FinCEN and ICE Issue Geographic Targeting Order (GTO) Against Miami-Area Electronics Exporters

On April 21, 2015, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) served a Geographic Targeting Order (GTO) on about 700 electronics exporter businesses in the Miami area as part of an investigation into cash transactions possibly tied to trade-based money-laundering schemes utilized by drug cartels. The GTO goes into effect April 28, 2015 and expires 180 days thereafter (October 25, 2015). It was issued in coordination with U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations and the Miami Dade State Attorney’s Office South Florida Money Laundering Strike Force and is similar to a GTO that FinCEN issued to fashion-industry businesses in the Los Angeles area in October 2014.

Click here to read the full issued Client Alert.

Schlumberger Faces More Than $232.7 Million in Penalties and Pleads Guilty to Criminal Charges for Violations of U.S. Sanctions

This post was written by Leigh T. Hansson and Hena M. Schommer.

On March 25, 2015, Schlumberger Oilfield Holdings, Ltd. (“SOHL”), a wholly owned subsidiary of Schlumberger Ltd., the world’s largest oil-field services company (collectively “Schlumberger”), agreed to plead guilty to criminal charges, enter into a plea agreement, and pay $232.7 million in penalties for willfully facilitating illegal transactions and engaging in trade with Iran and Sudan. The charges were brought under the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. § 1705, which makes it a crime to willfully commit, attempt, or cause a violation of any regulations issued pursuant to IEEPA. In this case, charges included violations of the Iranian Transaction Regulations, now known as the Iranian Transactions and Sanctions Regulations, and the Sudanese Sanctions Regulations, both issued pursuant to IEEPA.

Though both SOHL and Schlumberger Ltd. are non-U.S. entities, the charges outline a series of activities between February 2004 through June 2010, undertaken by Drilling & Measurements (“D&M”), a Schlumberger business segment headquartered in Sugar Land, Texas.

D&M personnel in the United States facilitated transactions with Iran and Sudan, systematically violating U.S. sanctions when they:

  • Made and implemented business decisions and company processes specifically concerning Iran and Sudan
  • Provided technical services to troubleshoot mechanical failures and sustain oilfield drilling equipment in Iran and Sudan
  • Approved and disguised capital expenditure requests from Iran and Sudan for the manufacture of new tools
  • Directed the transfer of equipment from oilfields in non-embargoed countries to oilfields in Iran and Sudan

Schlumberger is now paying the price for its failure to ensure U.S. entity and personnel compliance with U.S. economic sanctions. While Schlumberger had policies and procedures in place designed to ensure U.S. based entities complied with U.S. sanctions, Schlumberger failed to train or monitor its employees adequately to ensure that all U.S. personnel, including non-U.S. citizens, fully understood and complied with Schlumberger’s policies and procedures.

While a risk-based approach to compliance is encouraged by U.S. regulators, compliance programs require not only thorough implementation, including personnel and management training, but also continuous monitoring and auditing to ensure compliance.

In addition to Schlumberger, there are now several recent examples, including the PayPal, Inc. settlement with OFAC this week, of companies paying a steep price for inconsistent or inadequate implementation of existing compliance programs, along with a lack of training, or monitoring of compliance.  

Continuation of Russian Sanctions

Since March 2014, Reed Smith has been closely monitoring developments relating to the situation in the Ukraine and reporting them as Client Alerts and blog updates. We have set out below a brief summary of the EU’s decision of 20 March 2015 to effectively leave in place the sanctions imposed last year against Russia.

Click here to read the full issued Client Alert.

Inadequate Screening Processes Result in $7.65 Million Settlement for Violations of Various U.S. Sanctions Programs

This post was written by Michael J. Lowell and Paula A. Salamoun.

On March 25, 2015, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and PayPal, Inc. (“PayPal”) agreed to a $7.65 million settlement to settle potential civil liability for 486 apparent violations of various financial sanctions. Between 2009 and 2013, PayPal, a digital payments processor, apparently processed hundreds of transactions in violation of multiple U.S. sanctions programs, including sanctions on Cuba, Iran, Sudan, the Weapons of Mass Destruction Proliferators Sanctions, and the Global Terrorism Sanctions. OFAC administers and enforces various U.S. sanctions programs against targeted countries, persons, organizations, and certain activities, such as terrorism.

According to the Settlement Agreement between OFAC and PayPal, PayPal apparently did not implement effective compliance procedures and processes to identify, interdict, and prevent transactions that would violate U.S. sanctions. PayPal had compliance procedures and processes for screening transactions, but these were ineffective because PayPal did not screen in-process transactions, and several of its employees failed to appropriately respond to a screening match. As a result of these lapses, the Settlement Agreement identified 486 transactions that appeared to violate U.S. sanctions. The total value of the alleged transactions in violation of the sanctions was approximately $44,000 – an average of just more than $90 per transaction. PayPal voluntarily disclosed these transactions to OFAC.

OFAC determined that a portion of the transactions were egregious and demonstrated reckless disregard for U.S. sanctions. Over a period of approximately four years, PayPal processed 136 transactions (totaling $7,091.77) involving an individual on the Specially Designated Nationals List (“SDN List”). OFAC noted that PayPal’s automated interdiction filter failed to match the account holder to the SDN List for a period of six months after the individual was added to the SDN List. OFAC has previously levied penalties where interdiction or screening processes do not identify SDNs at the time that they are added to the SDN List (see, e.g., settlement between OFAC and GEICO announced June 3, 2010). After the interdiction software flagged the SDN on six separate occasions, multiple PayPal employees apparently failed to follow company procedures and cleared the flags to allow the transactions to go forward, which the Settlement Agreement described as “particularly reckless.”

This enforcement action illustrates several important points for compliance:

First, the existence of a sanctions compliance program is not sufficient to avoid penalties if it does not work. In particular, a screening or interdiction program to flag potential blocked persons will not minimize sanctions risks if the people that receive those screening alerts do not appropriately respond. It is critical that all screening compliance programs have clear lines of responsibility for resolving or escalating potential matches, and that those programs are audited to ensure that they work.

Second, although OFAC expressly recognizes the need for risk-based compliance programs, low-value transactions do not necessarily mean low risk for violations or penalties resulting from those violations. According to the figures referenced in the Settlement Agreement, the average transaction that was in violation of the sanctions was approximately $90. A review of prior OFAC enforcement actions would provide additional examples of low-value transactions resulting in large monetary fines.

Third, OFAC’s enforcement actions demonstrate value for voluntarily disclosing violations and implementing remedial compliance measures, as PayPal apparently did in this case. With 486 apparent violations, the $7.65 million settlement is far below the high-end potential penalties. Further, the Settlement Agreement requires PayPal to provide only a presentation in six months summarizing policies and procedures as they relate to screening transactions and customers, rather than more intrusive oversight by OFAC through an outside monitor or mandatory audits.

New Authorizations to Export Personal Communications Items and Services to Sudan

This post was written by Michael A. Grant, Leigh T. Hansson, and Michael J. Lowell.

On February 18, 2015 the Commerce Department’s Bureau of Industry and Security (“BIS”) and Treasury Department’s Office of Foreign Assets Control (“OFAC”) published changes to the Export Administration Regulation (“EAR”) and the Sudanese Sanctions Regulations (“SSR”) in order to advance the free flow of information and facilitate communications by the Sudanese people. OFAC’s changes are consistent and nearly identical to its personal communications general license for Iran, first issued on May 30, 2013 and revised on February 7, 2014. See our guidance related to the Iran Personal Communications License. Because BIS and OFAC maintain concurrent jurisdiction to regulate trade with Sudan, BIS has amended the EAR including the revision of License Exception Consumer Communications Devices (“CCD”) to authorize cetin exports to Sudan.

Sudanese Sanction Regulations

OFAC’s amendments to the SSR include provision for both U.S. and non-U.S. Persons.

  • U.S. Persons are authorized to export services to Sudan incident to the exchange of personal communications
  • U.S. and non-U.S. Persons may export certain U.S.-origin software to Sudan incident to personal communications
  • U.S. Persons may export certain foreign-origin software or software that is not subject to the EAR as defined in EAR § 734.3(b)(3)
  • U.S. and non-U.S. Persons may export certain hardware listed in Annex B to Sudan including (but not limited to):
    • Mobile phones and PDAs
    • Satellite phone and Broadband Global Area Network hardware
    • Consumer modems, network interface cards, ration equipment, routers
    • Laptops, tablets and personal computing devices
    • Anti-virus and anti-malware software
    • Anti-tracking software
    • Mobile operating systems and applications for mobile devices
  • U.S. Persons may provide certain consumer Internet connectivity services to Sudan
  • Authorized hardware and software may be imported into the United States
  • U.S. Persons may export certain free of cost services and software to the Government of Sudan

Export Administration Regulations

In consultation with OFAC and the State Department, BIS implemented changes to the EAR consistent with the new authorizations issued by OFAC. BIS has expanded License Exception CCD and made minor technical changes to ensure authorization of certain personal communication devices to Sudan.

Consumer Communications Devices

On January 15, 2015, BIS amended License Exception CCD to authorize the export of certain items to Cuba. The new change by BIS adds Sudan as an authorized destination for the license exception. In addition License Exception CCD now includes authorization to export certain Global Positioning System receivers and similar satellite receivers to Sudan only. The items authorized under CCD for Sudan overlap with OFAC’s new authorizations and include (but are not limited to):

  • Computers
  • Modems
  • Network access controllers and communications channel controllers
  • Mobile phones
  • Satellite telephones
  • Personal digital assistants
  • Consumer software to be used for equipment described in this list

Reexport of Items Subject to the EAR

BIS amended Section 742.10 of the EAR and no longer requires a license for non-U.S. Persons to reexport specified U.S. Origin items to Sudan. The items which no longer require a license for reexport are those classified under the following ECCNs: 2A994, 3A992.a, 5A991.g, 5A992, 5D992.b or .c, 6A991, 6A998, 7A994, 8A992.d, .e, .f, and .g, 9A990.a and .b, and 9A991.d and .e. In addition, these items are not included in the de minimis calculation for Sudan.

Additional Considerations

The new authorization permits U.S. Persons to provide certain free of charge services and items to the Government to Sudan. However, the Government of Sudan continues to be a prohibited end user for the direct or indirect export of fee-based services and hardware directly under both OFAC and BIS regulations. Both agencies have modified their specific licensing review policy from a policy of denial to a case-by-case assessment for personal communication services, software or hardware (OFAC) and for medical and telecommunications equipment (BIS).

BIS Addresses 'Commingling' in Crude Oil Exports

On December 30, 2014, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued its first-ever published guidance on the Short Supply Controls, the regulations that limit the export of crude oil out of the United States. The guidance, provided in the form of Frequently Asked Questions (“FAQs”), is of particular interest to many because it addresses the timely question of what kind of distillation process is sufficient to transform crude oil into a product that is exportable without a BIS license. The FAQs, however, also address the important but often misunderstood legal issue of “commingling.”

Click here for the issued Client Alert.

U.S. Department of Treasury Imposes Sanctions Against the Government of The Democratic People's Republic Of Korea

In response to recent cyber-attacks, President Obama signed an Executive Order January 2, 2015, imposing additional economic sanctions against the Democratic People’s Republic of Korea. The Executive Order authorizes the Treasury to apply sanctions against officials and entities associated with North Korea's government and the ruling Workers' Party of Korea.

Click here for the issued Client Alert.

BIS Issues First Published Guidance on the Short Supply Controls

Today, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued the first-ever published guidance on the Short Supply Controls, the regulations that limit the export of crude oil out of the United States. The guidance, provided in the form of Frequently Asked Questions (“FAQs”), sheds light on a number of issues, including the definition of “crude oil” under BIS regulations and the extent to which crude oil must be processed in order to qualify as a product that is exportable without prior BIS authorization.

Click here for the issued Client Alert.

Sanctions Update: the U.S. and the EU impose further measures against Russia

This alert follows our previous alerts on the Russia/Ukraine sanctions.

U.S. Passes New Sanctions Authorizing Statute - Sends Russia Frigid End of Year Message

President Obama: U.S. will “review and calibrate” sanctions in response to Russia’s actions On December 18, 2014, President Obama signed into law the Ukraine Freedom and Support Act of 2014 (“the Act”), the latest move in a series of sanctions imposed on Russia by the United States and the EU over the past year (full coverage of the Russia sanctions can be found here). While the Act gives the president authority to implement new sanctions against Russia, President Obama has declined to enforce the new provisions at this time. The strategy behind this move is unclear, though it appears to be a “wait and see” approach with the hope that even just the threat of new U.S. sanctions will curb Russia’s destabilizing efforts in Ukraine and the wider Eastern Europe and Central Asia regions. It is also believed that the U.S. administration wants to continue to remain in lock-step with the EU and its imposition of sanctions against Russia.

The provisions of the Act are wide-reaching, and if he chooses to enforce them, would authorize the president to provide defense articles, services, and training to Ukraine; address humanitarian relief efforts for displaced persons; and encourage increased investment in Ukraine’s energy sector with decreased Ukrainian dependence on Russian energy sources. The Act also puts forth several key export controls and sanctions provisions that could be implemented against Russia.

Click here for the issued Client Alert.

Normalizing U.S. Relations with Cuba: What is ahead?

On December 17, President Obama announced that he will take steps to normalize relations with Cuba, prompting questions about what this means for an island nation that has existed under a Cold War-era embargo for more than 50 years. The announcement indicates a dramatic shift in U.S. foreign policy toward Cuba, affecting not only diplomatic relations but also U.S.-Cuban economic ties and travel. Mr. Obama, however, carefully pointed out that the shift in U.S. policy will begin with executive action. The U.S. embargo against Cuba is codified in legislation, meaning that Congress must act to lift these sanctions entirely. Close observers of congressional politics may agree that this will probably present a challenge to normalization.

Click here for the issued Client Alert.

The Joint Plan of Action: A Recap of the Easing Of Sanctions Against Iran By The United States And European Union

On 24 November 2013, an agreement was reached between the E3+3 (also known as the P5+1, and which includes the United States, United Kingdom, Russia, China, France and Germany) and Iran.

This agreement, known as the Joint Plan of Action (JPOA), was the result of negotiations the aim of which was “to reach a mutually-agreed long-term comprehensive solution that would ensure Iran’s nuclear programme will be exclusively peaceful”. As part of the agreement, Iran reaffirmed that “under no circumstances would it ever seek or develop any nuclear weapons”. 

Click here for the issued Client Alert.

Iran: limited sanctions relief extended to 30 June 2015

In January 2014, both the EU and U.S. brought into force measures which temporarily suspended and relaxed (for an initial period of six months) some of the sanctions in place against Iran. This reflected the Joint Plan of Action (JPOA) agreed to in November 2013 between Iran and the E3+3, also known as the P5+1, which includes, the U.S., Russia, China, the UK, France, and Germany. Those measures were discussed in our alerts of 24 July 2014 and 23 January 2014.

