John Pisa-RelliJohn Pisa-RelliLegal Director, Trade Compliance Legal Director, Trade Compliance Thales USA, Inc.Thales USA, Inc.

The Butterfly EffectThe Butterfly EffectMaking Sense of OFAC Facilitation ProhibitionsMaking Sense of OFAC Facilitation Prohibitions

•Merriam-WebsterMerriam-Webster: to make easier : help bring about: to make easier : help bring about

facilitate facilitate fə-si-lə-tāt fə-si-lə-tāt (transitive verb)(transitive verb)

•OFACOFAC: to do : to do anythinganything [pretty much] that can be [pretty much] that can be

associated, however remotely, with a sanctions associated, however remotely, with a sanctions targettarget

Core ConceptsCore ConceptsFacilitation prohibits U.S. person from providing support to Facilitation prohibits U.S. person from providing support to foreign person engaged in activity that would be prohibited foreign person engaged in activity that would be prohibited if U.S. person engaged in activity directlyif U.S. person engaged in activity directly

Articulated specifically in sanctions against Burma, Iran, Articulated specifically in sanctions against Burma, Iran, Sudan, and Syria (and in CISADA re financial institutions)Sudan, and Syria (and in CISADA re financial institutions)

Applies in principle to Applies in principle to allall OFAC programs through recurring OFAC programs through recurring prohibitions against “evading” and “avoiding” sanctionsprohibitions against “evading” and “avoiding” sanctions

Inconsistent, ambiguous, and elastic definitions across Inconsistent, ambiguous, and elastic definitions across OFAC programs create practical compliance challengesOFAC programs create practical compliance challenges

Prevailing practice is to apply Prevailing practice is to apply cumulativecumulative understanding of understanding of facilitation to all OFAC programsfacilitation to all OFAC programs

PROHIBITIONSPROHIBITIONS

U.S. person prohibited fromU.S. person prohibited from

•ApprovingApproving

•FinancingFinancing

•FacilitatingFacilitating

•GuaranteeingGuaranteeing foreign person’s transaction where it would be prohibited if foreign person’s transaction where it would be prohibited if performed directly by the U.S. person or within the United Statesperformed directly by the U.S. person or within the United States

Burma (31 C.F.R. § 537.205) / Syria (E.O. 13582, § 2(e)) Burma (31 C.F.R. § 537.205) / Syria (E.O. 13582, § 2(e))

EXAMPLES (31 C.F.R. § 560.417)EXAMPLES (31 C.F.R. § 560.417)

•U.S. person U.S. person altersalters operating policies or procedures to permit operating policies or procedures to permit

• foreign affiliate to do something U.S. person would be foreign affiliate to do something U.S. person would be prohibited from performing directly; or;prohibited from performing directly; or;

• any affiliate to facilitate prohibited activityany affiliate to facilitate prohibited activity

•U.S. person U.S. person refersrefers directly prohibited business opportunities to directly prohibited business opportunities to foreign personforeign person

SAME PROHIBITIONS AS BURMA / SYRIASAME PROHIBITIONS AS BURMA / SYRIA

Iran (31 C.F.R. § 560.208) Iran (31 C.F.R. § 560.208)

EXAMPLES (31 C.F.R. § 538.407)EXAMPLES (31 C.F.R. § 538.407)

•Same as Iran (altering policies/ making referrals)Same as Iran (altering policies/ making referrals)

•AssistingAssisting or or supportingsupporting trading activity trading activity

•WarrantingWarranting quality of goods sold to target quality of goods sold to target

•Foreign subsidiaries must act Foreign subsidiaries must act independentlyindependently, including on , including on business / legal planning; decision making; making, designing, business / legal planning; decision making; making, designing, transporting goods; financial, insurance, and other riskstransporting goods; financial, insurance, and other risks

•Purely clericalPurely clerical activities activities OK (business reporting) OK (business reporting)

PROHIBITIONSPROHIBITIONS

Facilitation, including but not limited to brokeringFacilitation, including but not limited to brokering

