlert.com

Sanctions Risk Management Symposium

September 18-19, 2017

New York

www.SanctionsConference.com

www.SanctionsAlert.com

All rights reserved 2017 © Alert Media Group, LLC

Table of Contents Introduction .................................................................................................................................... 1

About SanctionsAlert.com .............................................................................................................. 2

Why SanctionsAlert.com? ........................................................................................................... 2

Who benefits from the SanctionsAlert.com training and information? .................................... 2

Targeted Training, Top Experts, Great Prices ............................................................................. 3

Unique OFAC Enforcement Action Database ............................................................................. 4

Interactive Sanctions Map .......................................................................................................... 4

Day 1 of Symposium: Monday September 18, 2017 ...................................................................... 6

9:45 AM – 10:45 AM: WMD Proliferation Finance – Choking Off the Grave New World Threat That Everyone is Nervous About ............................................................................................................. 6

New UK Study Aims To Track Trends In Money Flowing Into WMD Programs .......................... 6

Ongoing King’s College London ‘Interim Report’ Analyzes How Banks Can Better Combat Wmd Proliferation ................................................................................................................................ 9

Ofac Penalties And Enforcement Actions Show Greater Focus On Violations Linked To Weapons Of Mass Destruction ................................................................................................................. 12

Report: Study of Typologies of Financing of WMD Proliferation ............................................. 21

11:15 AM– 12:15 PM: OFAC and BIS: How they Work Together and How Regulatory and Criminal Powers Are Applied ....................................................................................................................... 70

Primer On Agencies That Enforce US Sanctions: Department Of The Treasury ....................... 70

Primer On Agencies That Enforce US Sanctions: Department Of Commerce .......................... 73

Multiple Agencies Dealing With Lifted Vietnam Arms Embargo Underscores Complex Compliance ............................................................................................................................... 76

1:30 -2:30 PM: Navigating Increasingly Complex Sanctions Regimes Against Iran, Russia and Cuba: Hot Button Issues .......................................................................................................................... 79

Iranian Sanctions Regimes Cause Ongoing Complications For Compliance Suites .................. 79

Western Companies With Russian Ties Get No Relief .............................................................. 83

The U.S. Continues To Remove Restrictions On Cuba .............................................................. 86

4:00 – 4:45 PM: Navigating the Sanctions and Export Controls Requirements of Multiple Jurisdictions................................................................................................................................... 93

Record-Breaking 1.19 Billion Fine For Chinese Tech Giant Demonstrates Broad Extraterritorial Reach Of U.S. Export Control Laws ........................................................................................... 93


Ofsi’s New Monetary Penalties Signal A Broader And Extraterritorial Approach To U.K. Sanctions Enforcement ............................................................................................................. 96

Upsurge In EU Sanctions Implementation Highlights The Growing Importance Of Industry Know-How ............................................................................................................................... 100

4:45– 5:30 PM: Designing a Sanctions/Export Controls Risk Assessment That Government Agencies (in Any Country) Will Applaud ..................................................................................... 102

Excerpt of SanctionsAlert.com Sanctions/Export Controls Risk Assessment Methodology .. 102

Day 2 of the Symposium: Tuesday September 19, 2017 ............................................................ 105

9:30 -10:30 AM: It's Not Just About the Lists Anymore: Using CDD to Detect Hidden UBOs and Prohibited End-Users .................................................................................................................. 105

Despite License, Russian Oil Deal May Trigger Sanctions Headaches for Citgo ..................... 105

NYDFS to Impose $630M fine on Pakistani Bank: OFAC Program Included Improper Inclusion of SDN’s on the Bank’s ‘Good Guy’ List .................................................................................. 110

Indictment Of Lebanese Businessman, Tajideen, Points To Bold Methods Of Sanctions Enforcement By Doj And May Trigger Compliance Headaches For Banks ............................. 110

In Blacklisting It As ‘Transnational Criminal Organization’, OFAC Puts Little Known Canadian Payment Processor In Dubious Company ............................................................................... 116

10:30 -11:15 AM: What U.S. Bank Examiners Look for in Their OFAC Compliance Examinations..................................................................................................................................................... 120

The Increasing Importance Of Sanctions Compliance And How To Stay One Step Ahead On Your OFAC Examinations ................................................................................................................. 120

Reviews By Bank Examiners May Result In Action By OFAC ................................................... 123

11:45 AM – 12:30 PM: Disclosures, Investigations and Enforcement: How to Reduce Criminal and Regulatory Sanctions Problems .................................................................................................. 127

Primer On Agencies That Enforce US Sanctions: Department Of Justice ............................... 127

1:30- 2:30 PM: Conducting Sound Audits of Sanctions Compliance Programs and Continued Reviews of Workflows and Processes to Identify Problems Before the Examiners Do ............. 131

4:00 – 4:50 PM: Seven Deadly Sins Unveiled in OFAC and BIS Cases – And Their Lessons ........ 132

OFAC Has Brought 913 Cases Since 2003 Against Widely Diverse Businesses For Total Penalties Of $4.2B................................................................................................................................... 132

Singapore Oilfield Services Company Pays OFAC $415,350 to Settles Potential Civil Liability for Apparent Violations of the Iranian Sanctions ......................................................................... 134

Panam Seed Case Shows How (Not) To Respond When OFAC Knocks On The Door ............. 135

Alcon To Pay $7.6M Fine As OFAC Takes A Harder Line Against Medical Tech Companies With Faulty Sanctions Compliance Programs .................................................................................. 138

All rights reserved 2017 © Alert Media Group,LLC | www.SanctionsAlert.com 1

Introduction

I’d like to personally welcome each of you to the SanctionsAlert.com Sanctions Risk Management Symposium, which we are hosting in cooperation with Compliance Week and Financial Research Associates.

Sanctions compliance professionals are confronting a time of many changes, both in the U.S. and abroad. Fast-changing laws, programs and initiatives are transforming the field on an almost weekly basis. The world of sanctions compliance is a high risk, high stakes and dynamic area in which to work. Non-compliance has huge potential repercussions, including $1B+ fines, -- even criminal charges.

SanctionsAlert.com, an independent source of knowledge, has been covering these changes and trends with articles, guidance, and our popular live and interactive training webinars, and we’ll continue to meet and bring inspired people together in forums like this, to ensure SanctionsAlert.com remains at the cutting edge. I

In these bonus materials, we provide background articles related to the topics discussed at the Symposium. For your convenience, they are organized per day and panel.

After two days of practical training I hope you’ll walk away inspired and re-energized to take on the challenges of sanctions compliance.

I’d like to thank our partners Compliance Week and Financial Research Associates, and each of your for attending, sponsoring or speaking at our Symposium and bringing your expertise to our gathering.

You, compliance professionals, have the vision, the knowledge, and the experience to help us at SanctionsAlert.com pave our way into the future. You are truly our greatest asset today and tomorrow, and we could not accomplish what we do without your support and leadership.

Throughout this Symposium, I ask you to stay engaged, keep us proactive and help us shape the

future of sanctions compliance. My personal respect and thanks goes out to all of you.

Saskia Rietbroek, CAMS

Principal


[email protected]

http://www.sanctionsalert.com/

mailto:[email protected]


About SanctionsAlert.com

SanctionsAlert.com provides authoritative and objective guidance, news, webinars and other training to corporations, financial institutions, lawyers, consultants and others on the requirements of and compliance with economic sanctions and export controls imposed by the United States, United Kingdom and other governments throughout the world, as well as by the United Nations, European Union and other international organizations.

Why SanctionsAlert.com?

Economic sanctions imposed by the United States, United Kingdom, Russia, Canada, UN and EU are complex and fluid. They have broad implications for companies and other organizations that do business with countries, organizations and persons that are the subject of economic sanctions and export controls. Failure to comply with sanctions can have serious consequences, including great reputational harm.

The webinars and other training and guidance offered by SanctionsAlert.com help persons who work in organizations subject to sanctions understand the direct and indirect issues that flow from them and to do their job better.

SanctionsAlert.com is guided by an Advisory Board whose members are top experts from diverse backgrounds and countries. These experts provide their knowledge and experience to assure that the content that appears on SanctionsAlert.com and in its courses is authoritative, current and leading-edge.

Who benefits from the SanctionsAlert.com training and information?

Training topics cover sanctions risk management and compliance for sanctions compliance professionals, attorneys, export controls officers, senior management and business lines in a variety of industries, including financial services, oil and gas, insurance, commodities, entertainment, sports and many others.



Targeted Training, Top Experts, Great Prices

We offer customized training and virtual training webinar series that teach you practical skills, insights and essential information you and your colleagues need to help do your job better and identify and control risks.

The live and on-demand webinars of SanctionsAlert.com are designed for sanctions compliance professionals, senior management and business lines leaders at a wide variety of corporations, financial institutions and government agencies worldwide. Our focused training includes case studies developed from sanctions experiences worldwide.

Examples of courses on our platform:

• New York’s Enforcement of Economic Sanctions: Too Much or On Target?

• Customer Due Diligence 3.0: Know Your Customer To Unveil Sanctioned Parties and Hidden Beneficial Owners

• New Techniques WMD Threat Financiers Use and Red Flags to Spot Them

• Designing and Applying a Sound OFAC/Sanctions Risk Assessments to Focus Your Compliance Efforts

• What to Do When International Trading Partners and Affiliates Operate in a Sanctioned Country

• OFAC’s Sibling – The Commerce Department’s Bureau of Industry and Security (BIS) and How Its Regulatory and Criminal Powers Are Applied

• Compliance Processes and Procedures That May Help Reduce Criminal and Regulatory Sanctions Problems

• What U.S. Federal Bank Examiners Look For in Their OFAC Compliance Examinations

• Key Metrics to Measure Sanctions Compliance Program Effectiveness

• ‘Panama Papers’ Reveal Sanctions Violations and Big Compliance Gaps: What You Must Know

• Financing of Proliferation of WMD– Detecting and Choking Off the Grave World Threat

• Critical Update on Iran Sanctions: Relief, Risk Management and Real World Considerations

• Vital Lessons From 10 Years of OFAC Enforcement Cases

• Navigating the Sanctions Requirements of Other Jurisdictions – European Union, UN, United Kingdom, Canada and Others

• Eight Things You Need to Know To Strengthen Your Sanctions Compliance Program

• Bootcamp! Get Your OFAC Commodities Trade Program in Shape

• Fake Endorsement Stamps, and Six More OFAC Compliance Mistakes You MUST Avoid

• Sanctions Risk in ACH, Payments and Clearing Systems

And more!

Become a SanctionsAlert.com member now! Call us at 305 433 7187 or email [email protected] or visit www.SanctionsAlert.com



Unique OFAC Enforcement Action Database

In addition to training, SanctionsAlert.com provides outstanding information, including a unique, searchable OFAC Enforcement Action Database with more than 900 cases.

In a field where the rules, their interpretation and application are constantly changing, SanctionsAlert.com resources will help you remain current what is going on.

An easily searchable database of 900+ OFAC enforcement actions, imposed by Department of Treasury’s OFAC as of 2003, across industries, with access to the PDFs of each settlement or assessment letters. Want a sneak peak? Contact us at [email protected] or call +1-305 433 7187 or visit the SanctionsAlert.com table at the Symposium.

Become a member of SanctionsAlert.com and receive an ongoing flow of information that is continuously updated and summarized for speed and help you conduct research.

Interactive Sanctions Map

The SanctionsAlert.com Interactive Map is an interactive tool on our website with an overview with sanctions in place against countries around the world. It focuses on EU, US (OFAC) and UN sanctions. Find out which specific sanctions are in place against a country by clicking on the continent and then on the country.



Day 1 of Symposium: Monday September 18, 2017

9:45 AM – 10:45 AM: WMD Proliferation Finance – Choking Off the Grave New World Threat That Everyone is Nervous About

New UK Study Aims To Track Trends In Money Flowing Into WMD Programs

October 4, 2016

By: Jonathan Brewer

Seventy five years after the first use of an atomic bomb, the proliferation of weapons of mass destruction (WMD) continues to be a threat to international peace and security. Each year, governments invest major resources in combating the quickening spread of WMD, which include nuclear weapons. Examples are the disrupting of the procurement networks, prosecuting the individuals and companies involved, and disrupting the money flow.

The UN Security Council (UNSC) has approved a number of resolutions to combat financing of proliferation (FoP). In 2004, UNSC Resolution 1540 required governments to implement controls on the financing of export and so-called transshipment –shipment to an intermediate destination – of goods and services related to WMD and their means of delivery. UNSC sanctions resolutions on North Korea’s WMD programs require governments to implement a range of financial controls, and although UNSC sanctions as such on Iran’s proliferation-sensitive programs have been terminated, a range of financial restrictions related to these programs are still in place under UNSC Resolution 2231 (2015).

Nevertheless, identifying the money flows to proliferation of WMD remains difficult. Despite much information regarding procurement of proliferation-sensitive materials and their means of transfer being publically available, much less information exists regarding methods and means to finance such procurement. A better understanding of FoP typologies would greatly assist to efficiently tackle this worldwide threat.

Studies and reports to-date

The most recent comprehensive review of FoP typologies, called the Typologies Report on Proliferation Financing, was published in 2008 by the Financial Action Task Force (FATF), a global



money laundering watchdog. As of 2016, the FATF consists of thirty-five member countries, including the UK, China, France, Germany, Russia, and the US. Since that time, more information has become available on the money flows that fund proliferation, particularly relating to Iran and North Korea’s programs.

In 2014 and 2015 information on FoP was published by the UN Sanctions Panel on Iran, based on material supplied as a result of requests to governments and the private sector. This exercise demonstrated that relatively few national authorities held specific data regarding FoP, and where they did, the data were usually related to circumvention of financial sanctions relating to WMD programs. Similarly, transaction monitoring and other compliance procedures carried out by banks and financial institutions were usually targeted at sanctions compliance rather than identifying FoP.

Examples of typologies

Following are examples of FoP provided by UN Sanctions Panel on Iran:

• a financial transaction involving a purchase order, the payment for which was initiated by a front company in Iran through another designated entity, which transferred funds through an Iranian company in the food business to a non-UN sanctioned Iranian bank.

• a trading company set up in the Middle East that opened a series of accounts that were denominated in local currency and in euros, USD, and other foreign currencies. The local currency funds, which were suspected to be coming from Iran, were channeled through the trading company and then quickly switched into foreign currencies and transferred overseas.

• a company in the Middle East, in partnership with a foreign national as a minority shareholder, opened an international bank account and made multiple large payments to several European companies. This was identified as possible money-laundering, and further investigation revealed that the company manager also managed a company that did business with Iran.

• a payment, which was originally thought to be made to a company located in a neighboring State to Iran, turned out to actually have been made to an Iranian company in a State neighboring Iran.

• an import Letter of Credit (LC), covering goods which were originally thought to have been shipped by a neighboring State to Iran, was found to have actually shipped those goods through an Iranian company. The beneficiary of the LC in the neighboring State acted as front company to the Iranian company.

Study seeks information that enables identification of patterns or trends in FoP

In order to better understand and disrupt the flow of money into WMD programs, King’s College in London, one of the world’s leading universities for education and research, has initiated a year-long study funded by the US State Department’s Office of Export Control and Related Border Security (EXBS). The purpose of the study is to publish usable ‘FoP Reports’ that collate and analyse information held by governments and the private sector on FoP and on circumvention of



financial sanctions relating to WMD programs. These FoP Reports will consist of case studies, risk indicators, patterns and trends, classifications and types of FoP as well as circumvention of financial sanctions, and how these vary amongst different proliferation programs. King’s College aims to publish these FoP Reports by mid-2017.

The FoP Reports are intended to address the requirements of both government and the private sector. They will support longstanding government efforts to:

• Identify FoP or circumvention of financial sanctions, and investigate the individuals and entities involved;

• Disrupt proliferation networks (by preventing their financing) more broadly; and • Provide guidance to financial institutions regarding the financing of proliferation and

implementation of financial sanctions.

The Reports will also assist financial institutions to:

• remain compliant with sanctions; • identify transactions relating to FoP or circumvention of financial sanctions and take

action as necessary, such as filing a suspicious activity report or otherwise informing the relevant authorities in their respective countries. More specifically, typologies may assist financial institutions to process financial transactions involving such countries like Iran, a market where foreign investors and businesses attempt to re-engage following Implementation Day on 16 January 2016.

Much of the data held by governments relevant to the Study will be classified, and data held by banks, financial institutions or commercial organizations may be governed by banking secrecy regulations or commercial considerations. The Study is not seeking the details of such data but instead is seeking information that enables identification of patterns or trends in FoP. Information collected by the Study will be held in secure storage, and consistent with King’s College, London standards. The sources of information need not be identified in the Study’s Reports.

For further details, or to offer information to the Study, please contact Dr Jonathan Brewer or Mr Ian Stewart. Based in New York, Dr Brewer is a Visiting Professor at King’s College, London and was the financial expert on the UN Panel on Iran between 2010 and 2015. He can be contacted on +1 917 900 7636 (mob), on +44 7815 848 418 (mob), and on [email protected]. Mr Ian Stewart is a Senior Researcher in the Department of War Studies at King’s College, London, and Head of Project Alpha on non-proliferation. He can be reached on +44 207 848 1342 (off) and at [email protected].

Read the full article here: http://sanctionsalert.com/new-uk-study-aims-to-track-trends-in-money-flowing-into-wmd-programs/



Ongoing King’s College London ‘Interim Report’ Analyzes How Banks Can Better Combat Wmd Proliferation

February 28, 2017

By: Jonathan Brewer*

Finding new, more effective ways of combating the proliferation of weapons of mass destruction (WMD) has become a major concern of the international community.

The international framework for combating proliferation is clearly set out in a number of United Nations Security Council resolutions. These include 1540 (2004) and 2325 (2016) that require UN Member States to adopt and implement legislation to combat proliferation, and specific resolutions against countries of proliferation concern, such as North Korea and Iran. Unilateral sanctions are in place to limit proliferation by Syria.

Yet, combating proliferation is most effective when governments and the private sector join forces. This is due to the fact that private sector entities may possess information that governments need to have to be able to put together the jigsaw puzzle of proliferation-related activities, and disrupt them.The financial sector has an important role to play in this joint effort, by monitoring for evidence of financing of proliferation (FoP).

An ongoing Study by King’s College London is intended to help both governments and the private sector better understand current FoP typologies and possible suspicious indicators.

Complex Networks and Front Companies

Detecting FoP often proves difficult for the private sector, as certain transactions can appear to be legitimate commercial activities even though they relate to goods and materials subject to export or other controls.

Furthermore, the sources of funds may be countries under sanctions, and companies and people involved in FoP can sometimes work through complex networks of procurement agents and front companies in multiple jurisdictions to hide their involvement.

Four Ways To Detect Financing of Proliferation

In principle, bankshave the ability to detect FoP in four ways:

• By screening and monitoring financial transactions to detect individuals or entities listed under UNSC or unilateral sanctions regimes for involvement in proliferation;

• By screening documentary information forproliferation-sensitive goods and materials. This is difficult in practice because banks usually do not have sufficient expertise to determine whether goods might be listed, and documents in their possession may not have sufficient detail;

• On the basis of intelligence or other information received from governments, for example, governments might pass on information that a particular financial transaction or financial network is associated with proliferation even though none of the entities or individuals involved is listed as such); and



• By monitoring financial transactions to detect patterns or characteristics that match typologies known to be associated with FoP.

No Box for “Financing of Proliferation” on SAR

For the majority of banks, financial crime compliance largely means satisfying regulatory requirements by focusing on the detection of money laundering and terrorist financing, as few regulators require suspicious activity reports relating specifically to FoP.

For example, the Suspicious Activity Report Form required by U.S. authorities under the Bank Secrecy Act, and used across multiple industries to report suspicious activity,has 80 options to choose from when characterizing the suspicious activity, but “Financing of Proliferation” is not one of them.

The more general category “Terrorist Financing” is included as one of the options on the SAR.

Typologies Poorly Understood

Typologies of FoP are also poorly understood and few banks currently monitor for them. Many could do more.

The most recent comprehensive review of FoP typologies, called the Typologies Report on Proliferation Financing, was published in 2008 by the Financial Action Task Force (FATF), an intergovernmental body established by the G-7 to protect the integrity of the global financial system.

The King’s College London Study is collating more recent data held by governments and banks, particularly in relation to UN sanctions on Iran and on North Korea, but looking at other proliferation programs as well.The Study’s Interim Report, published on February 5, 2017, analyzes 18 case studies in order to provide examples of the role that banks can play in combating proliferation.

Case Studies: Dual Use Goods To Iran and Circumventing Sanctions

The Interim Report provides a number of case examples, such as thoseinvestigated by authorities followingsuspicious activity reports submitted by banks.

In one particular case,the Swedish authorities investigated a company involved in exports of dual-use goods to Iran, in violation of export controls. The investigations were triggered by two suspicious transaction reports submitted by banks. The reports noted payments to the company from Iran, the first in late 2010, and the second in 2011.

The Interim Report also describes cases ofattempts to circumvent financial sanctions, whichwere primarilydetected by banks through monitoring for suspicious indicators related to money laundering.

In one such case, a trading company in the Middle East opened a number of bank accounts. Monitoring by the bank (in accordance with the bank’s due diligence practices relating to companies in the country concerned) established that the company’s financial activity was not



consistent with a normal trading company. The bank investigated and concluded that the accounts were being used to transfer funds from Iran into the international financial system

The King’s College London Study will continue to collect and analyze data onFoP from governments and the private sector, and will publish a final report in summer 2017.

*Dr. Jonathan Brewer, Visiting Professor at King’s College, London, currently based in New York City. Tel +1 917 900 7636(cell), +44 7815 848 418 (mob), and [email protected].

Do you have comments or feedback on the King’s College London Study’s interim report?Do you have any examples of possible financing of proliferation that might be shared with the Study (with sensitive details removed)?Comments or feedback are welcome and will be used to ensure that the Study’s final report is of as much practical value as possible for government and private sector practitioners.To provide comment or feedback, or for further information please contact Dr. Brewer at the information above.

Read the full article here: http://sanctionsalert.com/ongoing-kings-college-londoninterim-report-analyzes-how-banks-canbettercombat-wmd-proliferation/



Ofac Penalties And Enforcement Actions Show Greater Focus On Violations Linked To Weapons Of Mass Destruction

Date: March 19, 2016 By: www.SanctionsAlert.com An enduring consequence of the horror inflicted by the terrorist attacks of September 11, 2001, is the dread that a future terrorist attack on the United States could involve “weapons of mass destruction.”

The growing number of penalties imposed by the US Treasury Department’s Office of Foreign Assets Control (OFAC) for sanctions violations underscore that foreboding. In recent years, more OFAC penalties on a wide variety of businesses are linked to sanctions violations tied to “weapons of mass destruction” in one form or another. These WMD have included atomic weapons.

On February 27, 2016, Warren Buffet, whose insights on risk and opportunity are widely respected, gave a chilling assessment in his annual letter to the stockholders of Berkshire Hathaway. He said a “cyber, biological, nuclear or chemical attack in the United States” is a “clear, present and enduring danger” and that his company is “powerless” to protect against it.

OFAC regulations and a presidential Executive Order provide impetus

OFAC confronts this life-and-death danger through diverse sanctions programs aimed at combating the proliferation of weapons of mass destruction (WMD). The programs are specified in regulations, such as the Weapons of Mass Destruction Proliferators Sanctions Regulations (WMDPSR), 31 CFR Part 544, and the 2005 presidential Executive Order 13382, “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters”.

OFAC issues enforcement actions and imposes penalties against entities or individuals that are detected as not complying with these and other sanctions programs.

SanctionsAlert.com reviewed 913 OFAC announced enforcement actions announced between April 2003 and Feb. 8, 2016, and analyzed them for violations of the WMD sanctions programs. The analysis yields interesting findings.

Granular review of WMD sanctions cases paint a picture

Overview of OFAC enforcement and penalty actions for WMD regulatory violations

• Number of cases that included violations of WMD sanctions programs: 15, or roughly 1% of all published OFAC enforcement actions.

• Number of cases with WMD sanctions program violations exclusively: 9 • Number of cases that combined WMD sanctions program violations with other program

violations: 6 • The total amount paid in the 15 OFAC enforcement actions imposed for violations that

included WMD sanctions programs: $365 million • The largest amount paid in one sanctions program violation case: Commerzbank AG of

Germany (the US city where the violation occurred was New York): $258 million in 2015.



• The smallest amount paid in a WMD sanctions program violation case: International Union of Pure & Applied Chemistry (IUPAC), chemical business, North Carolina: $500 in 2003. This was the first published OFAC enforcement action for WMD sanctions program violations.

The 15 cases, from highest penalty to lowest penalty:

Date Entity Violations Penalty

March 12, 2015 Commerzbank AG

The Iranian Transactions and Sanctions Regulations, the Sudanese Sanctions Regulations, Executive Order 13382 “Blocking Property of WMD Proliferators and Their Supporters,” the WMD Proliferators Sanctions Regulations, the Burmese Sanctions Regulations, and the Cuban Assets Control Regulations

$258,660,796

August 25, 2011 JPMorgan Chase Bank

The Cuban Assets Control Regulations; the WMD Proliferators Sanctions Regulations; Executive Order 13382, “Blocking Property of WMD Proliferators and Their Supporters;” the Global Terrorism Sanctions Regulations, the Iranian Transactions Regulations; the Sudanese Sanctions Regulations; the Former Liberian Regime of Charles Taylor Sanctions Regulations; and the Reporting, Procedures, and Penalties Regulations

$88,300,000



January 27, 2014 Joint-Stock Commercial Bank “Bank of Moscow”

Executive Order 13382 “Blocking Property of WMD Proliferators and Their Supporters” and the WMD Proliferators Sanctions Regulations

$9,492,525

March 25, 2015 PayPal, Inc.

The WMD Proliferators Sanctions Regulations; the Iranian Transactions and Sanctions Regulations, the Cuban Assets Control Regulations, the Global Terrorism Sanctions Regulations, and the Sudanese Sanctions Regulations

$7,658,300

August 22, 2012 Grand Resources (Duratech) USA, Inc.

Iranian Transactions Regulations, and the WMD Proliferators Sanctions Regulations

$402,000

June 19, 2015 John Bean Technologies Corporation


$391,950

September 3, 2014

Citigroup Inc.

Iranian Transactions and Sanctions Regulations, the WMD Proliferators Sanctions Regulations, the Foreign Narcotics Kingpin Sanctions Regulations, or the Global Terrorism Sanctions Regulations

$217,841



July 24, 2015 Great Plains Stainless Co.


$214,000

February 1, 2013 Offshore Marine Laboratories

Iranian Transactions Regulations and Executive Order 13382, “Blocking Property of WMD Proliferators and Their Supporters”

$97,695

August 5, 2015 Production Products, Inc.

WMD Proliferators Sanctions Regulations

$78,750

July 17, 2014 Tofasco of America, Inc.


$21,375

March 21, 2013 Maritech Commercial Inc.


$20,800

September 5, 2013

Deutsche Bank Trust Company Americas

Executive Order 13382 “Blocking Property of WMD Proliferators and Their Supporters”

$18,900

June 1, 2007 Hecny Shipping WMD Trade Control Regulations

$2,800

April 4, 2003 International Union of Pure & Applied Chemistry (IUPAC)

WMD Trade Control Regulations

$500



Violators

87% (13) were US entities and 13% (2) were foreign (one Russian and one Germany entity).

7 of the 13 (53%) US entities that violated the WMD sanctions programs were from two states, California and New York.

9 (60%) from the 15 entities that were involved in the WMD sanctions program violations were non-financial businesses in the following industries:

• Chemical • Logistics • Coal and minerals • Offshore supply • Maritime services • Consumer goods and • Machinery, and steel.

40% of the cases, or 6, were against financial institutions. Of these, four were banks (Citigroup, Commerzbank AG, Joint Stock Commercial Bank – Bank of Moscow, JP Morgan Chase), one trust company (Deutsche Bank Trust Co. Americas), and one money services business (PayPal, Inc.).

There were no cases for WMD sanctions program violations against individuals.

Trends

More than half (8 of 15) enforcement actions were imposed in the last 2 years.