Click here for the issued Client Alert.

Condensate Exports Raise Compliance Questions for Purchasers

This post was written by Jeffrey Orenstein.

Recent press reports covering the sale and export of lightly processed condensate from the Eagle Ford Shale have characterized such transactions as a major test to the four-decade-long ban on crude oil exports, and a sign that the ban is crumbling. They are not exactly that. However, as condensate exports become more common, they will raise important compliance questions for would-be purchasers.

Click here to view the full issued Client Alert.

Federal Appeals Court Holds Employee Directly Liable for Penalties and Duties Related to Negligently Declared Goods - What are the Implications?

This post was written by John P. Donohue, Leigh T. Hansson, and Michael J. Lowell.

On September 16, 2014, the Court of Appeals for the Federal Circuit published its long-awaited decision in United States v. Trek Leather Inc., and its opinion may have created an unintended level of concern among compliance professionals and import departments.

Trek Leather is an importer of men’s suits. Its business plan called for the importer to supply at no cost to the foreign producer, the raw materials used in the production of the finished goods. The delivery of input raw material at no cost to the producer is not unlawful, but the law requires that – at the time of entry – the cost or value of the input material must be added to the international transfer price to arrive at a correct dutiable value. The delivery of merchandise at no cost or at a reduced cost is known in this area of law as an “assist.”

In 2002, the president/shareholder (the “Corporate Officer”) of the importer failed to advise his import broker of the assists used in the production of the imported wearing apparel. This error was identified by U.S. Customs, but resolved with the payment of additional duties and without ancillary enforcement proceedings. In 2004, however, the same importer, through the same Corporate Officer, again failed to declare the assists, and this time – in addition to the collection of duties – Customs instituted enforcement proceedings against both the importer and the Corporate Officer, alleging grossly negligent conduct.

Customs proceeded against the importer and Corporate Officer under 19 U.S.C. § 1592, which provides that no “person” may “enter or introduce or attempt to enter or introduce” merchandise into the United States negligently, grossly negligently or fraudulently, and enumerates the penalties available for each level of misconduct. The position of U.S. Customs was that the Corporate Officer and importer were both liable for introducing or entering the merchandise into the United States with an incorrect declaration of dutiable value. The critical question raised in the enforcement proceedings was whether the United States could seek the imposition of penalties against the Corporate Officer personally, since he was not the importer of the goods; did not make the false “declaration” supporting entry; and had no personal obligation to pay the duties allegedly due.

In the Court of International Trade (“CIT”) proceedings, the corporate defendant (Trek Leather) conceded liability for grossly negligent conduct, but the Corporate Officer argued that the statute did not extend to him personally because he was neither the importer of the goods nor the party legally obligated to pay the duties. The CIT nonetheless sustained the position of the United States and held that both the importer and the Corporate Officer could be held jointly and severally liable, not simply for the penalties relating to the grossly negligent conduct, but also for the duties themselves. The Court of Appeals for the Federal Circuit initially reversed the CIT as to the personal defendant, and the United States sought an en banc review. The en banc panel vacated the Federal Circuit’s holding and held that the United States could properly pursue the officer because the officer qualified as a “person” under the statute. In addition, the en banc panel conceded that the Corporate Officer did not make entry, but also noted that the statute extended not only to those who “entered” merchandise (which might be read to apply only to the importer of record), but also to those who “introduce” such merchandise, which could extend to a broader class. Finally, in dictum that will be sure to cause concern in all importing companies, the en banc panel specifically declined to affix liability to the Corporate Officer because of his legal status as an officer, but rather held the Corporate Officer liable because the evidence demonstrated that he committed the acts complained of. In short, the Federal Circuit had the opportunity to limit the breadth of its decision by pointing to officer, director or fiduciary status, but declined to do so.

The Federal Circuit’s opinion will likely cause concern among the compliance and supply chain professionals and other mid-level employees in Customs and International Trade departments of importing companies. Under the rationale of this decision, these employees may be subject to higher individual risks than they would have previously anticipated, including fines and penalties, in addition to duties due on the imported merchandise. To ensure that company employees who now operate in a higher-risk environment are given the support of their management, companies may have to review policies on assumption of liability, indemnification, and even absorption of attorneys’ fees and court costs. Similarly, while this decision may have resulted in Customs having a new vehicle for enforcing compliance against individual company employees, Customs will have to adopt its own policies to ensure that these individual employees – though technically now at risk – will not be indiscriminately pursued.

Further U.S. Sanctions Target Russia's Energy, Defense and Financial Sectors

This post was written by Leigh T. Hansson, Michael J. Lowell, Hena M. Schommer, and Paula A. Salamoun.

As the United States and Russia continue to clash over Russia’s actions in the Ukraine, on September 12, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued additional sanctions further restricting designated Russian financial institutions’ access to capital markets, targeting Russian defense entities, and prohibiting exports to Russian entities that have been specifically designated as participants in exploration and production in deepwater, Arctic offshore, or shale projects. As part of these recent changes, OFAC amended Directive 1, previously issued July 16, 2014, and added Directives 3 and 4 targeting the Russian defense and energy sectors. OFAC also added five more entities to its Specially Designated Nationals List (“SDN List”).

OFAC amended Directive 1 to change the debt maturity restriction from 90 days to 30 days. U.S. persons may not transact in, provide financing for, or deal in new debt or new equity of longer than 30 days, with entities designated under Directive 1 of the Sectoral Sanctions Identifications List (“SSI List”). All other previous restrictions provided for in Directives 1 and 2 remain unchanged. Directive 3 specifically targets the “defense and related materiel sector” of Russia, and prohibits “all transactions in, provision of financing for, and other dealings in new debt of longer than 30 days maturity” of designated entities. OFAC designated one Russian entity under Directive 3, Rostec State Corporation.

Directive 4 introduces new prohibitions targeting entities in Russia’s energy sector. OFAC designated five entities under Directive 4, prohibiting “the provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil” in Russia or any territory claimed by Russia. Concurrently, OFAC also issued General License Number 2, which allows U.S. persons until September 26, 2014, to engage in activities with Directive 4 designated entities that are “ordinarily incident and necessary to the wind down of operations, contracts, or other agreements” prohibited under Directive 4. The five entities designated under Directive 4 are Lukoil OAO, OJSC Gazprom Neft, Open Joint Stock Company Gazprom, Surgutneftegas, and Open Joint-Stock Company Rosneft Oil Company. Directive 4 prohibitions also apply to any entities 50 percent or more owned by one or more of the designated entities.

According to OFAC guidance, the Directive 4 prohibition does not apply to the provision of financial services, such as clearing transactions or providing insurance. However, the exportation of services, such as drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies, are examples of prohibited activities under Directive 4.

Other Reed Smith updates related to U.S.-Russia can be found here.


This post was written by Hena M. Schommer, Bethany R. Brown, Michael J. Lowell, Leigh T. Hansson, and Michael A. Grant.

On August 13, 2014, the Office of Foreign Assets Control (“OFAC”) revised its guidance on the status of entities owned by persons designated on the Specially Designated Nationals List (“SDN List”).  Under the new guidance, OFAC will consider an entity to be blocked if it is 50 percent or more owned, directly or indirectly, in the aggregate by one or more SDNs. This rule applies even if the entity is not itself listed on the SDN List.  The guidance reverses OFAC’s prior position on aggregate ownership by multiple SDNs.  In conjunction with the revised guidance OFAC also issued further guidance in the form of Frequently Asked Questions (“FAQs”).

OFAC’s revised guidance addresses ownership only and not control.  OFAC clarified that an entity collectively controlled by multiple SDNs - that is not also an SDN - owned under the 50 percent standard articulated in the guidance - is not automatically blocked.  Other more comprehensive sanctions programs may apply separate SDN control criteria, such as Cuba and Sudan.  However, OFAC warns that entities that are controlled by SDNs have a high risk of future designation by OFAC.

OFAC encourages entities considering potential transactions to undertake appropriate due diligence on parties to or involved with the transaction, especially in cases where complex ownership structures exist, since direct or indirect ownership by SDNs will trigger automatic blocking. Persons doing business with companies owned in part by an SDN should reevaluate the companies' status under the new guidance and consider whether existing due diligence processes will be sufficient to identify blocked persons going forward.

U.S. Expands Export Restrictions Targeting Russia's Oil and Gas Production

This post was written by Hena M. Schommer, Michael J. Lowell, and Leigh T. Hansson.

Effective August 6, 2014, the United States Department of Commerce’s Bureau of Industry and Security (“BIS”) issued new regulations, identified as the “Russian Industry Sector Sanctions,” restricting exports and other transfers of certain items subject to the Export Administration Regulations (“EAR”) that may benefit Russia’s energy sector.  Newly added EAR section 746.5 imposes licensing requirements on the export, reexport, or in-country transfer of a wide range of items that may be used in Russia in the exploration or production of deepwater, Arctic offshore, or shale projects having the potential to produce oil or gas. The new regulations also clarify that applications for pertinent export licenses are subject to a presumption of denial, and that no EAR license exceptions – aside from license exception GOV  – apply to covered shipments.  The BIS rule took effect immediately upon issuance. Any in-process shipments of restricted items that fall within the restrictions will be considered violations after August 6, 2014; this means that shipments that are in-transit on or after the effective date would be considered violations.

In section 746.5(a)(1), BIS provides a list of Export Control Classification Numbers (“ECCNs”) and a list of EAR99 items identified as the Russian Industry Sector Sanction List.  The specific ECCNs restricted for export to Russia are ECCNs 0A998 (newly added), 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999 (also newly added).  The Russian Industry Sector Sanction List, consisting of items identified by their Schedule B numbers and descriptions, includes, but is not limited to, drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Arctic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing, high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers.

U.S. and non-U.S. exporters and reexporters should carefully examine the Russian Industry Sector Sanction List and relevant ECCNs to determine whether any items recently shipped, in process, or intended for future export, reexport, or transfer, are covered.

As a result of U.S. and European Union (“EU”) cooperation, the list of restricted items is virtually identical to the items included in Annex II of the EU Regulation issued July 31, 2014.  However, the items actually controlled under the respective lists may differ because of divergent classification interpretations between the United States and the EU.  For further details on EU restrictions, see Reed Smith’s recent update here.

Foreign Investment in the United States: D.C. Circuit Reversal Could Lead to Increased Transparency for CFIUS

This post was written by Michael J. Lowell and Bethany R. Brown.

On July 15, the D.C. Circuit held that a presidential order requiring Ralls Corporation to divest its interests in Oregon windfarms because of national security concerns deprived Ralls of its constitutionally protected property interests without due process of law.  In doing so, the D.C. Circuit reversed a district court decision that had emphasized the president’s near-absolute, discretionary authority when responding to national security threats raised by foreign investment in the United States.  [link to Oct. 21, 2013 blog]

The presidential order was the end result of the Committee on Foreign Investment in the United States’ (“CFIUS”) review of the national security implications of Ralls’ acquisition of the four companies developing the windfarms.  Ralls – a Delaware corporation privately owned by two Chinese nationals – submitted the transaction to CFIUS for review after the acquisition had closed.  Following CFIUS’ review, President Obama ordered divestiture of Ralls’ acquisition of the membership interests in the four companies, citing national security concerns posed by the transaction.  Ralls brought suit against CFIUS, claiming, in part, that the presidential order deprived Ralls of its ownership interests in the companies without due process of law.  The case will now be returned to the district court for further review.

Though the decision does not affect the president’s ultimate power to order divestiture, the decision could have a significant impact on the manner in which CFIUS reviews proceed in the future.  Under the decision, CFIUS, before ordering divestiture, will be required to:  (1) inform the property owner about its action; (2) provide access to the unclassified evidence that supports its decision; and (3) provide the property owner with an opportunity to rebut the evidence.  This could lead to a review process that is much more transparent than current practice, wherein parties before CFIUS are often in the dark about the government’s concerns.

OFAC Targets Russia's Financial and Energy Sectors in New Sectoral Sanctions

This post was written by Hena M. Schommer and Leigh T. Hansson.

As a result of the ongoing Crimea conflict, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) has issued new sanctions targeting Russian banks and energy companies.  This week, OFAC issued a Ukraine-related Sectoral Sanctions Identifications List (“SSI List”) and Directives 1 and 2 pursuant to Executive Order 13662 (the “Directives”) that provide two lists of sectoral sanctions designations.  On or after July 16, 2014, the Directives, generally, prohibit U.S. persons – wherever located – from entering into “new debt” transactions, including “transacting in, providing financing for, or otherwise dealing in debt with a maturity of longer than 90 days…on behalf of, or for the benefit of the entities listed on the SSI List, their property, or their interests in property.” Directive 1 entities are also prohibited from entering into “new equity” transactions meeting the definition above. Entities included on the list are Russian banks and energy sector entities; the Directives also extend prohibitions to entities owned 50 percent or more by an entity designated on the SSI List.  According to OFAC’s website, transactions that will be caught under the “new debt” and “new equity” prohibitions include:

  • Debt defined as “bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper,” and
  • Equity defined as “stocks, share issuances, depositary receipts, or any other evidence of title or ownership” 

Further, the prohibitions in both Directives “extend to rollover of existing debt, if such rollover results in the creation of new debt with a maturity of longer than 90 days.”  Additionally, OFAC has issued General License No. 1, authorizing U.S. persons to engage in transactions of “derivative products whose value is linked to an underlying asset” that falls within the definition of the Directives.

OFAC has limited the scope of the SSI List by clarifying that the entities are not included on the OFAC Specially Designated Nationals List (“SDN List”), unless specifically designated by OFAC.  All prior designations on the SDN List and other trade restrictions that have not been lifted by OFAC remain in place.  Reed Smith’s other blog posts related to the U.S. Ukraine-related sanctions can be found here.

July Sanctions Update: Ukraine and Iran

This post was written by Siân Fellows, Lisa Mason, David Myers, Alexandra E. Allan, Alexandra Gordon, and Laith Najjar.

Since March 2014, we have been closely monitoring the developments relating to the situation in the Ukraine and reporting them as Client Alerts and blog updates.

We have set out below a summary of the recent changes in respect of the Ukraine as well as an update on the position regarding the “Joint Plan of Action” in respect of Iran.

For more detail on this topic, please see our Client Alert.

Crisis in the Crimea: Sanctions Update

This post was written by David Myers, Siân C. Fellows, Alexandra E. Allan, and Alexandra Gordon.

The European Union has made further additions to the list of sanctioned parties under the regime put in place in response to the Russian Federation’s actions in the Crimea (Regulation 269/2014 and subsequent amendments).

