Responding Properly To

OFAC Obligations

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Speakers:

Ann BroekerEconomic sanctions compliance program lead,

Former OFAC AttorneyGE Capital

Erich FerrariFounder

Ferrari Associates, P.C.

Complying with Sanctions

• Detecting potential sanctions exposure through screening and appropriate due diligence

Screen against appropriate lists based on business profile SDN List and country based sanctions as a baseline

Screen appropriate persons and transactions Beneficial owners, related parties such as banks, and transactions such as

third party payments

Escalate matches for timely review

Identify exposure that isn’t captured through screening through due diligence

Indirect sanctions exposure where a customer does business in a sanctioned country

New Crimea sanctions likely require more manual review

Awareness in the business is critical

Complying with Sanctions

• Protecting against violations through contract language Ensuring customer doesn’t engage in activities with sanctioned

countries or persons that causes a sanctions violation

For instance, loan agreements where customer does some business in a sanctioned country

Challenge ensuring language remains up to date in changing sanctions environment

• Where necessary, seeking authorization from OFAC Timing can be an issue

Complying with Sanctions in a Dynamic Environment

• The government is constantly calibrating sanctions to meet foreign policy and national security goals

Unlike other export controls, sanctions are intended to change behavior

• Dynamic nature of sanctions results in practical challenges to ensure compliance with evolving sanctions regimes

• Two categories of change: New/Emerging Sanctions Ukraine/Russia-Related Sanctions

Easing of Sanctions Cuba

Iran Framework Agreement

Myanmar/Burma

Complying with New Sanctions: Ukraine/Russia-Related Sanctions• Areas that present compliance challenges:

50% rule in context of Ukraine/Russia-related sanctions

New type of “sectoral sanctions”

Crimea territorial sanctions

Fifty Percent Rule• Identifying which Russian entities are subject to sanctions is

challenging

Volume: many of the Russian businessmen and companies subject to blocking sanctions have ownership or other interests in a large number of entities. In addition, several of Russia’s largest companies and banks are subject to sectoral sanctions as a result of ownership.

How much due diligence is necessary?

Aggregate ownership interests: on August 13, 2014, OFAC issued “Revised Guidance on Entities Owned by Persons Whose Property or Interests in Property are Blocked” and published FAQs clarifying that it aggregates ownership interests across multiple sanctioned parties for purposes of applying the 50% rule

Divestment of sanctioned ownership interests: still challenging to become comfortable doing business with entities due to lack of mechanism for OFAC to confirm ownership changes (Example: SMP Bank)

Sectoral Sanctions• Traditional screening doesn’t lend itself to limited scope of

sectoral sanctions

Volume: many hits against sectorally sanctioned entities despite limited nature of sanctions targeting certain new debt and equity

Comprehensive screening makes sense in the context of broad sanctions

Escalation of alerts may not be necessary or appropriate for all sectoralsanctions matches

• Contract language may need to be revised

Sanctions language in contracts may be outdated if it prohibits dealings with “sanctioned persons”; may not need to be that broad

But language may be too narrow with respect to Crimea sanctions if contract language uses the term sanctioned “countries” since Crimea is a territory

Couldn’t predict current sectoral sanctions, but we’ll likely see more in the future

Crimea Territorial Sanctions• US sanctions language is familiar; results in comprehensive territorial sanctions

similar to Sudan, Iran, and Cuba programs. Corresponding EU sanctions.

• Screening and detection challenges remain because Crimea is not a country

Can’t screen against “Crimea” as easily as countries such as Iran and Sudan that will more naturally appear in addresses

Must instead screen against cities, businesses, and banks in Crimea

Crimean address could be in Ukraine or Russia

US calls Crimea “region of Ukraine,” but Russia claims it annexed the territory in March 2014.

Easing of Cuba Sanctions• On December 17, 2014, President Obama announced a shift

in U.S. policy towards Cuba that included easing some of the sanctions in place against the country since 1960

• On January 16, 2015, the U.S. Departments of Commerce (BIS) and Treasury (OFAC) published revised regulations that formally implement the President’s announced changes to the Cuba sanctions program

• On May 29, 2015, the U.S. government removed Cuba from the list of State Sponsors of Terrorism

The vast majority of the Cuba embargo remains in place, and most transactions related to Cuba remain prohibited for US companies and their foreign subsidiaries that are subject to US jurisdiction for purposes of Cuba sanctions

Easing of Cuba SanctionsWhat Changed on January 16?