OFAC enforcement actions and penalties for WMD sanctions programs violations, by year:

Year Number of enforcement

actions Penalties paid

2003 1 $500

2004 – 2006 0 0

2007 1 $3,300

2008 -2010 0 0

2011 1 $88,300,000



2012 1 $402,000

2013 2 $118,495

2014 3 $9,731,741

2015 5 $267,003,796

Voluntary disclosures

In only three cases, or 20% of them (JP Morgan Chase, Citibank and PayPal), OFAC says the subject entity voluntarily disclosed the violation.

Penalty assessed or settlement

Of all these enforcement actions, only two, or 13%, resulted in assessment of a civil money penalty. (Hecny Shipping, in 2007, and Grand Resources USA Inc., in 2012). The others produced settlements of the entities with OFAC.

The last penalty OFAC assessed for WMD sanctions program violations was in 2012. After that, the penalties resulted from settlements.

Examples of diverse companies that run afoul of WMD rules

JP Morgan Chase made a trade financing loan for about $2.9 million to a bank that issued a letter of credit in which the underlying transaction involved a vessel that had been identified as blocked under the OFAC WMD sanctions regulations because of its affiliation with the Islamic Republic of Iran Shipping Lines (IRISL). Although JPMC supervisors and managers determined that the trade loan was likely a violation of the WMD regulations and, in late December 2009, submitted a self-disclosure to OFAC. JPMC did not mail its voluntary self-disclosure until March 2010, three days before the date on which JPMC received payment for the loan without OFAC advice or authorization. JPMC also failed to respond promptly and completely to an OFAC administrative subpoena seeking information about the transaction.

In 2005, GR-Duratech negotiated a sale of graphitized petroleum coke to a company in the United Arab Emirates, with knowledge that the goods were for delivery to Bandar Abbas, Iran. After negotiating the terms of the sale and the related letter of credit, GR-Duratech referred the sale to its parent company, Grand Resources Co., Ltd. (Grand Resources), in Beijing and later received a sales commission from Grand Resources. From July to August 2009, GR-Duratech dealt in property in which the Islamic Republic of Iran Shipping Lines (IRISL) had an interest, and engaged in transactions related to services of Iranian origin, or when GR-Duratech was involved in a cargo shipment aboard the blocked vessel “Sabalan,” in which IRISL had an interest. It



presented its bank with documents related to the shipment for payment under a letter of credit referencing the blocked vessel. GR-Duratech also conducted transactions resulting in the removal of references to Iran and an Iranian entity from the trade documents linked to the shipment. In September 2009, without OFAC authorization, GR-Duratech dealt in property in which IRISL had an interest by transferring the trade documents related to the shipment to its customer in Turkey

Maritech: Between about April 20, 2009, and about June 14, 2010, Maritech provided fuel inspection services, valued at $9,868, on five vessels affiliated with the Islamic Republic of Iran Shipping Lines (IRISL) that OFAC had identified as blocked property and placed on the OFAC list of Specially Designated Nationals and Blocked Persons (“SDN List”). IRISL, which has been known to engage in deceptive practices in an attempt to evade sanctions, had changed the names of four of the five vessels before the alleged violations, but the vessels remained identifiable by their IMO numbers, which are unique identifiers assigned to vessels of a certain size and nature when built, and are permanently and visibly marked on vessels. At the time of the subject transactions, Maritech was not screening the names or IMO numbers against the SDN List of any of the vessels to which it provided services.

Deutsche Bank and Trust Americas: On October 24, 2008, Deutsche Bank and Trust Americas (DBTCA) processed a $3,177 funds transfer originated by Hansabanka’s customer, Air Baltic Corporation. The funds were destined to the account of “I.A.C.” at Commerzbank AG in Frankfurt. The originator to beneficiary information field of the payment instructions contained the reference “MELIGB2L,” the Business Identifier Code (BIC) for the London branch of Bank Melli.

OFAC designated Bank Melli and all its offices worldwide on October 25, 2007, pursuant to Executive Order 13382, which blocks property of WMD proliferators and their supporters. DBTCA processed the payment without manual intervention and later determined that the beneficiary “I.A.C.” referred to the “Iran Airport Company.” On March 11, 2009, DBTCA rejected rather than blocked a $10,000 funds transfer originated by Intercontinental Bank Plc, Lagos, Nigeria, on behalf of Amsergs Nigeria Ltd. These funds were destined for the account of Chahar Mahal va Bakhtiary Yeast Co., Isfahan, Iran, at the Export Development Bank of Iran (EDBI). OFAC designated EDBI on October 22, 2008, pursuant to E.O. 13382. DBTCA stated that its automated interdiction software stopped the transaction for review due to several potential matches, including references to Iran and EDBI. Seven DBTCA employees, including a senior member of the review team who was the final reviewer for OFAC matters requiring escalated scrutiny, reviewed the transaction. They failed to notice the reference to EDBI in the payment. Based on their review, DBTCA rejected the transaction because of the beneficiary’s location in Iran, instead of blocking it because of the involvement of EDBI.

Bank of Moscow: On October 25, 2007, OFAC designated Bank Melli Iran ZAO, Moscow (“BMI Russia”) under E.O. 13382. From January 9, 2008, to July 13, 2009, Bank of Moscow transmitted 69 funds transfers totaling $41,306,113 for or on behalf of BMI Russia, which were processed to or through the United States. None of the payment messages of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) sent by Bank of Moscow in connection with these transfers included specific references to “Melli,” “Iran,” or BMI Russia’s SWIFT Business Identifier Code. Instead they identified the bank through abbreviations such as



“BMICJSCMOSCOWRUSSIA” (a reference to Bank Melli Iran Closed Joint Stock Company Moscow Russia) or “BMI CJSC.” U.S. financial institutions processed all 69 of the funds transfers straight through without manual intervention.

Tofasco: This company dealt in blocked property by engaging a bank to process a blocked letter of credit transaction representing payment for a shipment of recreational chairs with a substitute bill of lading omitting reference to the Islamic Republic of Iran Shipping Lines (“IRISL”), whose property and interests in property are blocked under the WMD rules. Tofasco initially presented trade documents to another bank in connection with the letter of credit transaction. However, the other bank refused to advise the letter of credit transaction because of IRISL’s involvement.

Citigroup: Between April 2and November 16, 2009, Citigroup Trade Services Malaysia (Citi Penang) processed four export bill collection applications for $638,074.15 on behalf of Citibank N.A. (Citibank) Hong Kong, which involved the shipment of goods to Iran. In two of those instances the Islamic Republic of Iran Shipping Lines (IRISL), which OFAC had designated on September 10, 2008, under Executive Order 13382 of June 28, 2005, “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters.” Although the bank possessed documents related to the export bill collections that contained references to Iran and IRISL, Citi Penang operators did not review or screen the bills of lading, certificates of origin, or shipment advices containing references to Iran or IRISL.

Separately, on February 9, 2010, January 12, 2011, March 8, 2011, and October 29, 2012, Citibank processed four funds transfers totaling $133,786.73, involving entities appearing on OFAC’s List of Specially Designated Nationals and Blocked Persons (the SDN List). Citibank’s interdiction software did not detect or identify references to the sanctioned parties in the payment instructions, and the bank processed the payments straight through without manual intervention. For example, Citibank received and processed a funds transfer initiated by a third-country financial institution’s customer, Higher Institute for Applied Science and Technology. Although the SDN List contained an entry for an entity named Higher Institute of Applied Science and Technology at the time of the transaction, Citibank did not stop the payment.

Commerzbank processed 142 wire transfers for about $39,567,720 between April 6, 2006 and January 8, 2010, involving property or interests in property of persons on OFAC’s SDN List in apparent violation of E.O. 13382 or the WMDPSR. The total base penalty for these apparent violations was $99,813,658.

PayPal: Between October 20, 2009, and April 1, 2013, PayPal processed 136 transactions totaling $7,091.77 to or from a PayPal account registered to Kursad Zafer Cire, an individual designated by the U.S. State Department on January 12, 2009 under Executive Order 13382, “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters,” in apparent violation of the WMDPSR.PayPal told OFAC it failed to identify its customer as a potential Specially Designated National (SDN) at the time of his designation because its automated interdiction filter was not “working properly.” Starting roughly six months later, PayPal’s automated interdiction filter appropriately flagged Cire’s account five times for potential matches to the SDN. On each occasion, PayPal Risk Operations Agents dismissed the alerts without requesting more information to clear the potential SDN name matches. PayPal stated



that this conduct did not comply with its internal policies and procedures for handling SDN name matches. On February 14, 2013, PayPal’s interdiction filter again flagged Cire’s account a sixth time due to a potential match to the SDN. A PayPal Risk Operations Agent followed PayPal’s procedures for handling an SDN name match by creating a “case” for the match, restricting Cire’s account, and requesting more information from the customer. When the requested information was received, including a copy of Cire’s passport showing date and place of birth that were identical to those of the SDN, PayPal’s Risk Operations Agent dismissed the match apparently misunderstanding why the interdiction filter had flagged Cire’s account. On April 3, 2013, PayPal’s interdiction filter flagged Cire’s account for a seventh time, and appropriately blocked the account and reported it to OFAC. The total base penalty for these apparent violations was $17,000,000.

John Bean Technologies: From about April 8 to 17, 2009, JBT appears to have violated E.O. 13382 and the OFAC regulations when goods it sold to a Chinese company were shipped by Islamic Republic of Iran Shipping Lines (IRISL) on a blocked vessel from Spain to China.Trade documents related to the shipment were presented to a U.S. bank for payment under a letter of credit (L/C) for $2,897,936.

From about May 8 to 19, 2009, JBT appears to have violated E.O. 13382 and the regulations by presenting trade documents related to the IRISL shipment to Banco Santander, a Spanish bank, in the amount of $2,897,936, to receive payment for the goods sold to CSA, after the U.S. bank declined to advise the L/C and the trade documents had been returned to JBT pursuant to an OFAC license.

From about May 21 to July 9, 2009, JBT committed an apparent violation when it reimbursed JBT AeroTech Spain for charges paid to its freight forwarder for the shipping services rendered by IRISL and to Banco Santander for fees associated with negotiating the L/C for $164,470.24 for the payments via inter-company transfers.

Great Plains Stainless Co: Violations occurred from about April 9to July 4, 2009 when GPS sold goods that its Chinese vendor shipped from Shanghai to GPS’s customer in Dubai aboard the vessel MN Sahand, which was identified as blocked in September 2008 . GPS conducted transactions apparently intended to evade or avoid the prohibitions in the WMDPSR when it requested creation of new trade documents and removal of references to the blocked vessel. It then transferred the altered documents to its customer to facilitate the release of goods at the port in Dubai.

Production Products, Inc: From about December 15, 2009, to August 18, 2010, PPI shipped three duct fabrication machines, valued at $500,000, to China National Precision Machinery Import and Export Corp. (CNPM), a Specially Designated National, and received payment without authorization from OFAC.

Read the full article here: http://sanctionsalert.com/ofac-penalties-and-enforcement-actions-show-greater-focus-on-violations-linked-to-weapons-of-mass-destruction/



Report: Study of Typologies of Financing of WMD Proliferation

Interim Report

5 February 2017

Jonathan Brewer

Visiting Professor

King’s College London

Executive Summary

Combating the proliferation of weapons of mass destruction is a key priority for the international community. One of the tools for doing this is disruption of the networks used to finance proliferation. However, detecting financing of proliferation (FoP) is difficult and requires a better understanding of the typologies.

The most comprehensive study of FoP to date was published by the Financial Action Task Force (FATF) in 2008.11 Since then, largely due to sanctions on Iran and DPRK, more information on FoP has become available. The King’s College Study of Typologies of Financing of Proliferation is collecting and analyzing information held by governments and the banking and financial sector in order to publish reports on current FoP typologies. This Interim Report comprises analyses of 18 case studies, based on information supplied to the Study to date, contained in reports of UN Panels on Iran and DPRK, and in documents relating to a small selection of US Department of Justice actions. Although in some of these 18 cases there is insufficient information available to determine whether the underlying typology relates to FoP or simply to circumvention of financial sanctions, key points can be identified.

Some of these points can be correlated with indicators of possible proliferation financing listed in FATF’s 2008 report. But the key points also suggest a small number of additional possible indicators. It is not suggested that any one of these would be definitive, and they will be further examined during the remainder of this Study. They include involvement of small brokers/intermediaries, involvement of dual nationals of countries of proliferation concern, involvement of a university in a country of proliferation concern, descriptions of goods being non-specific, banks named as consignees, and payments for large numbers of high-technology goods that are never imported. These additional indicators could possibly be visible to banks and financial institutions that might be unknowingly involved in processing related transactions.

The King’s College London Study will continue to collect and analyse data on FoP from governments and the private sector, and will publish a final report in Summer 2017. In the meantime comments on the contents of this Interim Report and its practical value will be

1 Typologies Report on Proliferation Financing, 2008 (http://www.fatfgafi. org/publications/methodsandtrends/documents/typologiesreportonproliferationfinancing.html) accessed 15 January 2017).



welcome, as will proposals to engage substantively with the Study. Contact details are contained in Annex 2.

Acknowledgments

Many governments have responded positively to approaches by the Study, and several have provided or promised data. The Swedish government was particularly supportive. The Study is grateful, as it is to several banks that have hosted informative discussions or promised data.

Maila Beniera, intern with the Alpha Project, King’s College, provided valuable support to the Study by analyzing published data on FoP. Andrea Berger, formerly of the Royal United Services Institute, now Center for Non-Proliferation Studies, Monterey, provided help and advice.

Introduction

Combating the proliferation of weapons of mass destruction (WMD) is a key priority for the international community. United Nations Security Council (UNSC) resolution 1540 (2004) and successor resolutions require UN Member States to put in place mechanisms to control proliferation. UNSC sanctions are in place against DPRK’s WMD programmes. Proliferation by Iran is constrained by a UNSC resolution and the Joint Comprehensive Plan of Action (JCPOA). Syrian proliferation is limited by unilateral sanctions. Other WMD programmes are closely monitored.

One of the favoured tools for countering proliferation is identification and disruption of procurement networks. Such networks seek to purchase, usually by covert methods, goods and materials that the proliferation programmes cannot produce indigenously. These goods and materials are usually industrial in nature and their procurement is often difficult to distinguish from legitimate global commerce.

As with legitimate global commerce, such goods and materials need to be financed and paid for, so identification and disruption of the associated financial networks offers an additional counter-proliferation tool. However, detecting the financing of proliferation (FoP) in the absence of other clues is difficult and requires a better understanding of FoP typologies. The most comprehensive study of FoP to date was published by the Financial Action Task Force (FATF) in 2008.2 It is based largely on material relating to FATF Member States’ implementation of financial provisions of resolution 1540 (2004) on non-proliferation. FATF identified 20 indicators of possible proliferation financing. Additional material on FoP has become available following implementation of UN sanctions on Iran (2006 to 2016), and on North Korea (2006 to date). This material is described in reports of UN Sanctions Panels on Iran and on DPRK.3

2 Typologies Report on Proliferation Financing, 2008 (http://www.fatfgafi.

org/publications/methodsandtrends/documents/typologiesreportonproliferationfinancing.html, accessed 15 January 2017). 3 Iran: UN Panel on Iran Reports dated 2012, 2013, 2014 and 2015 (available on the UN website as Security Council documents

S/2012/395, S/2013/331, S/2014/394 and S/2015/401); DPRK: UN Panel on DPRK Report dated 2010, 2012, 2013, 2014, 2015 and 2016 (available on the UN website as S/201/571, S/2012/422, S/2013/337, S/2014/147. S/2015/131 and S/2016/157).



King’s College London Study of Typologies of Financing

The objectives of the Study are to gain insights into current typologies of proliferation financing, based on data available following 2008. Reports published by the Study are intended to assist government practitioners to identify and investigate FoP, to disrupt proliferation networks, and to provide guidance to financial institutions regarding the financing of proliferation. The reports are also intended to assist banks, financial institutions and other relevant entities to remain compliant with sanctions, identify transactions relating to FoP, and inform relevant authorities (for example by submitting Suspicious Activity Reports).

This Interim Report summarises the results of the Study to date. It describes case studies (see Case Studies below), together with preliminary conclusions regarding indicators of possible financing of proliferation supplementary to those identified by FATF. It is based on exchanges with governments and banks, and on a selected compilation of publically available material relating to financing of proliferation. The underlying data are drawn from a number of different proliferation programmes, and result from implementation at the time of a variety of sanctions or other control regimes.

Definition of FoP

There is no universally recognised definition of FoP, and so the Study has adopted the widely used formulation proposed by FATF: "Proliferation financing" refers to: the act of providing funds or financial services which are used, in whole or in part, for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations.4 A key element of this definition is “means of delivery and related materials (including both technologies and dual use goods used for non-legitimate purposes)”. In practice, most counter-proliferation actions today are directed at the related goods and materials rather than finished weapons systems.

Comparing FoP with Money Laundering and Terrorist Financing

As highlighted in a recent report5, many financial institutions have a relatively low-level understanding of FoP, as do many States.6 This problem is compounded by uncertainties about the differences and similarities between FoP and Money Laundering (ML) and Terrorist Financing (TF). It is hoped that the general observations in Table 1 will help understanding of FoP.

4 Combating Proliferation Financing – A Status Report on Policy Development and Consultation, February 2010. 5 “Out of Sight, Out of Mind”, Emil Dall, Andrea Berger and Tom Keatinge, RUSI Whitehall Report, June 2016. 6 Author’s conclusions based on his experience of discussions with officials as a member of the UN Panel on Iran. Official guidance on FoP

may also confuse the picture. For example, Section 3.7.5 of FCA’s Thematic Review “Banks’ control of financial crime risks in trade finance” of July 2013 includes, under a discussion of counter terrorist financing (CTF) controls, material possibly more appropriate to financing of proliferation of dual-use goods.



Table 1. Comparison of ML, TF and FoP Characteristics 7

7 Modified from a presentation by James R Richards, Wells Fargo, 2005, quoted in the CAMS Examination Study Guide 5th Edition). The

author has added to this presentation the right-hand column, headed Financing of Proliferation.



Detection of FoP

There are, in principle, four ways that governments, banks or other financial institutions could determine whether a given financial transaction involves FoP:

1. Screening and monitoring financial transactions for involvement of individuals or entities

which are designated for their involvement in proliferation, under UN or unilateral

sanctions regimes. Such procedures are not fool-proof because much proliferation

involves individuals or entities which have not been designated and that are therefore

not detectable by many commercially available screening or monitoring systems;

2. Screening documentary information on goods and materials involved in transactions to

identity items that may be listed on the control lists of national authorities or of the export

control regimes;8 This is difficult for banks because they usually do not have sufficient

expertise to determine whether goods might be so listed, and may not have in their

possession documents or transaction information with sufficient detail;

3. Possession of intelligence or other information that FoP is taking place; 4. Identification

of patterns or characteristics that match typologies known to be associated with financing

of proliferation. This is the process the Study is intended to support. Few banks in practice

try to do this (and not many regulators require it). However, many banks carry out

transaction monitoring to detect ML and TF and, as some of the case studies below

illustrate, some patterns of FoP or circumvention of financial sanctions resemble

suspicious indicators for ML.

FATF FoP Typologies

FATF’s 2008 Report identifies 20 indicators of possible proliferation financing (see Annex 1). This remains the authoritative list although individual jurisdictions have also published lists of possible proliferation-related Suspicious Indicators99. As pointed out in a recent report and by others, arguably few of FATF’s indicators could be considered strong FoP indicators.1011 They might result from other financial crimes, such as trade-based money laundering or avoidance of tax or duty. They could also indicate sanctions circumvention or in some cases sloppy documentation practices.

8 For example the Nuclear Suppliers Group and the Missile Technology Control Regime. 9 See for example lists published by the Jersey Financial Services Commission

(https://www.jerseyfsc.org/pdf/Proliferation_and_Proliferation_Financing_Guidance_Oct_2011.pdf (accessed 26 December 2016)) and by the Monetary Authority of Singapore (http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Potential%20Indicators%20of%20Proliferation%20Fi nancing.pdf (accessed 26 December 2016)). 10 “Out of Sight, Out of Mind”, op cit, 11 Multiple comments from bank officials to author.



Trade Financing

Many of the case studies in FATF’s 2008 Report include references to documentation associated with trade finance, such as Letters of Credit. According to the Wolfsberg Group, the majority of world trade (approximately 80%) is carried out under “Open Account” terms.12 In comparison with information provided to support trade finance, open account transactions (essentially wire transfers) allow financial institutions relatively limited information for screening or monitoring against lists of suspicious indicators. But even where trade financing takes place many financial institutions conduct checks focused primarily on credit risk rather than proliferation financing, sanctions circumvention or other financial crime.13

The potential for trade financing documentation to assist in detection of FoP will be examined further by the Study.

Case Studies

In order to assist practitioners in governments and the private sector to understand FoP typologies, and better focus their investigations, 18 case studies are described below. These have been compiled from information:

a) provided by Governments to the Study and authorized for publication; b) contained in reports from UN Panels on Iran and on DPRK (this material relates to both

FoP and to circumvention of financial sanctions);14 c) contained in court records of US Department of Justice (DoJ) actions relating to financing

of proliferation or circumvention of sanctions.15 A small selection of this material is included primarily to add geographical diversity to the range of cases. A more complete selection will be included in the Study’s final report to be published in Summer 2017.

It should be noted that some of these 18 cases as described could at the time have been primarily attempts to circumvent financial sanctions. They are included because it is judged that the typology could also be used for FoP.

12 The Wolfsberg Trade Finance Principles (2011) (http://www.wolfsbergprinciples.

com/pdf/standards/Wolfsberg_Trade_Principles_Paper_II_(2011).pdf (accessed 21 January 2017)). 13 Dubai Financial Services Authority Trade Finance Report 2016 (http://dfsa.ae/Documents/ThematicReviews/TF-Report-

FINAL%20Eng%2012%20october%202016%20mid-res.pdf (accessed 21 January 2017)). 14 See list in footnote 4. 15 Accessed through a subscription-based repository of US courts documents: Public Access to Court Electronic Records

(https://www.pacer.gov/). OFAC cases listed at www.treasury.gov/resource-center/sanctions/Pages/default.aspx.



Case 1 (DPRK) Procurement network adapts so as to enable business to continue following designations by US authorities

According to US court documents relating to the arrest of father and son in 2013 and their conviction in 2015, a network of individuals including Alex Tsai, based in Taiwan and his son Gary Tsai, based in the US, was under investigation from 2009 for export of US-origin goods and machinery that could be used to produce weapons of mass destruction.16 These documents provide insights into the proliferation network’s financial arrangements.

According to these documents the network consisted of at least three Taiwan-based companies set up and managed by Alex Tsai: Global Interface Company, Inc., a subsidiary, Trans Merits Co. Ltd., and Trans Multi Mechanics Ltd. Tsai’s wife was an officer in Global Interface Company, Inc., and Trans Merits Co. Ltd.. Tsai and Trans Merits Co. Ltd were convicted by Taiwanese authorities in 2008 in connection with shipping restricted materials to North Korea. In January 2009 the US Treasury designated Tsai, his wife, Trans Merits Co. Ltd and Global Interface Company, Inc. for support to the Korea Mining Development Trading Corporation (KOMID), an entity closely linked with DPRK’s WMD programs. In effect, US persons could only do business with Tsai and his designated companies with an OFAC license.

According to a separate report, a few months later US authorities possessed information that Alex Tsai was due meet a KOMID representative in Singapore to receive a payment, possibly for shipment of equipment worth over USD 850,000, possibly in cash.17

Despite his designation in January 2009, according to court documents later that year Tsai imported from the US a precision machine tool through his third, non-designated, Taiwanese company, Trans Multi Mechanics Ltd, with the assistance of his son, Gary Tsai. Trans Multi Mechanics was represented on export documents as purchaser and end-user. Although payment was initiated by Trans Merits Co Ltd, the involvement of a designated entity in the transaction was hidden because the wire transfer, to Gary Tsai’s US bank account, took place from Trans Multi Mechanics Ltd’s bank account in Taiwan. Similarly, subsequent financial transfers from Alex Tsai to his son took the form of two wire transfers from a bank account in Taiwan controlled by his daughter, in effect hiding from the US banking system the involvement of a designated individual (Figure 1). Gary also set up a US based company, Factory Direct Machine Tools, to help develop business with his father’s companies.

16 For example, indictment filed 26 June 2013, US District Court Northern District of Illinois Eastern Division, Case 12 CR 829, United States

of America v. Hsien Tai Tsai and Yueh-Hsun Tsai, and Affidavit of FBI Special Agent in Support of Extradition. 17 US Department of State cable dated 14 April 2009, quoted by Wikileaks (https://wikileaks.org/plusd/cables/09STATE36855_a.html,

accessed 22 January 2016)



Figure 1. DPRK procurement network involves father’s and son’s companies in Taiwan and US

Key points

• This is an example of a proliferation network centred around a small family company. The members concerned were connected with the State through which goods and materials were being trans-shipped.

• This network was notably resilient: despite designation of the main figure (Alex Tsai) and two of his companies, the network adapted by creating additional companies, and expanded its proliferation and non-proliferation activities.

• Little information is available on the way in which the network was financed by KOMID. The one possible method, cash transferred in Singapore, if it in fact took place, would illustrate first the role of cash in financing of proliferation, and, second, that procurement shipments and their related financial transactions may be geographically far removed from each other.

• The network was also being used for non-proliferation related business (including an example of reverse procurement into the US).



Case 2 (DPRK) Financing of proliferation by avoiding international financial transactions

A Unha-3 rocket was launched by the DPRK in December 2012. Debris recovered from the launch was found to include pressure transmitters. Investigation of these by the UN Panel of Experts on DPRK revealed that they were purchased by a Taiwan-based company, Royal Team Corporation (RTC), from a UK-based company. Two transactions took place, in December 2006 and May 2010.18 After they were shipped to Taipei, RTC hand-carried the transmitters on flights via Beijing to Pyongyang19 where they were delivered to a North Korean company, Korea Chonbok Trading Corporation (KCTC).

RTC said that KCTC paid for the 2006 transaction by a transfer via a Malaysian bank of €71,700. The transfer may have involved the representative of the Bank of East Land in Malaysia (See Figure 2).

For the 2010 transaction, RTC provided two different descriptions of its reimbursement by KCTC (although no documentation was provided to support either scheme). The first method (method 1) was by means of a payment offset arrangement: RTC and a second Taiwan-based company, Company A, took part in a trade fair in Pyongyang. The fair was organized by a North Korean company, Korean International Exhibition Corporation (KIEC). It turned out that the sum Company A owed KIEC for participation of Taiwan-based companies in the fair was similar to that KCTC owed RTC for the pressure transducers. The parties’ commitments were met by KCTC paying KIEC a sum equivalent to the cost by the pressure transducers, and Company A transferring an equivalent sum to RTC.

However, (method 2) RTC subsequently claimed that it had been directly paid in cash by KCTC in Pyongyang and that Company A was not in fact involved. RTC used this cash to pay KIEC for the participation of Taiwan-based companies in the trade fair.

18 The summary of this case is taken from the UN Panel on DPRK’s Final Report of 2016 (S/2016/157). The UK company was not made

aware of the ultimate end-user. 19 Without declaring them to customs authorities.



Figure 2. Procurement of pressure transducers by Korea Chonbok Trading Co Ltd, and payment methods.

Key points

• The payment offset arrangement described here would have been difficult for financial authorities or institutions to track because no financial transactions took place through the international financial system.

• Similar offset arrangements in connection with circumvention of financial sanctions on Iran were described by the UN Panel on Iran.20

20 Para 59 of the UN Panel on Iran Final Report 2015 (S/2015/401).



Case 3 (DPRK) A shipping agent finances a proliferation shipment21

In July 2013 Panama Canal authorities detained a North Korean vessel, the Chong Chon Gang (CCG), while it was transiting the Panama Canal from Cuba to DPRK. Canal authorities found a shipment of arms and related materials concealed under other cargo22. The CCG was operated and managed by Ocean Maritime Management Ltd. (OMM), one of the largest North Korean shipping companies.23

Costs in connection with the voyage of the CCG were paid by Chinpo Shipping (Private) Limited, based in Singapore. Following investigations Singapore authorities filed criminal charges, and Chinpo was convicted of financing of proliferation24 in connection with a sum of USD 72,016.76 that Chinpo had remitted by wire transfer from a Bank of China account to a Panama Canal shipping agent25. Additionally, Chinpo was convicted of carrying out an unlicensed remittance business. (See Figure 3).