On 12 May 2014, the Council of the European Union published Regulation 477/2014, which added an additional 13 individuals to the list of those subject to a travel ban and a freeze on their assets within the European Union. The individuals are:

  • Vyacheslav Viktorovich VOLODIN; First Deputy Chief of Staff of the Presidential Administration of Russia. Responsible for overseeing the political integration of the annexed Ukrainian region of Crimea into the Russian Federation.
  • Vladimir SHAMANOV; Commander of the Russian Airborne Troops, Colonel-General. In his senior position holds responsibility for the deployment of Russian airborne forces in Crimea.
  • Vladimir Nikolaevich PLIGIN; Chair of the Duma Constitutional Law Committee. Responsible for facilitating the adoption of legislation on the annexation of Crimea and Sevastopol into the Russian Federation.
  • Petr Grigorievich JAROSH; Acting Head of the Federal Migration Service office for Crimea. Responsible for the systematic and expedited issuance of Russian passports for the residents of Crimea.
  • Oleg Grigorievich KOZYURA; Acting Head of the Federal Migration Service office for Sevastopol. Responsible for the systematic and expedited issuance of Russian passports for the residents of Crimea.
  • Viacheslav PONOMARIOV ; Self-declared mayor of Slaviansk. Ponomarev called on Vladimir Putin to send in Russian troops to protect the city and later asked him to supply weapons. Ponomarev's men are involved in kidnappings (they captured Ukrainian reporter Irma Krat and Simon Ostrovsky, a reporter for Vice News, both of whom were later released; they also detained military observers under OSCE Vienna Document).
  • Igor Mykolaiovych BEZLER; One of the leaders of self-proclaimed militia of Horlivka. He took control of the Security Service of Ukraine's Office in Donetsk region building and afterwards seized the Ministry of Internal Affairs' district station in the town of Horlivka. He has links to Ihor Strielkov under which command he was involved in the murder of Peoples' Deputy of the Horlivka's Municipal Council Volodymyr Rybak, according to the SBU.
  • Igor  KAKIDZYANOV; One of the leaders of armed forces of the self- proclaimed ‘Donetsk People's Republic’. The aim of the forces is to ‘protect the people of Donetsk People's Republic and territorial integrity of the republic’, according to Pushylin, one of the leaders of the ‘Donetsk People's Republic’.
  • Oleg TSARIOV; Member of the Rada. Publicly called for the creation of the Federal Republic of Novorossia, composed of South Eastern Ukrainian regions.
  • Roman LYAGIN; Head of the ‘Donetsk People's Republic’ Central Electoral Commission. Actively organised the referendum 11 May on the self-determination of the ‘Donetsk People's Republic’.
  • Aleksandr MALYKHIN; Head of the ‘Lugansk People's Republic’ Central Electoral Commission. Actively organised the referendum 11 May on the self-determination of the ‘Lugansk People's Republic’.
  • Natalia Vladimirovna POKLONSKAYA; Prosecutor of Crimea. Actively implementing Russia's annexation of Crimea.
  • Igor Sergeievich SHEVCHENKO; Acting Prosecutor of Sevastopol. Actively implementing Russia's annexation of Sevastopol.

For the first time in this regime, the EU has also listed two entities which are now subject to the asset freeze. They are:

  • PJSC CHERNOMORNEFTEGAZ; On 17 March 2014, the ‘Parliament of Crimea’ adopted a resolution declaring the appropriation of assets belonging to Chernomorneftegaz enterprise on behalf of the ‘Republic of Crimea’. The enterprise is thus effectively confiscated by the Crimean ‘authorities’.
  • FEODOSIA; On 17 March 2014, the ‘Parliament of Crimea’ adopted a resolution declaring the appropriation of assets belonging to Feodosia enterprise on behalf of the ‘Republic of Crimea’. The enterprise is thus effectively confiscated by the Crimean ‘authorities’.

So far, the EU has listed a total of 61 individuals and two entities to the list of designated parties. You can access a consolidated list of all those listed by the EU by accessing the following link.

New Ukraine-related Sanctions Curb Exports to Russia and Occupied Crimea

This post was written by Leigh T. Hansson, Michael J. Lowell, Michael A. Grant, and Bethany R. Brown.

On April 28, the U.S. Department of Commerce announced a new licensing policy restricting exports of “dual use” items that could contribute to Russia’s military capabilities.  Effective immediately, the Commerce Department’s Bureau of Industry and Security (“BIS”) will deny new and pending export license applications to Russia or occupied Crimea of high-technology items that could benefit Russia’s military.  BIS is also taking actions to revoke existing export licenses meeting these same criteria.  All other export licenses and license applications pertaining to Russia and occupied Crimea will be reviewed by BIS on a case-by-case basis to determine their contribution to Russia’s military capabilities.  A statement issued by the White House indicated that the State Department’s Directorate of Defense Trade Controls (“DDTC”) has implemented a similar policy for exports of defense articles; however, DDTC has not yet issued a notification to this effect.

These new export policies are part of a series of measures announced Monday in response to Russia’s continued activities in eastern and southern Ukraine, and its failure to honor its commitment made in Geneva April 17 to take steps to de-escalate the situation in Ukraine.  Other newly announced measures include the addition of 24 individuals and entities to the Treasury Department’s Specially Designated Nationals List.  Seven of the newly sanctioned persons are Russian government officials, two of whom are members of President Putin’s inner circle.  The remaining 17 newly sanctioned entities are companies with ties to President Putin’s inner circle.  Thirteen of these companies have also been added to the Entity List maintained by BIS, meaning that a license is now required to export, re-export, or otherwise transfer items subject to the Export Administration Regulations to the companies.

This announcement is the latest step in the United States' on-going policy of restricting exports of U.S.-origin goods to Russia.  In late March, BIS and DDTC announced that they had implemented a hold on the issuance of new licenses for the export or re-export of items to Russia.  Monday’s announcement is the first indication that the U.S. government will take action to revoke existing export licenses.  Companies with existing export licenses or pending export license applications are advised to review the status of their licenses, and to closely monitor future communications from BIS and DDTC.

To view other updates on the Crimea crisis, click here.

DC Circuit Invalidates Conflict Mineral Reporting Regulations

This post was written by Jeffrey Orenstein.

This week the U.S. Court of Appeals for the D.C. Circuit held that the Security and Exchange Commission’s (“SEC”) final rule concerning “conflict mineral” disclosures is unconstitutional.  Nat’l Assoc. of Mfrs v. SEC, No. 13-5252 (D.C. Cir., decided April 14, 2014).  The SEC rule requires registrants to disclose annually on a Form SD whether their products incorporate conflict minerals (i.e., tin, tungsten, tantalum, and gold, mined in war-torn Central Africa) or whether their products are “DRC Conflict Free.” 

The court ruled that, by requiring companies to report whether their products are free of conflict minerals, the SEC rule improperly compelled commercial speech in violation of the First Amendment.  Accordingly, the court invalidated both the SEC’s final rule and the underlying statutory provision in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), but only “to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.”’”   The court reasoned that “the label ‘conflict free’ is a metaphor that conveys moral responsibility for the Congo war” and, “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”

With the June 2, 2014 deadline fast approaching for filing a Form SD, many manufacturers and other parties impacted by the SEC’s final rule are eager to know whether the D.C. Circuit’s decision relieves them of their upcoming filing requirement. Unfortunately, the immediate impact of the decision is not entirely clear.

The court remanded the case to the District Court for a review of whether the SEC’s rulemaking, or language in the Dodd-Frank statute itself, is at the root of the free speech conflict.  In the interim, it is possible that the SEC will provide guidance indicating that issuers should file their Form SD but, per the D.C. Court’s decision, issuers may omit the declaration of whether their products are “DRC conflict free.”  It is also possible that the plaintiffs will move in District Court to stay implementation of the rule, pending the court’s decision on remand.  In the long term, the SEC may appeal the D.C. Circuit’s decision, putting its validity back into play once more, or it may amend its final rule in an effort to satisfy the constitutional standards articulated by the D.C. Circuit this week.

Ridiculous and Complicated: Proposed Changes to Support Documents for EAR Licenses

This post was written by Leigh T. Hansson, Carlos A. Valdivia, and Joelle E.K. Laszlo.

On April 9th, the Bureau of Industry and Security (“BIS”) proposed a rule that would remove certain documentation requirements in connection with Export Administration Regulations (“EAR”) license applications. Export nerds are well aware that changing these requirements would go a long way toward streamlining the license application process (which is ridiculous and complicated). As the BIS itself notes, the IC/DV system is the vestigial appendage of a long-defunct Cold War relic. (That is not a quote; it’s just the pent-up frustration of every export lawyer in the country.) For all its support documentation requirements, the IC/DV system nevertheless fails to obtain an affirmative statement from the ultimate end-user regarding the actual end use of the imported item.

Under the proposed changes, however, the following would happen:

  • International import certificates or delivery verifications would no longer be required in connection with license applications
  • Statements by the ultimate consignee and purchaser would be required for most license applications that previously required an international import certificate
  • Value threshold for requiring a Statement by Ultimate Consignee would increase from $5,000 to $50,000

It’s like Christmas in July. Incidentally, comments on this proposed rule must be received by June 9, 2014. If your business would benefit from reducing delays and administrative burdens in connection with exports or imports, you may want to voice your support for this rule change. And if you think we’re exaggerating when we characterize the IC/DV requirements as onerous, just read the description for obtaining an international import certificate.

Crisis in the Crimea: Sanctions Update 3

This post was written by Leigh T. Hansson, David Myers, Siân C. Fellows, Carlos A. Valdivia, Alexandra Allan, Sarah Rogers and Alexandra Gordon.

The Russian Federation and the United States continue to clash over the proposed annexation of Crimea from Ukraine, with the United States adding 20 Russian officials and related persons to its list of sanctioned persons. Some of the persons recently added to the United States’ SDN List were recently sanctioned by the EU, as we have noted earlier this week. Others appear to be novel additions under either the EU or United States’ sanctions lists, and include Russian officials, lawmakers, and persons within Vladimir Putin’s inner circle. For its part, the EU added 12 persons to its list of those subject to the initial travel ban and asset freeze. These new additions have caused a flurry of activity in the international business community as people scramble to guard their investments.

Specifically, the new sanctions have immediate consequences in the financial services and energy industries. For example, the United States’ sanctions target Russia’s Bank Rossiya, prohibiting U.S. firms and individuals from doing business with the $10 billion bank. As a result, Visa and MasterCard have stopped providing services for Bank Rossiya’s clients. In addition, the sanctions target the Rotenberg brothers, two Russian billionaires who have been acquiring subsidiaries of Gazprom, Russia’s state-run energy giant. Gennady Timchenko, who recently sold his 45 percent stake in Gunvor Group Ltd., was also targeted. Timchenko sold his shares to his partner, Torbjorn Törnqvist, in anticipation of the repercussions these sanctions might have on billions of dollars of energy contracts. These developments raise questions about the probability of sanctions against Gazprom itself and the risks of investing in Russia.

Below are the specific names added to the United States’ and EU sanctions lists.

Persons Added to the United States’ Sanctions List

The following persons (and one entity) were recently added to the OFAC’s Specially Designated Nationals List:

  • BUSHMIN, Evgeni Viktorovich (a.k.a. BUSHMIN, Evgeny; a.k.a. BUSHMIN, Yevgeny); DOB 10 Oct 1958; POB Lopatino, Sergachiisky Region, Russia; Deputy Speaker of the Federation Council of the Russian Federation; Chairman of the Council of the Federation Budget and Financial Markets Committee (individual) [UKRAINE2].
  • DZHABAROV, Vladimir Michailovich; DOB 29 Sep 1952; First Deputy Chairman of the International Affairs Committee of the Federation Council of the Russian Federation (individual) [UKRAINE2].
  • FURSENKO, Andrei Alexandrovich (a.k.a. FURSENKO, Andrei; a.k.a. FURSENKO, Andrey); DOB 17 Jul 1949; POB St. Petersburg, Russia; Aide to the President of the Russian Federation (individual) [UKRAINE2].
  • GROMOV, Alexei; DOB 1960; POB Zagorsk (Sergiev, Posad), Moscow Region, Russia; First Deputy Chief of Staff of the Presidential Executive Office; First Deputy Head of Presidential Administration; First Deputy Presidential Chief of Staff (individual) [UKRAINE2].
  • IVANOV, Sergei (a.k.a. IVANOV, Sergey); DOB 31 Jan 1953; POB St. Petersburg, Russia; Chief of Staff of the Presidential Executive Office (individual) [UKRAINE2].
  • IVANOV, Victor Petrovich (a.k.a. IVANOV, Viktor); DOB 12 May 1950; alt. DOB 1952; POB Novgorod, Russia (individual) [UKRAINE2].
  • KOZHIN, Vladimir Igorevich; DOB 28 Feb 1959; POB Troitsk, Chelyabinsk Oblast, Russia (individual) [UKRAINE2].
  • KOVALCHUK, Yuri Valentinovich (a.k.a. KOVALCHUK, Yury Valentinovich); DOB 25 Jul 1951; POB Saint Petersburg, Russia (individual) [UKRAINE2].
  • MIRONOV, Sergei Mikhailovich (a.k.a. MIRONOV, Sergei); DOB 14 Feb 1953; POB Pushkin, Saint Petersburg, Russia; Member of the Council of the State Duma; Leader of A Just Russia Party; Member of the State Duma Committee on Housing Policy and Housing and Communal Services (individual) [UKRAINE2].
  • NARYSHKIN, Sergey Yevgenyevich (a.k.a. NARYSHKIN, Sergei); DOB 27 Oct 1954; POB Saint Petersburg, Russia (individual) [UKRAINE2].
  • OZEROV, Viktor Alekseevich (a.k.a. OZEROV, Viktor Alexeyevich); DOB 05 Jan 1958; POB Abakan, Khakassia, Russia; Chairman of the Security and Defense Federation Council of the Russian Federation (individual) [UKRAINE2].
  • PANTELEEV, Oleg Evgenevich (a.k.a. PANTELEEV, Oleg); DOB 21 Jul 1952; POB Zhitnikovskoe, Kurgan Region, Russia; First Deputy Chairman of the Committee on Parliamentary Issues (individual) [UKRAINE2].
  • ROTENBERG, Arkady; DOB 15 Dec 1951; POB St. Petersburg, Russia (individual) [UKRAINE2].
  • ROTENBERG, Boris; DOB 03 Jan 1957; POB St. Petersburg, Russia (individual) [UKRAINE2].
  • RYZHKOV, Nikolai Ivanovich (a.k.a. RYZHKOV, Nikolai); DOB 28 Sep 1929; POB Duleevka, Donetsk Region, Ukraine; Senator in the Russian Upper House of Parliament; Member of the Committee for Federal Issues, Regional Politics and the North of the Federation Council of the Russian Federation (individual) [UKRAINE2].
  • SERGUN, Igor Dmitrievich; DOB 28 Mar 1957; Lieutenant General; Chief of the Main Directorate of the General Staff (GRU); Deputy Chief of the General Staff (individual) [UKRAINE2].
  • TIMCHENKO, Gennady (a.k.a. TIMCHENKO, Gennadiy Nikolayevich; a.k.a. TIMCHENKO, Gennady Nikolayevich; a.k.a. TIMTCHENKO, Guennadi), Geneva, Switzerland; DOB 09 Nov 1952; POB Leninakan, Armenia; alt. POB Gyumri, Armenia; nationality Finland; alt. nationality Russia; alt. nationality Armenia (individual) [UKRAINE2].
  • TOTOONOV, Aleksandr Borisovich (a.k.a. TOTOONOV, Alexander; a.k.a. TOTOONOV, Alexander B.); DOB 03 Mar 1957; POB Ordzhonikidze, North Ossetia, Russia; alt. POB Vladikavkaz, North Ossetia, Russia; Member of the Committee on Culture, Science, and Information, Federation Council of the Russian Federation (individual) [UKRAINE2].
  • YAKUNIN, Vladimir; DOB 30 Jun 1948; POB Vladimir Oblast, Russia (individual) [UKRAINE2].
  • ZHELEZNYAK, Sergei Vladimirovich (a.k.a. ZHELEZNYAK, Sergei; a.k.a. ZHELEZNYAK, Sergey); DOB 30 Jul 1970; POB Saint Petersburg, Russia; Deputy Speaker of the State Duma of the Russian Federation (individual) [UKRAINE2].
  • BANK ROSSIYA (f.k.a. AKTSIONERNY BANK RUSSIAN FEDERATION), 2 Liter A Pl. Rastrelli, Saint Petersburg 191124, Russia; SWIFT/BIC ROSY RU 2P; Website; Email Address [UKRAINE2].