Sudan (31 C.F.R. § 538.206) Sudan (31 C.F.R. § 538.206)

NotNot facilitation to sell to foreign person (e.g., distributor) who facilitation to sell to foreign person (e.g., distributor) who resells to sanctions target if:resells to sanctions target if:

• For general inventory and not to fill specific order; For general inventory and not to fill specific order; andand

• Foreign person sales / transfers from inventory are not Foreign person sales / transfers from inventory are not predominantlypredominantly to sanctions target to sanctions target

CAVEATSCAVEATS

• Retransfer / reexport controls may apply to foreign person, Retransfer / reexport controls may apply to foreign person, depending on destination etc.depending on destination etc.

• ““Predominantly” not definedPredominantly” not defined

• Is it > 50% overall, or determined case-by-case? Is it > 50% overall, or determined case-by-case?

• Arises from longstanding agency practice Arises from longstanding agency practice

Inventory ExceptionInventory Exception

Thorny IssuesThorny Issues

• U.S. parent / foreign subsidiaryU.S. parent / foreign subsidiary

• Foreign affiliate “entanglement”Foreign affiliate “entanglement”

• Remote / obscure sanctions nexusRemote / obscure sanctions nexus

• Expat employees / recusal policiesExpat employees / recusal policies

• Shared servicesShared services

• M&A / investmentM&A / investment

• Compliance counseling / legal adviceCompliance counseling / legal advice

U.S. Parent / Foreign SubsidiaryU.S. Parent / Foreign Subsidiary

• What is adequate “independence”?What is adequate “independence”?

• Is it practically attainable?Is it practically attainable?

• Interlocking management, approval Interlocking management, approval requirements, shared services, etc. requirements, shared services, etc.

• What if you alter policies / procedures for general What if you alter policies / procedures for general or non-sanctions business reason but change or non-sanctions business reason but change allows sanctioned business to occur?allows sanctioned business to occur?

• Effects-driven or intent-based?Effects-driven or intent-based?

• What becomes of revenue derived from foreign What becomes of revenue derived from foreign sanctions-related activities?sanctions-related activities?

• How important are corporate formalities?How important are corporate formalities?

• If you don’t honor them will the enforcers?If you don’t honor them will the enforcers?

Foreign Affiliate “Entanglement”Foreign Affiliate “Entanglement”

• Foreign affiliates don’t always recognize that what they Foreign affiliates don’t always recognize that what they can do lawfully is illegal for you to support under U.S. can do lawfully is illegal for you to support under U.S. lawlaw

• What if affiliate does not disclose sanctions connection What if affiliate does not disclose sanctions connection when requesting support? when requesting support?

• Compare to “stripping,” where a bank will be Compare to “stripping,” where a bank will be deemed in violation of OFAC sanctions when it deemed in violation of OFAC sanctions when it removes information from payment instructions to removes information from payment instructions to avoid detection of sanctions activityavoid detection of sanctions activity

• Remember: potential strict liability for civil violations Remember: potential strict liability for civil violations (no need to prove intent)(no need to prove intent)

• Can trigger liability for foreign person as wellCan trigger liability for foreign person as well

Remote / Obscure Sanctions NexusRemote / Obscure Sanctions Nexus

• How deeply into a transaction must you delve to How deeply into a transaction must you delve to confirm no sanctions connection?confirm no sanctions connection?

• How many steps removed are sufficient to eliminate How many steps removed are sufficient to eliminate liability for violations?liability for violations?

• Is strict liability actually enforced absent some Is strict liability actually enforced absent some indication of knowledge or reason to know?indication of knowledge or reason to know?

• Reason to know may be inferred from Reason to know may be inferred from documentary traildocumentary trail

• Bank blocking / reject reports may reveal Bank blocking / reject reports may reveal sanctions nexus not adequately considered sanctions nexus not adequately considered by U.S. person and give OFAC notice of by U.S. person and give OFAC notice of potential facilitationpotential facilitation

• Whither the “butterfly effect”?Whither the “butterfly effect”?