According to court documents26, Chinpo Shipping (Private) Limited was a ships agency, chandlers and general wholesale importer/exporter. It was one of three companies run by a Chinese family that shared the same business address, employees, and an email account for communications with DPRK entities. They also shared an account at the Bank of China (in Chinpo’s name). The DPRK Embassy in Singapore used the business as a postal address. Chinpo had business relationships with North Korean shipping companies since the 1980s, and with OMM since the mid-1990s.

Chinpo used its Bank of China account to manage funds on behalf of OMM. Monies due to OMM (for example freight charges) were paid into the account. Monies were remitted from the account at OMM’s request, for example to DPRK vessel owners (who were not able to set up their own bank accounts because of sanctions), or on their behalf for supplies, port charges or other disbursements, or from one DPRK ship owner to another. Chinpo also used the account to transfer funds to OMM.27

According to court documents Chinpo kept track of these funds on OMM’s behalf, and they were separate from Chinpo’s chandlery and ship agency services. Over three years, 605 remittances

21 This case study has been developed with the assistance of Andrea Berger, Center for Non-Proliferation Studies at Monterey. 22 The arms and related materials included 2 MiG-21 jet fighters, anti-tank rockets, and SA-2 and SA-3 Russian surface-to-air missile systems

and their components. 23 UN Panel on DPRK Final Report 6 March 2014 (S/2014/147) 24 The specific charge was “transferring financial assets or resources that may be reasonably used to contribute to DPRK’s nuclear programmes

or activities”. 25 Public Prosecutor v Chinpo Shipping Company (Private) Ltd [2016] SGDC104. Specifically, the Judge concluded that the arms and related

material onboard the vessel could contribute to DPRK’s overall nuclear capability, and thus the payment of USD 72,106.76 for transit fees through the Canal was in connection with DPRK’s nuclear capability. 26 Public Prosecutor v Chinpo Shipping Company (Private) Ltd [2016] SGDC104 27 Although court documents refer only to an account, or possibly accounts, at Bank of China, media reporting of the case hearings suggests

Chinpo also used accounts at other banks in Singapore for money remittance activities, including United Overseas Bank, International Commercial Bank (https://www.nknews.org/2015/09/court-case-reveals-chinpo-shippings-ties-to-north-korea/ - accessed on 6 January 2017).



took place totaling more than USD40m, all related to DPRK vessels. Chinpo was effectively operating as a remittance business although had no license to do so from Singapore authorities.

Chinpo tried to hide its involvement with DPRK companies by removing the names of DPRK vessels and other identifying details from remittance forms and email correspondence. Payments from Chinpo’s account took place in the absence of invoices or other details.



The court documents record that the Bank of China queried a remittance by Chinpo on only one occasion: in connection with payment for expenses in connection with the outward leg of CCG’s voyage to Cuba. In that instance, the Bank requested details of CCG’s cargo, its consignee in Cuba, and the Bill of Lading. These details were provided.

Figure 3. The proliferation-related payment to C.B. Fenton and Co. S.A from Chinpo’s account at the Bank of China was funded from a remittance by Expedimar S.A. for a shipment delivered by CCG earlier in its voyage.

Key points

• Chinpo is an example of a small, family-run company involved in a proliferation network. • The company’s DPRK business connections go back many years and were well known

locally, but it is not clear what monitoring of the Chinpo bank account(s) was carried out by Bank of China. Clearly some screening of transactions in relation to US sanctions took place because the Bank requested more information regarding the payment in connection with Cuba. With respect to sanctions on the DPRK, perhaps Chinpo had no dealings with DPRK entities sanctioned at the time.

• However, the sums transferred through Chinpo’s account far outweighed those connected with its declared shipping agent/chandlery business and might have been flagged by screening against appropriate ML suspicious indicators;

• Furthermore, payments were being made from Chinpo’s account in the absences of invoices or other details; details were being removed from remittance forms;



• Similarly, it is unusual for ship agents to hold large amounts of money on behalf of ship owners and this might also have been flagged by appropriate monitoring policies; Chinpo’s remittance business activities are similar to those described in other case studies in this report (see Cases 6 and 14).



Case 4 (Iran) Financing of Proliferation in 1999: Some techniques have changed little

Although the purpose of the current Study is to identify current typologies of financing of proliferation the following case is included here as it shows that some typologies have changed little over the years. The case dates from 1999 and was provided by Swedish authorities to FATF for inclusion in the 2008 Report on Proliferation Financing. The 2008 report reads:

In the spring of 1999 the Swedish Customs found out that a person (P) in Halmstad, via a pizzeria, had exported a thyratron to Iran that was classified as a strategic product and therefore was subject to export control. After an audit and interview with P, suspicions grew that it was a question of smuggling.

A search was made in the apartment of P and a seizure of a thyratron was made at Arlanda Airport. It was on its way to a jurisdiction of proliferation concern. Earlier another thyratron was already exported.

P stated that he had been contacted by his cousin in the jurisdiction of proliferation concern in the spring of 1998 who worked at a university in that jurisdiction. The cousin wanted P to get a thyratron to the university. The producer in the United States directed P to the branch in Sweden. P stated he would use it as a degree project at a Swedish university. He forged an end user statement in order to buy the thyratron.

P paid the company 22 000 SEK and delivered the product to Halmstad. P contacted a forwarding company in order for them to export the thyratron to a university in the jurisdiction of proliferation concern. P wrote a pro forma invoice in the name of the pizzeria. The buyer was the university in the jurisdiction of concern. The thyratron was then exported.

In November 1998 P ordered one more thyratron after an order from another university in the jurisdiction of concern. P paid the delivery and in 27 May 1999 the thyratron was delivered to P in Halmstad.

The forwarding company got an assignment to send it to the jurisdiction of concern. The product was not exported because P had not paid the forwarding company for the cost of the freight terminal. P had the impression that Iran Air would once again be responsible for all expenses like last time.

During the preliminary investigation the Swedish Customs found documents like dispatch notes for payment from abroad, inter alia, from the jurisdiction of proliferation concern.

Swedish authorities provided the King’s College London Study with additional information as follows (see Figure 4): Individual 1 (referred to as person P in FATF’s 2008 report), who originally came from Iran to study in Sweden, owned the Pizzeria Bambino in Halmstad. At one point in 1998 he received an order by telephone for a thyratron from his cousin. His cousin’s telephone number placed him in Iran. Individual 1 was instructed by his cousin on how to prepare invoices. Individual 1 also took orders from Glen Mica Co, based in Tehran but Individual 1 was not engaged in any other trade with Iran, nor with other countries, nor within Sweden.



Individual 1 placed an order for a thyratron with a UK company. The UK company sourced the equipment from the US. Following receipt in Sweden on 11 June 1998, Individual 1 repackaged the thyratron and sent it to Amir Kabir University in Tehran.28 According to open source information at the time, Amir Kabir University was identified as having procured goods and/or technology for weapons of mass destruction programmes, in addition to doing non-proliferation related business. Swedish authorities subsequently determined that the thyratron was controlled for export.29

Individual 1 received payment for this order on 23 September 1998 by means of a wire transfer originated by an individual in Ontario, via Deutsche Bank. Individual 1 was subsequently asked to procure a second thyratron. This he also sourced from the UK company and on receipt on 29 May 1999, repackaged it for dispatch to Amir Kabir University. On this occasion he was paid on 18 May 1999 by means of a wire transfer from Chase Manhattan Bank, New York, initiated by another university, the University of Elm va Sanat (University of Science and Technology) in Tehran.

This second thyratron was intercepted by Swedish Customs who subsequently interviewed Individual 1 (his personal details were on the Customs documents). At the request of Swedish Customs following this seizure Amir Kabir University supplied Swedish authorities with an end user certificate for the first thyratron.

Individual 1 also initiated two payments to the account of Individual 2 at Bank Melli, Iran: the first for 6000 Kr on 2 November 1998 and the second, 8500 Kr, on 3 March 1999. He also initiated a payment of 8000 Kr on 26 May 1999 to Individual 3’s account at Commerzbank, Hamburg. Swedish authorities speculated that these payments may have been kick-backs.

28 Amir Kabir University was identified as the Industrial University of Amir Kabir. It possessed a US-supplied research reactor and hot cells. 29 According to EU regulation 3381/94 Annex 1 item 3A228.



Figure 4. The elements of the thyratron procurement network (adaptation of i2 chart provided by Swedish authorities) Key points

• This case is an example of financing of proliferation involving a national connected with a country under sanctions.

• These orders for thyratron’s appeared to be “one-offs”, and transaction monitoring currently practiced by many financial institutions would presumably highlight financial transactions connected with these procurements as inconsistent with those expected of a pizzeria business.

• The channels for payment were geographically far removed from the channels for procurement. The items were procured via the UK, payments were received via Canada, Germany and the US.

• Academic institutions (universities) were involved in the supply of an end user certificate for the first thyratron, and in initiating payment for the second thyratron.



Case 5 (Iran) Financing of procurement of dual-use valves 30

Individual 4, a Swedish-Iranian dual national, managed a company, Petro Instrument HB registered in 2009 by his wife and brother. The company acted as a procurer of technical equipment. Most of its customers were located in Iran.

Petro Instrument HB, initially came to the attention of the authorities on the basis of Suspicious Transactions Reports (STRs) submitted by two Swedish banks. The reports noted payments to Petro Instrument from Iran, the first in late 2010, and the second in 2011. Investigation by the Swedish Financial Intelligence Unit revealed that Petro Instrument HB had no declared income and that withdrawals from the company’s account were mostly in cash.

In 2010, Individual 4 arranged the procurement and shipment of a consignment of valves to a customer in Iran.

The valves, dual-use goods, were to be exported in violation of Swedish export controls.31 Documentation accompanying the shipment declared it was not dual-use material, but Swedish technical experts established that the valves were in fact dual-use goods. Although manufactured for the petrochemical industry they could also be used in uranium gas centrifuge enrichments plants (and for this reason were prohibited for transfer to Iran).

Furthermore, although according to the air waybill and customs declaration the final destination of the shipment was Sharjah in the United Arab Emirates, on the day of shipment the air waybill was changed to record the final destination as Tehran. Swedish authorities were not informed of the change.

Swedish authorities, which were already investigating Individual 4, intercepted the shipment before it left the country. A search of Individual 4’s office and home by the authorities revealed several examples of export-related declarations and certificates stating that exported goods would not be used for production of nuclear weapons.

Investigation by the authorities determined that Individual 4 had an irregular employment history and no specialized training or knowledge in the engineering equipment he was seeking to procure.32 He pre-paid most of the shipments to Iran. Initially, he was reimbursed by payments from Iran via a money exchange company in Sweden; later, he was paid through cross border wire-transfers to a Swedish bank account. He received a commission.

He claimed that while on vacation in Dubai he was approached by an Iranian national who suggested he establish a company in Sweden in order to procure items on behalf of Iranian entities.

The authorities determined that the language found on many of the documents discovered in Individual 4’s computer during the search of Individual 4’s office could be found using Internet

30 This account is based on Lund District Court records (Case B 3487-11 date 6 Feb 2013) 31 Swedish export control regulations based on Regulation (EU) No. 961/2010 relating to Iran. 32 Paragraph 23, UN Panel on Iran Final report June 2013 (S/2013/331)



search engines, and included language taken from the website of the government’s non-proliferation office.

Key points

This case provides a wealth of lessons relevant to detecting possible FoP:

• It is an example of the role banks can play in countering proliferation. By identifying suspicious transactions and submitting STRs banks triggered the subsequent successful investigations and interdiction by authorities;

• The individual involved was connected to the country under sanctions; • He had an irregular employment history and no specialized training or knowledge in the

engineering equipment he was seeking to procure; • His company’s financial profile was unusual (no declared income, cash withdrawals) and

would presumably be flagged by monitoring procedures in place in many financial institutions today;

• Experience is important when carrying out due diligence with respect to trade documentation. In this case Individual 4 was in a position to fake export documentation.



Case 6 (Iran) Circumvention of financial sanctions: A trading company turns into a money remittance business

According to Swedish authorities this case was initiated by a Suspicious Transaction Report in December 2008, when the bank concerned raised awareness in relation to a deposit, worth a billion Swedish crowns, from Iran, and suspected violation of laws on international sanctions.

Individual 5, who came from Iran to Study at university in Sweden, established Aram Company AB in 1986. According to court documents in connection with his conviction in 2010 for accounting fraud, the company was registered with local authorities to conduct, amongst other business, export and import of industrial technical goods and services.33

In late-2007/early-2008 Individual 5 established a business partnership with an Iranian currency broker, whose family had run a currency brokering business in Tehran for several generations. Individual 5 opened foreign currency bank accounts at Swedbank and other banks in Sweden through which funds from the currency broker in Iran were channeled to bank accounts of companies abroad (see Figure 5).

Aram notified the Swedish Financial Services Authority in 2008 that it would also carry out money transfer and currency exchange operations as a financial institution. Its customers would be Iranian small businesses dealing with Europe and China. Payments were to be made through Aram's bank account in a Swedish bank and Aram would receive commissions (about USD 20 for each service, cheaper than a bank would charge).

Between fiscal years 2007/08 and 2009/10 a total of 10,724 transactions amounting to about Kr 11.7bn (roughly USD 1.3bn) were processed through Aram accounts at banks in Sweden. By comparison Aram’s sales were small.34

According to Swedish authorities, the funds was then transferred from Sweden to individuals and companies in countries in the EU, USA, Canada, Japan, China, South Korea, UAE, Russia and other countries. Swedish authorities strongly suspected that some of the transactions were related to proliferation financing, and connected with an investigation in another country about procurement of proliferation-sensitive items. The Iranian currency broker appeared to be a middle-man in a proliferation financing chain.

33 This account is based on Umeå District Court records (Case B 58-10 date 3 May 2010) 34 Aram Company AB reported net sales of about 240,000 Kr in 07/08 and 580,000 Kr in 08/09 for example, and no sales were reported in 09/10.



Figure 5. The elements of the Aram Company AB’s remittance business Key points

• This an example of the role banks can play in countering proliferation. By submitting an STR the bank triggered the subsequent investigations and prosecution by authorities;

• According to Swedish authorities, this pattern of financial activity, involving the deposit of a large sum of money, not necessarily from abroad, while the person in question trades high-technology goods that are never imported to Sweden but sent straight to Iran or a neighbouring country, continues to take place.

• This is another example of an individual involved with circumvention of financial sanctions (and possibly financing of proliferation) having a connection with a country under sanctions;

• Transaction monitoring practices conducted by many financial institutions today would presumably detect that the scale of the transactions through Aram’s bank accounts did not match the company’s stated business;

• Aram Company’s money remittance business activities appear to resemble those described in Case 3 and Case 14.



Case 7 (Iran) A small broker/intermediary plays a key role in a procurement network (1)

According to documents35 filed in connection with his arrest and conviction, in March and July 2013 Individual 636 arranged two shipments of a metallic powder to a company in Turkey. These were then onward shipped to a company in Iran. The powder (a mix of cobalt and nickel), designed to protect surfaces against corrosion at high temperatures, could be used in aerospace, missile production and nuclear applications and required an OFAC license for export.

The first shipment was paid for by means of a wire transfer initiated by the Turkish company through a New York-based financial institution to a US-based account maintained by Individual 6. Individual 6 then paid the US-based supplier of the metallic powder by cheque (Figure 6).

In July 2013, Individual 6 arranged a second shipment of powder to the Turkish company. On this occasion he paid the US supplier by means of a wire transfer through a New York based financial institution. He subsequently invoiced the Turkish company for the sum plus a commission (about 9%).

According to court documents, on both occasions the Turkish company was described on export documentation as the end-user of the powder. In response to subsequent enquiries by US authorities, the Turkish company represented itself as an import business, including items used by medical industry customers to manufacture implants. The company claimed that the metallic powder was used for this purpose.

35 US District Court Eastern District of New York, Case 16M134, 18 Feb 2016. 36 A naturalized US Citizen of Turkish descent and CEO of Global Metallurgy LLC, a small company based in, New York.



Figure 6. Procurement paid for with a transfer from a bank in Turkey Key points

• This is another example of proliferation-related procurement involving a small broker/intermediary company, although in this case the shipments concerned appear to have been consistent with the business profile of the company.

• The owner of the small broker/intermediary company was connected with the State through which goods were being trans-shipped.

• Although the metallic powder required a US export license it does not appear on Nuclear Supplier Group lists, nor lists of other international export control organisations.



Case 8 (Iran) A probable sanctions circumvention scheme detected by monitoring for suspicious transactions (1)

A trading company was set up by a foreign national in a country in the Middle East.37 A series of accounts on behalf of the company were opened at a branch of an international bank in the State concerned. These accounts were denominated in local currency, euros, US dollars, and other foreign currencies.

The international bank monitored transactions through the trading company’s account in accordance with its standard practices. This monitoring revealed that the trading company received funds into its local currency account from only one source, This source was a second company, set up by another foreign national. These local currency funds were then quickly switched into foreign currencies and transferred overseas from the company’s foreign currency accounts (Figure 7).

This activity did not appear consistent with a trading company’s normal pattern of financial transactions. The bank investigated, and discovered that the owners of both companies had links to Iran. The bank suspected the funds originated in Iran and that the trading company’s bank accounts were being used to transfer the funds into the global financial system.

Figure 7. Mechanism for transferring Iranian funds into the international financial system

37 Annex V of UN Panel on Iran Final Report 2014(S/2014/394)



Key points

• The bank detected this apparent scheme to circumvent financial sanctions on Iran through monitoring suspicious indicators related to money laundering.

• The two companies concerned had links to a country under sanctions, Iran in this case. • The policy of the bank was to withdraw from any business with a connection to Iran. • Thus no further data are available to determine whether the scheme was being used to

finance proliferation.




A trading company was set up by a foreign national in a State in the Middle East and a company account opened at an international bank in the State concerned.38 The international bank monitored transactions through the trading company’s account in accordance with its standard practices. This monitoring revealed a high turnover of funds, and the bank suspected money-laundering was taking place.

Investigations by the bank showed that the foreign national’s stated employment was as a member of staff in a second company. This second company had the same telephone number as the trading company.

Further investigation revealed that this telephone number was the same as that belonging to two further companies previously identified by the bank as having Iranian shareholders and being involved in Iranian business (see Figure 8). The bank therefore suspected the trading company was being used as a front for Iranian business.

Figure 8. Common telephone numbers link companies in a suspected sanctions circumvention scheme

38 Annex V of UN Panel on Iran Final Report 2014 (S/2014/394)



Key points

• The bank detected this apparent scheme to circumvent financial sanctions on Iran through monitoring for suspicious indicators related to money laundering.

• The companies concerned had links to a country under sanctions, Iran in this case. • The policy of the bank was to withdraw from any business with a connection to Iran. • Thus no further data are available to determine whether the scheme was being used to





A company was set up in a State in the Middle East by a national of the State concerned, in partnership with a foreign national as a minority shareholder.39

An account was opened on behalf of the company at an international bank in the State concerned.

Monitoring by the international bank of transactions through the trading company’s account revealed that multiple large payments were being made from this account to several companies at the same address in a State in Europe. Multiple large payments were also being made to a second set of companies sharing the same address in a second State in Europe (Figure 9).

The bank identified this pattern of transactions as possible money laundering. It carried out further investigation that revealed that the national of the State in the Middle East also managed another company that did business with Iran.

Figure 9. Suspected scheme to transfer funds from Iran to companies in Europe

39 Annex V of UN Panel on Iran Final Report 2014(S/2014/394)



Key points

• The bank detected this apparent scheme to circumvent financial sanctions on Iran through triggering suspicious indicators related to money laundering.

• The companies concerned had links to a country under sanctions, Iran in this case. • The policy of the bank was to withdraw from any business with a connection to Iran. • Thus no further data are available to determine whether the scheme was being used to




Case 11 (Iran) Attempt to circumvent sanctions by use of a fake address to hide involvement of an Iranian entity

A financial institution was asked to process a payment to a company in a State neighbouring Iran.40 The policy of the financial institution was to conduct enhanced due diligence where companies in this particular State were concerned. As a result this company (the beneficiary of the payment) was found to be located in Iran. The address in the neighbouring State was fake (see Figure 10).

Figure 10. Sanctions circumvention using a fake address

Key points • The financial institution detected this apparent scheme to circumvent financial sanctions

through application of its due diligence procedures where the particular State was concerned.

• This is an example of the role that companies in countries neighbouring countries under sanctions may play in circumventing sanctions.




Case 12 (Iran) Attempt at sanctions circumvention as the beneficiary of a Letter of Credit acts as a front company for an Iranian company

A financial institution was asked to process an import letter of credit (LC) covering a shipment of goods.41 The goods originated in State A, in South Asia, and were ostensibly to be shipped from State B, neighbouring Iran, to State C in North Africa.

The financial institution investigated the LC, and discovered that the shipment was conducted by a third company, which was Iranian. The beneficiary of the LC in State B neighbouring Iran was acting as front company to the Iranian company, the actual beneficial owner, based on information in the LC (see Figure 11).

Figure 11. Sanctions circumvention by front company based in neighbouring state

Key points

• The financial institution detected this apparent scheme to circumvent financial sanctions through its policy of investigating trade financing schemes where States neighbouring Iran were concerned.

• This is an example of the importance of extending checks of Letters of Credit documentation beyond simply credit risks.

• The example also illustrates the geographical range of attempts by entities in Iran to circumvent sanctions.




Case 13 (Iran) Sanctions circumvention revealed by examination of documents for a shipment to a State neighbouring Iran

An international financial institution was asked to process transactions covering goods shipped from a State A in North Africa to a State B neighbouring Iran.42 A review of related shipping documents by the financial institution in accordance with its policies revealed that the goods were in fact in transit to Iran (see Figure 12).

Figure 12. Sanctions circumvention through a neighbouring state

Key points

• The financial institution detected this apparent scheme to circumvent financial sanctions through its policy of investigating trade financing schemes where States neighbouring Iran were concerned.

• The example also illustrates the geographical range of attempts by entities in Iran to circumvent sanctions.




Case 14 (Iran) Sanctions circumvention by a company acting as remittance agent on behalf of a company in Iran

A company in Iran, Company A, entered into an agreement with a company in a State in the Middle East, Company B, under which Company B agreed to accept or process payments on behalf of company A.43 Company B had a bank account at a non-Iranian financial institution. Company A informed its customers to direct their payments to Company B and informed beneficiaries to expect payments from Company B’s bank (see Figure 13).

It is not known how Company B and Company A in Iran settled their financial liabilities.

Figure 13. Sanctions circumvention by company acting as remittance agent

Key points

• Company B’s role as a money remitter on behalf of Company A was presumably not declared when the bank onboarded Company B’s business. Monitoring of financial transactions of Company B presumably triggered an alert as being inconsistent with its expected financial profile.

• The services provided by Company B to Company A appear similar to the money remittance activities described in Case 3 and Case 6. Bank accounts were used to receive and transmit funds on behalf of a third party unable to transact business because of sanctions.




Case 15 (Iran) Sanctions circumvention by an Iranian businessman located overseas who received income from his business in Iran

An Iranian businessman set up a business in Iran selling goods domestically and abroad.44 He moved abroad, but continued to own his business in Iran and he received income from it. The businessman received the income in the form of wire transactions originating from small financial institutions located in neighbouring States. The accounts in the financial institutions from which the wires originated were affiliated with companies located outside Iran (Figure 14).

It is not known exactly how value was transferred between the business in Iran and the companies outside Iran. It was possible that hawala methods were used.

Figure 14. Iranian businessman based outside Iran receives income from his company inside Iran Key points

• Detecting this scheme to circumvent financial sanctions by transferring funds outside Iran would require a financial institution to implement a high-level of due diligence during the customer on-boarding process and subsequent transaction monitoring.

44 Annex V of UN Panel on Iran Final Report 2014 (S/2014/394).



Case 16 (Iran) Sanctions circumvention as a payment to company inside Iran is made through a third company outside Iran

A non-Iranian company located outside Iran, Company A, tried to send a payment to a company inside Iran, Company B. The payment was sent to a specific account purportedly belonging to company B at a bank inside Iran.

The payment was rejected by an international financial institution in the payment chain, and a report filed with authorities. Company A then arranged a payment for a similar amount to a third company as beneficiary, Company C, located outside Iran. The number given for the beneficiary account number was the same account number as Company B (Figure 15).

It is not known if or how this second attempted payment reached company B. Open source searches failed to reveal a connection between the Iranian Company B and Company C outside Iran.

Figure 15. Repeated attempt to pay a company in Iran

Key points

• It is fairly common for payments that have been rejected by a financial institution to be re-presented later. Some banks have systems in place to detect and block such attempts. In this case the bank subsequently spotted the repeat transaction through the reference it contained to the account number of the initial, blocked transaction.



Case 17 (Syria) A small broker/intermediary plays a key role in a procurement network (2)

According to court documents filed in connection with his arrest and conviction, between 2008 and 2011, Individual 7 used his company, Global Parts Supply, Inc, based in Pennsylvania, USA, to export a range of chemical warfare-related agents and other items destined ultimately for Syria.4546 These items were procured from US suppliers and required US export licenses. The items were typically shipped to third countries (UAE, UK, Jordan) against false or misleading invoices; goods and services involved were undervalued or mislabeled, and the purchasers and end-users listed on documentation were usually false.

Payments for these goods were made by wire transfers to a Global Parts Supply account at the People’s National Bank in the USA. The wire transfers issued from banks in Lebanon (including the Lebanon and Gulf Bank of Beirut Central District), and in one case an exchange house (the Zourheir El-Ariss & Sons Exchange, Ras Beirut, Hamra-Adonis Str, Ariss Bldg, Beirut), and in one further case from a bank in Jordan (Figure 16).

According to court documents, the wire transfers were typically accompanied by bland descriptions of the transactions they covered, such as “goods value”, “laboratory spare parts” and “value of industrial machine spare parts”.

45 https://www.ice.gov/doclib/news/releases/2014/140423philadelphia.pdf 46https://www.ice.gov/news/releases/extradited-british-resident-pleads-guilty-conspiracy-illegally-export-restricted


https://www.ice.gov/doclib/news/releases/2014/140423philadelphia.pdf


Figure 16. Payments for procurement initiated from multiple locations

Key points

• This was another example of a small business involved as a broker/intermediary in procurement for a proliferation program.

• Bland descriptions of proliferation-sensitive goods and materials covered by these financial transactions have been recorded in the case of other proliferation networks.47 The intention may have been to avoid the shipments concerned attracting the attention of authorities.

• The involvement of exchange houses in financial transactions associated with proliferation has been highlighted by US Treasury.48

• This was an example of the use made of States neighbouring a State under sanctions for transit or trans-shipment of goods, and related financial transactions.

47 Based on the author’s experience of investigations of interdicted shipments undertaken as a member of the UN Panel on Iran. 48 The Use of Exchange Houses and Trading Companies to Evade U.S. Economic Sanctions Against Iran 10 January 2013

(https://www.treasury.gov/resource-center/sanctions/Programs/Documents/20130110_iran_advisory_exchange_house.pdf



Case 18 (Pakistan) Practices of an alleged procurement network operating from Pakistan

According to an Indictment filed in 2014,49 a US-based company, Optima Plus International LLC, exported a range of dual-use items to Pakistan between 2009 and 2013. The items were imported by a Pakistani company, Afro Asian International Pvt Ltd, and transferred to the Pakistan Atomic Energy Commission, PAEC (see Figure 17). PAEC is listed on the US Department of Commerce restricted Entity List50, and many of the items should have been subject to export licensing applications. According to the Indictment none was.

In addition, according to the Indictment, Optima and Afro Asian colluded to mislead US authorities by falsifying invoices and shipping documents by mis-describing and undervaluing the items shipped to Pakistan.

The Indictment does not describe how Optima received payment from Afro Asian, nor how Afro Asian was reimbursed by PAEC, and contains little other information directly relevant to FoP. However, the case is of interest because as described some elements of this Pakistani network resemble other networks described above. So banks and financial institutions unknowingly involved in processing financial transactions connected with this alleged proliferation network would likely have come across similar suspicious indicators.