Persons Added to the European Union Sanctions List

The EU have recently added 12 persons (PDF of EU Council Implementing Regulation) to those noted in our earlier post who were the subject of the initial travel ban and asset freeze. Those twelve persons are now subject to a travel ban and asset freeze, and they are:

  • Rogozin, Dmitry Olegovich; DOB 21 December 1963; POB Moscow; Deputy Prime Minister of the Russian Federation
  • Glazyev, Sergey; DOB 1 January 1961; POB Zaporozhye (Ukrainian SSR); Adviser to the President of the Russian Federation
  • Matviyenko, Valentina Ivanova; DOB 7 April 1949; POB Shepetovka, Khmelnitskyi oblast (Ukrainian SSR); Speaker of the Federation Council
  • Naryshkin, Sergei Evgenevich; DOB 27 October 1954; POB St. Petersberg; Speaker of the State Duma
  • Kiselyov, Dmitry Konstantinovich; DOB 26 April 1954; POB not supplied; Head of the Russian Federal State news agency Rossiya Segodnya
  • Nosatov, Alexander; DOB 27 March 1963; POB Sevastopol (Ukrainian SSR); Deputy Commander of the Black Sea Fleet
  • Kulikov, Valery Vladimirovich; DOB 1 September 1956; POB Zaporozhye (Ukrainian SSR); Deputy Commander of the Black Sea Fleet
  • Surkov, Vladislav Yurievich; DOB 21 September 1964; POB Solntsevo, Lipetsk; Aide to the President of the Russian Federation
  • Malyshev, Mikkhail; DOB not supplied; POB not supplied; Chair of the Crimea Electoral Commission
  • Medvedev, Valery; DOB not supplied; POB not supplied; Chair of Sevastopol Electoral Commission
  • Lt. Gen. Igor Turchenyuk; DOB not supplied; POB not supplied; Commander of Russian forces in Crimea
  • Mizulina, Elena Borisovna; DOB not supplied; POB not supplied; Deputy in the State Duma

The situation is reaching a point where further sanctions may have negative consequences for Western companies. Anyone with foreign investments or energy contracts would be well-advised to keep a watchful eye on these developments. Such caution should extend to the international business community as well, given the increasingly interconnected nature of our financial and energy markets.


OFAC Issues General License Authorizing Certain Academic Exchanges with Iran

This post was written by Leigh T. Hansson, Michael J. Lowell, Bethany Brown, and Michael A. Grant.

On March 19, the Office of Foreign Assets Control (“OFAC”) issued a general license under the Iranian Transactions and Sanctions Regulations that authorizes several specific forms of academic exchanges with Iran.

The newly issued general license – General License G (the “License”) – authorizes qualifying U.S. colleges and universities to engage in certain transactions related to Iranian students and educators. Additionally, the License makes provisions for U.S. persons to participate in certain educational activities in Iran. Finally, the License permits U.S. financial institutions to process funds transfers in furtherance of the licensed activities, so long as such transfers do not involve debiting or crediting an Iranian account, and to collect, accept, and process student loan payments from Iranian persons.

Accredited Colleges and Universities

Specifically, the License provides that accredited colleges and universities in the United States may enter into student exchange agreements with universities located in Iran and may engage in all activities related to such agreements, including the provision of scholarships to Iranian students to facilitate their attendance at a school in the United States. Qualifying academic institutions may also export services related to their application processes and tuition fees, as well as services related to signing up for and participating in undergraduate-level online courses offering specified courses of study. Under the License, qualifying academic institutions may additionally export services related to the recruitment, hiring, or employment of Iranian persons who are regularly employed as teachers at an Iranian university.

U.S. Persons

Furthermore, the License authorizes U.S. persons to engage in certain educational activities in Iran. U.S. persons actively enrolled in accredited U.S. colleges and universities may participate in educational courses and noncommercial academic research in specified areas of study at Iranian universities. U.S. persons may export services in support of specified not-for-profit educational activities in Iran, including combating illiteracy, increasing access to education, and assisting in educational reform projects. Additionally, under the License, U.S. persons may administer professional certificate examinations and university entrance examinations to Iranian persons.

U.S. Financial Institutions

The License qualifies the colleges, universities, and persons that may participate in the exchanges and limits eligible degree programs and areas of study. Additionally, the License specifically does not authorize the exportation or reexportation of any goods or technology to Iran or the Government of Iran, with the exception of technology or software released under the License that is designated as EAR99 under the Export Administration Regulations (“EAR”) or constitutes Educational Information not subject to the EAR, if the release does not otherwise require a license from the Department of Commerce. Entities utilizing the License should review OFAC General License D-1, which authorizes certain exports to Iran of equipment incident to personal communication. See our previous guidance on the use of General License D-1. See our previous guidance on the use of General License D-1.

Benefits for Business Travelers in the New Iran Personal Communications General License

This post was written by Leigh T. Hansson, Michael J. Lowell, and Joelle E.K. Laszlo.

U.S. persons traveling to Iran for business can now take heart, because they, as well as most laptops and smart phones, may do so without the need for a license. A recent amendment to the wordily-named “General License with Respect to Certain Services, Software, and Hardware Incident to Personal Communications” (formerly “General License D,” now “General License D-1”) permits the export and reexport of a surprisingly broad array of hardware and software to Iran. But even though business travelers to Iran may bring many high-tech devices, they are still advised to exercise great care in planning what they will do in the country.

Whether on purpose or, as some have speculated, by accident, General License D only permitted the export and reexport of specified hardware and software to recipients in Iran, which meant that it did not allow travelers to the country to bring that same hardware and software with them. General License D-1 is a game changer in this regard, permitting individuals traveling from the United States to carry specified hardware and software to Iran, and to bring back items carried out of the U.S. The list of hardware and software authorized for export or reexport under General License D-1, if not actually longer than the list associated with General License D, is more comprehensible. Importantly, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) has clarified that any item on that list, which comprises the Annex to General License D-1, is presumptively “incident to personal communications,” meaning that it may be exported or reexported to Iran under the authority of the License, even if it will not only be used for personal communications. Hence, laptops and smart phones carried to Iran chiefly for business purposes (in addition to the occasional Facebook status update or Skype session with the fam) fall within the License’s scope, as long as they meet the applicable technical criteria in the Annex. Mobile apps and fee-based desktop publishing and productivity software, as long as designated EAR99 or classified under Export Control Classification Number 5D992.c, may also be exported or reexported under the General License.

To be sure, business travelers are not quite the intended beneficiaries of the expanded authorizations under General License D-1. Rather, the new License and its predecessor are the continuation of an effort started by the U.S. Government in 2010 to facilitate the access to and use of personal communications technologies by citizens in some of the most heavily-embargoed countries. Thus, even though travel to Iran from the United States is not prohibited, business travelers should not view General License D-1 as an invitation to pack their bags. U.S. sanctions still greatly limit the ability of U.S. persons to participate in transactions with or provide services to Iran. Business travelers seeking to avoid a forced vacation (or OFAC penalties) are advised to obtain guidance on what they can and cannot do before departing for Iran.

Crisis in the Crimea: Sanctions Update

This post was written by Leigh T. Hansson, David Myers, Siân C. Fellows, Carlos A. Valdivia, Alexandra Allan, Sarah Rogers, Alexandra Gordon.

Tensions continue to mount between the Russian and Ukrainian governments in the wake of a controversial referendum that threatens to expand the borders of the Russian Federation. The results of that Crimean plebiscite show that an estimated 97 percent of voters favor the Russian annexation of Crimea, but the peninsula’s ethnic Tartars boycotted the referendum. Whatever the outcome, the consequences of the vote reach well beyond the Black Sea, and the international community has coordinated sanctions against Russia.

U.S. Sanctions Against Russian Officials

As part of those efforts, President Obama yesterday issued a second Executive Order that expands the scope of sanctions against Russia as first outlined in March 6, 2014, and targets Russian officials by name. The latest Executive Order freezes assets and imposes visa bans on the following persons:

Persons that the Secretary of the Treasury (in consultation with the Secretary of State) determines:

  • To be a Russian government official
  • To operate in Russia’s “arms or related materiel sector"
  • To be owned or controlled by senior Russian officials or a person whose assets have been blocked under the order
  • To have materially assisted or supported a senior Russian official or a person whose assets have been blocked under the order.

Certain Russian officials (see Annex A of this PDF):

  • Yelena Mizulina [State Duma Deputy, born December 9, 1954] 
  • Leonid Slutsky [State Duma Deputy, born January 4, 1968]
  • Andrei Klishas [Chairman of the Russian Federation Council Committee on Constitutional Law, Judicial and Legal Affairs and the Development of Civil Society, born November 9, 1972]
  • Valentina Ivanovna Matviyenko [Federation Council Speaker, born April 7, 1949]
  • Dmitry Olegovich Rogozin [Deputy Prime Minister of the Russian Federation, born December 21, 1963]
  • Vladislav Yurievich Surkov [Presidential Aide to the President of the Russian Federation, born September 21, 1964]
  • Sergey Glazyev [Presidential Advisor to the President of the Russian Federation, born January 1, 1961]

The Executive Orders also prohibit donations of food, clothing, and medicine made to any person whose assets are frozen under these orders. The sanctions became effective as of 12:01 a.m., March 17, 2014.

Relatedly, the U.S. Department of the Treasury designated four individuals “involved in violating Ukrainian sovereignty.” Those four individuals are:

  • Sergey Valeryevich Aksyonov [Crimea-based separatist who claims to be Prime Minister of Crimea, born November 26, 1972]
  • Vladimir Andreyevich Konstantinov [Speaker of the Crimean Parliament, born November 19, 1956]
  • Viktor Medvedchuk [Leader of Ukrainian Choice, born August 7, 1954]
  • Viktor Fedorovych Yanukovych [Former President of Ukraine, born July 9, 1950]

These individuals are being designated for their role in actions or policies that undermine democracy in Ukraine. In the meantime, the United States continues to seek a diplomatic solution.

EU Sanctions Against Russian & Crimean Officials

The EU, like the United States, continues to seek a diplomatic solution. Consistent with the EU Heads of State of Government statement of March 6, however, the Council of the European Union recently targeted 21 persons with a travel ban and a freeze on their assets within the EU. The measures came into force yesterday. They are aimed at underlining the EU’s resolve to protect the territorial integrity, sovereignty and independence of Ukraine against those who would seek to undermine it. Four persons are common to both the U.S. and the EU lists, namely Andrei Klishas, Leonid Slutski, Sergey Valeryevich Aksyonov, and Vladimir Andreevich Konstantinov. The remaining 17 persons are:

  • Rustam Ilmirovich Temirgaliev [Deputy Chairman of the Council of Ministers of Crimea, born August 15, 1976]
  • Deniz Valentinovich Berezovskiy [Commander of the Ukrainian Navy, born July 15, 1974
  • Aleksei Mikhailovich Chaliy [“Mayor of Sevastopol”, born June 13, 1961]
  • Pyotr Anatoliyovych Zima [Head of the Crimean Security Service (SBU), date of birth not supplied]
  • Yuriy Zherebtsov [Counsellor of the Speaker of the Verkhovna Rada of Crimea, date of birth not supplied]
  • Sergey Pavlovych Tsekov [Vice Speaker of the Verkhovna Rada of Crimea, born March 28, 1953]
  • Viktor Alekseevich Ozerov [Chairman of the Security and Defense Committee of the Federation Council of the Russian Federation, born January 5, 1958]
  • Vladimir Michailovich Dzhabarov [First Deputy-Chairman of the International Affairs Committee of the Federation Council of the Russian Federation, born September 29, 1952
  • Nikolai Ivanovich Ryzhkov [Member of the Committee for federal issues, regional politics and the North of the Federation Council of the Russian Federation, born September 28, 1929]
  • Evgeni Viktorovich Bushmin [Deputy Speaker of the Federation Council of the Russian Federation, born October 4, 1958]
  • Aleksandr Borisovich Totoonov [Member of the Committee on culture, science and information of the Federation Council of the Russian Federation, born March 3, 1957]
  • Oleg Evgenevich Panteleev [First Deputy Chairman of the Committee on Parliamentary Issues, born July 21, 1952]
  • Sergei Mikhailovich Mironov [Member of the Council of the State Duma; Leader of Fair Russia faction in the Duma of the Russian Federation, born February 14, 1953]
  • Sergei Vladimirovich Zheleznyak [Deputy Speaker of the State Duma of the Russian Federation, born July 30, 1970]
  • Aleksandr Viktorovich Vitko [Commander of the Black Sea Fleet, Vice-Admiral, born September 13, 1961]
  • Anatoliy Alekseevich Sidorov [Commander, Russia’s Western Military District, units of which are deployed in Crimea, date of birth not supplied]
  • Aleksandr Galkin [Russia’s Southern Military District, forces of which are in Crimea]

At a press conference yesterday, asked whether the EU had deployed “softer” measures than the United States, High Representative of the Union for Foreign Affairs & Security Policy/Vice-President of the European Commission, Baroness Ashton, replied that it was a question of what was appropriate for the EU. The High Representative was not prepared to be drawn on whether the EU would move to the third stage of its escalating measures, were Russia to annex Crimea. She expressed the hope that Russia would act in a manner conducive to de-escalating the crisis.