Expat Employees / Recusal PoliciesExpat Employees / Recusal Policies

• How do U.S. expats act appropriately when How do U.S. expats act appropriately when presented with sanctions activities?presented with sanctions activities?

• Especially managers and board membersEspecially managers and board members

• Remember: Green Card holders are U.S. Remember: Green Card holders are U.S. persons for OFAC purposespersons for OFAC purposes

• Is recusal a potential Catch-22? Is recusal a potential Catch-22?

• Does it matter who creates the policy (U.S. Does it matter who creates the policy (U.S. versus foreign person) and why (general versus foreign person) and why (general versus sanctions-specific)?versus sanctions-specific)?

• Does the very act of recusal potentially Does the very act of recusal potentially facilitate by allowing a transaction to facilitate by allowing a transaction to otherwise proceed?otherwise proceed?

Shared ServicesShared Services

• How do you manage IT, ERP, finance, compliance, HR, How do you manage IT, ERP, finance, compliance, HR, and other potential shared services in global company and other potential shared services in global company with foreign business in OFAC-sanctioned countries?with foreign business in OFAC-sanctioned countries?

• Where is line drawn for clerical services?Where is line drawn for clerical services?

• What if “routine” financial report provides basis for What if “routine” financial report provides basis for making sanctions-related business decision?making sanctions-related business decision?

• Distinction between general and dedicated services? Distinction between general and dedicated services?

• Does “predominance” matter?Does “predominance” matter?

• Some practitioners say that analysis is similar to Some practitioners say that analysis is similar to “inventory” exception, which itself is not fully clear“inventory” exception, which itself is not fully clear

• When U.S. company acquires interest in foreign When U.S. company acquires interest in foreign company, no “grace period” to wind down sanctions-company, no “grace period” to wind down sanctions-related activities that could impute liabilityrelated activities that could impute liability

• Due diligence therefore essential to anticipate and Due diligence therefore essential to anticipate and address potential risksaddress potential risks

• Risks vary depending on nature and extent of Risks vary depending on nature and extent of investment and subsequent authorityinvestment and subsequent authority

• What about passive investment / international What about passive investment / international securities offerings?securities offerings?

• No “per se” rule but practitioners often identify a No “per se” rule but practitioners often identify a conservative range of 5-15% of sanctioned conservative range of 5-15% of sanctioned business as potentially tolerable for U.S. business as potentially tolerable for U.S. investmentinvestment

• What becomes of revenue derived from foreign What becomes of revenue derived from foreign sanctions-related activities?sanctions-related activities?

M&A / InvestmentM&A / Investment

• How do you distinguish permissible How do you distinguish permissible compliance counseling from impermissible compliance counseling from impermissible business / strategic / legal advice?business / strategic / legal advice?

• Can you advise on a hypothetical business Can you advise on a hypothetical business deal involving sanctions targets?deal involving sanctions targets?

• What about general business strategy What about general business strategy without reference to a specific sanctions-without reference to a specific sanctions-related transaction?related transaction?

• Again, is the “predominance” concept Again, is the “predominance” concept vital, let alone subject to practical vital, let alone subject to practical interpretation?interpretation?

Compliance Counseling / Legal AdviceCompliance Counseling / Legal Advice

• OFAC has settled a number of reported civil cases alleging OFAC has settled a number of reported civil cases alleging facilitation violations against full range of parties, including facilitation violations against full range of parties, including banks, U.S. corporate affiliates, and shippersbanks, U.S. corporate affiliates, and shippers

• But OFAC public enforcement data yield little helpful information But OFAC public enforcement data yield little helpful information about precise facts / elements that constitute alleged facilitation about precise facts / elements that constitute alleged facilitation in any particular casein any particular case

• Anecdotal information suggests that OFAC tends to advance an Anecdotal information suggests that OFAC tends to advance an expansive view of facilitation (“if the dots connect...”)expansive view of facilitation (“if the dots connect...”)