49 22 January 2014, US District Court for Middle District of Pennsylvania Case No 14 CR 29 US v. Shafqat Rana, Abdul Qadeer Rana, Shahzad

Rana, Optima Plus International LLC, Afro Asian International Pvt Ltd. The case has yet to come to court. 50 PAEC is on DoC’s restricted entity list as “…engaged in activities that could result in in increased risk of diversion of exported items to

weapons of mass destruction programs, to nuclear proliferation activities…”



Figure 17. Alleged transfers of dual-use items to Pakistan



Key points

• The exporting company based in the US appears to have been a small, privately owned broker/intermediary company;

• The owner of the company was linked to the country whose proliferation program he was allegedly supplying;

• Documentation (such as shipping documentation and invoices) was falsified.



FATF indicators of possible proliferation financing: A second look

How do the FATF 2008 indicators look in the light of the information in this Interim Report? Table 2 is a brief summary of matches between key points of the above case studies and material in UN Panel reports, and some of the twenty indicators listed in FATF’s 2008 Report on Proliferation Financing. Those indicators against which, on this basis, no substantial matches can be made, are excluded.51

Despite the limited dataset covered by this Interim Report it is interesting to note that almost half of the FATF indicators of possible proliferation financing appear to be matched. It is tempting to speculate that perhaps these indicators are more indicative of FoP than the others, but the data are too limited as yet to reach any conclusion.

Table 2. Indicator Comparison

51 Exclusion of FATF indicators from this table does not imply they are not valid indicators of financing of proliferation.



52535455

52 Para 143 UN Panel on Iran Final Report of 2013 (UN document S/2013/331) 53 Annex V of UN Panel on Iran Final Report of 2015 (S/2015/401) 54 Paras 70, 71 of UN Panel on Iran Final report of 2014 (S/2014/394) 55 Paras 30 and 63 of UN Panel on Iran Final Report of 2014 (S/2014/394).



STFoP additional indicators of possible financing of proliferation

Based on this Interim Report, certain additional indicators of possible financing of proliferation can also be identified as follows (Table 3): involvement of small brokers/intermediaries, involvement of dual nationals of countries of proliferation concern, involvement of a university in a country of proliferation concern, descriptions of goods involved are non-specific, banks named as consignees, and payments for large numbers of high-technology goods that are never imported.

These additional indicators of possible proliferation financing are a little more specific than the original FATF indicators, and they could possibly be visible to banks and financial institutions that might unknowingly become involved in processing the transactions.

However, as the FATF indicators so these additional indicators are a starting point to assist financial institutions to identify financing of proliferation transactions. It is not suggested that any one of these additional indicators would be definitive by itself, or that they are exclusive to financing of proliferation. Nor are they exhaustive. For example, cash may also be an important element of FoP.56

56 Para 194(b) of UN Panel on Iran Final report of 2012 (S/2012/395), Para 146 and FN 33 of UN Panel on Iran Final Report of 2013 (S/2013/331).



Table 3. Additional Possible Proliferation Financing Indicators



5758596061

57 According to Swedish authorities, some individuals, following their acquisition of dual-national status, have set up companies dealing with technically complicated equipment despite lacking a technical background. They may be asked to cooperate by representatives of States of proliferation concern. 58 Para 120 UN Panel Report on Iran of 2013 (UN document S/2013/331) 59 Footnote b, Table 1 of Annex 2 of UN Panel on Iran report of 2014 (UN document S/2014/394) 60 See also para 63 of UN Panel on Iran Report of 2015 (UN document S/2015/401) for references to individuals connected with universities in Iran that were subject to designations under UN sanctions on Iran.

61 Paragraph 73 of Panel on DPRK Report of 2016 (UN document S/2016/157).



It is outside the scope of this Interim Report to propose steps that banks and other financial institutions might take to mitigate risk, but implementation of robust “know your customer” policies, regular monitoring, and ensuring trade documentation is checked not simply for credit risk but for sanctions and proliferation risk, would seem potentially useful steps.

Conclusions and STFoP future work

Based on the 18 case studies discussed in this Interim Report a number of indicators of possible financing of proliferation can be identified additional to those listed in FATF’s 2008 Report on Proliferation Financing. These are: involvement in the financial transactions of small brokers/intermediaries, involvement of dual nationals of countries of proliferation concern, involvement of a university in a country of proliferation concern, descriptions of goods involved being non-specific, banks named as consignees, and payments for large numbers of high-technology goods that are never imported. These additional indicators could possibly be visible to banks and financial institutions that might be involved in processing the transactions. If confirmed they should improve identification of financing of proliferation, improve identification of underlying networks, and thus better enable specific action to be taken to disrupt proliferation of WMD.

Further work is needed to examine and refine, and if necessary add to these additional possible indicators. STFoP will continue to collate and analyse information provided by governments and the private sector and final conclusions, including as regards indicators of possible proliferation financing, will be set out in the final report of the Study, due to issue in Summer 2017.

In the meantime comments on the contents of this Interim Report and its practical value will be welcome, as will proposals to engage substantively with the Study. Contact details are contained in Annex 2.



Annex 1: FATF 2008 Report: Indicators of possible proliferation financing62

1. Transaction involves individual or entity in foreign country of proliferation concern. 2. Transaction involves individual or entity in foreign country of diversion concern. 3. Trade finance transaction involves shipment route (if available) through country with weak

export control laws or weak enforcement of export control laws. 4. Transaction involves individuals or companies (particularly trading companies) located in

countries with weak export control laws or weak enforcement of export control laws. 5. Transaction involves shipment of goods inconsistent with normal geographic trade patterns

(e.g. does the country involved normally export/import good involved?). 6. Transaction involves shipment of goods incompatible with the technical level of the country

to which it is being shipped, (e.g. semiconductor manufacturing equipment being shipped to a country that has no electronics industry).

7. Transaction involves financial institutions with known deficiencies in AML/CFT controls and/or domiciled in countries with weak export control laws or weak enforcement of export control laws.

8. Based on the documentation obtained in the transaction, the declared value of the shipment was obviously under-valued vis-à-vis the shipping cost.

9. Inconsistencies in information contained in trade documents and financial flows, such as names, companies, addresses, final destination etc.

10. Customer activity does not match business profile, or end-user information does not match end-user’s business profile.

11. Order for goods is placed by firms or individuals from foreign countries other than the country of the stated end-user.

12. Customer vague/incomplete on information it provides, resistant to providing additional information when queried.

13. New customer requests letter of credit transaction awaiting approval of new account. 14. The customer or counter-party or its address is similar to one of the parties found on publicly

available lists of “denied persons” or has a history of export control contraventions. 15. Circuitous route of shipment (if available) and/or circuitous route of financial transaction. 16. Transaction demonstrates links between representatives of companies exchanging goods i.e.

same owners or management. 17. Transaction involves possible shell companies (e.g. companies do not have a high level of

capitalisation or displays other shell company indicators). 18. A freight forwarding firm is listed as the product’s final destination. 19. Wire instructions or payment from or due to parties not identified on the original letter of

credit or other documentation. 20. Pattern of wire transfer activity that shows unusual patterns or has no apparent purpose.

62 Page 54 of the Report.



Annex 2: Methodology

The King’s College London Study of Typologies of Financing of Proliferation is a year-long programme initiated in August 2016. Funding is provided by the Export Control and Related Border Security (EXBS) programme, US Department of State, under Award No. S-LMAQM- 16-GR-1138.

The results are based primarily on collation and analysis of financial information provided by States, financial institutions and other private sector entities relating to financing of proliferation or circumvention of financial sanctions. Such data are for the most part held in governments by financial intelligence units and security and intelligence agencies. In banks and other financial institutions they are probably held by financial intelligence units, other units dedicated to investigation of suspicious transactions, or equivalent bodies.

This type of information may be classified, sensitive, or governed by banking secrecy, data protection or other considerations. The Study has initiated the process of collecting data through meetings to enable detailed discussion of the Study’s objectives and methodology to ensure potential stakeholders have confidence in procedures to safeguard their data.

The Study is conducted, and information held, in accordance with King’s College London standards on ethics and data security. In particular no material is included in the Study's reports without permission from the owner.

The Study is not seeking classified, sensitive or protected data but has drawn on and continues to seek anonymised or desensitised information in the form of case studies or analyses that enable identification of patterns or trends of FoP. Including for example:

• Identification of types of entities involved, and their location; • Study of the role of front companies and the individuals involved • Identification of patterns characteristic of different sectors (eg, money service

businesses), • Identification of channels typically used, • Determination of main current trends (for instance, letters of credit as opposed to open

account); • Comparison of past proliferation and embargo circumvention practices and patterns with

current trends; • Identification of differences between typologies of different networks (e.g. Iran and North

Korea); • Comparison of proliferation finance with respect to nuclear, chemical or biological WMD; • Understanding of the role of hawala and other informal channels for proliferation and

circumvention of sanctions;



Contacts with potential stakeholders have been initiated either through existing connections, through introductions or by means of recommendations from EXBS officials.

In addition, the Study has participated in meetings in order to expand outreach to the private sector. A brief was also submitted for circulation by the Wolfsberg Secretariat to participants at the Wolfsberg meeting Washington DC on 7/8 December 2016.

For further information about the Study please contact:

Dr Jonathan Brewer, Visiting Professor at King’s College, London, currently based in New York City. Tel +1 917 900 7636 (mob), +44 7815 848 418 (mob), and [email protected], or

Mr Ian Stewart, Senior Researcher in the Department of War Studies at King’s College London, and Head of Project Alpha on Non-Proliferation. Tel +44 207 848 1342 (off) and [email protected].

www.projectalpha.eu




11:15 AM– 12:15 PM: OFAC and BIS: How they Work Together and How Regulatory and Criminal Powers Are Applied

Primer On Agencies That Enforce US Sanctions: Department Of The Treasury

By: www.SanctionsAlert.com

Date: July 21, 2016

The US has one of the most complex national systems of sanctions enforcement in the world. This system derives from the number of agencies that are empowered to initiate actions against violators of US sanctions. Because each US agency maintains a different “Do Not Touch” list, organizations and individuals on the various lists may overlap. It is not uncommon for three or four US agencies to take action jointly, thus exposing a business to multiple investigations and varying penalties.

This article is the first of a series on the role US agencies play in sanctions enforcement. The series focuses on the role departments and agencies play in enforcement, administration and investigation of sanctions violations.

We begin with the US Department of the Treasury, which is the most visible, important and active US sanctions enforcement body.

OFAC

The Treasury’s Office of Foreign Assets Control (OFAC) plays a primary role in administering and enforcing US sanctions programs. Its website says OFAC “administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States”.

The International Emergency Economic Powers Act of October 1977, known as the IEEPA, is the primary source of OFAC’s powers. It authorizes the President to declare the existence of an “unusual and extraordinary threat… to the national security, foreign policy, or economy of the United States” from a foreign source. IEEPA makes it a crime to willfully violate, or attempt to violate, any IEEPA regulation. In coordination with the Department of State, OFAC may issue licenses to conduct transactions with a variety of goods and services in sanctioned countries.

OFAC has a wide investigative mandate but relies on the financial institution functional regulators to detect violations and weak compliance policies and procedures. These agencies include the



Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve System and FINRA. The Department of Commerce’s Bureau of Industry and Security (BIS) enforces laws and regulations concerning strategic trade controls, including supervision and examination of trade in “dual-use” items under the Export Administration Regulations (EAR). Nonetheless, transactions involving sanctioned countries or persons may still fall under OFAC’s purview. The same applies to the State Department’s Directorate of Defense Trade Controls (DDTC), which enforces laws dealing with trade in items pertaining to military defense under the International Traffic in Arms Regulations (ITAR).

OFAC publishes a list covering ‘Specially Designated Nationals’ (SDNs). To see the full list, click here.

OFAC also publishes and maintains lists containing:

• Sectoral Sanctions Identifications • Foreign Sanctions Evaders • Non-SDN Palestinian Legislative Council • Non SDN Iranian Sanctions • Foreign Financial Institutions subject to Part 561 (the “Part 561 List”)

FinCEN

Another US Treasury Department bureau that plays an indirect role in sanctions enforcement is the Financial Crimes Enforcement Network. Known as FinCEN, it collects and analyzes information, primarily from US financial institutions, about currency and electronic financial transactions and movements in order to combat domestic and international money laundering, terrorist financing, and other financial crimes. It also implements, administers and enforces compliance with the Currency and Foreign Transactions Reporting Act of 1970, commonly known as the Bank Secrecy Act, or BSA.

As its powers are mainly derived from the BSA, which does not directly apply to or govern sanctions, FinCEN enforcement actions do not deal with sanctions violations directly but often involve an anti-money laundering violation or action.

FinCEN imposes “Special Measures” under Section 311 of the USA Patriot Act (31 USC Section 5318A), which addresses US concerns about sanctions violations, money laundering and terrorist financing. This provision authorizes FinCEN to impose “special measures” on financial institutions, nations or jurisdictions if it finds that they are of “primary money laundering concern.” Special measures may prohibit or restrict the opening or operation of correspondent or payable-through accounts for a financial institution.

Internal Revenue Service

The Internal Revenue Service has several components that may play an indirect role in sanctions enforcement and compliance. The Examination Division, which employs more than 15,000 examiners, examines compliance with tax laws and tens of thousands of businesses throughout the United States. If it finds a possible criminal violation, it refers the matter to its constituent



unit, the Criminal Investigation Division (IRS-CI), which investigates criminal violations of the US tax code and related financial crimes, such as money laundering.

The IRS-CI cooperates closely with other US agencies, including OFAC, to identify terrorists and terrorist fundraising activities for inclusion in the counterterrorism sanctions program.

All of these constituent agencies of the Treasury Department coordinate their work closely with other departments, particularly if a criminal prosecution is being contemplated. In that case, it’s imperative that the United States Department of Justice be involved in the analysis of the matter and the decision of whether to prosecute for a criminal offense.

http://sanctionsalert.com/primer-on-agencies-that-enforce-us-sanctions-department-of-the-treasury/



Primer On Agencies That Enforce US Sanctions: Department Of Commerce

Date: August 25, 2016 By: Anna Sayre, Legal Content Writer, SanctionsAlert.com

The US has one of the most complex national systems of sanctions enforcement in the world. This system derives from the number of agencies that are empowered to initiate actions against violators of US sanctions. Because each US agency maintains a different “Do Not Touch” list, organizations and individuals on the various lists may overlap. It is not uncommon for three or four US agencies to take action jointly, thus exposing a business to multiple investigations and varying penalties.

This article is the second in a series of articles on the role US agencies play in sanctions enforcement. The series focuses on the role departments and agencies have in the enforcement, administration and investigation of sanctions violations.

Article two of the series deals with the Department of Commerce and its role within sanctions related affairs. Though the Department of Commerce has only one main office that handles sanctions related enforcement, it plays a vital role in sanctions enforcement and often works in conjunction with other US agencies to implement and enforce US sanctions policy.

BIS

The Bureau of Industry and Security (BIS), in contrast to the Department of State’s Directorate of Defense Trade Controls that monitors defense trade, enforces the export of so-called “dual-use” items, including software and technology as well as less sensitive military items. Dual-use items are commodities, technology and software that have both civilian and military or proliferation applications.

The BIS develops export control policies, issues “do not touch” and “regulated items” lists, and issues export licenses for particular goods on a case-by-case basis according to its Export Administration Regulations (EAR). The EAR primarily regulates items designed for commercial purposes, such as computers or software, but also includes hardware and technology that could have military applications.

List of regulated items

BIS publishes a list of regulated items, called the Commercial Control List (CCL), which can be seen by clicking here. The CCL contains 10 broad categories, such as “Nuclear & Miscellaneous”, “Materials, Chemicals, Microorganism and Toxins”, and “Sensors and Lasers”. Each category is subdivided into five product groups, including “Systems, Equipment, and Components”, “Software” and “Technology”. Individual dual-use items used for export control purposes are identified by an Export Classification Numbers (ECCN) included on the CCL. An ECCN consists of a five-character alpha-numeric designation, e.g. 3A001, and is a key factor in determining whether a license must be obtained in order to export a dual-use item. If the item you intend to export has been given an ECCN, the CCL offers a wealth of information about the item, including: the reasons for control of that item, such as, national security, anti-terrorism, or crime control;



indications as to which transactions may require an export license based on the country of destination; and also information regarding which license exceptions, if any, may apply. For further details on how to determine if your export needs a license, click here.

In addition to ECCN classification, exporters have the opportunity to self-classify their items using BIS’s online resources and their own technical understanding of the item. Exporters can then submit an official request for a classification of the item by BIS. For more information on self-classification, click here.

BIS also regulates civilian items, not identified on the CCL, called “EAR99” items. Generally, and depending on the facts of the transaction, EAR99 items may be shipped without a license. If an EAR item is exported to an embargoed or sanctioned country by the Office of Foreign Assets Control (OFAC), or to an end-user of concern or in support of a prohibited end-use, you may be required to obtain an export license.

Lists of persons and entities

BIS also issues “do not touch” lists with individuals or entities. Depending on which list the match was found, a match indicates either: there is a strict export prohibition; a specific license requirement; or the presence of a “red flag”.

Denied Persons List: A list of individuals and entities that have been denied export privileges. Any dealings with a party on this list that would violate the terms of its denial order are prohibited.

Entity List: A list of foreign parties that are prohibited from receiving some or all items subject to the EAR unless the exporter secures a license. Those persons present a greater risk of diversion to weapons of mass destruction (WMD) programs, terrorism, or other activities contrary to US national security or foreign policy interests.

Unverified List (UVL): A list of parties whose bona fides BIS has been unable to verify. No license exceptions may be used for exports, reexports, or transfers (in-country) to parties on this list. A statement must be obtained from such parties prior to shipping items not subject to a license requirement.

The Consolidated Screening List (CSL) is a list of parties for which the United States Government maintains restrictions on certain exports, reexports or transfers of items. The list is a consolidation of multiple export screening lists of the Departments of Commerce, State and the Treasury.

EE Unit

BIS’s Export Enforcement (EE) Unit enforces export controls. It’s mission is “to protect US national security, homeland security, foreign policy, and economic interests through a law enforcement program focused on: sensitive exports to hostile entities or those that engage in onward proliferation; prohibited foreign boycotts; and related public safety laws”. EE accomplishes its mission through preventative and investigative enforcement activities and then, pursuing appropriate criminal and administrative penalties against export and sanctions violators.



EE is made up of the Office of Export Enforcement (OEE), Office of Enforcement Analysis (OEA), and the Office of Anti-Boycott Compliance (OAC). These offices work together to impose civil money penalties and, when applicable, deny export privileges. Namely, the OEE has the authority to make arrests, execute search warrants, serve subpoenas, and seize goods about to be illegally exported.

Close connections with other US agencies

EE works in close connection with other US agencies in order to enforce global sanctions policy. For cases concerning criminal sanctions violations, BIS often works closely with the Department of Justice, and similarly, with the FBI and Department of Homeland Security with regard to foreign investigations.

BIS also frequently works in conjunction with the Department of Treasury’s OFAC to implement sanctions policy. If exports are to be made to a sanctioned country, such as Cuba or Burma, BIS and OFAC will share licensing jurisdiction for exports to these countries based on the type of item or activity. BIS will handle licenses for exports of items subject to the EAR, whereas OFAC will handle licenses for travel, financial activities, services, and other specially designated items. For some countries, such as Iran and Sudan, BIS will even have a specific list of “deemed exports”.

http://sanctionsalert.com/primer-on-agencies-that-enforce-us-sanctions-department-of-commerce/



Multiple Agencies Dealing With Lifted Vietnam Arms Embargo Underscores Complex Compliance

By: Anna Sayre, reporter SanctionsAlert.com Date: June 2, 2016

Trade between the US and Vietnam has grown exponentially within the last two decades. US exports to Vietnam increased by 23 percent in 2015 alone, and Vietnam is now the biggest Southeast Asian exporter of goods to the US. Effective May 23, 2016, the US government lifted its historical 50-year arms embargo against Vietnam, further opening the door to increased trade between the two countries. With relations continuing to improve, the importance of becoming more familiar with the nuances of relevant US sanctions regulations and how they relate to trade dealings with Vietnam has been underscored.

In trying to cope with US export regulations to Vietnam, exporters and compliance professionals now face a myriad of agencies, laws, and regulations. With growing trade between the US and Vietnam, it is important for compliance professionals to understand which US agencies currently administer sanctions policy relating to Vietnam as well as how financial and non-financial institutions can seek to be fully compliant.

Which US agency administers trade with Vietnam?

There are a number of agencies and regulators who administer and regulate trade dealings with Vietnam, each with their own set of laws and regulations. Which regulations are specifically applicable will depend on the kinds of goods and/or services that are being exported, namely whether they are classified as defense articles, , or “dual use” items and technology that can have both civil and military uses.

Defense Articles and Services – the ITAR and US Munitions List

The US State Department’s Directorate of Defense Trade Controls (DDTC) is the US agency that monitors and regulates defense trade activities and administers the International Traffic in Arms Regulations (ITAR), which regulates defense articles (including hardware items, software and technology) and services for use in a military setting, including certain space related items and technology. The enabling legislation for the ITAR is the Arms Export Control Act, which, thus, also governs US trade in military items. Included in the ITAR is the US Munitions List, a comprehensive list of all defense articles and services subject to the ITAR and control by DDTC. For the full list, click here.

Section §126.1(l) of the ITAR states, “It is the policy of the United States to deny licenses or other approvals for exports or imports of defense articles and defense services destined for or originating in Vietnam”. However, in a recent Industry Notice, DDTC says that, “effective immediately, the Department of State’s policy prohibiting the sale or transfer of lethal weapons to Vietnam, including restrictions on exports to and imports from Vietnam for arms and related materiel, has been terminated. Consequently, in accordance with the Arms Export Control Act, the Directorate of Defense Trade Controls (DDTC) will review on case-by-case basis applications for licenses to export or temporarily import defense articles and defense services to or from



Vietnam under the International Traffic in Arms Regulations (ITAR). DDTC will soon publish a rule in the Federal Register to implement a conforming change to ITAR §126.1.” Thus, although the regulatory change has yet to be made, the arms embargo was terminated and DDTC will now review requests for authorization for USML exports to Vietnam.

Commercial Items and “Dual-Use” – The EAR and CCL

In contrast with DDTC, the Department of Commerce’s Bureau of Industry and Security (BIS) administers and enforces a separate export control regime for so-called “dual-use” items software and technology, and for certain less sensitive military items. BIS’s regulations are known as the Export Administration Regulations (EAR). The EAR primarily regulates items designed for commercial purposes, such as computers or software, including hardware, software, and technology, but that could also have potential military applications.

It should be noted, however, that the countries listed as subject to US arms embargoes in the EAR are drawn from Section 126.1 of the ITAR. Therefore, any change to ITAR implemented by DDTC in relation to Vietnam will also have the effect of removing Vietnam from the list of US arms embargoed countries contained in the EAR. BIS recently stated that it, too, will issue a new rule to reflect the new US policy vis-à-vis Vietnam.

Similarly to that of DDTC, BIS also has a list of items that are regulated called the Commercial Control List (CCL). The full CCL can be found by clicking here. Note that BIS also regulates civil items not identified on the CCL, so-called “EAR99” items.

How to comply –DDTC

If articles or services are found on the USML, a manufacturer or exporter must register with DDTC and obtain authorization for export from DDTC, through either a license or license exemption, in order to be compliant with the ITAR. As noted in the above-excerpted industry notice on Vietnam, DDTC will now review applications for licenses to export to or from Vietnam on a case-by-case basis. It is the responsibility of the manufacturer or exporter to take the necessary steps to certify that they have complied with the relevant regulations. Further information in relation to compliance with the ITAR can be found here.

Currently, civil fines for non-compliance with ITAR can be as high as $500,000 and criminal violations can carry jail time of up to 10 years per violation, whereas civil fines for non-compliance with EAR can reach $250,000 and criminal violations can carry prison time of up to 20 years per violation.

What about OFAC?

The US Treasury Department’s Office of Foreign Assets Control (OFAC) does not administer sanctions on Vietnam. Though OFAC does enforce sanctions compliance, and did in fact administer sanctions against Vietnam in the past, its involvement ended when President Clinton lifted the Vietnam trade embargo in 1994. If a transaction under the ITAR happened to involve a person designated by OFAC, then US persons would still be barred from involvement with such a transaction. Accordingly, it is important to screen all proposed transactions for involvement by



OFAC Specially Designated Nationals, or other restricted parties (such as BIS’s Entity List and Denied Parties Lists, and other such lists).

At present, there are not many individuals or entities from Vietnam listed on OFAC’s Specially Designated Nationals and Blocked Persons List, but that list, as well as lists of other parties of concern are updated frequently.

Further specifics with regard to history of the Vietnam arms embargo are discussed in the first part of this article, posted on June 1, 2016 on www.SanctionsAlert.com.

http://sanctionsalert.com/multiple-agencies-dealing-with-lifted-vietnam-arms-embargo-underscores-complex-compliance-2/



1:30 -2:30 PM: Navigating Increasingly Complex Sanctions Regimes Against Iran, Russia and Cuba: Hot Button Issues

Iranian Sanctions Regimes Cause Ongoing Complications For Compliance Suites

May 17, 2017 By: Anna Sayre, Legal Content Writer, SanctionsAlert.com

Since the international community decided to implement a plan to reduce sanctions against Iran, formally known as the Joint Comprehensive Plan of Action (JCPOA), on January 16, 2016 (“Implementation Day”), the European and U.S. regimes have become increasingly misaligned. Not surprisingly, this has led to compliance officers and other professionals having to navigate extremely treacherous waters. In a recent poll conducted by Sanctions Alert, when attendees were asked what the prospects are that U.S. sanctions will be eased in the near future, almost 90% of those polled indicated that this was either “Unlikely” or “Very Unlikely”.

This increasing confusion resulting from varying international rules regarding Iran places an onus on the importance of examining the unique differences between the European and U.S. Iranian sanctions regimes and makes it all the more paramount to understand what a compliance officer can do to stay fully compliant in in both areas of the world.In a recent webinar at sanctionsalert.com, Babak Hoghooghi, Counsel at Berliner Corcoran & Rowe in D.C., and Nadiya Nychay, Partner at Dentons in Brussels, discussed both the European and U.S. sanctions programs against Iran, how they differ, and how professionals can make their best effort to stay compliant.

U.S. sanctions on Iran before and after Implementation Day

Mr. Hoghooghi starts by outlining the various historical sanctions that have existed against Iran since the mid 1980s. These are made up of primary sanctions, relating to U.S. persons, secondary sanctions, relating to non-U.S. persons, and targeted sanctions, which target specific listed individuals or entities.As such, it is not necessary to be a U.S. citizen nor even present within the U.S. in order to fall under the U.S. Iranian sanctions regime. Imposition of the majority of these sanctions have stemmed from the U.S. motivation to protect against terrorist activities, violations of human rights, or the creation of weapons of mass destruction.

Following the JCPOA, the U.S. has indeed eased its sanctions regime against Iran, yet most of these changes center on secondary sanctions. Almost all secondary sanctions have been removed by the JCPOA, as well as many of those sanctions that relate to obstruction of trade and hindrance to the Iranian economy. Remaining restrictions still include: export of U.S. origin goods to Iran,



use of U.S. institutions for transactions related to Iran, and any dealings with the IRGC or other listed SDNs.

Following Implementation Day, U.S. persons are still broadly barred from conducting business with the Iranian government or Iranian companies. Specifically prohibited activities include:

• Engaging in any transactions in which the Government of Iran or an OFAC listed Specially Designated National (SDN) has an interest;

• Export of goods and services, software, or technology to Iran, whether or not they originate in the U.S.;

• Import of Iranian origin goods and services, whether those goods have been manufactured in Iran or simply entered the Iranian market;

• Make new investments in Iran, whether by funds or credit; and • Facilitating, or provide any assistance whatsoever for, prohibited transactions.

In short, as long as a US person has reason to know that goods/services will end up in Iran or are for the benefit of Iran, this sort of activity remains strictly prohibited.

The exceptions are few, but include:

• humanitarian grounds, such as export of food, medicine, and basic medical supplies, • personal communication, such as devices and software for chatting and social

networking; as well as phones/laptops.

Since Implementation Day, the JCPOA has provided three additional exceptions, which include:

• the export of commercial passenger aircraft equipment for civil aviation (which is still limited by the need for a license);

• the engagement of non-U.S. subsidiaries of U.S. persons in Iran transactions subject to certain limitations; and

• the import of certain goods into the U.S, such as foodstuffs and Iranian carpets.

“The bottom line,” says Mr Hoghooghi, “is that general licenses are there but compliance procedures, training and oversight are very critical.” “When in doubt, always go to OFAC and seek clarification”, he advises.