Yet there may be little hope of de-escalation for the time being. Even as we push these words to publication, we are receiving word that Russian President Vladimir Putin has signed a decree recognizing Crimea “as a sovereign and independent state,” effective immediately. We can only speculate as to how the West may react, but we can expect a reaction.


Crisis in the Crimea: Are sanctions against Russia imminent?

This post was written by Leigh T. Hansson, David Myers, and Carlos A. Valdivia.

Speaking on Sunday’s talk-show circuit, Secretary of State John Kerry condemned Russia’s military intervention in the Crimea, accusing the Kremlin of invading the Ukraine and violating the UN Charter.  The condemnation echoes calls from Capitol Hill to impose immediate sanctions against Russia, but Putin will likely persist despite such threats.  In the past, Russia ignored international opprobrium when it invaded Georgia in 2008.  And somewhat like the Georgian case, where Moscow had established a military presence, Russia possesses a significant investment in the Crimean peninsula in the form of a strategically valuable naval base.  Given this, Secretary Kerry’s remark that the international community is considering “all of the options,” carries a degree of imminence and inevitability.  Of those options that are immediately available, the warning of Russia’s possible economic isolation, asset freezes, and visa bans have us wondering what shape such sanctions may take.

If sanctions are implemented, they may include asset freezes and visa bans targeting some Russian officials.  In a recent letter to President Obama, members of the U.S. Senate’s Foreign Relations Committee proposed “targeted sanctions and asset recovery targeting corruption.”  This may take the form of asset freezes and visa bans not unlike those implemented by the European Union and the United States, following the death of Sergei Magnitsky.  Those sanctions targeted Russian officials connected with Magnitsky’s death, who had alleged that Russian officials carried out large-scale fraud, theft, and human rights violations.  It is unclear at this stage, however, whom precisely the sanctions might target.  Trade sanctions may also seek to limit Russian banks’ access to the international financial system.

U.S. threats of sanctions may amount to more than mere chest-pounding.  When Russia invaded Georgia in 2008, the international community raised the possibility of implementing sanctions against Moscow.  The threats never materialized into action—though some conspiracy theories cite U.S. involvement in the conflict as the reason why U.S. or European sanctions were not imposed – yet another way that this conflict differs from the Georgian invasion.

Nevertheless, recent developments indicate that inaction may be disfavored in this instance.  The EU may yet join the United States in issuing sanctions against Russia.  In a statement released today, the Council of the European Union noted that it would consider suspending “talks with Russia on visa matters” and “further targeted measures.” The EU has already agreed to impose asset freezes and visa bans on Ukrainian officials responsible for “violence and use of excessive force.”


We will monitor the U.S. and EU response as it continues to develop, with an eye toward those economic sanctions that may impact trade relations with Russia.  The Russian stock market has already suffered a significant loss today and more economic consequences may follow.  For further reading, you can find Secretary Kerry’s statement on the matter here.  Others may be interested in how Russia’s Ukrainian intervention squares with Putin’s “Plea for Caution” and related commentary.

Smoke with No Fire: Despite Agreement in Geneva, U.S. Sanctions Continue To Prohibit Most Iran Transactions

This post was written by Michael A. Grant, Michael J. Lowell and Leigh T. Hansson.

On November 23, 2013, the White House issued a Press Release (“the Announcement”)  outlining the first of a two-step negotiation process between Iran and the United States, the United Kingdom, Germany, France, Russia, and China (the “P5+1”).  The Announcement calls for the P5+1 countries to provide limited sanctions relief to Iran in exchange for Iran’s commitment to reduce its enriched uranium efforts. Persons and entities subject to the jurisdiction of the United States will experience very little impact from the limited sanction relief offered in the Agreement.  The U.S.’s comprehensive sanctions program remains in full force and the U.S. government is committed to enforcing sanctions violations.  

The Announcement establishes a six-month time frame during which the P5+1 countries and Iran will continue to negotiate in order to establish a comprehensive solution to address Iran’s nuclear development.  During these six months, the U.S.’s comprehensive sanctions regime will remain in place, with the exception of a few elements carved out as described in the Announcement.  Each government of the P5+1 will be responsible for promulgating country-specific regulations or rules adopting the policies outlined in the Announcement, and persons subject to the jurisdiction of the U.S. would be wise to wait for clarifying guidance in the form of Executive Orders or General Licenses before engaging in otherwise prohibited conduct. 

The P5+1 have agreed to exempt the following activities from sanctions during the six-month period in order to keep Iran an active participant in the negotiations:

  1. No New Sanctions for Six Months.  Provided Iran meets its obligations during the six-month period, the P5+1 will not impose additional nuclear sanctions on Iran, if permissible.  This clause is subject to challenge by the United States as Congress contains the authority to issue legislation directly sanctioning Iran.
  2. Suspension of Targeted Sanctions.  The Agreement calls for a suspension of recently enacted U.S. sanctions targeting the following sectors of Iran economy: gold and precious metals, automotive, and Iran’s petrochemical exports.  Persons will need to wait for specific guidance from the U.S. government prior to engaging in any transaction with these otherwise blocked sectors of Iran’s economy. 
  3. Safety of Iranian Aircraft.  Grant licenses for transactions related to the inspection and repair within Iran of designated Iranian airlines.  U.S. persons will need to wait for specific authorization from the U.S. government prior to engaging in transactions in Iran related to Iranian airlines. 
  4. International Purchases of Iranian Oil.  The P5+1 countries will allow the international community to continue purchasing Iranian oil at its current level without requiring a further global reduction in Iranian oil.  This authorization will have no impact on U.S. persons as they remain prohibited from dealing in Iranian oil.       
  5. Unblocking of Iranian Assets for Educational Purposes.  The P5+1 countries will authorize the unblocking of $400 million of Iranian assets so the funds can be transferred to recognized educational institutions in third countries to offset the educational costs of Iranian students.
  6. Humanitarian Activities.  The Agreement calls for the P5+1 countries to facilitate humanitarian activities with Iran.  This element of the Agreement is likely to have little impact on U.S. persons as the U.S. government authorizes exports of medicine, medical devices, food and agricultural products to Iran.  However, the Agreement does reference the authorization to make payments for medical expenses incurred by Iranians abroad.  Such authorization could substantially impact insurance companies or other service providers that extend insurance services to Iranian nationals.  

In order to earn the reductions in sanctions cited above, Iran has committed to substantially modify its uranium enrichment and to make available for inspection its uranium enrichment.  Iran’s commitments include:

  • Stop all uranium enrichment above 5 percent
  • Dilute or convert uranium enriched above 5 percent
    • Stop future enrichment activities by:
    • Not installing new centrifuges
    • Leaving inoperable certain centrifuges at Natanz and Fordow
    • Limiting centrifuge production to replacement of damaged machines
    • Not constructing new enrichment facilities
  • Not increasing its stockpile of 3.5 percent enriched uranium
  • Authorize access by IAEA:
    • Natanz and Fordow
    • Centrifuge facilities
    • Centrifuge component production and storage facilities
    • Uranium mines and mills
  • Ceasing activities at Arak reactor and Halting progress on plutonium
    • Provide design information about the Arak reactor
    • Provide inspector access to Arak
    • Provide Arak safeguard protocol

Reed Smith is continuing to monitor this situation closely. 

It's 2013: Do You Know Where Your TSRA License Is?

This post was written by Leigh T. Hansson, Michael J. Lowell, and Joelle E.K. Laszlo.

When your work involves export controls, it’s good to remember that reform – especially in the form of decontrol – seldom has an immediate impact. It’s been just over a year since the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) lifted its restrictions on the export and re-export of certain medicines and medical devices to Iran, and just over two years since OFAC lifted corresponding controls on the export and re-export of most foods to Iran and Sudan. Presumably, both of these changes freed up resources within OFAC’s Licensing Division to enable the more expeditious review of applications filed under the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”). It’s impossible to know, however, since OFAC has not sent a single TSRA Quarterly Report to Congress for a month falling in the 2013 calendar year. Absent these reports or any other relevant guidance, those seeking TSRA licenses should continue to expect extended wait times.

The TSRA was enacted in October 2000 to replace a series of unilateral bans on the export and re-export of agricultural and medical products from the United States to embargoed countries, notably Cuba, Iran, and Sudan. Under the new scheme, starting in July 2001, prospective exporters of these goods could apply to OFAC for one-year specific licenses. In the first three months of TSRA licensing, OFAC received 153 applications, and posted a remarkable average license approval time of just 13 business days. That’s a far cry from the 100-business-day average license approval time in the most recent TSRA Report to Congress, which covered the period from October to December 2012. And earlier in 2012, the average processing time for a TSRA license was 108 business days.

Despite OFAC’s decontrol measures over the past two years, companies seeking to take advantage of the TSRA, particularly prospective exporters of medical devices, may not see a marked difference in license processing times, at least in the near future. To be fair, OFAC’s 2011 relaxation of controls on food exports and re-exports immediately resolved 69 pending license cases, certainly freeing up significant OFAC resources for other matters. But OFAC’s 2012 relaxation of controls on medicine and medical device exports and re-exports to Iran only closed six cases. Indeed, fewer than 7 percent of the TSRA license applications OFAC received in calendar year 2012 were to export medicines to Iran. Conversely, more than 75 percent of the TSRA license applications OFAC received that year involved medical device exports.

For medical device manufacturers, patience – and compliance – is the only option. OFAC’s most recent enforcement action against a medical device manufacturer that failed to comply with export licensing requirements resulted in a $404,100 settlement over alleged exports whose value was only half that amount. We’ll continue to watch for and report on developments in this area, including the publication of OFAC’s overdue TSRA Quarterly Reports to Congress. But until something changes – to paraphrase the old saying – apply early and often for your necessary TSRA licenses.

Foreign Investment in the United States: Executive Order to Divest Foreign Investors Withstands Judicial Review

This post was written by Bethany Brown, Michael J. Lowell, Leigh T. Hansson, and Gregory S. Jacobs.

On October 10, 2013, the U.S. District Court for the District of Columbia issued an amended ruling dismissing Ralls Corporation’s (“Ralls”) challenge to a presidential order requiring divestiture of its interest in four companies engaged in developing wind farms near a Naval base in Oregon. After the deal concluded, Ralls – a Delaware corporation privately owned by two Chinese nationals – submitted the deal to the Committee on Foreign Investment in the United States (“CFIUS”) for review of the transaction’s national security implications. Following this review by CFIUS, President Obama ordered divestiture of Ralls’ acquisition of the membership interests in the four companies, citing national security concerns posed by the transaction.

Ralls challenged the divestment order on several grounds, including under the due process clause of the Fifth Amendment. In its decision on October 10, the District Court dismissed the due process claim, holding, first, that Ralls had not alleged that it was deprived of a protected interest and, second, that Ralls had received sufficient process prior to the divestment order.

The court found that Ralls could not predicate a due process claim on deprivation of property rights that it had acquired because Ralls had forgone the voluntary pre-acquisition CFIUS review process provided by statute. Additionally, the court found that Ralls had received sufficient process because it was given opportunities: to provide CFIUS with the reasons that the acquisition did not pose risks to national security, to meet with CFIUS representatives, and to respond to questions posed by CFIUS. Furthermore, the court was unconvinced by Ralls’ argument that the president must disclose specific reasons for his finding that the transaction posed risks to national security, noting that any property interest Ralls may have had in the companies was “relatively weak in the face of the strong governmental interest in protecting national security.” In dismissing Ralls’ due process claims, the court emphasized the president’s near-absolute, discretionary authority when carrying out the mandate of the CFIUS statute. Because the court had previously dismissed Ralls’ other claims, this decision resulted in dismissal of Ralls’ suit.

This decision limits the judicial remedies available to businesses engaged in cross-border investment in the United States that fail to voluntarily submit transactions for pre-acquisition CFIUS review. Like CFIUS’ review of the Smithfield Foods-Shuangui International Holdings transaction discussed in our blog post earlier this month, this decision highlights the significant potential benefits of a proactive approach to CFIUS for foreign investors acquiring interests in the United States.

The decision is Ralls Corp. v. Comm. on Foreign Inv. in the U.S., No. 12-1513 (D.D.C. Oct. 10, 2013), available here.

Foreign Investment in the United States: Pork, National Security, and the CFIUS Tie that Binds

This post was written by Bethany Brown, Michael J. Lowell, and Leigh T. Hansson.

What does pork have to do with national security? Companies contemplating cross-border investment in the United States should be asking themselves this question in the aftermath of recent action by the Committee on Foreign Investment in the United States (“CFIUS”). Last month, CFIUS completed its review of China’s Shuangui International Holdings Limited’s acquisition of Smithfield Foods. Smithfield, headquartered in Smithfield, Virginia, is the world’s largest pork producer and processor, employing approximately 46,000 people and reporting more than $13 billion in global sales last year. Although CFIUS ultimately cleared the acquisition, the Smithfield review is a cautionary tale for any company involved in investing across United States borders.

CFIUS is a federal interagency committee comprised of the U.S. Departments of Treasury, Justice, Homeland Security, Commerce, Defense, State, and Energy, as well as the Office of the U.S. Trade Representative and the Office of Science & Technology Policy. It is tasked with reviewing the national security implications of transactions that may result in foreign ownership of a U.S. entity. The review process is designed primarily as a voluntary exercise initiated by companies involved in investment transactions. However, CFIUS also has authority to initiate reviews on its own, and may do so even after a deal has been concluded. When it finds that a particular transaction poses a national security risk to the United States, CFIUS is empowered to order mitigation measures or complete divestiture. This means that even months after a deal has concluded, CFIUS has the power to unwind an acquisition.

CFIUS has authority to order mitigation measures when foreign investments raise national security concerns. However, the legislation that created CFIUS does not define “national security,” except to construe the phrase to include issues relating to homeland security and to list factors that CFIUS may consider when conducting reviews. These include, among others, domestic production needed for projected national defense requirements, potential effects on the nation’s capacity to meet the requirements of national security, and long-term projections of domestic requirements for critical resources and materials. From 2009 through 2011, CFIUS reviewed 269 foreign investment transactions. Twenty-six percent of these transactions involved acquisitions by investors from the United Kingdom; investment from Canada and France accounted for an additional 10 percent each, and investment from China accounted for 7 percent of the covered transactions. Of these 269 transactions, CFIUS ordered mitigation measures in 22 cases. These cases where mitigation measures were necessary involved businesses engaged in software development, computer programming, computer and electronic manufacturing, electrical equipment and component manufacturing, aerospace financing, and finance.

Because CFIUS is statutorily prohibited from publicly releasing information about individual reviews, the specific factors that sway its analysis in any given situation are generally unknown. However, the Smithfield review may indicate that CFIUS’ focus is broadening to include industries not traditionally thought of as affecting national security. Foreign investors acquiring interests in the United States should explore the pros and cons of submitting future deals to CFIUS review. Since CFIUS’ recent action suggests that pork production may implicate national security, the scope of national security concerns being reviewed by CFIUS may be broader than conventional wisdom would suggest.