Some categories of newly authorized transactions include:

• Export of building materials for private residential construction, agricultural equipment for farmers, goods for use by private sector Cuban entrepreneurs (Support for the Cuban People)

• Humanitarian activities in Cuba• Certain categories of travel and travel-related transactions

previously requiring specific licenses• Certain financial transactions and financing for authorized

exports• Limited transactions for foreign subsidiaries of US

companies

Easing of Cuba Sanctions• Many questions about scope of the general licenses/license

exceptions; OFAC issued updated FAQs in April

• Authorizations can include key carve-outs that challenge practical implementation; policy goals may not align with practical implementation

• Example: Banks and credit card providers may process credit and debit card payments in Cuba, as long as the charges or withdrawals are made by persons engaging in authorized travel-related transactions (15 CFR § 515.560(c)(5))

Persons subject to U.S. jurisdiction may rely on the traveler with regard to compliance with the authorization, provided there is no knowledge or have reason to know that a transaction is not authorized by this section

Banks weren’t viewing travel by non-US persons located outside of the United States as “authorized” travel

New OFAC FAQ says general license applies to third country travelers to Cuba

Easing of Cuba Sanctions-Foreign Subsidiaries

• Any U.S.-owned or -controlled partnership, association, corporation, or other organization in a third country is authorized to provide goods and services to a Cuban national who is an individuallocated outside of Cuba, provided that the transaction does not involve a commercial exportation, directly or indirectly, of goods or services to or from Cuba (15 CFR § 515.585)

• Limited relief for most activities involving independent foreign subsidiaries of U.S. companies

Easing of Iran Sanctions? • Joint Plan of Action (JPoA) between P5plus1 and Iran

The JPoA between the P5plus1 (five UN Security Council members and Germany) and Iran was originally negotiated in November 2013.

The original agreement provided for six months to negotiate a final deal starting in January 2014; deadline was then extended several times to June 30, 2015.

• Framework Agreement announced in April Detailed agreement to be drafted by June 30

“Nuclear-related sanctions” will be lifted when IAEA has verified that Iran has taken “all of its key nuclear-related steps”

No timetable provided (expectation is months after final agreement)

No definition of “nuclear-related sanctions”

Sanctions imposed for terrorism, human rights, missile controls, or other reasons will remain

Complex Iran sanctions framework that include territorial sanctions, targeted blocking sanctions, and extensive secondary sanctions imposed by the President

and Congress may make it difficult to take advantage of lifting of the “nuclear-related sanctions”

Easing of Burma Sanctions-Lessons Learned for Cuba and Iran?

• Example of the US Government lifting-or generally authorizing-broad categories of prohibitions

Similar dramatic lifting of sanctions in programs like first and second Libya sanctions programs

• The USG significantly eased Burma sanctions in July 2012 Generally authorized export of financial services to Burma (note this

prohibition had effectively served to prohibit US trade with Burma)

Generally authorized new investment in Burma

Generally authorized transactions involving several banks on the SDN List in 2013

Easing of Burma Sanctions• Certain restrictions remained Financial services and new investment general licenses excluded Burmese

Ministry of Defense, including the Office of Procurement, and any state or nonstate armed group

Persons, including several banks, remained on the SDN List

Reporting requirement for new investment over $500,000

• Remaining Challenges Dealing with the Burma-related targeted sanctions that remain in place,

particularly those targeting banks Banks may reject payments to accounts at Burmese banks still on the SDN List

, even if they are authorized by the export of financial services general license

May want to ask customer to use different bank account, even if payments will be authorized, if bank is still on SDN List

Easing of Burma Sanctions• Remaining Challenges (continued) Navigating other remaining requirements

Carefully calculate “new investment” to determine whether reporting requirement is triggered

Ambiguity may drive conservative approach

Avoid dealing with Ministry of Defense and other prohibited parties

Majority owned entities can be difficult to identify, but standard sanctions representations contract language can help