Continuing Challenges of doing business with Iran under U.S. rules

Sanctions compliance aside, many challenges remain for those who seek to do business with Iran. There are political risks, both as a result of potential corruption in Iran and the new Trump administration in the U.S., a possibility of ‘snap-back’ if Iran fails to adhere to all of its nuclear obligations under the JCPOA, and to some extend there still exists a stigma of doing business with Iran that could hurt a business’s reputation.

The Trump administration appears to be confrontational regarding the JCPOA, however, the details of its policies remain very unclear.

The Jurisdiction of EU Sanctions

The U.S. rules on Iran stand in stark contrast to the changes implemented by the EU.



Ms. Nychay starts by explaining the scope of EU jurisdiction. EU rules on Iran apply to any individual or business: within EU territory, any EU national or business incorporated in a Member State, anyone on board an aircraft or vessel under the jurisdiction of a Member State, or any business done in whole or in part within the EU. The latter category can be the most complicated to navigate, especially if for example, a business procures a vessel in the EU, which is manufactured in China and eventually intended for sale in Iran, EU jurisdiction would be extended to cover that vessel. These situations, however, are decided on a case-by-case basis. Though EU law is consistent, each Member State implements EU lawsin their own way, making the outcome of a case also potentially dependent on whether the case is heard in France, the U.K., Poland, or another Member State.

EU Sanctions on Iran: what has been lifted and what remains?

Following Implementation Day, prohibitions on Iran were lifted, namely those involving trade and finance, such as: oil & gas, SWIFT transactions, software and technology, shipping and transport, precious metals, and some asset freezes.It should be noted that only some individuals have been delisted, therefore, it is still wise to monitor these lists regularly.

There are still some EU sanctions that continue to have effect, which can be broken up into two categories.

1. Those dealing with the cultivation of nuclear or military programs, such as arms and missile technology as well as asset freezes on some key individuals and entities.

2. Those relating to human rights standards and a number of listed individuals and entities related to Da’esh and Al’Qaeda.

The result is the facilitation of foreign investment and the bolstering of Iran’s economy while, at the same time, maintaining a strong stance on human rights and anti-terrorism.

This, of course, stands in contrast to the US who, despite also encouraging trade in Iran and boosting of the Iranian economy, still maintains much stricter restrictions in relation to persons engaged in dealings with Iran.

How to stay compliant with EU Sanctions on Iran

Ms. Nychay provides a few recommendations on how professionals can make sure to stay compliant.

• Always live up to the strictest standard. If a transaction happens to have a U.S. and E.U. nexus, then try to adopt the stricter U.S. standard;

• Monitor and screen all counter parties to a transaction, by checking all applicable lists and regulations (such as EU Regulation 267, 833, and OFAC’s SDN List);

• Do not process USD denominated payments through the U.S. financial systems as they are almost sure to not be cleared; and

• Ring-fence any U.S. persons within the company from business being done with Iran.

Ms. Nychay reminds us that the U.K. is moving towards a U.S.-style of sanctions enforcement, which will affect financial sanctions going forward. The U.K. will now impose civil penalties for sanctions violations as well as a fine equaling the greater of £1 million or 50% of the value of the



transaction. In addition, the U.K. has eased its standard of proof to a “balance of probabilities” and extended its jurisdiction to all transaction with a “U.K. nexus”.

http://sanctionsalert.com/increasingly-complex-iranian-sanctions-regimes-cause-ongoing-complications-for-compliance-suites/



Western Companies With Russian Ties Get No Relief

September 9, 2016 By Anna Sayre, Legal Content Writer, SanctionsAlert.com

On July 1, 2016, the Western powers agreed to further extend sanctions imposed on Russia until 31 January 2017, much to the chagrin of certain international companies and exporters. For them, continued sanctions against Russia means further potential decreases in their sales revenue as well as unwelcome restrictions on their investment opportunities. While Western sanctions have certainly taken a toll on Russia’s economy in the past few years, Western companies have not escaped unscathed.

In our globalized world, it is nearly impossible to avoid the indirect adverse effects that result from imposing sanctions, particularly when those sanctions are imposed upon a country with strong international business ties. Through weakening the Russian economy, the EU and the US risks lowering the demand for Western exports, and thus weakening their own economies as a result. Russia’s counter-ban on certain Western imports also threatens to further weaken the countries it targets.

A summary of Western sanctions against Russia

Sanctions against Russia, in response to Russia’s annexation of Eastern Ukraine (i.e. Crimea), were first imposed on March 17, 2014. This first wave of sanctions was fairly soft and included: asset-freezes, travel bans against some Russian officials, as well as prohibitions on conducting business with any organization or company involved with the invasion of Crimea.

TIMELINE OF SANCTIONS AGAINST RUSSIA

• March 17, 2014: Crimea Annexed: first wave of Western sanctions against Russia.

• July 31st, 2014: Flight MH17 shot down: second wave of Western sanctions against Russia.

• August 7th, 2014: first Russian counter-sanctions targeting food imports.

• 2015-2016: extensions of Western sanctions as well as Russian counter-bans.

• July 1st, 2016: most recent extension of Western sanctions against Russia until January 2017.

On July 31, 2014, following the crash of Malaysian Airlines flight MH17 allegedly shot down by mistake over Ukraine by pro-Russian insurgents, the second round economic sanctions against Russia were implemented. These, arguably more severe, economic sanctions restricted lending to Russia’s state banks, imposed a trade embargo on arms, a ban on the exportation of oil, technology and services, as well as dual-use goods that have a potential military application.

In defiance to these harsher restrictions, Russian leader Vladimir Putin responded by imposing counter measures of his own against the West in early August 2014. This included a near total ban on food imports from the EU, US and other countries, including dairy, fruit, vegetables, chicken, beef, and fish.This, in turn, sparked a third round of sanctions, this time by countries such as Norway and even commonly-neutral Switzerland, imposing a myriad of bans and blacklisting of Russian individuals and companies.Putin has since extended his ban on food products sanctions with only the following food products being exempt to the embargo: baby



food, selected animal products and live animals, fruit juices or canned fruit, milk and milk products, salmon fry, seed potatoes, onion sets, hybrid sweet corn, and dietary supplements.

Since that time, more and more countries have imposed sanctions against Russia, and countries with sanctions already imposed against the Kremlin,have extended their bans.

Effect on the Russian economy

While there is little doubt that the Western sanctions against Russia have had some effect on the Russian economy, it is difficult to estimate precisely how big that impact has been. For the first time in five years, Russia’s economy has shrunk by 0.5%, its currency has plummeted, and interest rates have skyrocketed. The restricted opportunities for attracting foreign capital, including loan refinancing, has also been a painful consequence of the sanctions against Russia. Many adverse effectsto the investment strategies of Russian entities have stemmed from the limited possibilities of obtaining capital from sources outside the system of Western financial institutions.

Though some experts argue that Russia’s descending economy can be mostly linked to the unrelated issues of sliding oil prices, it would be difficult to argue that Western sanctions have played no part at all in its dwindling economy.Russian officials, including the Minister of Economy, Alexey Ulyukaev, and Minister of Finance, Anton Siluanov, have estimated the cost of financial sanctions on Russia to be anywhere between $40-90 billion per year (about 1% of its GDP in 2016). Though this is not as much of an impact as the recent prices of oil, which is estimated at around 4% of the Russian GDP in 2016, sanctions against Russia nevertheless have undeniably had a substantial negative economic impact. Some experts predict an even stronger negative impact on Russia’s economy in the future due to the continued inability to attract capital from foreign sources, especially in relation to energy projects usually used to bolster the Russian infrastructure. Some believe that this coupled with further Western sanctions may putcrushingstrain on the already vulnerable Russian budget.

Effect of Russian sanctions on the West

Though Western sanctions have had a desired impact on the Russian economy to some degree, the balance of harm to Western companies cannot be ignored. Most Western losses are, arguably, caused by the retaliatory measures Russia has taken against the West. It is estimated that Russia’s counter-ban on food imports cost the US in excess of $9 billion per year.This, coupled with the effect of Western sanctions inadvertently causing low demand for Western exports by Russia has been felt by a number of big name brands.

A number of US companies have felt the effects of the crackdown on Russia by the West, most namely, food, car and oil companies.Ford Motor and Volkswagen Russian sales dropped 40% and 20% respectively in 2015. The Danish beer company, Carlsberg, saw its shares plummet over 20% in 2015 because of its ties as Russia’s number one brewer, and numerous energy and oil companies, such as Exxon and Mobil, have also felt the effects of decreasing sales because of the forced cancellation of Russian energy projects.

The EU has suffered similar economic losses as a result of its sanctions against Russia, though the overall impact on the EU economy has been rather limited. This is mostly because some countries



economically rely on Russia, and vice versa. Despite Russia being EU’s third largest trading partner, representing 8.4% of total trade, the EU is in fact Russia’s number one trading partner, representing as much as 48% of total Russian foreign trade, and its most important foreign investor (i.e. up to 75% of foreign direct investment comes from the EU). Certain sectors and countries, most notably Germany, have been more significantly affected by sanctions against Russia than others.

Estimates of the impact to the EU economy vary, however, most indicate an overall resilience of the European economy to any adverse effects of decreased trade with Russia. Most importantly, sanctions against Russia are not thought to be a systematic threat to the EU’s financial sector. The most visible direct effect is the substantial fall in EU agricultural and food exports to Russia following Russia’s ban on food imports. The losses are, however, mitigated to a large extent by redirecting exports to alternative markets.

In light of potentially damaging effects on business, it is essential to maintain a watchful eye. Often times, however, this is not as easy as it would seem. Maria Miltiadou, a sanctions consultant in Cyprus, says that “although US and EU/UK sanctions are very much alike, they differ somewhat in the scope of targeted entities and imposed actions. Companies must consider their jurisdiction for the specific transaction whether it is for restricted exports, re-exports and services they are providing to clients.”

Continued struggle for foreseeable future

Western countries may rethink their stance on Russian sanctions. Many continue to struggle in the wake of the global financial crisis, and European governments are reportedly considering allying with Russia in Syria. However, Russia’s refusal to back down from the crisis in Ukraine despite hard-line sanctions imposed by the West tends to suggest that the effects of sanctions could be felt by Western companies for the foreseeable future.

In the meantime, companies doing business with Russia should keep a vigilant eye on these developments and brace themselves for a continued struggle until at least 2017.

http://sanctionsalert.com/western-companies-with-russian-ties-get-no-relief/



The U.S. Continues To Remove Restrictions On Cuba

Author: Michelle Roberts and Bruce Zagaris* Date: June 6, 2016

In January, March and April 2016, the Obama Administration has continued to normalize relations with Cuba and reduce its unilateral sanctions. The latest regulations came just before an historic visit by President Obama to Cuba on March 21-22, 2016. This was the first such trip by a U.S. president in 88 years. The revisions since last September’s regulatory changes have related primarily to travel related transactions, especially those that will help the Cuban people and enhance people-to-people exchanges. The changes are discussed chronologically by month in which the changes occurred1. While general tourist travel is still not permitted, U.S. persons can easily travel to Cuba if their travel involves any of a number of favored categories. The U.S. has made significant changes to the restrictions on trade financing and a broadening of some of the prior authorizations described in our white paper of December 17, 2015.

1. December 10, 2015– Direct Mail and Direct Flights

On December 10, 2015, the U.S. and Cuba reached an agreement on resumption of direct mail services between the two countries, and concluded talks on direct commercial air service on December 17, 2015. Direct mail flights will take place between the countries several times a week rather than having mail transit third-countries prior to delivery to Cuba. The mail flights are expected to start by the end of the year.

On February 17, 2016, the U.S. and Cuba signed an agreement permitting flights between the two countries to resume for the first time in more than 50 years. Federal officials said the agreement will allow more than 100 daily round-trip flights between the U.S. and 10 airports in Cuba. Charter flights between the two countries — currently the only option for passengers seeking air travel — will be allowed to continue.2 The U.S. Department of Transportation said U.S. carriers must apply by March 2, with final comments and answers due March 21. Passenger and cargo carriers can apply. No restriction exists on aircraft type or size. The government expects to make its decision this summer. Carriers could start selling tickets on those flights in the fall.3

2. January 27, 2016 – Liberalized Licensing Policies, Travel and Trade Finance

2.1. The BIS Rule

On January 27, 2016, the Bureau of Industry and Security, U.S. Department of Commerce (BIS) made some adjustments to its licensing policies on Cuba exports, adopting a general policy of approval on certain exports that previously had been subject to a policy of case-by-case review, and a case-by-case review policy on certain exports that had been subject to a general policy of denial. 81 Fed. Reg. 4580 (Jan. 27, 2016).

The exports/reexports now subject to a general policy of approval include items for safety of civil aviation and safe operation of commercial aircraft engaged in international air transportation (including to state-owned enterprises); telecommunications items to improve communication to, from and among the Cuban people; agricultural-related items that are not defined as “agricultural commodities,” such as insecticides and herbicides, and agricultural commodities



that are not eligible for License Exception AGR because they are not EAR99; certain items to human rights organizations or individuals and NGOs that promote independent activity intended to strengthen civil society in Cuba; and items for use by U.S. news bureaus. A license is still require for these items, but the likelihood of receiving a license for these types of exports is now quite high.

The exports/reexports now subject to case-by-case review include items for agricultural production, artistic endeavors, education, food processing, disaster preparedness, relief and response, public health and sanitation, residential construction, and renovation and public transportation. The “case-by-case” review will determine the extent to which such transactions meet the needs of the Cuban people, even if made to state-owned enterprises and parts of the Cuban government that provide goods and services to the Cuban people. A general policy of denial remains in place for exports and reexports of items for use by state-owned enterprises and parts of the Cuban government that primarily generate revenue for the state, including those engaged in tourism and the extraction or production of minerals and raw materials, and for items for the Cuban military or intelligence apparatus.

2.2. The OFAC Rule

For its part, OFAC took coordinated action to amend its Cuban Assets Control Regulations (“CACR”) to ease restrictions on travel and related services, and to remove certain restrictions on trade financing for exports and reexports of non-agricultural, licensed U.S. origin goods. 81 Fed. Reg. 4583 (Jan. 27, 2016). Of particular importance , the changes for financing for licensed goods – which removed a requirement of payment by cash-in-advance and authorized financing directly by U.S. banks instead – excludes financing for agricultural goods authorized for export under the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”). The TSRA dictates specifically how such exports must be financed, so the restrictions cannot be altered through administrative action alone, so for TSRA exports, payment of cash-in-advance or financing through a third-country bank rather than a U.S. or Cuban bank is still mandated.

On the travel side, OFAC authorized the entry into blocked space, code-sharing, and leasing arrangements by and between U.S. and Cuban airlines to facilitate the provision of carrier services by air, and broadened authorization for U.S. person travel and other transactions related to professional meetings and sporting events, public performances, participation in humanitarian disaster preparedness and response projects, and information and informational materials, including transactions incident to professional media or artistic productions in Cuba, such as music, movies and television production. U.S. profits from such events also no longer have to be donated. . The new authorization for informational materials will permit substantive enhancement of informational materials, the creation of travel-related and other materials for exportation, importation, or transmission, including the filming or production of media programs, music recordings, and the creation of artworks in Cuba by persons that are regularly employed in or have shown professional experience in a field relevant to such professional media or artistic production, as well as employment of Cuban nationals and payments of royalties, opening up greater opportunity for U.S./Cuban artistic collaborations.



OFAC also authorized U.S. person activities directly incident to the temporary sojourn of aircraft and vessels authorized by BIS to travel between the U.S. and Cuba. The activities of U.S. persons, such as pilots and flight attendants, related to normal operation and service on board carriers authorized for travel to Cuba are now expressly authorized.

3. March 16, 2016 – More Authorized Travel, Authorization of U-Turn Transactions, and Expanded Authorizations to Maintain a Physical Presence in Cuba

On March 16, 2016, the Administration eased certain travel restrictions and more fully implemented certain earlier authorizations, summarized below. 81 Fed. Reg. 13971 (Mar. 16, 2016) (BIS Rule) and 81 Fed. Reg. 13989 (Mar. 16, 2016) (OFAC Rule).

3.1. The BIS Rule

The rule revised License Exception AVS to authorize vessels departing the U.S. on temporary sojourn to Cuba to travel to Cuba even if they are laden with cargo bound for other destinations. Previously, a license would have been required for the cargo bound for other destinations to transit Cuba.

The rule also revised License Exception SCP to authorize the export and reexport of items classified EAR99 or controlled for Anti-Terrorism reasons only for use by persons authorized by OFAC to establish and maintain a physical business presence in Cuba. Prior to the rule, License Exception SCP enumerated the activities for which OFAC had generally authorized such physical presence, and that enumerated list would have excluded authorization for exports to persons who received a specific license from OFAC and would not have covered new categories of persons eligible for the OFAC general license, discussed below. Thus, License Exception SCP now authorizes exports and reexports of eligible items to all persons authorized by OFAC to establish a physical presence in Cuba, whether by general or specific license, and automatically covering any future expansions to the OFAC general license.

Finally, the rule adopted a policy of case-by-case review for license applications for exports and reexports of items to enable or facilitate exports from Cuba of items produced by Cuba’s private sector. This expands on the case-by-case review policy for items to help meet the needs of the Cuban people established in the January BIS rule discussed above. Hence, persons who export U.S. goods that can be used to help the Cuban private sector export its products, may be able to export goods to Cuba to facilitate exports by the Cuban private sector. This opportunity is presently small due to the restrictions remaining on the Cuban private sector and the small size of the sector.

3.2. The OFAC Rule

The OFAC rule authorizes expanded people-to-people travel, U-turn transactions, and expands the authorization for businesses to locate in Cuba, as summarized below.

3.2.1. People-to-People Travel

OFAC removed the requirement that people-to-people educational travel be conducted only through a sponsoring organization. Now, travelers are free to choose their own itinerary of educational activities intended to enhance contact with the Cuban people, support civil society



in Cuba, or promote independence from Cuban authorities, and that will result in meaningful personal interactions and exchanges. Travelers relying on this authorization must retain records of their travel transactions, demonstrating “a full schedule of authorized activities.” Thus, travelers seeking to further their expertise in rum tasting, cigar smoking, Cuban music, and studying Hemmingway’s novel writing and carousing should be sure to properly document their visits to all distilleries, cafes, historic sites, and factories sufficiently to demonstrate an absence of leisure time for non-exempt activities.

3.2.2. Compensation for Cubans in Non-Immigrant Status

U.S. persons can now more easily hire Cubans visiting the U.S. on a visa since U.S. persons will be authorized to pay them more than just enough to cover living expenses and acquisition of goods for their own personal consumption. U.S. persons can pay them any amount that is consistent with their non-immigrant travel authorization, provided that the Cuban national is not subject to any special tax assessment by the Cuban government. All transactions related to sponsorship or hiring of a Cuban national to work in the U.S. are also now authorized, though the CACR still prohibit payments to the Cuban government in connection with such sponsorship or hiring.

3.2.3. U.S. Persons Traveling Abroad

U.S. persons traveling in third-countries are now generally authorized to acquire Cuban origin goods for personal consumption, and to receive services from Cuba or a Cuban national that are ordinarily incident to maintenance within the third-country. However, importation of the Cuban origin goods is still prohibited unless otherwise authorized. Hence, U.S. persons must consume the Cuban rum and cigars abroad because they are still not able to carry them to the U.S.

3.2.4. U-Turn and Certain Other Financial Transactions Involving Cuba or Cubans

U.S. banks may now process so-called “U-turn transactions” in which Cuba or a Cuban national has an interest. This authorizes Cuba or Cuban-related funds transfers from a bank outside the U.S. that pass through one or more U.S. financial institutions before being transferred to a bank outside the U.S. where neither the originator nor the beneficiary is a U.S. person. Why would such funds transfers pass through a U.S. bank? Probably because the funds transfer is denominated in U.S. dollars. So, essentially, this allows U.S. banks to participate to the extent necessary to process U.S. dollar transactions by non-U.S. persons abroad, including Cubans. Transfers that involve a U.S. person are still prohibited unless otherwise authorized.

U.S. banks may also process U.S. dollar monetary instruments presented indirectly by Cuban banks. Correspondent accounts used for such transactions may also be denominated in U.S. dollars, though it is still prohibited for U.S. banks to open correspondent accounts directly with Cuban banks.

Finally, OFAC is authorizing U.S. banks to open and operate accounts solely for the use of Cuban nationals located in Cuba for the purpose of receiving payments in the U.S. in connection with authorized transactions and remitting such payments to Cuba. For example, OFAC indicated that a Cuban national author could open a U.S. bank account to receive payments for the sale of a book.



In the past, banks and financial institutions have incurred large fines for processing Cuban-related transfers just because the transactions have been denominated in U.S. dollars. Hence, this regulation will be very helpful to financial institutions who may be willing to recommence engaging in Cuba-related transactions.

3.2.5. Expanded Authorization to Establish a Physical Presence in Cuba

In September of last year, OFAC authorized U.S. persons to establish physical locations in Cuba to facilitate the provision of certain authorized activities. OFAC has now expanded the list of categories of businesses/entities eligible to establish a physical business presence in Cuba to include all of the following:

• Providers of telecom services authorized by CACR 515.542(b)-(d) or persons engaged in activities authorized by 515.542(e)

• Providers of internet-based services authorized by CACR 515.578(a) or persons engaged in activities authorized by CACR 515.578(c) or (e)

• Exporters of goods authorized for export to Cuba (or otherwise exempt) by under CACR 515.533 or 559 (e.g., goods licensed by BIS, authorized agricultural commodities, etc.)

• Providers of mail or parcel delivery services authorized by CACR 515.542(a), or providing cargo transportation services in connection with trade involving Cuba that is authorized or exempt

• Providers of travel and carrier services authorized by CACR 515.572 • News bureaus • Entities organizing or conducting educational activities authorized by CACR 515.565(a) • Religious organizations engaging in religious activities authorized by CACR 515.566 • Entities engaging in non-commercial activities authorized by CACR 515.574 (Support for

the Cuban People) • Entities engaging in humanitarian projects identified in CACR 515.575(b) • Private foundations or research or educational institutes engaging in transactions

authorized by CACR 515.576

The authorization to establish a physical presence in Cuba includes the authorization to engage in all transactions necessary therefor, including the leasing of physical premises, conducting marketing related to the physical presence, hiring of both Cuban and U.S. nationals to operate the physical presence, and opening and maintenance of bank accounts in Cuba for the purpose of running the location. Certain limitations may apply under certain circumstances, so interested persons should check all terms and conditions of the authorizations in advance.

3.2.6. Student Grants and Awards

To continue to facilitate meaningful educational exchanges, OFAC has authorized the provision of grants, scholarships, and awards to Cuban nationals or in which Cuba or a Cuban national has an interest. For example, a U.S. university can now grant scholarships to Cuban students to pursue a degree. Significant educational exchanges have started between the U.S. and Cuba since the Obama administration’s liberalization of the Cuban regulations.



4. Analysis and Future for U.S./Cuba Sanctions?

Many challenges remain in the U.S./Cuba relationship, including such thorny issues as property claims and human rights. These issues arouse passions in both Cuba and the U.S. It also remains to be seen whether the next administration will embrace Obama’s moves toward liberalization, or seek to suspend them or even roll them back. The statutory embargo remains a firm fixture of U.S. law with seemingly insufficient political will, at least at present, to lift it. This will tie the Administration’s hands and that of any future administration, though there may still be room for some continued incremental loosening around the edges.

Some progress has been made on Internet connectivity in Cuba. The number of private businesses has slowly grown in Cuba. However, little progress has been made on political freedom. While the number of dissidents in detention has steadily increased in recent months, the recent detainees have been held for a few hours at most and released.4

On March 22, 2016, in the midst of the President’s trip to Cuba, several American companies announced and signed agreements to enter the Cuban market and explore business opportunities including: 1) Google Alphabet, which is exploring opportunities to expand Internet access, including by providing laptops and other electronic equipment to a Havana museum; 2) General Electric intends to provide power, aviation, and medical equipment to the Cuban government; 3) Western Union announced its expansion to Cuba; 4) Carnival Corp. announced it will begin traveling to Cuba in May after receiving approval from the Cuban government; 5) Starwood Hotels & Resorts Worldwide Inc. agreed to manage two (and possibly a three) hotels in Havana; and 6) Verizon Communications Inc. and Sprint Corp. will begin offering roaming services for customers visiting Cuba.

The fact that a predominant portion of people-to-people travel must not be with a prohibited official of the Government of Cuba, as defined in 31 CFR § 515.337, or a prohibited member of the Cuban Community Party, as defined in 31 CFR §515.338, illustrate that, notwithstanding the expanded liberalization, the regulations still require care by Americans and can be a trap for the unwary.

The fact that OFAC is now authorizing the provision of educational grants and awards illustrates the delicate balance liberalization is taking, since necessarily at present the Cuban educational system is state-controlled.

The major barrier to U.S. investment in Cuba is the restrictions on foreign investment and private enterprise. Many parts of the economy are still off-limits. The U.S. liberalization is to facilitate investment in Cuba only in activities with private enterprise. The problem is that private enterprise is still limited mainly to persons who moonlight and have limited access to capital. Most of the major economic activities require joint ventures and approval by the Cuban government. A business cannot even hire a single Cuban without the approval of the government. Although the Obama Administration hopes that the Cuban government will liberalize the economy in response to the liberalized Cuban regulations, the Cuban government has not yet responded and does not want to betray the revolution in response to the long-awaited reduction of the sanctions, especially since the U.S. has not removed the Embargo and indeed cannot without action by the U.S. Congress. On April 16, 2016, President Raúl Castro, speaking at the



start of the Cuban Communist Party’s three-day congress, said that the U.S., in promoting Cuba’s small private sector, was using “other means” to undermine the system and people needed to be “alert more than ever.” He admitted that the government has completed only one-fifth of the economic changes approved at the last congress in 2011.5

_______________________________

1. This paper contains general legal guidance on the matters discussed herein, but should not be construed as legal opinions on the application of this guidance to any specific facts or circumstances. Opinions provided herein are solely those of the authors.

2. Mark Berman, U.S. and Cuba sign deal restoring passenger flights, WASH. POST, Feb. 16, 2016.

3. Susan Carey, U.S., Cuba in Accord to Reopen Service, WALL ST. J., Feb. 17, 2016, at B1, col. 6.

4. Karen DeYoung and Juliet Eilperin, Eight months after U.S. reopened embassy, Obama to visit Cuba, WASH. POST, Feb. 18, 2016, at A13, col. 2.

5. Victoria Burnett, Castro Urges Cubans to Remain Alert to U.S. Efforts to Alter Communist System, N.Y. TIMES, Apr. 17, 2016, at 10, col. 1.

*Michelle Roberts is Counsel at law firm of Berliner, Corcoran & Rowe, LLP, and member of SanctionsAlert.com Advisory Board. She can be reached at [email protected]. Bruce Zagaris is partner with the law firm of Berliner, Corcoran & Rowe, LLP. He can be reached at [email protected].



4:00 – 4:45 PM: Navigating the Sanctions and Export Controls Requirements of Multiple Jurisdictions

Record-Breaking 1.19 Billion Fine For Chinese Tech Giant Demonstrates Broad Extraterritorial Reach Of U.S. Export Control Laws

March 22, 2017 By Anna Sayre, Legal Content Writer SanctionsAlert.com

On March 7, three U.S. regulators – the Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry and Security (BIS), and the Department of Justice (DOJ) – entered into a coordinated settlement with Zhongxing Telecommunications Equipment Corporation (ZTE), in which the company agreed to a record-breaking combined $1.19 billion in civil and criminal penalties for knowingly shipping illegal telecommunications equipment to Iran and North Korea in violation of U.S. sanctions law. ZTE, a Chinese publicly traded telecommunications manufacturer, is the largest in China and the fourth largest telecommunications manufacturer in the world.

The fines imposed by the regulators represent the largest penalty ever imposed by BIS, and the largest ever imposed by OFAC against a non-financial entity. If the criminal plea is accepted bya federal judge, it will be the largest criminal fine by the DOJ in connection with an IEEPA prosecution.