GCC-Singaporean Trade Agreement Becomes Effective During U.S. Sanctions Exemption

This post was written by Leigh T. HanssonGautam Bhattacharyya, and Carlos Aksel Valdivia.

In June 2013, Secretary of State John Kerry issued a statement announcing that Singaporean financial institutions would be temporarily exempt from U.S. sanctions under Section 1245 of the National Defense Authorization Act. Singapore, and eight other countries, qualified for the exceptions because they reduced their volume of crude oil purchases from Iran. In September, a free trade agreement (“FTA”) between the Gulf Cooperation Council (“GCC”) and Singapore became effective and immediately granted zero-tariff treatment to all GCC imports. The FTA’s entry into force will likely increase trade activity in a number of sectors, including the petrochemical industry. So what does this mean for the enforcement of U.S. sanctions in Singapore?

Click here to read the issued Client Alert.

Manhattan Office Building Would Be the Largest Terrorist-Related Forfeiture

This post was written by Michael A. Grant, Michael J. Lowell, and Leigh T. Hansson

As members of the United Nations prepared to descend upon Manhattan’s East Side, the U.S. government was moving to seize a building only 13 blocks away. On Monday, September 16, 2013, following a civil complaint originally filed in 2008 by the Manhattan U.S. Attorney’s Office, the U.S. District Court for the Southern District of New York cleared a path for the U.S. government to seize a Manhattan office building located at 650 Fifth Ave., New York, in what U.S. Attorney Preet Bharara called the “largest-ever terrorism-related forfeiture.

The building, owned by the 650 Fifth Avenue Company (“650 Fifth”), is a partnership between the Alavi Foundation (“Alavi”), a New York not-for-profit corporation, and Assa Company, Limited (“Assa”), a corporation domiciled in the Channel Islands with a legal entity incorporated in New York.

U.S. sanctions on Iran require U.S. persons, including U.S. financial institutions, to block all property and interest in property of the government of Iran, including entities owned or controlled by the government of Iran. The court found that Assa is a front company for Bank Melli, an Iranian financial institution long ago determined by the U.S. government to be owned and controlled by the government of Iran, and on the basis of that finding, authorized the U.S. government to seize the property. Additionally, the court authorized the U.S. government to seize several bank accounts held in the name of 650 Fifth. There has been no indication whether the Office of Foreign Assets Control (“OFAC”) will pursue enforcement against other U.S. companies that may have engaged in transactions with 650 Fifth.

When considered in conjunction with OFAC’s recent enforcement and $750,000 fine against a Turkish trading company for processing funds through U.S. financial institutions for the benefit of the government of Iran, it is clear that the U.S. government intends to continue vigorous enforcement of the OFAC sanctions in the financial services industry in the United States and abroad.

U.S. Export Control Reform: Permanent Import Controls and the DOJ

This post was written by Leigh T. Hansson and Carlos A. Valdivia.

As part of the U.S. Government’s Export Control Reform Initiative, the Justice Department’s U.S. Munitions Import List (“USMIL”) has been “delinked” from the State Department’s U.S. Munitions List (“USML”). On April 22, 2013, the DOJ’s Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”) issued a final rule that distinguishes defense articles and services controlled by the Attorney General from those controlled by the Secretary of State. Before this rule, the USMIL adopted most of the items controlled under the ITAR. This means that items controlled by the USMIL will not be affected by the transfer of items from the USML to the Commerce Control List (“CCL”).

The ATF rule was effective on publication, and amends the USMIL to do the following:

  1. Removes the language adopting the State Department’s USML;
  2. Clarifies that the Attorney General has the authority (under the Arms Export Control Act or “AECA”) to designate defense articles and defense services for inclusion on the USML for purposes of permanent import controls, regardless of whether the State Department controls them for export or temporary import; and
  3. Clarifies that items controlled by the Attorney General under the AECA authority appear on the USMIL, and that the USMIL is a subset of the USML.

This rule does not change the content of the USMIL, and any revisions to the USMIL will be addressed by the Attorney General in a separate rulemaking.

Companies seeking to permanently import defense articles and services should therefore be mindful that the move of items from the USML to the CCL may nevertheless be subject to USMIL controls. The USMIL currently controls firearms, artillery, ammunition, vessels of war, and aircraft, just to name a few broad areas of regulation. The reforms to aircraft and gas turbine engines become effective on October 15, 2013, so it raises a question about the degree to which these items are still governed by the USMIL. The same issue applies to vessels of war, tanks, auxiliary military equipment, and submersibles, which will move from the USML to the CCL on January 6, 2014.

President Obama Enacts New Iran Sanctions

This post was written by Leigh T. Hansson and Carlos Aksel Valdivia.

On January 2, 2013, President Obama signed into law an act that imposes new sanctions on Iran. The new sanctions target certain entities and transactions, but largely focus on the energy, shipping, and shipbuilding sectors of the Iranian economy. Several of these provisions will become effective on July 1, 2013.

Please click here to read the issued Client Alert.

Growing Trend Among States Threatens Debarment for Contractors with Iran Ties

This post was written by Gunjan Talati, Joelle E.K. Laszlo and Michael A. Grant.

Guilt by association seems to be a growing trend in government contracts. Under this trend, states are starting to use their contracting authority to promote U.S. foreign policy and impose mandatory debarment for policy violators. In the latest example, companies doing business with Michigan must now be sure to stay away from business dealings with Iran, or they could find themselves debarred from state contracts for three years.

Please click here to read the issued Client Alert.

Foreign Subsidiaries of U.S. Companies Now Prohibited from Engaging in Transactions with Iran

This post was written by Michael A. Grant.

In August of this year, President Obama signed the Iran Threat Reduction and Syria Human Rights Act of 2012. This law required presidential action to implement certain restrictions, and today, on October 9, 2012, President Obama issued a new Executive Order (EO): “AUTHORIZING THE IMPLEMENTATION OF CERTAIN SANCTIONS SET FORTH IN THE IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT OF 2012 AND ADDITIONAL SANCTIONS WITH RESPECT TO IRAN.”

Effective immediately, Section 4 of the EO exposes U.S. parent companies to liability for transactions by non-U.S. companies that they own or control. Non-U.S. companies that are owned or controlled by a U.S. Person are now prohibited from engaging in transaction with Iran, as if that non-U.S. company was itself, directly subject to U.S. jurisdiction. In the event that a foreign owned entity engages in a prohibited transaction with Iran, the U.S. parent company, not the foreign owned entity, is subject to penalty.

The EO does contain a wind down period, enabling U.S. Persons to divest or terminate their Iranian business by February 6, 2013. This date is consistent with the timing that was originally published in the Iran Treat Reductions Act. In anticipation of substantial interest, the Office of Foreign Assets Control has already released a series of FAQ’s discussing Section 4, which are available here.

The SEC's New Rules on Conflict Minerals

This post was written by Leigh Hansson, Jeffrey Orenstein, and Carlos Aksel Valdivia.

What do the SEC and Leonardo DiCaprio have in common? Both have brought attention to the area of “conflict resources” in Africa. But whereas Leo has acted in a movie about so-called “blood diamonds,” the SEC is turning the spotlight on “conflict minerals.” Regrettably, the public will not be enjoying an SEC-produced summer blockbuster regarding the matter, but instead will face new rules implementing the Dodd-Frank reforms.

Please click here to read the issued Client Alert.

President Obama Follows CFIUS Recommendation, Orders Divestiture on Ralls Wind Farm Deal

This post was written by Gregory S. Jacobs.

As many expected, today President Obama issued an Order exercising his statutory authority to block foreign investment in the United States that he finds to impair national security – in this case, the acquisition of wind farms in Oregon by Ralls Corporation, a firm owned by Chinese nationals. As previously reported, following CFIUS’ interim measures to prevent Ralls from moving forward with the investment (as CFIUS claimed, to maintain the status quo), Ralls filed suit in federal court. Though Ralls and the Committee reached an agreement that effectively suspended the court challenge, the relief for the Chinese investors was short-lived: the President’s Order not only requires divestiture and removal of all equipment, it also prohibits the Ralls owners and their representatives from physically entering the site.

For Ralls, the options moving forward appear limited. By statute, the President’s decisions are not subject to judicial review – any attempts by Ralls to challenge that provision would like run directly into the President’s inherent authority over national security. Perhaps more likely, Ralls may pursue monetary relief under the Constitution’s Takings Clause, under the theory that its private property (investment in the wind farms) has been seized and that just compensation is owed.

For the CFIUS process generally, this high-profile denial of seemingly innocuous investment may make Chinese purchasers more skittish about the uncertainties of U.S. investment. Whether it will ultimately curtail investment remains to be seen. But it is likely, especially in the short term, that nearly all purchases of U.S. businesses that include a real estate component will be notified to CFIUS. Given the experience of Ralls, and Firstgold before it, why would the parties take the chance?

Presidential Dilemma on Ralls CFIUS Case

This post was written by Gregory S. Jacobs.

In a closely-watched case that will have important implications for future Chinese investment in the U.S. renewable energy market, President Obama is expected to rule in the next day or so on whether Ralls Corporation can go ahead with the acquisition of a wind farm that happens to be located near restricted airspace used for training exercises conducted by the U.S. Navy.

Ralls is privately owned by two Chinese nationals. In March 2012, Ralls was the latest purchaser of four wind farm projects formed by an Oregon energy company. The wind farms are expected to make up less than 0.4% of the regional power grid’s total generating capacity, and the Federal Aviation Administration had already approved each of the twenty planned turbines at the proposed location. However, CFIUS reviewed the transaction (after the Department of Defense learned about it in Wind Power Monthly), first at its own initiative, and then on the basis of a voluntary notice filed by Ralls. When CFIUS took interim action to block the deal pending a determination from President Obama, Ralls filed suit in federal court, arguing that the Committee had exceeded its power. The parties then reached agreement under which Ralls could move forward with some limited development of the project, pending the President’s decision.

With the September 28 deadline looming, President Obama faces potential negative consequences with either approving or rejecting the deal. If he follows CFIUS’ conclusion that the transaction involves national security concerns that cannot be mitigated, he may feed recent criticism that his administration has been protectionist and too closed in trade with China. If he elects to disregard the Committee’s conclusions and approve the deal, he will almost certainly be criticized for ignoring the advice of the very national security experts tasked with evaluating these transactions. Complicating the issue is that, at least publicly, there does not appear to be significant evidence of a national security concern with this transaction. This dilemma may well lead the administration, through CFIUS, to seek a compromise with Ralls to mitigate the perceived security issues, while still granting the parties the economic benefits of the deal. 

Reed Smith’s John Zhang has commented on this issue and the concerns it poses for Chinese investors in the Chinese publication, Caixin.

Newest Iran Sanction Legislation Awaits President Obama's Signature

This post was written by Michael A. Grant.

Late last night the U.S. Senate voted to approve the Iran Threat Reduction and Syria Human Rights Act of 2012, a vote which the House has taken and approved earlier in the day. The Act now awaits the signature of President Obama. As noted in our earlier coverage, this latest round of sanctions further targets the petroleum and shipping industries while imposing new and significant restrictions with Iran.

One of the most significant new restrictions is Section 218 “Liability of parent companies for violations of sanctions by foreign subsidiaries.” Within 60 days of the President’s signature, foreign subsidiaries of U.S. companies will be prohibited from conducting transactions with Iran, as if they were themselves U.S. companies. The penalties for violations by foreign subsidiaries will be imposed not on the foreign subsidiary, but on the U.S. Parent company.

Now is the time for U.S. companies to understand the full scope of their foreign subsidiaries’ activities in Iran. Section 218 does provide an exemption from penalties if the U.S. Person, within 180 days of enactment, divests or terminates their businesses with the foreign entity.

Sanctions Against Iran Increased by United States

This post was written by Matthew J. Thomas, Charles A. Brown and David Myers.

Yesterday, Treasury’s Office of Foreign Assets Control (OFAC) made dozens of significant additions to its list if Iran-linked sanctioned parties, adding new energy, finance and shipping companies, as well as many new individuals and vessels. An update from our shipping, energy and commodities lawyers explains what is behind these latest moves, and what they mean for international business.

For additional information, please click here to read the issued Client Alert.

U.S. Government's $619 Million Settlement With ING Bank and Increased Sanctions on Iran Present New Challenges for Non-U.S. Banks

This post was written by Matthew J. Thomas, Leigh T. Hansson, Michael J. Lowell and Leonard A. Bernstein.

ING Bank N.V., a Dutch financial institution, has agreed to pay $619 million in a settlement with the Treasury Department’s Office of Foreign Assets Control (OFAC), the Department of Justice (DOJ) and the Manhattan District Attorney. The settlement is the result of OFAC’s investigation into an alleged ING Bank conspiracy to violate state and federal laws by illegally moving billions of dollars through the U.S. financial system on behalf of persons and entities subject to U.S. sanctions. The enforcement actions against ING come against a backdrop of increasing enforcement and aggressive new extraterritorial measures aimed at third-country banks that deal with U.S. sanctions targets.

For a more detailed analysis, please click here to read the issued Client Alert.

U.S. Government Eases Sanctions on Burma: Authorizes Financial Services and New Investment

This post was written by Michael J. Lowell and Michael A. Grant.

 On July 11, 2012, the Office of Foreign Assets Control (“OFAC”) implemented two general licenses authorizing the exportation of financial services and new investment in Burma (Myanmar). These general licenses follow earlier announcements that the U.S. government would take steps to ease sanctions on Burma, and follows the lead of Canada and the European Union. This should open the door for the participation of U.S. companies and investment funds in the development of Burma’s vast natural resources.

A. Background

Since 1997, the United States has prohibited new investment in Burma by U.S. persons, and U.S. persons’ facilitation of new investment in Burma by foreign persons. These sanctions were expanded in 2003 with the Burmese Freedom and Democracy Act, in 2007 and 2008 with several Executive Orders, and with passage of the Tom Lantos Block Burmese JADE Act of 2008. In response to historic reforms in Burma over the past year and in the wake of Secretary Clinton’s visit to that country, the U.S. government and many Western allies have eased their sanctions.

B. Financial Services

In particular, OFAC issued General License 16 authorizing the exportation or reexportation of financial services to Burma. The Burmese Sanction Regulations broadly define the exportation or reexportation of financial services to include:

  • "The transfer of funds, directly or indirectly, from the United States or by a U.S. person, wherever located, to Burma; or
  • The provision, directly or indirectly, to persons in Burma of insurance services, investment or brokerage services (including but not limited to brokering or trading services regarding securities, debt, commodities, options or foreign exchange), banking services, money remittance services; loans, guarantees, letters of credit or other extensions of credit; or the service of selling or redeeming traveler's checks, money orders and stored value.”