Topic Areas

•Reporting Requirements

•OFAC Enforcement Guidelines

•Voluntary Self-Disclosures

•OFAC Administrative Subpoenas

What Triggers an OFAC Investigation?• Reports

• Blocking Reports

• Reject Reports

• Other Submissions Licenses, 3rd Party Responses to Administrative Subpoenas

• Voluntary Self-Disclosures• Submitted by Subject Party

• Submitted by third parties

• Other Information• Ongoing/Existing Cases

• Publicly Available Information

• Informants

• Referrals from Other Agencies (including Regulators)

Reporting Requirements•Record Keeping and Reporting Requirements

• U.S. persons are required to maintain records for 5 years of any transaction implicating the regulations of Chapter V, Title 31 C.F.R. (31 C.F.R. § 501.601)

• Also a requirement to furnish those records on demand by OFACAdministrative Subpoenas (31 C.F.R. § 501.602)

•Blocking and Reject Reports• Filed with OFAC whenever transactions with sanctions nexus is blocked or

rejected

• Blocking report Blocked Party (e.g., SDNs) has interest in the transactions

• Reject report transaction is prohibited but no blocked party

•Information to Include• The value date, amount, and type of transaction

• Parties involved in the transaction (originator/beneficiary, financial institutions, sanctioned party)

• Steps taken in identifying the reported transaction

OFAC Enforcement Guidelines• General Factors

• A: Willful or Reckless Violation of Law

• B: Awareness of Conduct at Issue

• C: Harm to Sanctions Program Objectives

• D: Individual Characteristics

• E: Compliance Program

• F: Remedial Response

• G: Cooperation with OFAC*

• H: Timing of Apparent Violation in Relation to Imposition of Sanctions

• I: Other Enforcement Act

• J: Future Compliance/Deterrence Effect

• K: Other Relevant Factors

OFAC Enforcement Guidelines

• General Factor G: Cooperation with OFAC• Voluntary Self-Disclosure?

• Provide all relevant information

• Promptly respond to all requests for information

• Tolling agreement?

• Substantial cooperation can lead to a reduction of 25-40%; in cases involving voluntary self-disclosures can be viewed as a further mitigating factor

Voluntary Self-Disclosures•Voluntary vs. Non-Voluntary (Appendix A, Part 501)

• Self-initiated prior to or at the same time that OFAC, or other government agency, discovers the apparent violation or substantially similar apparent violations

• Substantially similar apparent violation is one that is part of a series of apparent violations or is part of the same pattern or practice of conduct

• VSD must include, or be followed up with, sufficient detail for OFAC to understand the apparent violation’s circumstances (must be materially complete)

•Not a VSD• If third party is required to, and does, notify OFAC due to transaction’s

blocking or rejection

• If disclosure is suggested by other government agency or official

• If made on behalf of entity without consent of senior management

• If disclosed in license application or administrative subpoena

• Contains false or misleading information

Voluntary Self-Disclosures• What Goes Into a VSD?

• Specifics regarding transactions: value, dates, parties, purpose, implicated sanctions program, history with parties

• Personnel involved in the transactions: management/supervisory involvement; compliance/legal review

• Policies and procedures: did personnel follow policies, do the violations indicate a weakness in Subject Persons policies?

• Supporting documentation: payment instructions, invoices, bill of lading, purchase order, customer account information, etc.

• Remedial actions: staff conducted review, follow up with customer/correspondent; adjustments to policies/procedures; changes to filter calibration on screening software

OFAC Administrative Subpoenas•Hallmark of an OFAC investigation

• OFAC has statutory and regulatory authority to compel parties to respond and submit records

• All responses must be truthful false or misleading information could lead to 18 U.S.C. § 1001 criminal violation

•Communicating with Enforcement• Make initial call to enforcement officer to ensure you understand the

scope of the subpoena

• Negotiate extensions if necessary Tolling Agreements, rolling productions

• Communicate by writing to ensure accuracy of administrative record

•Next Steps• Make sure to provide information responsive to subpoena AND

relevant to OFAC Enforcement Guidelines

• Be prepared for multiple subpoenasmay want to expand your investigation

Conclusion•If you have questions after the event please contact me:

• Erich Ferrari

• Phone: 202-280-6370

• Email: ferrari@ferrariassociatespc.com

• www.sanctionlaw.com

•THANK YOU!