Details of Coordinated Settlement

Under the settlement, the Chinese cell phone manufacturer has agreed to the following:

• to pay a civil penalty of $661 million to BIS, with $300 million suspended during a seven-year probationary period,for violating the Export Administration Regulations (EAR);

• to pay a civil penalty of $100.8 million to OFAC for violating the Iranian Transactions and Sanctions Regulations (ITSR); and

• to plead guilty as well as(pending approval by the courts) to pay a criminal penalty of over $430 million to the DOJ ($286,992,532 fine and $143,496,266 in criminal forfeiture) for, among other things,conspiring to violate the International Emergency Economic Powers Act (IEEPA).

In addition, ZTE has also agreed to active monitoring and compliance requirements designed to prevent and detect future violations. If ZTE violates any aspect of the agreement, it could trigger a seven-year suspended denial of export privileges for the company.



Adrienne Braumiller, Partner at Braumiller Law Group in Dallas, Texas, who specializes in international trade and export controls, reminds us that, “we should not assume large companies – like ZTE – have robust procedures or internal control programs. Regardless of the company’s size, U.S. suppliers must continue to exercise due diligence in their day-to-day activities, request customers to sign end-user or end-use certificates (if appropriate), and incorporate flow-down export control clauses in their contracts in order to protect their companies.”

US-Parts

The case against the Chinese tech giant centered on allegations that ZTE violated US economic sanctions and export controls by supplying electronics products to Iran and North Korea that had “US-origin components”.

According to case documents, for a period of almost six years, ZTE obtained US-origin items – including dual-use goods on the Department of Commerce’s Commerce Control List (CCL) – incorporated some of those items into ZTE equipment and shipped the ZTE equipment to customers in Iran and/or North Korea.

This seemingly tenuous connection to the US market is enough to trigger US extraterritorial jurisdiction.

‘Long Arm’

The unusually ‘long-arm’ of US sanctions and export regulations stems from the general trade prohibitions that forbid any exports of goods, services, software, and technical information to Iran, North Korea or any other US embargoed location if it is:

• directly from the US; • by a US person (whether in the U.S. or outside the U.S.); or in this case, • from anyone, including non-U.S. companies, as long as the items originated in the U.S. or

contained specified levels of U.S.-origin content.

For non-U.S. companies, the third type of trade prohibition is crucial and, oftentimes, overlooked. In its broad and ever-expanding exercise of extraterritorial jurisdiction, U.S. regulators are able to apply impose U.S. sanctions and export control regulations to trades made by non-U.S. entities based merely on the fact that the traded item was created in the U.S. or contains some level of content that was created in the U.S. This one connection is sufficient to subject an otherwise foreign company to U.S. jurisdiction, and as a consequence, the large fines that may result.

It should be noted, however, that ZTE’s alleged violations were greatly exacerbated by ZTE’s failure to cooperate with U.S. authorities. ZTE sometimes intentionally devised elaborate plans to hide illegal activities from U.S. authorities and mislead enforcement officials.Though cooperation would not exonerate ZTE’s actions, its blatant flouting of U.S. law contributed to its ultimate penalty.

Bryan Early, Associate Professor of Political Science at the University of Albany in New York, says that, though “the ZTE case is a notable achievement in holding a major sanctions-busting firm accountable for its violations, the U.S. Government will still continue to face a pervasive problem



of U.S. companies seeking to profit from undercutting sanctions. ”Professor Early adds that, “if anything, the ZTE case suggests the U.S. Government should be investing greater amounts of resources in both industry outreach and its enforcement efforts in this area.”

Indeed, this is not the first time ZTE felt the reach of U.S. export controls. Earlier, in March 2016, ZTE was also found to violate U.S. sanctions by selling U.S.-made goods to Iran. Allegedly, the telecommunications provider used shell companies in China and Iran to illicitly re-export controlled items to Iran in violation of U.S. export control laws. As a result, ZTE was temporarily blocked from buying any technology from U.S. companies without a special license from the Department of Commerce. A few weeks later, the U.S. government temporarily lifted the restrictions.

“Putting the World on Notice”

According to Acting Assistant Attorney General McCord,“ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports…ZTE then repeatedly lied to and misled federal investigators, its own attorneys and internal investigators. Its actions were egregious and warranted a significant penalty,” said McCord. “Companies that violate these laws – including foreign companies – will be investigated and held to answer for their actions.”

Secretary of Commerce, Wilbur J Ross, reiterated the sentiments of the DOJ by saying, “We are putting the world on notice: the games are over. Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences,” said Secretary Ross. “Under President Trump’s leadership, we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers.”

US authorities have made it quite clear that they are very serious about enforcing sanctions and export controls to the full extent of their extraterritorial application.

http://sanctionsalert.com/record-breaking-1-19-billionfine-for-chinese-tech-giant-demonstrates-broad-extraterritorial-reach-of-u-s-export-control-laws/



Ofsi’s New Monetary Penalties Signal A Broader And Extraterritorial Approach To U.K. Sanctions Enforcement

April 10, 2017 By: Anna Sayre, Legal Content Writer, SanctionsAlert.com

As of April 1, 2017, the U.K.’s new sanctions watchdog, Office of Financial Sanctions Implementation (OFSI) is now able to impose monetary penalties for breaches of financial sanctions. These fines can be imposed for up to £1 million or 50% of the breach, whichever is greater.

Though monetary penalties have been widely used in the U.S. for over a decade, they are a new way of responding to offences in the U.K., where regulators are currently limited to either a formal criminal prosecution or warning letter for financial sanctions breaches.

This new power, which only applies to financial sanctions, and not trade sanctions, is one of a series of measures taken by the U.K. in order to strengthen the government’s response to sanctions breaches and adopt a hard line and extraterritorial approach to sanctions enforcement.

U.K. Sanctions, in Brief

Like all EU countries, the U.K. derives sanctions policy from three places:

• the United Nations resolutions • EU directives, or • its own national laws.

Most financial sanctions are made through EU law, which currently has direct effect under U.K. law. Now that the U.K. has formally triggered the process of exiting the EU, the future effect of EU laws involving sanctions is unknown. However, while the U.K. conducts ‘Brexit’ negotiations during the next two years, the manner in which the U.K. creates and administers sanctions will remain the same.

The OFSI, a part of Her Majesty (HM)’s Treasury Department of the U.K. government, is the authority for the implementation of financial sanctions in the U.K. The OFSI is a newly created office within HM Treasury, launched by the U.K. on March 31, 2016. This agency takes over from the Asset Freezing Unit of HM Treasury, which originally took over from the Financial Sanctions Unit of the Bank of England in October 2007. The new OFSI is expected to have a much broader scope.

Not unlike The US Department of Treasury’s Office of Foreign Assets Control (OFAC), the OFSI keeps a list of ‘designated persons’, or ‘targets’. A designated person means anyone, whether an individual, company or country, that is subject to financial sanctions and appears on the OFSI’s “consolidated list of targets”. For the full list, click here.



New Powers of the OFSI

The OFSI’s monetary penalty regime regarding enforcement of financial sanctions occurred following commencement of Part 8 of the U.K.Policing and Crime Act 2017 (‘2017 Act’), effective on 1 April 2017.

The 2017 Act, originally given ‘Royal Assent’ on January 31, 2017,introduces a range of changes relating to financial sanctions, including an increase of the maximum sentence for criminal offenses from two to seven years.

Harsher Fines

The amount of monetary penalty under civil law that the OFSI has power to impose for breach of sanctions regulations has been markedley increased.

The maximum penalty is set at £1 million, or 50% of the total value of the breach, whichever is greater. The OFSI will also take certain factors into account that could serve to aggravate or mitigate the imposed penalty.

Mr Karim Bouali, Partner at CCG Legal in London, reiterates that, “the new regime provides strong incentives for full and early disclosure, with penalty discounts of up to 50%. Businesses need to be aware of the threat of £1m plus fines from a regulator looking to test their new civil penalty powers.”Mr Bouali adds that, “Firms should evaluate how they gather and consider material at an early stage when flags are raised, and potentially bring in external advisers sooner, so they can benefit from the incentives in place.”

An Easier Standard of Proof

According to the provisions of the 2017 Act, the circumstances in which the OFSI will have increased powers to impose monetary penalties, due to an easier standard of proof.

The OFSI considers a “balance of probabilities” to be the civil standard of proof, which means it is ‘more likely than not’ that an event has happened. This is closerto “preponderance of evidence,” which is the standard required in most civil cases in the U.S.

This can be contrasted with a criminal case in which the facts are held to the much higher standard of ‘beyond reasonable doubt’. Here, the OFSI will simply make a judgment on whether it is more likely than not that there has been a breach.

Further, the OFSI considers a “reasonable cause to suspect” to cover a broad amount of situations, including such cases where a person does not have clear confirmation of an event, but they are still aware of something that can prompt them to think it may have happened.

Deferred Prosecution Agreements

The new Act also brings financial sanctions into the scope of Deferred Prosecution Agreements (DPAs) and Serious Crime Prevention Orders,

DPAs, which are quickly gaining popularity as a means of resolving financial crime cases, are basically court-supervised settlement agreements where the regulator agrees to suspend prosecution provided an organization meets certain obligations defined in the agreement.



DPAs were introduced only recently in the U.K for offences under the Fraud Act 2006, the Proceeds of Crime Act 2002 and the Bribery Act 2010 as well as other economic crimes. Typically, the indictment will be delayed and, subject to compliance with the requirements of the DPA, such as implementation of enhanced compliance procedures and payment of a financial penalty, the case will eventually be discontinued. DPAs are only available for corporates, not individuals.

In a statement from HM Treasury, Economic Secretary Simon Kirby, said: “We’ll continue to place more emphasis on compliance and we will take tough action against those who deliberately flout the law.”

Instant Effect of UN Sanctions

The new Act also gives direct, instant effect into U.K. law of all new UN financial sanctions listings made by UN sanctions committees. This is in order to allow the U.K. to “swiftly implement its UN obligations” as,up until now, the U.K. had to wait an average of four weeks for the EU regulation to adopt sanctions regulations implementing UN asset freezes.

The instant effect of UN sanctions will also reduce the risk of money or other assets from the targeted entity or person being removed from the UK, before sanctions can be imposed.

The persons designated for the purposes of UN financial sanctions Resolution, will be treated for a period of 30 days as if the person were included in the EU list (as well as being designated by the UN). The temporary implementation only relates to freezing funds or other economic resources, or to preventing funds or economic resources being made available to, or for the benefit, of persons designated by the UN sanctions regime.

“It is vital that ‘legal issues’ do not delay the ability for law enforcement and intelligence agencies to take action against those identified as undertaking or providing support to terrorist activities,” says Andy McDonald, Former Head of SO15 Counter Terrorist Command.

For the full 2017 Act, click here.

A “U.K. nexus”

To fall within the OFSI’s enforcement of sanctions, there has to be a U.K. connection to the breach, or so-called “U.K. nexus”. As the breach does not have to occur within U.K. borders, such a nexus is not a difficult one to create. The following situations are just some examples of what can create a U.K. nexus:

• a U.K. company working overseas; • an international transaction clearing or transiting through the U.K.; • an action by a local subsidiary of a U.K. parent company; or • purchase/sale of financial products or insurance on U.K. markets, even if held or used

overseas.

This means that a UK company with only one overseas subsidiary or a company clearing just one international transaction through the U.K may be caught by U.K. sanctions requirements and could be liable for violations committed against U.K. financial sanctions. The previous mantra



that European sanctions do not extend to foreign subsidiaries or non-EU persons is no longer true.

In consideration of its far-reaching scope, this new power to impose monetary penalties by the U.K. government should not only be taken into account by British professionals, but also by the international compliance community at large.

Other Compliance Considerations

The proposals within the 2017 Act certainly suggest a stricter stance towards sanctions enforcement, and will bring the U.K. sanctions enforcement regime closer to the US model.

Mr Bouali reminds us that, “the OFSI will be keen to flex its new muscles as it builds internal expertise towards a new ‘OFAC’ style of enforcement in the U.K. GC’s and In house counsel, financial crime, risk and compliance teams need to be aware of the OFSI’s new powers, and be prepared to engage with them in the near future. This means ensuring risk assessments and sanctions compliance programs are upgraded to reflect the new civil penalties, cognizant of the lower civil burden of proof.”

The Policing and Crime Act 2017 is an important piece of legislation. It further enables both the UK alone and also the UK working with EU and global partners to tackle those who engage in, or support terrorist activity. It also provides a route to prosecute individuals and corporate entities from the regulated sector that fail to report terrorists using their firms for nefarious purposes,” adds Mr. McDonal

For the new guidance on financial sanctions issued by the OFSI, click here.

http://sanctionsalert.com/ofsis-new-monetary-penalties-signal-a-broader-and-extraterritorial-approach-to-u-k-sanctions-enforcement/



Upsurge In EU Sanctions Implementation Highlights The Growing Importance Of Industry Know-How

By: Anna Sayre, reporter SanctionsAlert.com Date: May 17, 2016

Since the early 1990s, EU sanction implementation has been on the rise and, as a result, has attracted growing attention from the international community.

This dramatic rise in sanctions implementation increases the likelihood of consequences to financial institutions and nonfinancial businesses. This also highlights the importance of knowing the intricacies of EU sanctions regimes as well as those regimes of other nations worldwide. With this ever growing and complicated system of international sanctions, it is important that businesses and financial institutions familiarize themselves with the EU sanctions regimes, how they are implemented and enforced, and who is liable for sanctions violations.

What are EU sanctions and why are they typically imposed?

EU sanctions, or “restrictive measures” are considered preventive, non-punitive, instruments that allow the EU to respond swiftly to political challenges and developments. These measures, just as any other sanction imposed by one country upon another, are generally viewed as a more cost effective and lower risk alternative to military force.

The EU is required to implement sanctions imposed by the United Nations Security Council (UNSC), but can also decide to impose its own sanctions in the absence of a UNSC mandate. This is referred to as the EU’s autonomous practice. The “Basic Principles on the Use of Restrictive Measures (Sanctions)”approved in June 2004 by the Political and Security Committee (PSC) states that the EU should impose sanctions in accordance with the UN, but also autonomously whenever ‘necessary’ to meet the objectives of the EU. The EU has decided on adoption of a number of sanctions regimes in the absence of pre-existing UNSC resolutions, thus developing a rich sanctions practice that has become more frequent and more sophisticated, especially in the last 20 years.

“Targeted” EU restrictions aim to preserve national welfare

Most EU restricted measures today are “targeted”. This simply means that they purport to channel harm toward specific public figures and entities, while maintaining the economic status quo of the country being sanctioned. Targeted sanctions are thus implemented in such a way that they only affect certain individuals, organizations, elites or economic sectors rather than the country’s entire economy. This notably excludes comprehensive trade embargoes (such as the US embargo of Cuba) owing to their indiscriminate effects.

EU targeted restrictive measures can be divided into four main categories: The first consists of arms embargoes, which refers to the prohibition to sell weapons and services to restricted individuals, groups, or states. The second category is travel bans, which mainly consist of restrictions or prohibitions of certain visas to certain individuals. The third category is that of economic measures, which refers to the restriction of imports/exports of goods and services that could be used by targeted actors to pursue a restricted objective. Lastly, financial measures are



imposed generally to freeze the assets of certain restricted individuals or entities. An example of the last three categories can be seen in the most recent controversial sanctions against Russian, imposing travel bans and asset freeze over 21 individuals as well as a ban on import of goods from Crimea and Sevastopol.

For the current consolidated list of restrictive measures in force, click here.

How are restrictive measures “adopted” and enforced?

The EU is made up of 28 members states and seven different decision making bodies, most of which were established during the inception of the EU in 1958. This includes two legislative bodies called the Council of the European Union (the Council) and the European Parliament. Since that time, sanctions have become an increasingly important tool of the EU’s Common Security and Foreign Policy (CFSP). According to Articles 29 and 31 of the Treaty of the European Union (TEU), the Council must adopt CFSP decisions involving sanctions on a unanimous basis among Member States.

As the EU has no formal enforcement bodies of its own, individual member states have created their own enforcement regulators. Each member country will enact its own statutes to give effect to EU restrictive measures, and penalties vary according to country and severity of the offence. Though the European approach to punishing sanctions violators has in the past not been as vigorous as that of other countries, like the US, it is steadily becoming more aggressive. This can namely be seen through the recent actions taken by the UK.

As of March 2016, the UK has created the new Office of Financial Sanctions implementation (OFSI) (replacing the HM Treasury’s Asset Freezing Unit – for further information, click here), which is responsible for the implementation and administration of international financial sanctions in the UK. The Department for Business, Innovation & Skills (BIS) is responsible for trade sanctions. The current maximum penalties for breaching the embargo on financing or importing crude oil or petroleum originating from Iran is two years imprisonment and/or an unlimited monetary fine. A new UK Policing and Crime Bill has also recently been introduced in Parliament. This law would effectively, among other things, create a new monetary penalty regime for breaches of financial sanctions and increase maximum criminal penalties from two years to seven years.

http://sanctionsalert.com/upsurge-in-eu-sanctions-implementation-highlights-the-growing-importance-of-industry-know-how/



4:45– 5:30 PM: Designing a Sanctions/Export Controls Risk Assessment That Government Agencies (in Any Country) Will Applaud

Excerpt of SanctionsAlert.com Sanctions/Export Controls Risk Assessment Methodology

Category Factor Low Applies?

Moderate Applies?

High Applies

Total inherent risk

Mergers, Divestment

s and Acquisitions, including disposal of

assets.

Does the organization engage in M&A activities, including formation of joint ventures, partnerships or similar activities?

No engagement in M&A activities, including formation of joint ventures, partnerships or similar activities

Moderate engagement in M&A activities, including formation of joint ventures, partnerships or similar activities

Many M&A activities, including formation of joint ventures, partnerships or similar activities

Does the organization engage in outsourcing of Trade Control related aspects?

No outsourcing of Trade Control related aspects

Moderate outsourcing of Trade Control related aspects

Many Trade Control related aspects are being outsourced

Does the organization engage in divestments of assets or the sale of surplus materials?

No divestments of assets or the sale of surplus materials.

Moderate engagement in divestments of assets or the sale of surplus materials.

Many divestments of assets or the sale of surplus materials.



Classifying Goods, Technology (including Services) and Software. Please note that this section is only about classification. Actual export transactions and related Customs Classification will be addressed in next section

Does the organization manufacture, possess or export goods controlled for import or export by government authorities IN its country(ies) of operation?

No manufacturing, possessing or exporting goods controlled for import or export by government authorities IN its country(ies) of operation?

Limited manufacturing, possessing or exporting goods controlled for import or export by government authorities IN its country(ies) of operation?

A lot of manufacturing, possessing or exporting goods controlled for import or export by government authorities IN its country(ies) of operation?

Does the organization manufacture, possess or export goods controlled for import or export by government authorities (i.e., United States) OUTSIDE its country(ies) of operation?

No manufacturing, possessing or exporting goods controlled for import or export by government authorities OUTSIDE its country(ies) of operation

Limited manufacturing, possessing or exporting goods controlled for import or export by government authorities OUTSIDE its country(ies) of operation

Company manufactures, possesses or exports a lot of goods controlled for import or export by government authorities OUTSIDE its country(ies) of operation.

Does the organization possess, develop, or make use of technology or technical information?

Does the organization use,



import or export third party software?

Does the organization have internal software development capabilities?

ETC

Contact us for more information: [email protected] or call 305 433 7187, or visit the SanctionsAlert.com booth at the Symposium.




Day 2 of the Symposium: Tuesday September 19, 2017

9:30 -10:30 AM: It's Not Just About the Lists Anymore: Using CDD to Detect Hidden UBOs and Prohibited End-Users

Despite License, Russian Oil Deal May Trigger Sanctions Headaches for Citgo

August 30, 2017

On August 24, 2017, the U.S. government announced new Venezuelan sanctions, impacting oil company Petroleos de Venezuela (PdVSA), and other Venezuelan government entities.

As they were not “list-based” the latest Venezuela sanctions place heavy burdens on compliance and due diligence programs for companies and financial institutions doing business with the Venezuelan government and related entities.

The U.S. carefully carved out exemptions for Citgo, a subsidiary of PdVSA with large U.S. presence: A general license authorizes all transactions “where the only government of Venezuela entities are Citgo Holding Inc. and any of its subsidiaries.”

However, sanctions implications may potentially trouble Citgo and U.S. persons doing business with the company, as the result of a deal involving Rosneft. The Russian state oil corporation sanctioned by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) under “Sectoral sanctions”, may have the right to claim an ownership stake in Citgo if PdVSA defaults on billions in loans. If Rosneft were to acquire a 50 percent or more ownership stake, this could potentially trigger sanctions against Citgo under OFAC’s 50 percent rule.

Citgo as Collateral


https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl2.pdf


Houston-based Citgo is an indirect wholly owned subsidiary of PdVSA and operates three oil refineries and three pipelines in the U.S., along with a Citgo-branded network of nationwide gas stations. In order to obtain a loan from Rosneft, PdVSA used Citgo as collateral.

If PdVSA defaults on its Russian loan, it would result in a 49.9 percent stake in U.S. oil company, Citgo, being transferred from Venezuelan PdVSA to Russian Rosneft. If Rosneft’s ownership in Citgo’s parent PdVSA is bumped to 50 percent, due to default or other reasons discussed below, sanctions on Citgo would automatically be triggered under OFAC’s 50 percent rule.

As a result, any U.S. person would no longer be allowed to engage in certain transactions applicable under the narrow SSI List restrictions with the Houston-based oil company, unless authorized by OFAC.

Rosneft and Sanctions

In 2014, the U.S. and other countries implemented sanctions against Rosneft following Russia’s intervention in Ukraine. The oil company was placed on the Sectoral Sanctions Identifications (SSI) List as subject to Directives 2 and 4 under Executive Order 13662 of March 20, 2014 - "Blocking Property of Additional Persons Contributing to the Situation in Ukraine.”

As opposed to those entities found on OFAC’s SDN List, entities on the SSI List do not face asset freezes, and U.S. persons are not strictly prohibited from dealing with them. Rather, they are subject to restrictions regarding access to certain types of financing and, in some cases, access to U.S. exports. Entities of which 50 percent or more is owned by a SSI listed entity are also subject to “sectoral” sanctions pursuant to OFAC’s 50 percent rule.

Rosneft is not currently on OFAC’s SDN list and is not subject to asset freeze.

OFAC’s 50 percent Rule and Applicability to the SSI List

Under OFAC’s 50 percent rule: 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. Accordingly, a U.S. person may not engage in any transactions with such an entity, unless authorized by OFAC.

As already mentioned, OFAC’s 50 percent rule applies to entities on both the SDN List and SSI List. The former are considered blocked entities and subject to asset freezes. With regard to SSI List restrictions, OFAC’s FAQs provide some guidance:



“The property and interests in property of persons on the SSI List (and entities

owned 50 percent or more in the aggregate by one or more persons subject to the SSI List restrictions) are not required to be blocked; instead a more limited set of transaction restrictions applies to them.

"Indirectly," as used in OFAC’s 50 percent Rule, refers to one or more blocked persons' ownership of shares of an entity through another entity or entities that are 50 percent or more owned in the aggregate by the blocked person(s).”

Therefore, the same 50 percent rule applies to entities on the SSI List as applies to those on the SDN List. However, OFAC does not ‘block’ the property of entities on the SSI List, but rather imposes certain narrow prohibitions on dealings by U.S. persons.

As such, if Rosneft is regarded as owning 50 percent or more of Citgo, indirectly, through PdVSA, any U.S. person, including financial institutions, may be restricted in conducting ‘certain narrow’ transactions with Citgo.

U.S. Sanctions on Venezuela and Effect on PdVSA

On March 8, 2015, former-President Obama issued targeted sanctions against Venezuelan officials by Executive Order (E.O.) 13692, which blocks property and suspends entry of “certain persons contributing to the situation in Venezuela.” The E.O. specifically names 7 Venezuelan government and military officials.

Since the Trump administration took office in January, Venezuela’s President, Nicolas Maduro, Vice President, Tareck El Aissami, and several judges, were placed on OFAC’s SDN list. They have been accused of international drug trafficking or anti-democratic practices.

On July 26, 2017, PdVSA’s Vice President for Finance, Simon Zerpa Delgado was placed on the SDN list. A former PdVSA executive, Carlos Malpica Flores was also placed on the SDN list.

PdVSA was not placed on the SDN list.

However, the August 24, 2017 Venezuelan sanctions issued by the U.S do have an impact on PdVSA as a company. They virtually ban trade in Venezuelan debt and block PdVSA from selling bonds in the U.S.

Section 1.

(a) All transactions related to, provision of financing for, and other dealings in the following are prohibited:

(i) new debt with a maturity of greater than 90 days of PdVSA;

(ii) new debt with a maturity of greater than 30 days, or new equity, of the Government of Venezuela, other than



debt of PdVSA covered by subsection (a)(i) of this section;

(iii) bonds issued by the Government of Venezuela prior to the effective date of this order;

(iv) dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela.

(b) The purchase, directly or indirectly of securities from the Government of Venezuela, other than securities qualifying as new debt with a maturity of less than or equal to 90 or 30 days as covered by subsections (a)(i) or (a)(ii) of this section, respectively, is prohibited.

(c) The prohibitions in subsections (a) and (b) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted before the effective date of this order.

Sec. 2.

(a) Any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set forth in this

order is prohibited.

(b) Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.

This latest round of Venezuelan sanctions, are applicable to U.S persons or upon transactions in the U.S.

Basically, the August Venezuelan sanctions impose restrictions on limited transactions on certain entities, mostly the government of Venezuela, and entities it controls, such as PdVDA.

As mentioned earlier in this article, the U.S. granted specific exemptions to Citgo.

Not Quite Sectoral Sanctions

The new Venezuelan sanctions are somewhat similar to “sectoral sanctions,” because they do not impose broad prohibitions to do any business with targeted entities, but yet, they are different in some respects.

First of all, unlike some other sectoral sanctions, the Venezuelan sanctions do not target specific sectors.

Second, they are not “list-based,”. With other “sectoral sanctions” the prohibitions are limited to the entities contained on the SSI list (such as Rosneft), including unlisted companies under OFAC’s 50 percent rule.



Compliance Implications

As the latest Venezuelan sanctions are not “list-based,” compliance officers need to keep in mind compliance goes beyond mere list-matching and resolution of alerts. Instead, Venezuela sanctions now require due diligence in order to determine whether transactions involve prohibited dealings with the Venezuelan government.

Further, if Rosneft were to obtain 50% ownership in Citgo, as a result of the above mentioned oil deal, and despite the Citgo license, the applicability of OFAC’s 50 percent rule on SSI listed entities, may cause compliance complications.

Persons, financial institutions and corporations considering a potential transaction with Rosneft (on the SSI list, but not on the SDN list), PdVSA (not on any list, but restricted for limited transactions), and affiliated companies or individuals, such as Citgo (not on any list, but may become 50% owned by SSI listed entity), and Mr. Zerpa (SDN), an executive of PdVSA, would be well advised to conduct appropriate due diligence on all entities that are party to or connected with the transaction.

This would include entities and individuals with whom account relationships are maintained in order to determine relevant ownership stakes, or even who signs contracts.

A recent case involving Rosneft demonstrates an aggressive approach by OFAC.

On July 20, 2017, OFAC assessed a $2 million civil monetary penalty against ExxonMobil for violations of the Ukraine-Related Sanctions Regulations imposed against Russia.

OFAC states that ExxonMobil violated sanctions when the presidents of its U.S. subsidiaries dealt in services of an individual whose property and interests in property were blocked, namely, by signing legal documents related to oil and gas projects in Russia with Rosneft’s Igor Sechin. At the time of signing, Sechin was on OFAC’s SDN list. Sechin did not own a majority of Rosneft’s equity.

In response, Exxon Mobil has filed a lawsuit against OFAC claiming that the scope of the sanctions imposed by the Treasury are too broad - specifically, that the sanctions pertain to Sechin exclusively in his personal capacity, and do not extend to his professional interests at Rosneft.

OFAC maintains that, "ExxonMobil demonstrated reckless disregard for U.S. sanctions" and that



top executives did business with Sechin knowing full well that he was a designated individual.

Read the full article: http://sanctionsalert.com/russian-oil-deal-may-citgo/

NYDFS to Impose $630M fine on Pakistani Bank: OFAC Program Included Improper Inclusion of SDN’s on the Bank’s ‘Good Guy’ List

August 31, 2017


On August 24, 2017, the New York Department of Financial Services (NYDFS) – NY State’s financial regulator – announced it is seeking up to $630 million in penalties from Habib Bank for “serious deficiencies” in its AML and OFAC compliance programs. The deficiencies, identified in the “Statement of Charges”, span more than a decade.