These transactions are now largely authorized under the General License, although U.S. persons continue to be prohibited from exporting financial services to the Burmese Ministry of Defense; any Burmese armed group; or any Specially Designated National; or from engaging in any transaction involving a blocked account.

C. New Investment

Prior to the implementation of the General License, the U.S. government’s prohibition against new investment was targeted at the exploration of natural resources in Burma, including contracts “conferring rights to explore for, develop, extract, or refine petroleum, natural gas, or minerals in the ground in Burma; or a contract to assume control of a mining operation in Burma, acquire a forest or agricultural area for commercial use of the timber or other crops, or acquire land for the construction and operation of a hotel or factory.” 31 C.F.R. § 537.302(b). Now, subject to certain limitations and reporting requirements, General License 17 will authorize these new investments.

Limitations include continued prohibitions on new investment pursuant to an agreement with the Burmese Ministry of Defense, state or non-state armed groups (which includes the military), or entities owned by the foregoing, or any person blocked under the Burma sanctions program. Also, U.S. persons that engage in new investment in excess of $500,000 are required to file reports with the U.S. Department of State.


U.S. Company's Back-Office Support of a Foreign Affiliate's Sales in Cuba Leads to OFAC Sanctions Penalty

This post was written by Michael J. Lowell and Michael A. Grant.

On July 10, 2012, OFAC announced that Great Western Malting Co. (“Great Western”), a U.S. company, agreed to pay $1.35 million to settle apparent violations of the Cuban Assets Control Regulations. Great Western produces malt for the brewing, distilling and food markets. OFAC’s settlement announcement indicates that Great Western’s U.S.-based personnel provided back-office support for a foreign affiliate’s sales of foreign-origin barley malt to Cuba. This case is noteworthy because the liability appears to be based solely on Great Western’s facilitation of its foreign affiliates’ sales of foreign products.

This case also demonstrates the real value of OFAC’s voluntary disclosure process and the risks of discovery for violations that are often perceived as difficult to detect. OFAC imposed the $1.35 million penalty despite the fact that the goods involved were foreign-origin, the primary activity was by a foreign person, and OFAC licenses were available for this activity. In many cases, similar violations have been closed with a warning only on the basis of a voluntary disclosure. OFAC’s discovery of these violations, which would not typically be easily discovered since it is back-office support, should cause some caution in future decision-making on whether or not to file a voluntary disclosure. It should also be noted that the penalty reflects significant mitigation (total possible base penalty of $5.9 million) at least in part because of Great Western’s substantial cooperation with OFAC after discovery of the violation, including entering into a statute of limitations tolling agreement.

This enforcement action is a warning to companies operating globally with business in the United States and in U.S.-sanctioned countries – particularly U.S.-based companies whose foreign affiliates and subsidiaries conduct business in Cuba, Iran, Sudan, or Syria. Companies should consider whether they have sufficient internal controls in place to prevent inadvertent back-office support or other forms of facilitation of their related companies’ sales in sanctioned countries.

Another Foreign Bank Fined by OFAC

This post was written by Michael J. Lowell.

On the heels of the largest penalty settlement to date, OFAC has announced yet another settlement with a foreign bank relating to payments processed through U.S. financial institutions. On June 14, 2012, OFAC announced a settlement with the National Bank of Abu Dhabi (“NBAD”) for $855,000 to settle potential civil liability for 45 electronic funds transfers processed through U.S. financial institutions on behalf of its Sudan branch. According to OFAC, NBAD’s clerical staff removed or omitted Sudan-related references in payment instructions routed through U.S. banks for a total value of approximately $4.3 million.

Unlike the recent action against ING, OFAC considered the apparent violations to be “non-egregious.” OFAC’s finding likely relates to the relatively small value of the transactions and the lack of involvement of senior bank management. In the ING enforcement, OFAC alleged senior management awareness and a significant harm to U.S. sanctions programs objectives, while in the NBAD announcement, OFAC referred to the removal or omission of information by “clerical staff” and noted NBAD’s prompt and appropriate remedial action and its substantial cooperation. Most noteworthy is a consideration of these factors on the penalty assessed. In the ING enforcement, OFAC settled the matter for $619 million on a total base penalty amount of $665 million – ING paid approximately 93 percent of the base penalty. Alternatively, without the finding of egregious behavior and with substantial cooperation, NBAD paid less than 20 percent of the total base penalty.

See OFAC’s announcement here. You may find a description of the earlier enforcement actions against foreign banks here.

Proposed Rule Narrows ITAR Coverage of Personal Protective Equipment

This post was written by Michael J. Lowell.

The Directorate of Defense Trade Controls (“DDTC”) is currently accepting comments to a proposed revision to Category X of the U.S. Munitions List (“USML”) in the International Traffic in Arms Regulations (“ITAR”), which covers personal protective equipment, including body armor. The proposed rule was published June 7, 2012, in coordination with a proposed revision to the Commerce Control List of the Export Administration Regulations (“EAR’). The proposed changes will further implement the Administration’s Export Control Reform effort and seek to provide additional clarity to exporters while generally decreasing controls on many parts and components, and moving the standard cut-off for ITAR body armor from NIJ Type 3A to NIJ Type 4.

For a more detailed analysis, please click here to read the issued Client Alert.

Dutch Bank's Efforts to Avoid OFAC Sanctions Leads to $619 Million Penalty

This post was written by Michael J. Lowell and Michael A. Grant.

The U.S. Office of Foreign Assets Control (“OFAC”) and Bureau of Industry & Security (“BIS”) announced today that it has reached a settlement with ING Bank N.V. (“ING”) relating to potential liability under various U.S. sanctions against Burma (Myanmar), Cuba, Iran, Libya, and Sudan. The apparent violations date back to conduct that begin in 1994 and concern an allegedly willful plan by ING to covertly process fund transfers that benefited U.S. sanctioned countries through the U.S. financial system.

The settlement agreement outlines the allegedly deceptive behavior undertaken by ING. This conduct included payment processing manuals instructing employees to give special attention to Cuban references, which was followed by verbal instructions from ING senior management to avoid Cuba references in payment instructions. Additionally, ING allegedly provided misleading information on SWIFT payment instructions so as to avoid OFAC detection.

In addition to finding conduct intended to avoid OFAC detection, OFAC determined:

  • From 2002 through 2007, ING processed payments through financial institutions in the United States, in violation of the Cuban Sanctions, with an aggregate value of approximately US$1.655 billion
  • From 2003 through 2007, ING processed electronic funds transfers, in violation of the Burmese Sanctions, through the United States in the aggregate amount of approximately US$15 million
  • From 2004 through 2006, ING processed electronic transfers through the United States in violation of the Sudanese Sanctions, in the aggregate amount of approximately US$2 million
  • In 2004, ING processed approximately US$26,000 in transactions through the United States in violation of the Libyan Sanction
  • In 2004, ING processed letters of credit that benefited Iranian entities in violation of the Iran Transaction Regulations

In determining its penalty, OFAC noted that ING promptly undertook action to remediate its violations by conducting a global review of its practices. ING adopted a consolidated sanctioned countries policy for all ING business units, disengaged in any new business in sanctioned countries, and closed its office in Havana.

This penalty is the latest in a string of enforcement actions against European banks that have been brought by OFAC working in conjunction with the Department of Justice and the New York Country District Attorney’s Office. A discussion of the prior enforcement actions may be found here.

Investment by Foreign Agent Creates OFAC Liability for U.S. Asset Manager

This post was written by Michael J. Lowell.

On May 21, 2012, the Office of Foreign Assets Control (“OFAC”) announced the settlement of an apparent violation of the U.S. sanctions on Iran by Genesis Asset Managers, LLP (“GAM US”). GAM US agreed to remit $112,500 in order to settle potential civil liability relating to an investment in the First Persian Equity Fund (“FPEF”), by its foreign agent. Although based in the Cayman Islands, FPEF invests exclusively in Iranian securities, according to OFAC’s announcement. This case is noteworthy because the apparent violation appears to be based solely on an investment decision by the foreign agent (and subsidiary) of GAM US, pursuant to delegated authority.

According to OFAC’s announcement, GAM US is the investment manager for Genesis Emerging Markets Fund (“GEMF”), an investment fund organized under the laws of Guernsey (a British Crown dependency in the English Channel). GAM US has contractual authority to manage, invest, and reinvest GEMF’s assets under a Management Agreement. GAM US, in turn, authorizes its London-based subsidiary, Genesis Investment Management LLP (“GIM UK”), “to carry out transactions as an agent of GAM US in accordance with the investment policies and strategies adopted from time to time by GEMF.” Pursuant to this delegated authority, GIM UK purchased approximately $3 million shares in FPEF for GEMF. Therefore, the theory of liability in this settlement was based on the investment of foreign assets (GEMF’s assets) by a foreign entity (GIM UK) in a Cayman Islands company investing in Iranian securities, because the U.S. person (GAM US) had delegated its contractual authority to manage and invest GEMF’s assets without having sufficient controls in place to ensure compliance with OFAC sanctions.

Among other factors, including officer awareness of the conduct and the benefit conferred on Iran, OFAC found as an aggravating factor that “GAM US failed to exercise a minimal degree of caution or care in the conduct that led to the apparent violation,” which presumably refers to the lack of controls in the Investment Advisory Agreement between GAM US and GIM UK. Mitigating factors cited by OFAC include the substantial cooperation by GAM US in the OFAC investigation, voluntary disclosure, agreement to settle without a Prepenalty Notice, implementation of appropriate remedial actions, and the fact that GAM US may not have fully understood its OFAC obligations.
This settlement demonstrates once again the need to consider limitations and other controls in delegations of authority to non-U.S. agents, and the high expectations OFAC places on companies in the financial industry. OFAC’s announcement may be found here.

Senate Approves Revisions to the Iran Sanctions

This post was written by Leigh T. Hansson, Matthew J. Thomas, Jeffrey Orenstein & Michael A. Grant.

Just ahead of this week’s meeting in Baghdad between Tehran and other nations concerning Iran’s controversial nuclear program, the U.S. Senate passed an Iran sanctions bill by a unanimous voice vote. This bill is the Senate counterpart to the "Iran Threat Reduction Act of 2011" (H.R. 1905), which passed the House in December. The two bills will have to be reconciled before reaching President Obama’s desk for final passage. Among its many provisions, the Senate bill would impose high civil penalties on U.S. parent companies for any activities of their foreign subsidiaries that, if they had been undertaken by a U.S. person or in the United States, would violate U.S. sanctions law. The bill adopts a broad definition of "subsidiary" so that those foreign entities that are either owned or controlled by U.S. interests will be subject to the legislation.  Continue reading here.

Secretary Clinton Announces an Easing of Sanctions on Burma

This post was written by Michael J. Lowell and Michael A. Grant.

On May 17, U.S. Secretary of State Hillary Clinton announced in remarks with the foreign minister of Burma (Myanmar) that the U.S. government will be taking action to ease sanctions on Burma in the form of a new general license. A general license is similar to an exception to the sanctions and authorizes the performance of certain categories of transactions.

Currently, U.S. sanctions on Burma generally prohibit U.S. Persons from engaging in new investment, exporting financial services, and importing Burmese-origin goods into the United States, among other restrictions, including an arms embargo. Secretary Clinton stated that investment and the export of financial services will soon be authorized:

“The United States will issue a general license that will enable American businesses to invest across the economy, allow citizens access to international credit markets and dollar-based transactions.” Secretary Clinton also said that, “Our presumption is that our companies will be able to deal in every sector of the economy with any business. That is a rebuttable presumption in the event that there is a company whose reputation, whose practices, are not in keeping with our stated policies of corporate responsibility or other matters that rise to our attention. But the presumption is that our oil and gas companies, our mining companies, our financial services companies are all now free to look for investments that can be mutually beneficial to Burma and to them.”

Secretary Clinton’s announcement follows the lead of Canada and the European Union (which recently suspended their sanctions on Burma), and indicates a warming of relations with Burma evident by Secretary Clinton’s recent visit.

It is important to note that Secretary Clinton’s remarks do not have the force of law, and the Office of Foreign Assets Control (“OFAC”) has not yet issued the general license that Secretary Clinton announced. Also, there will continue to be prohibitions against transactions with Specially Designated Nationals in Burma, and other limitations will likely be on the general license. There has not yet been any announcement on the timing for implementation of this new general license.

The Secretary’s full remarks are available here.


New OFAC Guidance Promotes Internet Freedom in Iran...As Long As the Internet Is Free

This post was written by Joelle E.K. Laszlo.

What if you issued a general license and no one used it? The Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has faced such a conundrum since March 2010, when it published a final rule amending U.S. regulations on Cuba, Iran, and the Sudan to permit the license-free export of certain services and software incident to the exchange of personal communications over the Internet. But the rule did not have quite the impact that was intended – in particular, the “electronic curtain” around Iran never fell. Thus, OFAC recently issued new interpretive guidance and a policy statement on Internet freedom in Iran. While on its face this is a nice gesture, a closer look confirms that the only Internet services and software free from regulation are those free of charge; fee-based products and services essentially remain subject to the strictest controls on exports to Iran.

OFAC’s interpretive guidance on the personal communications general license for Iran includes the following “illustrative list” of free services and software that fall within the scope of the license:

  • Personal Communications (e.g., Yahoo Messenger, Google Talk, Microsoft Live, Skype (non-fee based))
  • Updates to Personal Communications Software
  • Personal Data Storage (e.g., Dropbox)
  • Browsers/Updates (e.g., Google Chrome, Firefox, Internet Explorer)
  • Plug-ins (e.g., Flashplayer, Shockwave, Java)
  • Document Readers (e.g., Acrobat Readers)
  • Free Mobile Apps Related to Personal Communications
  • RSS Feed Readers and Aggregators (e.g., Google Feed Burner)

As long as they are made publicly available at no cost to the user (and provided the user is not the Iranian government or an agent thereof), such services and their associated software may be exported to Iran from the United States or by a U.S. person, wherever located, without a specific license.

OFAC’s statement of its “favorable” licensing policy on Internet freedom in Iran similarly provides a non-exhaustive list of fee-based services and software eligible for specific licensing, including web hosting, online advertising, fee-based mobile applications, and fee-based Internet communications services. What the statement neglects to mention, however (and what commentators besides us have noticed), is that any specific license issued to provide fee-based personal communications services in Iran will not permit the U.S. service provider to accept payments made through a designated Iranian bank. Unfortunately, these are the very banks likely to be used by most Iranian citizens, who are precisely the anticipated customers of fee-based personal communications services. Thus, while OFAC’s intention may be to approve licenses to provide fee-based personal communications services in Iran, such licenses may not be so readily used.