• Lack of transparency / consistency, established deference courts Lack of transparency / consistency, established deference courts grant OFAC to interpret its rules, and potentially steep penalties, grant OFAC to interpret its rules, and potentially steep penalties, create uncertain compliance landscapecreate uncertain compliance landscape

• Arguably calculated to give OFAC visibility / control and Arguably calculated to give OFAC visibility / control and compel conservative behaviorcompel conservative behavior

• BOTTOM LINE: any U.S. nexus to a sanctioned transaction, BOTTOM LINE: any U.S. nexus to a sanctioned transaction, however seemingly attenuated, triggers facilitation riskhowever seemingly attenuated, triggers facilitation risk

Enforcement TrendsEnforcement Trends

• Anticipate as part of due diligence potential sanctions risks Anticipate as part of due diligence potential sanctions risks associated with proposed international activities and operations associated with proposed international activities and operations

• Easier and less disruptive to prevent than correctEasier and less disruptive to prevent than correct

• Don’t discount possibility of OFAC issues in global Don’t discount possibility of OFAC issues in global environment – most U.S. sanctions are unilateralenvironment – most U.S. sanctions are unilateral

• Think big picture - envision all possibilities, however remoteThink big picture - envision all possibilities, however remote

• Use policies, procedures, and contractual limitations / exclusions Use policies, procedures, and contractual limitations / exclusions to prevent becoming embroiled in sanctions activitiesto prevent becoming embroiled in sanctions activities

• But timing is key, and be careful that your effort to comply But timing is key, and be careful that your effort to comply does not itself become unwitting facilitationdoes not itself become unwitting facilitation

• Educate foreign counterparts about U.S. sanctions risksEducate foreign counterparts about U.S. sanctions risks

Compliance StrategiesCompliance Strategies

Remember: if you can’t do it yourself directly, Remember: if you can’t do it yourself directly, you probably can’t help someone else do ityou probably can’t help someone else do it

Compliance VisualizedCompliance Visualized

Understand all layers of transactionUnderstand all layers of transaction

•Sanctions issues can be nested deeplySanctions issues can be nested deeply

Exercise 360˚ Situational AwarenessExercise 360˚ Situational Awareness

•Don’t just think upstream / downstreamDon’t just think upstream / downstream

My presentation was informed by invaluable and generous insights My presentation was informed by invaluable and generous insights from members of the American Bar Association, Section of from members of the American Bar Association, Section of International Law & Practice, Export Control & Economic Sanctions International Law & Practice, Export Control & Economic Sanctions CommitteeCommittee

Special thanks to Professor Terence Lau, whose 2004 paper on Special thanks to Professor Terence Lau, whose 2004 paper on facilitation remains a vital guidepost:facilitation remains a vital guidepost:

Terence Lau. "Triggering Parent Company Liability Under United States Terence Lau. "Triggering Parent Company Liability Under United States Sanctions Regimes: The Troubling Implications of Prohibiting Approval Sanctions Regimes: The Troubling Implications of Prohibiting Approval and Facilitation" American Business Law Journal 41.4 (2004): 413-457.and Facilitation" American Business Law Journal 41.4 (2004): 413-457.Available at: http://works.bepress.com/terence_lau/4.Available at: http://works.bepress.com/terence_lau/4.

Hat tip to Clif Burns, Esq. at Bryan Cave who previously invoked the Hat tip to Clif Burns, Esq. at Bryan Cave who previously invoked the “butterfly effect” metaphor in one of his excellent essays in his “butterfly effect” metaphor in one of his excellent essays in his indispensable Export Law Blog (http://www.exportlawblog.com)indispensable Export Law Blog (http://www.exportlawblog.com)

The information in this presentation should not be construed as The information in this presentation should not be construed as legal advice or the furnishing of professional services, nor does it legal advice or the furnishing of professional services, nor does it represent the views of any third partyrepresent the views of any third party

AcknowledgementsAcknowledgements