Among other things, the regulator’s investigation determined that transactions went un-reviewed because of the improper inclusion of certain individuals and transactions on the Bank’s so-called ‘good-guy’ list. Such improper inclusions comprised prohibited persons and entities identified on OFAC’s SDN List corresponding to:

- a transaction that involved the leader of a Pakistani terrorist group; - a transaction that involved a known international arms dealer; - an individual on the Specially Designated Global Terrorist list; - the former Deputy Prime Minister of Iraq under Saddam Hussein; and - a transaction involving an Iranian oil tanker.

In a letter posted on its website, the bank says that it plans to fight the allegations and close its NYC branch.

Indictment Of Lebanese Businessman, Tajideen, Points To Bold Methods Of Sanctions Enforcement By Doj And May Trigger Compliance Headaches For Banks

July 14, 2017 By Anna Sayre, Legal Content Writer, SanctionsAlert.com

On March 24, 2017, Kassim Tajideen, an international financier and businessman operating a network of businesses in Lebanon and Africa, was charged by the U.S. Department of Justice (DoJ) with evading sanctions by purposefully concealing his association with certain companies, the profits of which were used in part to support the Shiite militant movement Hezbollah. This terrorist group was also designated by the U.S. Department of State as a Foreign Terrorist


http://sanctionsalert.com/russian-oil-deal-may-citgo/


http://www.dfs.ny.gov/about/ea/ea170824a.pdf

http://www.hbl.com/Download/Disclosure%20of%20Material%20Information-HBL%20New%20York%20%20August%2028,%202017.pdf


Organization in 1997. Tajideen, who was extradited from Morocco to the U.S., pleaded not guilty to all 11 counts.

According to a 27-page indictment, Tajideen, in conspiracy with Mr.Imad Hassoun, allegedly restructured his multi-billion-dollar businesses in order to evade U.S. sanctions laws and continue to profit from his businesses. In order to do so, Tajideen masked his involvement by using a complex web of business names and misrepresented his ownership stake during the course of several transactions, including one with food processing giant, Seaboard Corp., known for its Butterball turkey brand.

The conspirators were also charged with conspiracy to commit money laundering as a result of their efforts to “conceal and disguise the nature, the location, the source, the ownership and the control of the proceeds of illegal business transactions.”

In just over seven years, Tajideen succeeded in completing at least 47 fraudulent wire transfers totaling more than $27 million.

An Intricate Corporate Network to Conceal Ownership

Since May 2009, Mr Tajideen has been listed as a Specially Designated Global Terrorist (SDGT) by OFAC. SDGTs are entities and individuals who OFAC finds have committed or pose a significant risk of committing acts of terrorism, or who provide support, services, or assistance to, or otherwise associate with, terrorists and terrorist organizations.

Directly after being ‘blacklisted’ by the Office of Foreign Assets Control(OFAC) in 2009, Tajideen, and his conspirator, Hassoun, utilized different corporate entities over a period of years, such as Epsilon, International Cross Trade Company Limited (ICTC), and Sicam Ltd, to procure and distribute goods throughout the world.

Throughout their conspiracy, Tajideen and Hassoun conducted approximately 15 commercial transactions with U.S. persons using the aforementioned businesses, all the while taking steps to conceal Tajideen’s ownership stake by providing false compliance statements to OFAC and other fraudulent actions.

Tajideen Charges a Departure from the Norm

In the March case, Mr Tajideen, an SDGT,was charged for doing business with U.S. persons without an OFAC license.Namely, by not disclosing his true controlling stake in various companies, Tajideen caused U.S. persons to transact business with those companies, thus allegedly violating U.S. sanctions. Though not technically a controlling stakeholder in these companies, as he owned less than 50% share in each, the DoJ has alleged that Tajideen nevertheless was the “ultimate owner”.

The indictment saysthat,“the business empire utilized different corporate entities over the years, all controlled(bold added)by KASSIM TAJIDEEN…. KASSIM TAJIDEEN was the ultimate owner and chief decision-maker of the business empire, with IMAD HASSOUN acting as confidante and lieutenant. KASSIM TAJIDEEN benefited directly and indirectly from the operation of the business empire.”



It goes on to say that, “the SDGT designation resulted in any property in the United States, or in the possession or control of U.S. persons, in which KASSIM TAJIDEEN had an interest, being blocked, and all U.S. persons were generally prohibited from transacting business with, or for the benefit of, KASSIM TAJIDEEN.”

This is a seeming departure from current OFAC guidance on the subject. According to OFAC’s guidance on its‘50% rule’, control alone does not result in the designated individual’s company being blocked.

OFAC’s 50% Rule

OFAC has issued guidance regarding the circumstances in which any corporate entity –even though it is not listed – will itself become blocked because an SDGT or a Specially Designated National (SDN) has a 50% or more ownershipstake in the entity.

The guidance states: “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.”

In this case, however the indictment makes no mention of Tajideen having a 50-percent or more stake in the businesses involved in the allegedly criminal transactions.Instead, the indictment describes Tajideen as the “ultimate owner and chief decision-maker” for such business, while Hassoun acted as a “confidante and lieutenant”.

OFAC indicates in its guidancewith regard to the 50% rule:

“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.”

Transactions Through Banks

According to the indictment, in order to carry out prohibited transactions after his listing as an SDGT, Tajideen utilized such banks as: Bank of America, BB&T, City National Bank, Emirates NBD Bank, Noor Islamic Bank, Sharjah Islamic Bank, and Mashreq Bank.

The indictment lists multiple transactions that flowed through the U.S. and other financial institutions.For example, “(…) amounts were wire transferred from Epsilon accounts in the UAE into account number ********5232 at Bank of America, and other accounts in the U.S., as payments for goods bought by Epsilon and consigned to Neptune Enterprise in Gambia, Congo Stars in the Democratic Republic of Congo, as well as General Trade Company in the Democratic Republic of Congo.”

A few examples of these transactions are:



Date Received by US Account Holder

Amount Originating Bank Account (Epsilon’s account)

Country of Origin

May 13, 2014 $342,720.00 Emirates NBD Bank UAE

May 16, 2014 $342,694.80 Emirates NBD Bank UAE

June 11, 2014 $68,544.00 Noor Islamic Bank UAE

Potential Implications for Financial Institution

Though it contained no allegations against any financial institution, the indictment against these Lebanese businessmen may have future compliance and legal implications on several fronts for the banks that processed the payments for goods bought or sold by Mr. Tajideen and Mr. Hassoun’s businesses.

The Bank Secrecy Act (BSA)

In accordance with the BSA, financial institutions are required to have internal controls for money laundering prevention and detection and check whether their clients are suspected money launderers or terrorists and report any suspicious activity to Treasury’s Financial Crimes Enforcement Network (FinCEN) or their own country’s Financial Intelligence Unit.

The indictment against Mr. Tajideen and Hassoun does not state whether there were potential red flags indicating suspicious activity that should have been detected by the financial institutions that processed these transactions. However, this could very well become the subject of a future investigation.

Willful violation charge under the IEEPA

The Department of Justice (DOJ) has the power to investigate and prosecute violations of federal criminal laws, which includes willful violations of sanctions and export controls laws. Under the International Emergency Economic Powers Act (IEEPA), the primary law under which U.S. sanctions programs are issued, it is a crime to willfully violate, or attempt to violate, any regulation issued under the act.

As such, individuals or entities, including financial institutions, may face criminal enforcement action by the DOJ under the IEEPA.

U.S. money laundering prosecution

The Money Laundering Control Act of 1986, codified at Title 18 U.S. Code s.1956, was the first law in the world to make money laundering a crime. It is one of the most powerful anti-money



laundering laws in the world. Among other things, section 1956, in general, prohibits anyone knowingly engaging in a financial transaction with illicit proceeds (proceeds of a Specified Unlawful Activity (SUA)) or with the intent to conceal the true source or ownership of the proceeds or in order to avoid the mandatory reporting requirements.

Listed among the more than 220 SUAs that can serve as predicates to a U.S. money laundering prosecution is Section 206 of the IEEPA, which as mentioned above, prescribes penalties for violating the sanctions requirements of the U.S. Treasury Department.

As a SUA, violations under the IEEPA can activate a U.S. money laundering prosecution, when strict conditions are met, against not only Mr. Tajideen and Mr. Hassoun, but also against financial institutions that were involved with processing the criminal funds.

This money laundering violation carries a maximum penalty of 20 years in prison and criminal fines of up to $500,000 for each violation.

An ‘Aggressive Approach’ by the DoJ

The DoJ has been keen to showcase its commitment to the enforcement of sanctions laws and the Tadijeen case has given them an opportunity to do just that.

“This extradition sends a clear message that we are resolved to find and hold accountable those who violate these laws,” said the DoJ’s Acting Assistant Attorney General for National Security, May B. McCord.

The Tajideen case demonstrates the willingness of the DoJ to go above and beyond current guidance and regulations in certain circumstances to hold SGDTs accountable for violations of sanctions laws. Businesses and financial institutions should therefore take heed and use extreme caution when doing business with entities in which a listed person has a defacto ownership stake, even if those individuals do not technically meet OFAC’s 50-percent rule.

Peter Jeydel, Counsel at Steptoe & Johnson, says “targeting an SDN with criminal charges based on a conspiracy theory is an interesting and aggressive approach, particularly when combined with an effective extradition effort.”

Customer Due Diligence Lessons

As for lessons to be learned from such a case, Mr Jeydel points to practical matters. “This case is all about due diligence. If an SDN was lurking behind these transactions in a concealed and actively misrepresented manner, as the government has alleged, the most instructive aspect from a compliance perspective would be to know if there were red flags that could have alerted the U.S. persons to the involvement of an SDN.”

Mr. Bruce Zagaris, Partner at Berliner Corcoran & Rowe, suggests that the “strong extraterritorial enforcement of sanctions in this case by the U.S. presages what is likely to continue to occur with respect to North Korean sanctions.” Mr Zagaris says this is true “especially since the U.S. has not succeeded in its use of multilateral institutions to restrain North Korea.”



At any rate, this bold action by the DoJ in taking the time to extradite Tajideen from half way across the world highlights the growing need for compliance professionals to stay diligent and on top of their duties in all circumstances.

Read the full article here:

http://sanctionsalert.com/indictment-of-lebanese-businessman-tajideen-points-to-bold-methods-of-sanctions-enforcement-by-doj-and-may-trigger-compliance-headaches-for-banks/



In Blacklisting It As ‘Transnational Criminal Organization’, OFAC Puts Little Known Canadian Payment Processor In Dubious Company

November 18, 2016 By Daniel Calloway, Legal Content Writer, SanctionsAlert.com

It’s really dangerous for a financial institution to operate as a third party conduit for fraudsters. That appears to be one lesson from the recent placement on a “do not touch” list by Treasury’s Office of Foreign Assets Control (OFAC) of Pacnet Group.

On September 22, 2016 OFAC designated the Vancouver-based PacNet Group as a so-called ‘significant transnational criminal organization.’

PacNet was placed on the blacklist because according to the government, it was part of an international network that has stolen hundreds of millions of dollars from elderly victims.

The designation by OFAC was unprecedented, because it places a payment processor on the government’s “do not touch” list in the company of deadly and criminal organizations like the Japanese Yakuza, and the Mexican Los Zetas.

As a result of the action, US banks, businesses and citizens are now prohibited from doing business with PacNet and its US-based assets have been frozen.

‘Payment processor of choice’ for criminals

OFAC said in its lengthy news release that PacNet had a history of knowingly processing payments on behalf of a wide range of mail fraud schemes that largely targeted vulnerable individuals such as the elderly and impoverished. The conduct was so pervasive that OFAC described the company as the “third party payment processor of choice for perpetrators of a wide range of mail fraud schemes.” PacNet’s international network members, which consisted of 12 individuals and 24 entities across 18 countries, were also designated.

Executive Order confronts global crime groups

PacNet’s designation was pursuant to Executive Order 13581 “Blocking Property of Transnational Criminal Organizations”.

The rationale for the Executive Order, issued in 2011, is that foreign criminal organizations were becoming increasingly sophisticated, and thus posed a serious risk to the security of the US. These organizations are fully entrenched in foreign governments and the international financial system which undermines the rule of law, economic markets, and, ultimately, democratic institutions.

Crippling criminal organizations

The Executive Order was created to combat the overall effectiveness of such criminal regimes.

Specifically, EO 13581 freezes the property or interests in property of designated individuals or entities (1) within the jurisdiction of the US; (2) within the control or possession of “US persons”; or (3) that may come into the possession or control of any US person, including any overseas branch.



Criteria for designated individuals or entities:

1. A foreign person that “constitutes a significant transnational criminal organization (TCO)”; 2. Any person that has materially assisted or supported any person whose property interests

are blocked pursuant to the EO; 3. Any person “owned or controlled” by, or acts on behalf of, a person or entity whose

interests in property are blocked pursuant to the EO.

Defined in the EO, a TCO is a group of persons that includes one or more foreign person; that engages in an ongoing pattern of serious criminal activity involving the jurisdictions of at least two foreign states; and that threatens the national security, foreign policy, or economy of the United States.

The names of individuals and entities listed under Executive Order 13581 are incorporated into OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) with the identifier ‘[TCO].’

Prohibited transactions

A designation under Executive Order 13581 prohibits:

1. US persons from engaging in any transactions or dealings in which such designated persons, or any entities owned or controlled by them, have an interest.

2. US persons are not allowed to transfer, pay, export, withdraw, or otherwise deal in such property.

3. Making any contribution or provision of funds, goods, or services (including charitable donations) by, to, or for the benefit of any blocked party.

4. The receipt of such funds, goods, or services from blocked parties.

Also, it is forbidden to take any action to evade or avoid these prohibitions.

Conduit for criminal organizations

Prior to this designation, OFAC hadn’t used its power on a mainstream commercial business not affiliated with a well-known organized criminal group.

The past six designations, for example, included operations like Japan’s well-known criminal organization, Yakuza. According to a Fact Sheet accompanied with the original Executive Order, the Yakuza, at the time, were located in no less than 17 countries with an estimated 80,000 members. The group had a variety of legitimate international businesses in construction, real estate, and finance. Because of the intertwining of the Yakuza’s criminal and legitimate businesses, the OFAC designation was swift and intuitively understandable. They were a well known foreign criminal entity with far reaching arms that disturbed national security domestically and abroad, fitting the precise definition of a TCO.

PacNet’s designation, on the other hand, has made headlines because it is not an outright criminal entity itself. Instead, it is, according to OFAC, a foreign commercial company that operated as a third party conduit for other known criminal groups.



Harsh lesson

Before designating the company, US authorities warned PacNet of its criminal business partners and requested that they cease business dealings with those entities.

For example, PacNet received subpoenas in 2014 from the Iowa State Attorney General regarding the victimization of the elderly and other Iowans by fraudsters they identified as PacNet clients. Despite the warnings, PacNet did not cease the transaction until law enforcement eventually shut down the fraudsters.

This case serves as a harsh lesson. If financial institutions, despite warnings from authorities, knowingly continue to conduct business with criminal organizations that utilize their institution to launder money or evade sanctions, they will be subject to large fines, criminal prosecution, or, as it turns out, a possible SDN designation.

Comparison with HSBC case

In other financial crime cases, federal and state authorities have taken a more lenient approach. For example, in the 2012 HSBC case, the government alleged that the London-based bank laundered more than US$800 million, and evaded sanctions programs.

Regardless, it did not designate the London-based bank as ‘transnational criminal group’, nor indict it on charges of vast money laundering and sanctions evasion charges. Reportedly, this was for fear that criminal prosecution would topple the bank, and in the process, endanger the financial systems. The bank reached a $1.9 billion settlement to resolve the money laundering accusations.

It appears from the Pacnet case that OFAC not only thinks that assisting foreign criminal entities is just as much a national security threat as the foreign criminal threat itself, but will also take measures that will cut off a financial institution from the US financial system.

Screening

OFAC’s decision to designate PacNet will no doubt have an effect on other financial institutions ‘know your customer’ and sanctions screening programs.

Financial institutions and other corporations involved in international business frequently conduct automated screening of customer databases and/or transactions as part of their sanctions compliance program. This screening process assists in detecting individuals, entities and countries subject to OFAC sanctions.

Typically, the provider of the sanctions screening tool to screen customer lists against sanctions lists will add any newly listed entities to the file that is scanned against customers or business partners.

It is reasonable to forecast that US financial institutions and other corporations will consider voluntary reviews of their previous interactions with PacNet, and any other related entities, as a matter of traditional sanctions screening process. If they find a hit, they must report this to OFAC.



Correspondent banking

Large financial institutions often have ‘correspondent relationships’ with foreign financial institutions. These correspondent accounts, often called a nostro or vostro accounts, are established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for the foreign financial institution.

Due to the OFAC designation, US financial institutions are well advised to conduct a review to determine if they have a direct or indirect correspondent relationship with Pacnet, and, if so, wind down the relationship as soon as possible.

False positives due to common names

Not only PacNet Corporation, also its subsidiaries, and specific individuals received the TCO designations. The listed individuals were major executives in PacNet’s chain of command, including president, partner and corporate director Paul Davis.

Because the OFAC designation to an individual carries the same prohibitions that it does for a corporation, every time any ‘Paul Davis’, a common name, attempts to open an account or a transaction at a US financial institution, or otherwise wants to conduct business with a corporation, it will be flagged by the institution’s or corporations’s OFAC screening software. As a result, the transaction will be stopped, and the person will be blocked from doing business with that bank or corporation.

Because the name is very common, this obviously may generate false positives triggered by the software tool.

Good guy list

After Paul Davis designation, financial institutions and corporations are well advised to develop a “false hit list” comprised of individuals and entities whose characteristics trigger a screening match to one or more entries on the SDN List or other sanctions criteria, but who, after a thorough review, are determined not to be blocked.

Once an individual or entity is added to the false hit list, sometimes called the ‘good guy list’ the screening software typically will suppress an alert (or will otherwise bypass an alert) associated with the individual or entity, thereby eliminating any transaction hold on, or prompting further manual review of, such parties in the absence of other alerts.



10:30 -11:15 AM: What U.S. Bank Examiners Look for in Their OFAC Compliance Examinations

The Increasing Importance Of Sanctions Compliance And How To Stay One Step Ahead On Your OFAC Examinations

February 15, 2017 By: Anna Sayre, Legal Content Writer, SanctionsAlert.com

Today, staying compliant with the continually changing breadth of sanctions regulations and laws is no easy task. Sanctions, regulated, among other agencies, by the U.S. Treasury’s Office of Foreign Assets Control (OFAC), continue to pose an increasing risk in terms of number and complexity. Though it is now quite common for a financial institution to have a Bank Secrecy Act/Anti-Money Laundering (BSA/AML) program, compliance professionals are recognizing the growing need for an OFAC risk assessment and compliance program as well. In a recent poll conducted by Sanctions Alert, when attendees were asked if the OFAC portion of the BSA/AML examination conducted by federal bank regulators was more important, less important or the same as compared to 5 years ago, a whopping 75% said that the OFAC portion of the assessment had become more important.

This increasing onus on sanctions compliance by bank regulators makes it all the more paramount to understand what is required by a bank examiner during an OFAC examination and the best ways to stay fully compliant. In a recent webinar at sanctionsalert.com, John S Karansky, a BSA Risk Examiner at the Federal Reserve Bank of Atlanta – Miami Branch,and Timothy R. White, a Sanction Automation Specialist at Banker’s Toolbox Inc., discussed the general processes involved during an OFAC compliance examination as well as how compliance professionals at financial institutions can best create a thorough sanctions compliance program.

The Regulator’s Objective

Mr. Karansky says that, often times, AML and OFAC compliance programs overlap, mainly due to the fact that they share the common goal of national security. In short, the goal of an OFAC compliance examination is to “assess the bank’s risk-based OFAC compliance program to evaluate whether it is appropriate for the OFAC risk, taking into consideration its products, services, customers, entities, transactions and geographic locations.”

Generally speaking, says Karansky, it is not the regulator’s primary role to identify OFAC violations, but rather to evaluate the sufficiency of the bank’s implementation of risk-based policies and procedures and processes to ensure compliance with OFAC laws and regulations. A bank examiner will review a number of factors in order to develop a plan for the initial



examination, including: past and current examinations conducted by the bank, independent examinations conducted by third parties, and any correspondence between the bank and the regulator, evidencing the bank’s involvement and concern with regard to potential OFAC violations.

Much can be gleaned from prior behavior in dealing with potential OFAC violations, adds Karansky. Similarly, any self-examinations by the bank of their OFAC risk assessment, or independent assessments by third parties and auditors,can provide meaningful evidence of compliance, especially in terms of whether or not that profile is representative of the true risks within the organization.The examiner will also review any communications between the bank and the regulator, namely, whether the bank has made an effort to block any accounts for OFAC compliance purposes, where necessary, self-disclose any incidents, contact OFAC for advice/concerns, or generally been active in contacting the appropriate authorities.

Considerations of the Examiner

Mr. Karansky identifies some key considerations used by bank examiners in determining if a bank’s internal controls are adequate. The following, inter alia, may be considered:

• Whether a bank’s OFAC compliance program includes internal controls for identifying suspect accounts and transactions;

• Whether blocked and rejected transactions are reported to OFAC; • For screening purposes, how the bank identifies and reviews transactions, as well as if the

bank engages in timely updating of lists of sanctioned countries, individuals, and entities; • If the bank used a third party to perform OFAC checks on its behalf in addition to any self-

assessment; and • On the basis of OFAC risk assessment, prior reports and audit findings, whether

transaction testing is performed and how thoroughly this is evidenced through documentation.

Tips for Risk Assessment

Mr. White continues by sharing some valuable tips for risk assessment and how to logically meet the requirements from a banker’s point of view.

“OFAC has not always been risk-based,” Mr. White points out. Since 2005, however, sanctions have taken a front-seat in the regulatory environment and now sanctions can reach into virtually almost every area of a bank. As sanctions are constantly changing and evolving, a risk-assessment must be a thorough and ongoing process. It is important to understand the type of OFAC exposure to which your particular bank is subject.To that end, Mr. White recommends that each bank write a risk tolerance statement, which includes any potential risks to your specific institution.

As a first step, Mr. White says that it is crucial to explore any external risks to the institution, by ongoing review of:

• The OFAC section of the BSA/AML examination manual (FFIEC).



• Any new or changing sanctions programs to high-risk countries such as Iran, Cuba, Ukraine, or Myanmar (Burma). If your bank has a nexus with these countries, be sure to keep well up-to-date with any trends.

• Ongoing updates to the actual lists, and make sure that you have documented those updates.

• Recent OFAC enforcement actions.

After the external risks are understood, the next step is to assess the internal risk factors, White says. It is critical to keep on top of all exam findings, audits, policies and procedures. It is equally important to keep up-to-date with any new products/services that are being offered by the bank, new personnel, or new customers and accounts that could expose the bank to new sanctions risks. This includes current monitoring and screening software, appropriate and frequent training at all levels, and keeping all developments well documented with thorough logs and records.

Start with an Organogram

It goes without saying that, once these policies and procedures are in place, it is very important to remember to follow them, Mr. White reminds us. This seems academic, but often times, a bank has wonderful policies and procedures in place that its employees simply fail to adhere to.

Mr. White goes on to point out a few ways that a financial professional can keep on top of these issues and logically make sure nothing is left out:

1. Start with an organogram of your organization and determine the risks by department. Once this is determined, make a risk-decision document for every risk identified to make sure you cover all your bases.

2. If you are a low-risk OFAC institution, write policy statements that are based upon history and experience within your institution;

3. Due to the high volume of enforcement actions in this area, it is highly recommended that everyone in your institution knows about ‘stripping’ and that a clear policy is adopted on how to prevent such actions; and finally

4. If you are in New York, it is important to be aware that, in addition to OFAC regulations, you are also subject to ‘high bar’ set by the NY Department of Financial Services.

http://sanctionsalert.com/the-increasing-importance-of-sanctionscompliance-and-how-tostay-one-step-ahead-onyour-ofac-examinations/



Reviews By Bank Examiners May Result In Action By OFAC

Date: August 17, 2016

By: www.SanctionsAlert.com

The US Treasury Department’s Office of Foreign Assets Control (OFAC) plays, arguably, the biggest role in implementation and enforcement of US sanctions. All US persons, including US financial institutions, must comply with OFAC regulations. Despite this fact, OFAC does not specifically require that financial institutions set up policies or programs to ensure compliance with sanctions laws. OFAC simply requires that financial institutions do not break the laws that it administers. Nevertheless, the potential consequences of not having a comprehensive sanctions compliance policy should not be taken lightly.

US financial institutions regularly undergo examinations by federal and state banking agencies, such as the FDIC, OCC, Federal Reserve, as well as their state financial regulator. These “examiners” are tasked with reviewing records, policies, accounts, and documents to evaluate whether an institution’s internal procedures are in line with applicable laws and regulations, including those of OFAC. As such, even though OFAC does not specifically require financial and non-financial institutions to have a compliance program in place, the lack of written safeguards and policies against backlisted persons and entities can be a risky move for banks and other financial institutions.

BSA/AML examinations by bank regulators

Though OFAC regulations do not fall under the scope of AML laws, evaluation of OFAC compliance is frequently included in AML examinations.

The Bank Secrecy Act (BSA) is a federal law that requires banks and other financial institutions to bring large cash transactions and other dubious activity to the attention of regulators. The BSA also requires financial institutions to have complex controls in place to detect any criminal activity, including an “anti-money laundering (AML) program”. In order to assess compliance with the BSA, and AML laws, an assessment is conducted called the BSA/AML Examination.

Federal bank regulators conduct formal assessments for adherence to AML laws and the BSA. In order to make sure that the examiners use uniform standards, the Federal Financial Institutions Examination Council (FFIEC), an interagency body, has issued the FFIEC BSA/AML Examination Manual (the Manual). The Manual, first issued in 2005, and last updated in 2014, provides vital information on what to expect from the examiner with respect to their review of an institution’s OFAC/sanctions compliance program. Even though OFAC is not part of the FFIEC, it assists in the development of the sections of the manual that relate to OFAC reviews.

OFAC assessment takes a front seat

Despite their name, BSA/AML examinations test for more than just AML compliance. The examination of the compliance program for adherence to OFAC rules by the examiner takes a primary role during the review. In fact, the Manual mentions the word “OFAC” 316 times,



including in the first sentence, which reads: “This Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act (BSA)/Anti-Money Laundering Examination Manual provides guidance to examiners for carrying out BSA/AML and Office of Foreign Assets Control (OFAC) examinations.” The Manual’s section “Core Examination Overview and Procedures for Regulatory Requirements and Related Topics” consists of 14 sections, one of which is entirely devoted to OFAC compliance called “OFAC Overview and Examination Procedures”. This section on OFAC takes up 10% of the Core Procedures, and consists of 11 pages. Based on the number of pages, it is the 2nd largest section, only surpassed by the section on Suspicious Activity Reports.

At the start of the examination, as part of the scoping and planning procedures, the examiner must take a look at the institution’s OFAC risk assessment procedures and independent testing.

To facilitate the examiner’s understanding of the bank’s risk profile and to adequately establish the scope of the OFAC examination, the examiner completes several steps, including:

• A review of the bank’s OFAC risk assessment. The risk assessment, which may be incorporated into the bank’s overall BSA/AML risk assessment, should consider the various types of products, services, customers, entities, transactions, and geographic locations in which the bank is engaged, including those that are processed by, through, or to the bank, to identify potential OFAC exposure. Though not specifically stated in the manual, best practice dictates that a larger financial institution creates a stand-alone OFAC Risk Assessment Policy with an in-depth review of sanctions risks.

• A review of the bank’s independent testing of its OFAC compliance program. This refers to supporting documents of the independent testing (audit) of the institution’s OFAC compliance program. The federal banking agencies’ reference to “audit” does not confer an expectation that the required independent testing be done by a specifically designated external or internal auditor, however, the person performing the independent testing must not be involved in any part of the bank’s OFAC compliance program. This includes both persons developing policies and procedures and conducting training.

• A review of the civil penalties area on the OFAC website. This is to determine whether the bank has had any warning letters, fines, or penalties imposed by OFAC since the most recent examination.

• A review of correspondence between the bank and OFAC. The examiner will be looking for relevant communications, including periodic reporting of prohibited transactions to OFAC and, if applicable, annual OFAC reports on blocked property.

OFAC training requirements

OFAC laws and regulations may not specifically require training, but the federal bank examiner will ask financial institutions to show evidence of OFAC training as part of the BSA/AML Examination. According to the Manual, the examiner will:

• request an “OFAC training schedule with dates, attendees, and topics”, • request “a list of persons in positions for which the bank typically requires

OFAC training but who did not participate in the training.”; and • “review the adequacy of the bank’s OFAC training program based on the bank’s OFAC risk

assessment.”



Potential actions by bank regulators

The federal banking agencies can issue enforcement actions for non-compliance, including requirements to reform the bank’s OFAC program and impose civil money penalties.

In a case involving Deutsche Bank AG, the Federal Reserve imposed a $58 million penalty and consent cease and desist order against the German banking giant, related to violations of US sanctions. The 2015 order required Deutsche Bank to implement and enhanced program to ensure global compliance with US sanctions administered by OFAC.

Informing OFAC of irregularities

Federal banking agencies also often have a duty to inform OFAC when they spot problematic behavior, for example involving transactions to or from sanctioned countries or a lack of written controls to comply with sanctions laws.

This duty is usually derived from an agreement made with OFAC called a “Memorandum of Understanding” (MOU). These MOU agreements set forth procedures for the exchange of certain information between the parties, including a full report of the findings during an examination as they relate to sanctions enforcement. Such agreements exist with institutions like the Federal Reserve and the FDIC as well as almost every state financial regulator. For a list of state and federal agencies with which OFAC currently has an MOU, please click here.

The MOU between OFAC and the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union (NCUA), the Office of Comptroller of the Currency (OCC) and the now defunct Office of Thrift Supervision (OTS) was signed ten years ago, in 2006. To see it, please click here. Information that can be shared includes unreported violations of sanctions, and other examination findings, such as “significant deficiencies in a banking organization’s policies, procedures, and processes for ensuring compliance with OFAC regulations.”

OFAC compliance program as a mitigating factor

In identifying a potential sanctions violation, OFAC uses “Enforcement Guidelines,” the framework for the enforcement of all economic sanctions programs it administers. This document says that OFAC will consider some general factors in determining an enforcement action for an apparent breach of sanctions. One of the factors is General Factor E, Compliance Program: the existence, nature and adequacy of a risk-based OFAC compliance program at the time of the apparent violation, where relevant. OFAC will follow the procedures set forth in the MOU and consults the regulator on the quality and effectiveness of the compliance program in place. Even in the absence of an MOU, OFAC may take into consideration the views of federal, state, or foreign regulators, where relevant. In case of a breach of sanctions laws, having a sound OFAC compliance program can mitigate an OFAC enforcement action.

Salvatore Scotto, of Sanctions Forensics & FCC Advisory Services, explains that “OFAC, with its MOUs with various federal, state and other regulators relies on their examinations for insight to a financial institution’s ability to effectively comply with the regulations. We are at a state where sanctions programs are more complicated and technology has become more sophisticated, an institution can no longer just buy an off the shelf interdiction tool and issue a compliance policy



statement. Sanctions compliance programs require comprehensive governance to meet regulatory expectations. While a regulatory examination can be a bit stressful, the regulators may see something you do not see, embrace their findings as an opportunity to strengthen your sanctions program and hopefully the strength of your sanctions program may one day mitigate an OFAC Enforcement Action”.

http://sanctionsalert.com/reviews-by-bank-examiners-may-result-in-action-by-ofac/



11:45 AM – 12:30 PM: Disclosures, Investigations and Enforcement: How to Reduce Criminal and Regulatory Sanctions Problems

Primer On Agencies That Enforce US Sanctions: Department Of Justice

September 12, 2016 By Anna Sayre, Legal Content Writer SanctionsAlert.com

The US has one of the most complex national systems of sanctions enforcement in the world. This system derives from the number of agencies that are empowered to initiate actions against violators of US sanctions. Because each US agency maintains a different “Do Not Touch” list, the restrictions that apply based on inclusion on the various lists may differ. Furthermore, the regulations issued by these various agencies often have areas of overlap. It is not uncommon for three or four US agencies to take action jointly, thus exposing a business to multiple investigations and varying penalties.

This article is the fourth in a series of articles on the role that US agencies play in sanctions enforcement. The series focuses on the role departments and agencies have in the enforcement, administration and investigation of sanctions violations.

Article four examines the role of the Justice Department, which can criminally prosecute willful violations of certain export controls and sanctions laws, along with other related criminal laws.

Willful violations

The Department of Justice (DOJ) has the power to investigate and prosecute violations of federal criminal laws, which includes willful violations of sanctions and export controls laws.

Under the International Emergency Economic Powers Act (IEEPA), the primary law under which US sanctions programs are issued, it is a crime to willfully violate, or attempt to violate, any regulation issued under the act. As such, individuals or entities may face criminal enforcement action by the DOJ. The DOJ typically prosecutes violations of sanctions programs through one of its 93 local US Attorney’s Offices, which work to enforce federal criminal laws throughout the country. DOJ Headquarters in Washington, DC often plays a role in these cases as well.

Criminal referrals to DOJ

In other articles in this series on US agencies, we explained the role of US Treasury’s OFAC and Department of Commerce’s BIS, which both play an important role in the administration of US sanctions and export controls regimes. The DOJ often works together with these and other law enforcement entities, at both the state and federal level, to investigate and prosecute for willful



violations of US sanctions laws. Administrative and civil enforcement agencies that frequently collaborate with the DOJ include the Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry and Security (BIS), as well as the Department of State’s Directorate of Defense Trade Controls (DDTC), to name a few. Cases referred to the DOJ for criminal prosecution may still be concurrently subject to civil penalties or other administrative action from another agency. Therefore, what starts out as a purely civil or administrative matter can potentially become a white-collar criminal case with the risk of hefty fines and/or jail time.

In a recent case involving multiple agencies, Fokker Services B.V. (FSBV), a Dutch aerospace services provider agreed to forfeit $10.5 million in 2014 to the US for conspiring to violate the IEEPA by exporting aircraft parts and services to sanctioned countries. The Dutch company was charged criminally in federal court by the DOJ with knowingly and willfully conspiring to violate sanctions laws. In addition to the criminal penalty, the company also agreed to an additional $10.5 million civil penalty to settle OFAC and BIS charges for the same missteps.

NSD and CES

The National Security Division (NSD) of the DOJ was created in the wake of the September 11 terrorist attacks. NSD contains the Counterintelligence and Export Control Section (CES), which prosecutes and supervises cases affecting national security and US foreign relations, including espionage, illegal export of military and strategic commodities and certain cyber-related activity. NSD’s priority areas involve China, Iran and WMDs, all subject to export controls.

In June 2016, the CEO of Global Metallurgy LLC, an international metallurgical company based in New York, pleaded guilty to one count of conspiring to violate the IEEPA, in connection with the export of specialty metals from the US to Iran. The CEO in question, Mr. Kuyumcu, conspired to export a metallic powder composed of cobalt and nickel, a specialized metal that is closely regulated by the Department of Commerce, without having obtained the required license from OFAC. At sentencing, he will face up to 20 years in prison and a $1 million fine.

FBI

The DOJ’s Federal Bureau of Investigation (FBI) is the prime federal law enforcement agency of the US. The main priorities of the FBI are to combat terrorism, cyber-attacks, and transnational/national criminal organizations, fight white-collar crime and corruption, as well as protect civil rights. As such, it plays a major role in gathering and finding evidence to support criminal prosecutions brought by the DOJ, including for violations of sanctions laws.

The FBI is primarily a domestic agency, maintaining 56 field offices in major cities throughout the United States, and more than 400 resident agencies in lesser cities and areas across the nation. Despite its domestic focus, the FBI also maintains a significant international footprint, operating 60 Legal Attaché (LEGAT) offices and 15 sub-offices across the globe.



DEA

The DOJ’s Drug Enforcement Administration (DEA) mission is to enforce the US controlled substances laws and regulations. It has sole responsibility for coordinating and pursuing drug investigations both domestic, and abroad.

It plays a big role in some sanctions cases – generally those with a narcotics connection of some kind: For example, cases involving individuals or entities designated under a law known as the Kingpin Act, which prohibits all transactions between drugs traffickers and US companies and individuals, and freezes any of their assets in the US. As such, the DEA works closely with Treasury’s OFAC to attack and dismantle violent, deadly criminal organizations and individuals, including drug cartels, criminal networks, and terrorist organizations.

ATF

Another smaller arm of the DOJ is the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). ATF is a law enforcement agency within the DOJ that protects against illegal use and trafficking of firearms, storage of explosives, acts of arson and bombings, acts of terrorism, and the illegal diversion of alcohol and tobacco products.

The ATF, with only an occasional role in sanctions, has a broad regulatory role concerning imports. It issues import permits for certain items, such as defense articles. Similar to the Department of State’s DDTC US Munitions List, the ATF keeps its own US Munitions Import List. The list can be found by clicking here. Occasionally, there will be an item on the ATF’s US Munitions Import List that is not covered by the DDTC’s US Munitions List. As such, when importing a good that could potentially be considered a defense article, it is good practice to check both lists so as to ascertain the correct license needed for that import.

The money laundering connection

The DOJ’s power to prosecute for money laundering violations can be predicated on an underlying sanctions violation. The principal US money laundering law, Title 18 US Code Sec. 1956, lists more than 220 “specified unlawful activities” (SUAs) that can serve as grounds for a money laundering prosecution. One of these SUAs is Section 206 of the IEEPA (Title 50, US Code Sec. 1705), which prescribes penalties for violating sanctions requirements imposed by OFAC.

US money laundering law, which is seen as one of the strictest anti-money laundering laws in the world, carries a maximum penalty of 20 years in prison and criminal fines of up to $500,000 per violation.

Actions by the DOJ against banks, corporations

Recently, the DOJ has come down hard on many foreign financial institutions for violating sanctions regulations. Most of these cases involve so-called wire transfer “stripping” associated with US dollar clearing. Stripping means that, before performing a wire transfer, the financial institution removed pertinent information such as customer names and/or addresses to avoid economic sanctions violation detection. In 2014, BNP Paribas and Commerzbank AG were



required to pay almost $9 billion and $258 million, respectively, to resolve investigations into concealed transactions involving sanctioned entities.

The DOJ also has the power to pursue aggressive criminal actions against corporations for sanctions violations. In 2015, Schlumberger Oilfield Holdings Ltd, the world’s largest oilfield services company with principal offices in Paris, Houston, London and the Hague, paid $237 million in settlement and negotiated criminal plea. The DOJ charged a unit of Schlumberger with conspiracy to violate sanctions imposed against Iran and Sudan for facilitating prohibited trades with Iran and Sudan from their US-based unit in Texas. In addition to paying the rather steep fine, Schlumberger also succumbed to a three-year period of corporate probation, during which it must cease all prohibited operations and hire a consultant to review its sanctions compliance policy.

The DOJ’s ‘long-arm’

DOJ’s criminal enforcement authority is widely feared due to the Department’s strong investigative powers and the tough penalties it imposes, often including imprisonment. What is less well understood is that DOJ’s criminal jurisdiction can also be very broad, and can include companies and conduct that sometimes has only a tenuous link to the United States.

The aforementioned Schlumberger case is a prime example of this. One expert in the field, Peter Jeydel, an associate at Steptoe & Johnson LLP whose work focuses on US export controls and economic sanctions, characterizes the Schlumberger case as “a warning to the international business community about the long arm of the US criminal justice system when it comes to regulating international business transactions, in particular with countries like Iran.” Mr. Jeydel has co-authored a detailed analysis of the Schlumberger case, which can be read by clicking here.

http://sanctionsalert.com/primer-on-agencies-that-enforce-us-sanctions-department-of-justice/



1:30- 2:30 PM: Conducting Sound Audits of Sanctions Compliance Programs and Continued Reviews of Workflows and Processes to Identify Problems Before the Examiners Do



4:00 – 4:50 PM: Seven Deadly Sins Unveiled in OFAC and BIS Cases – And Their Lessons

OFAC Has Brought 913 Cases Since 2003 Against Widely Diverse Businesses For Total Penalties Of $4.2B

Date: May 9, 2016

If any business thinks getting caught evading a sanctions program of the US Office of Foreign Assets Control (OFAC) is inconsequential in money and reputation, they should look closely at the settlement agreements OFAC signs with each penalized business.

Like clockwork, at a rate of 5.9 cases per month from April 4, 2003 to February 8, 2016, the US Office of Foreign Assets Control took “enforcement action” against 913 businesses in oil and gas, pharma, pension funds, finance, insurance and diverse other business activities, penalizing them a combined $4.2 billion for violation of its economic sanctions orders. Banking was the industry most penalized and most frequently by OFAC during this time.

OFAC, an agency within the US Treasury Department, receives little public notice for its enforcement activities, compared to other government agencies, such as its Treasury Department counterpart, the Financial Crimes Enforcement Network (FinCEN), which also impose penalties on businesses for regulatory infractions under the Bank Secrecy Act, which focuses on regulatory controls of potential money laundering activities.

OFAC penalty activity believed to be most active in US government

The OFAC penalties are believed to be the largest in number, most frequent and largest in amount of civil penalties imposed by any agency of the United States federal government.

In the 154 months ending in February 2016, the average money penalty in the OFAC “enforcement actions” was $4.6 million. Of the 913 enforcement actions that OFAC initiated, only six were not accompanied by a money penalty.

The penalty amounts, names, sanctions program violated and other data in the OFAC settlement agreements provide valuable information that businesses can use to construct and improve their sanctions and OFAC compliance programs. Few things teach as much as the mistakes of others and in the case of OFAC penalties, that is very true.

OFAC appears to publish all its enforcement actions on its website. Although comments are heard that some OFAC penalties are not made public, no confirmation of that suspicion is available. (SanctionsAlert.com has filed a request for information to OFAC requesting information on any unpublished penalties and also full data about OFAC penalties covering the period January 1, 1990, to December 31, 2002. This data is not presently provided by OFAC on its website.) The penalties that OFAC publishes are posted without comment.



Three businesses and one nonprofit organization were subjects of OFAC enforcement action but paid no money penalty:

Year Organization

2010 Christ for all Nations

2013 VISA International Services Association

2015 Schlumberger Oilfield Holding, Ltd*

2015 BMO Harris Bank NA

(*Note: Schlumberger Oilfield Holdings Ltd. agreed to plead guilty and paid over $232.7 million for violating US sanctions by facilitating trade with Iran and Sudan to US Department of Justice.)

Five businesses, all financial institutions, suffered the highest OFAC monetary penalties:

Year Organization Penalty Amount*

2014 BNP Paribas SA $963,619,900

2012 ING Bank N.V $619,000,000

2009 Credit Suisse AG $536,000,000

2012 HSBC Holdings plc $375,000,000

(**Note: These amounts are merely the OFAC portion of the penalties, and do not include US Department of Justice, or other agencies’ fines or penalties, unless the OFAC documents only mentioned one total amount.)

National security links give OFAC penalties great US government priority

OFAC penalties carries special significance for the United States government because of their intimate ties to national security considerations that form part of the economic sanctions



imposed by the President of the United States and executed and enforced by the US Treasury Department through OFAC.

It is for these reasons that SanctionsAlert.com will continue to provide special coverage to the OFAC enforcement actions and the resulting penalties.

http://sanctionsalert.com/ofac-has-brought-913-cases-since-2003-against-widely-diverse-businesses-for-total-penalties-of-4-2b/

Singapore Oilfield Services Company Pays OFAC $415,350 to Settles Potential Civil Liability for Apparent Violations of the Iranian Sanctions

www.sanctionsalert.com

August 31, 2017

On August 24, 2017, COSL Singapore Ltd, an oilfield services company located in Singapore and a subsidiary of China Oilfield Service Limited, agreed to pay OFAC $415,350 to settle its potential civil liability for 55 apparent violations of the Iranian sanctions. The company, through two subsidiaries, exported or attempted to export 55 orders of oil rig supplies from the U.S. to Singapore and the U.A.E., and then re-exported or attempted to re-export these supplies to four oil rigs located in Iranian waters. According to OFAC, although some of the purchase order quotations the COSL Singapore procurement specialists received from U.S. vendors included specific language warning that any such goods could not be shipped or re- exported to countries subject to U.S. economic sanctions, specifically including Iran, the company purchased the goods and shipped them to the oil rigs over a period of several years. The transactional value of the 55 orders was $524,664. COSL did not self-report the violations. One of the lessons of this case is that foreign companies in high risk sectors, such as off shore services, are well advised to have an OFAC compliance program in place when conducting business in the United States and/or with U.S. companies



https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170824_cosl.pdf

https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20121022_33.aspx


Panam Seed Case Shows How (Not) To Respond When OFAC Knocks On The Door

October 24, 2016 By: Daniel Calloway, Legal Content Writer, SanctionsAlert.com

On September 13, 2016, Pan American Seed Company, a US-based producer of flower seeds, agreed to pay over $4,000,000 to settle potential civil liability for alleged violations of the Iranian Transactions and Sanctions Regulations.

The settlement comes after the Office of Foreign Assets Control (OFAC) – the US Treasury’s agency tasked with US sanctions administration and enforcement – allegations that PanAm Seed, indirectly exported flower seeds to two Iranian distributors on 48 separate occasions.

The case has vital lessons on how employee behavior can bring the wrath of OFAC, even when you are selling a harmless product like flowers, and how to engage with the agency once it starts investigation your company.

Continued sale to Iran for 8 months despite OFAC investigation

Section 560.204 of the Iranian Transactions and Sanctions Regulations prohibits exports to third countries when done with knowledge or reason to know that the goods are “intended specifically” for Iran.

OFAC alleged that for a number of years, the grower made indirect sales of seeds to two Iranian distributors. PanAm Seed would ship the seeds to consignees based in a third country in Europe or the Middle East, and PanAm Seed’s customers would arrange for the re-exportation of the seeds to Iran.

According to OFAC, PanAm Seed employees, including mid-level managers, knew that the transactions were potential sanctions violations, and needed a license from OFAC. They also knew that the seeds were intended for re-exportation to Iran, and tried to hide the sale to the sanctioned country.

Finally, the grower continued sales to its Iranian distributors for nearly eight months after its Director of Finance learned of OFAC’s investigation, according to OFAC.

No cooperation and willful violations

Several additional factors contributed to OFAC’s aggression in seeking action against PanAm Seed.

1. Willfully violated US Sanctions on Iran by engaging in, and systematically obfuscating conduct it knew to be prohibited;

2. Demonstrated recklessness with respect to US sanctions requirements by ignoring its OFAC compliance responsibilities, despite substantial international sales and warnings that OFAC sanctions could be implicated;



3. Had contemporaneous knowledge of the transactions precipitating the exportations and continued sales to its Iranian distributors for nearly 8 months even after learning of the OFAC investigation;

4. Engaged in this pattern of conduct for years, providing over $770,000 in economic benefit to Iran;

5. Did not initially cooperate with OFAC; 6. Is a “commercially sophisticated, international corporation” (as a division of Ball

Horticultural), with full awareness of compliance protocol.

Mitigating factors

By law, the maximum and base civil monetary penalty amounts for the listed violations are up to $12,000,000. OFAC intended to pursue this case fully for two reasons: that PanAm Seed did not voluntarily self-disclose the alleged violations to OFAC, and that the violations were egregious.

Ultimately, the case settled for much less at $4,320,000. Several mitigating factors led to the smaller settlement: (1) PanAm Seed was considered a “first offender” making them eligible for mitigation up to 25 percent; (2) the exports were most likely eligible for an OFAC license; (3) PanAm Seed took remedial steps such as stopping the action, implementing a compliance program, and training its personnel; (4) PanAm cooperated with OFAC by tolling the statute of limitations (the amount of time they were susceptible to legal action)for a total of 882 days.

Four lessons for export companies

Firstly, the case underscores the importance of a “culture of compliance”. It is not enough to merely have written compliance procedures. The leadership must actively support and understand compliance efforts. In this case, continuing to sell to Iran for 8 months after the Director of Finance became aware of the OFAC investigation is clearly not the right message from the top. Employees need to understand the importance of cooperating with OFAC officials and the manner in which a company responds when it becomes aware of its violations is critical to successful resolution.

Secondly, the case demonstrates that OFAC continues to vigorously enforce Iran sanctions that are still in force. The January 2016 partial lifting of Iran sanctions as a result of the nuclear agreement, did not change the prohibitions that apply to US persons and US origin products and technology.

Thirdly, the case underscores that exporters that use foreign intermediaries or resellers in their sales process must ensure that these will not re-export their products to Iran or other sanctioned countries in violation of US export controls or sanctions laws.

Fourthly, when you think of sanctions most people immediately point to obvious US national security concerns: Export of military materials, bank transactions involving terrorists, come to mind, not of the export of flowers that can be found in garden centers in the US, Canada and Europe. The PanAm case teaches us that no sector is immune from OFAC prosecution.

Whether you are dealing in arms or simply selling flower seeds, OFAC will pursue an enforcement action. Less sensitive fields such as agriculture and food must take this seriously and be sure to



include a sanctions compliance program and stay up to date on OFAC’s regulations and guidelines.

http://sanctionsalert.com/panam-seed-case-shows-how-not-to-respond-when-ofac-knocks-on-the-door/



Alcon To Pay $7.6M Fine As OFAC Takes A Harder Line Against Medical Tech Companies With Faulty Sanctions Compliance Programs

October 15, 2016 By: Dan Calloway, Legal Content Writer, SanctionsAlert.com

The Obama administration sent a message this summer that it was taking a more aggressive stance on medical tech firms as it reached its second consecutive and record settlement with a company for exporting medical-use products to sanctioned countries.

The latest enforcement action by US Treasury Department’s Office of Foreign Assets Control against a medical tech firm was against Alcon Laboratories, Inc., Fort Worth, Texas, and its affiliates in Switzerland. In July, Alcon settled potential civil liability in the amount of $7,617,150 for violations of the Iranian Transactions and Sanctions Regulations (ITSR) and the Sudanese Sanctions Regulations (SSR).

The Alcon case came a month after OFAC entered into a $$107,691 settlement with Hyperbranch Medical Technology, Inc. from Durham, NC, for its export of medical products to Iran.

History of violations in medical/pharmaceutical sector

The Alcon case is the 11th time since 2003 that a medical/pharmaceutical company is subject to an OFAC enforcement action for violations of US sanctions laws.

With $7,617,150, Alcon paid 18 times more than the second largest OFAC penalty in the sector, imposed on American Optisurgical, Inc, from California, in 2013 for the alleged export of unlicensed medical goods and services to Iran.

Company that paid fine Year Sanctions program violated

Amount paid

Alcon Laboratories, Inc. 2016 Iran, Sudan $7,617,150

American Optisurgical, Inc. 2013 Iran $404,100

Ellman International, Inc. 2013 Iran $191,700

Philips Electronics of North America Corporation

2009 Cuba $128,750

Sandhill Scientific, Inc. 2012 Iran $126,000



Hyperbranch Medical Technology, Inc.

2016 $107,691

Zimmer Dental, Inc. 2008 Iran $82,850

Robbins Instruments, Inc. 2011 Iran $37,080

Iridex Corporation 2008 Sudan $7,500

Confi-Dental Products, Co 2008 Iran $5,500

LI-COR, Inc. 2008 Iran $2,315

Source: SanctionsAlert.com database of OFAC enforcement actions

513 violations

A closer look at the enforcement action against Alcon, a global medical company specializing in eye-care products, shows that it engaged in the unlicensed sale and exportation of medical end-use surgical and pharmaceutical products from the US to distributors in sanctioned countries Iran and Sudan.

Alcon’s misconduct was not an isolated incident. The violations are said to have occurred from August 2008 to December 2011 on a total of 513 occasions.

The settlement runs concurrently with Alcon’s additional settlement agreement with the Department of Commerce’s Bureau of Industry and Security (BIS).

No license

This case is rather clear-cut in terms of the alleged violations; An exporter selling its goods to a sanctioned country without a license from the governing agency.

Enforcement of US sanctions, which are among the toughest of the world, rests with Treasury’s Office of Foreign Assets Control. Enforcement of US export controls lies with Commerce Department BIS. Both can make exceptions and issue a license under a 16-year-old law mandating that agricultural and medical humanitarian aid be exempted from sanctions or trade restrictions.

Licenses are reviewed on a case-by-case basis, and issued when the proposed deal or transaction serves US foreign policy goals. For example, for exporting food or medicine to provide relief in North Korea.



A license can simply authorize the company to extricate itself from a transaction. In other cases, the license authorizes the company to return money or to proceed with a proposed transaction, exports or re-exports of goods and technology from the US.

With a license, Alcon could have conducted trade that otherwise would be prohibited because of the sanctions or export controls.

Unlike enforcement actions, which are published on the OFAC website, licenses issued to companies seeking to do business with sanctioned entities or countries are not made public.

Aggravating and mitigating factors

An important takeaway from the Alcon case is OFAC’s discussion of aggravating and mitigating factors as it relates to settlement agreements and penalties.

The settlement amount for Alcon was approximately $7.5 million, a far cry from the statutory maximum civil monetary penalty amount of $138,982,584 and the so-called “base penalty” or proposed penalty of $16,927,000 for the apparent violations.

The settlement amount is reflective of OFAC’s consideration of both mitigating and aggravating factors promulgated by the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines. In OFAC’s official enforcement action the following aggravating factors were outlined:

• Alcon did not voluntarily self-disclose the alleged violations. • Alcon’s senior management knew, or had reason to know about the alleged violations,

thus making the alleged violations ‘willful’. • Alcon, despite significant experience in international trade, demonstrated a reckless

disregard for US Sanctions requirements by (1) having virtually no compliance program; and (2) failing to take adequate steps to investigate a third-party freight forwarders cessation of shipments to Iran on behalf of Alcon;

OFAC also found the following mitigating factors:

• The violations were not determined to be egregious; • The alleged violations did not harm US sanctions programs because the exports at issue

were licensable for sale to Iran and Sudan; • Alcon was a first time OFAC offender; • Alcon cooperated with OFAC by agreeing to toll the statute of limitations during the

pendency of the investigation; • Alcon implemented a robust compliance program in response to the investigation.

Alcon’s missteps teach vital lessons

OFAC’s enforcement actions describe what is important to the agency. From Alcon’s case we can draw several conclusions that will serve as practice points for companies selling life science products.

OFAC looks favorably upon companies that cooperate with OFAC investigations. A key element of cooperation appears to be the so-called tolling agreements. This is a contract between the parties to waive a right to claim that litigation should be dismissed due to the expiration of a



statute of limitations. In the Alcon case, the tolling agreement gave OFAC additional time (beyond the normal 5-year statute of limitations) to review and potentially fine Alcon.

Secondly, OFAC places value on voluntary self-disclosures. By definition, if OFAC discovers a potential violation before a self-disclosure is filed and/or if the file is filed more than 30 days after you have become aware of a violation, you lose all mitigation potential. Thus if you find that your company is in violation of a sanctions law, it is beneficial to self-disclose to the agency.

Third, any indication that senior management was aware or should have been aware of potential sanctions violations will serve as a significant aggravating factor in OFAC’s penalty evaluation.

Lastly, is the importance of an export compliance program. If the question is why should companies invest in export compliance programs for their business that may not directly implicate national security concerns or deal directly with dangerous products, then the answer is simply risk management.

OFAC has shown us repeatedly, via its enforcement actions, that penalties for exporters are not calculated based solely on the value of the underlying transaction. In other words, even though your trade transaction might have been worth $100,000, you can be penalized at a much higher rate. In particular, it highlights the most important factor, which is the implementation of compliance controls.

Difference with Bank Secrecy Act

The Bank Secrecy Act, a US anti-money laundering law, imposes a legal requirement to maintain and implement a so-called anti-money laundering program. The US sanctions laws do not impose a similar legal mandate.

But, as the Alcon case shows, it makes sense financially to invest in an export compliance program, because it will influence the amount of the penalty to be paid when the government finds a sanctions violation.

Alcon is just another example of OFAC’s clear message that every exporter must have robust sanctions and export compliance controls and programs.

http://sanctionsalert.com/alcon-to-pay-7-6m-fine-as-ofac-takes-a-harder-line-against-medical-tech-companies-with-faulty-sanctions-compliance-programs/