The result under OFAC’s Iran policy is that freedom’s just another word for Internet you didn’t pay for – at least if it comes from a U.S. provider. If history is any gauge, further developments in this area will not come soon, but we (and Bobby McGee) will be watching for them.

Regulatory Round Up 11. 8.11

This post was written by Michael A. Grant.



Regulatory Round Up 10 .20. 11

This post was written by Michael A. Grant.


Regulatory Round Up 9.19.11.


Sanctions Update: Libya and Syria

We've written before on the new sanctions regimes introduced by the EU, UN and the U.S (link to past blog). This is an update on sanctions imposed against Libya and Syria. Attached to this briefing is an updated table of sanctions targets. To view the entire alert please click here.

Regulatory Round Up 8.16.11

Continue Reading...

Sanctions Targets

The last eighteen months have seen numerous new sanctions regimes introduced by the EU, UN and the U.S. Reed Smith has issued a series of Client Alerts already this year as and when new or changed sanctions regimes have been introduced. Amongst the energy and commodity trading and the shipping communities, there has naturally been a heavy focus on Iranian, Ivory Coast and Libyan sanctions. It is important to understand, however, that there are now a whole host of countries facing sanctions from the EU, UN and U.S. Whilst the sanctions position is fast moving, we thought it sensible to draw all of these together in one place.

To view the entire alert please click here.

A Route Forward: Easing Licensing Requirements Under the New STA License Exception

This post was written by Joelle E.K. Laszlo.

The Export Control Reform Initiative currently underway will transform the cumbersome U.S. export controls regime into a streamlined system featuring a single control list, a single licensing agency, a single information technology system, and a single primary enforcement coordination agency. Until that dream of a reality comes true, the Administration’s serial short- and medium- term changes will have to suffice.

The latest is the Strategic Trade Authorization (“STA”) license exception. Effective immediately, License Exception STA allows for the export, reexport, and in-country transfer of specified goods to “low risk” countries. Specifically, under 15 C.F.R. § 740.20(c)(1), licenses will not be required for exports to any of 36 countries of certain sensitive technologies that are subject to control for any of six reasons (national security, chemical or biological weapons, nuclear nonproliferation, regional stability, crime control and/or significant items). The sensitive technologies eligible for License Exception STA include submersible vehicles, radar systems, source code, and high tech cameras.

Under 15 C.F.R. § 740.20(c)(2), a second group of eight destinations is eligible for export, reexport, and transfer (in-country) of a shorter list of less-sensitive technologies. Specifically, under the this part of the STA license exception, technologies controlled only for national security reasons are eligible for export to Albania, Hong Kong, India, Israel, Malta, Singapore, South Africa, and Taiwan.

The STA license exception applies only to goods for which the Export Administration Regulations (“EAR”) already impose the obligation to receive a license before export, reexport, or transfer (in-country). The license exception is not available for items controlled for other reasons like encryption, short supply, surreptitious listening, missile technology, chemical weapons, and human rights reasons. A user of the STA license exception are required to furnish its consignee with the Export Control Classification Number (“ECCN”) of any items shipped under the exception, maintain written records of shipments, and notify the consignee that the shipment is made pursuant to the license exception. Exporters of software source code must follow separate conditions for STA license exception use that include explicitly notifying the end user, in writing, of the restrictions on further release of the software.

The STA license exception is only a first and a small step in the long reformation process to come, and it may not be among the best. Even if the license exception applies to a given shipment, compliance with its conditions will not going be easy – exporters using the exception must keep thorough records, train employees, and possibly modify business practices. Those able to manage the conditions of License Exception STA, however, will also reap its substantial benefits.

Research and drafting assistance for this post was provided by Reed Smith Summer Associate Julya Vekstein.


Regulatory Round Up 6.24.11


Same Stuff, Different Way: New ITAR Rules on Transfers to Dual and Third-Country Nationals Move U.S. Companies into Oversight Role, but Don't Lighten the Compliance Load

This post was written by Joelle E.K. Laszlo.

A relaxation of export controls is not very relaxing when all it really does is shift the majority of the compliance burden from one party to another. But it appears that that will be the result of recent amendments to the International Traffic in Arms Regulations (“ITAR”) regarding transfers of unclassified technical data and defense articles to dual and third-country nationals employed by approved end-users. Under the new rules, U.S. companies will no longer have the responsibility to collect and submit to the State Department’s Directorate of Defense Trade Controls (“DDTC”) certain biographical information about the employees of their foreign business partners, in order to ensure there will be no diversion of unclassified defense articles or controlled technical data to unauthorized countries or entities. Instead, the bulk of anti-diversion tasks will fall to the foreign business partners. Since the U.S. companies in these arrangements will remain responsible for everyone’s ITAR compliance, however, their new role may be one of strenuous oversight of their business partners’ anti-diversion measures.

Under DDTC’s current policy, a U.S. company seeking authorization under the ITAR via a Technical Assistance Agreement or a Manufacturing License Agreement for the transfer of unclassified defense articles and/or technical data to a foreign business partner has typically been required to collect and provide the nationality and country of birth of each of the business partner’s dual- and third-country national employees who will have access to the transferred defense articles, and submit this information with the associated agreement application. (A dual national is a citizen or national of the country of his employer and of another country, neither of which is the United States. A third-country national is a citizen or national of neither the United States nor the country of his employer.) The collection of employee personal data is not required if every individual who will have access to the transferred articles is a national of a NATO or European Union member country, Australia, Japan, New Zealand, or Switzerland. In order to qualify under this exemption, however, the transfer to any national of one of the named countries must take place entirely within the physical territory of the country, or the United States, and the foreign business partner that employs the national must be a signatory to the agreement under which the transfer is made, or must have executed a Non Disclosure Agreement. As noted by commenters to the new rules, the personal data collection required for any proposed transfer of defense articles that doesn’t meet the precise specifications of the exemption imposes a significant administrative burden on U.S. companies, and potentially violates foreign data privacy, labor, and “human rights” laws.

The new rules add an exemption to the current policy, that will permit transfers of unclassified defense articles and technical data to dual and third-country national employees of a foreign business partner (including any corporate or governmental entity or international organization, whether the partner is an end-user, consignee, or sub-licensee) without prior DDTC authorization (and the personal data collection pursuant thereto), provided four conditions are met:

  • First, any dual or third-country nationals who will have access to the transferred articles or technical data must be either (a) “permanently and directly employed” by the foreign business partner, or (b) “in a long term contractual relationship” with the business partner and meet certain other employment criteria detailed in the exemption;
  • Second, the transfer must take place entirely within the physical territory of the country where the business partner is located or operates;
  • Third, the transfer must be within the scope of an approved export license or other export authorization (or a license exemption); and
  • Fourth, the foreign business partner “must have effective procedures to prevent diversion” of the transferred articles.

This fourth condition is the one shifts the compliance burden, and there are two ways that it may be met. First, the foreign business partner will be considered to have “effective procedures to prevent diversion” if it has a security clearance for its employees issued by the government of the country in which it operates. Alternatively, a business partner lacking such a clearance must (a) have in place an active “technology security/clearance plan” that includes a process to screen employees for “substantive contacts” with restricted countries and (b) maintain a Non Disclosure Agreement with any employee to whom the defense article is to be transferred. The business partner must keep records of its screening activities for five years, and provide details of its plan and records to DDTC upon request “for civil and criminal law enforcement purposes.”
While the provision equating the foreign business partner’s holding of a general security clearance with “effective procedures to prevent diversion” arguably should lessen the compliance burden for all parties, it also has distinctly limited applicability. Otherwise, the new rules impose a substantial burden on business partners to develop comprehensive plans for employee screening with virtually no guidance about what will make those plans “effective” to prevent diversion. Though the new rules put forward seven kinds of activities constituting “substantive contacts” for which dual and third-country national employees should be screened, the seventh is the very broad “acts otherwise indicating a risk of diversion.” Thus absent further guidance from DDTC, foreign business partners will have to devise their screening plans largely from scratch, and in light of the same data privacy, labor, and “human rights” laws that make compliance with the current policy difficult. Given that they will be held wholly responsible if something goes wrong, U.S. companies will not only want a say in the development of those screening plans, but will have to devise some means of monitoring to ensure that the plans are being followed, and that they are being “effective.” As a result, U.S. companies that wish to take advantage of the new exemption and still meet the obligations of anti-diversion compliance, will also be required to shoulder some of the burdens risk analysis and anti-diversion enforcement.

The new rules will take effect on August 15, 2011. In the meantime, we’ll be watching State closely in anticipation of further guidance.

Research assistance for this post was provided by former Reed Smith Intern Henry R. Barnes.


Iran and Syria Sanctions Update

This post was written by Matthew J. Thomas.

US and EU sanctions continue to escalate on Iran and Syria, catching an ever-broadening group of global targets, as detailed in this latest update.  While the EU continues to add dozen of names to its lists of blocked parties, the US today began imposing secondary sanctions on non-Iranian companies that allegedly have provided investment and assistance to Iran's refined petroleum sector.


This post was written by Matthew J. Thomas.

"Have you seen these new Mideast sanctions? I don't think we can go ahead with our contracts there. Can we just cancel them?"

This common dilemma is at the heart of a new Reed Smith Client Alert discussing the application of sanctions-based contract cancellation clauses. Use of such clauses was examined recently by the Court of Appeals of England and Wales in Arash Shipping Enterprises Co. Ltd. v. Groupama Transport, a case involving international shipping, insurance, and new sanctions on Iran.

The alert also gives an update on the latest round of trade sanctions against Syria, both by the US and the EU. Given developments there, we expect the sanctions landscape to continue to evolve.

Wanted: Serviceable Definition of "Defense Service"

This post was written by Joelle E.K. Laszlo.

In an effort to update U.S. policy to “enhanc[e] support to allies and friends, improv[e] efficiency in licensing, and reduc[e] unintended consequences,” the State Department (“State” or “the Department”) has proposed to revise the definition of “defense service” in the International Traffic in Arms Regulations (“ITAR”). While the proposed revisions, which are currently up for public comment, provide some helpful streamlining and clarification, providers of these kinds of services are likely to find the changes do not go as far as they would like. Whether State will further modify the definition of “defense service” to accommodate concerns about its breadth is uncertain, given that the Department has already declined some tailoring recommendations offered by the Defense Trade Advisory Group (“DTAG”), the body which coordinates formally with industry on U.S. export policy.

Continue Reading...

California Contracting Notice

For everyone out there contracting with the State of California -- here is a quick heads up. Remember way back in 2010 when Congress passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act? Well, it turns out that California has decided to take advantage of the Divestment part. The Iran Contracting Act of 2010 requires the state to create a list of "persons" who "invest" in Iran. If a person makes it onto the list, they are prohibited from contracting or renewing a contract with California state and local governments. Contractors are encouraged to be on the lookout for communication from California indicating that the state plans on listing them. After all, the only evidence needed to list a person is "credible information available to the public."

For more of the fine print, exceptions, and defenses check out this Reed Smith Client Alert.

Who Wants Libyan Oil?

With all that had been going on in Libya, the US Government has been working to ensure that regulations are not prohibiting the Administration's anti-Gaddafi policy. OFAC recently released some guidance that should ease the burden on those US persons seeking to do business with the anti-Gaddafi regime in eastern Libya. For more information seek this Reed Smith Client Alert.

Regulatory Roundup 4.29.11

After reading this article, I will no longer complain while my family gets ready to go out. Unlike the DoD, which spends approximately $31 Billion/year, I’m pretty sure I can't fund a constant state of preparedness.

Howard Sklar does some thinking out loud about the risk/reward for implementing a private sector bribery compliance program under the UK Bribery Act.

Line of the Day (ok -- I know the post is a couple weeks old) goes to Clif Burns at Irish-American musicians can’t go to the Cuban festival because there will be Irish people there (emphasis in original). Thanks OFAC.

Electric car buying … batteries no longer included?

Presenting a new segment I'm calling: It's OK to Laugh.


Regulatory Round Up 3.31.11

Regulatory Round Up 3.24.11

Regulatory Round Up 3.11.11

Ramped-Up Libyan Sanctions Impacting U.S. Business; More to Come

This post was written by Joelle E.K. Laszlo.

In response to the increasingly grave political, commercial, and humanitarian turmoil that Libya has endured in the recent weeks, the international community has combined forces in an effort to subdue Muammar Qadhafi’s brutal regime. The United Nations Security Council has called its Member States to enact, among other initiatives, trade sanctions targeted against not only Qadhafi and his close associates, but also against the entire Libyan Government.

In affirming this concerted stance against Qadhafi, President Obama put into force an Executive Order Blocking Property and Prohibiting Certain Actions Related to Libya (“the Order”) on February 25, 2011. The Order immediately blocks the assets of and prohibits the provision of goods or services (including humanitarian donations) to: the Libyan Government and its agencies, instrumentalities, and controlled entities; the Central Bank of Libya; and Qadhafi and those closely associated with him. The Order further provides for the blocking of assets of anyone determined by the Secretary of the Treasury, in consultation with the Secretary of State, to be a senior official of the Libyan Government; a child or agent of Qadhafi; a spouse, dependant child, or agent of any of Qadhafi’s children named in the Order; or in any way responsible for or materially involved in “the commission of human rights abuses related to political oppression in Libya.”

On the day the Order was signed, aside from adding the designated Qadhafi family members to the Specially Designated Nationals List (each with a sizeable list of aliases), the Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued a general license authorizing transactions with Libyan Government –owned or –controlled financial institutions organized under the laws of a country other than Libya. On February 26th, the State Department’s Directorate of Defense Trade Controls announced the immediate suspension of all licenses it had issued for exports to Libya, and advised that no exemption in the International Traffic in Arms Regulations may be used to export defense articles and services to Libya until further notice (forthcoming in the Federal Register). Shortly thereafter, OFAC issued a second general license on March 1, 2011 authorizing the provision of and payment for goods and services to Libya’s diplomatic missions to the United States and the United Nations (limited to items to support official business and for employee personal use).

The Order, which actively blocks an estimated $30 billion, was described by the White House as “the most rapid and forceful sanctions” ever, and has already caused considerable commercial backlash. For instance, Morgan Stanley, in complying with the OFAC sanctions, has been left with no alternative but to entirely cease its operations in Libyan oil trade. Other members of the U.S. business community have expressed their concern and continue to seek authorization to provide measures of safety, welfare, and support of their employees and contractors who remain in Libya by paying their salaries and for other routine taxes, fees, benefits, goods and services associated with their employment. As developments with respect to Libya’s political and commercial climate become alarmingly unpredictable, investors and other potential stakeholders should remain aware of the situation at hand and should also exercise a heightened level of prudence, particularly with respect to transactions that may implicate the Libyan government or its agencies, instrumentalities or controlled entities.

Acting alongside the U.S, other nations and coalitions have recently demonstrated their united opposition against Qadhafi with sanctions of their own. A Reed Smith Shipping Alert addressing the measures taken by the U.S., the United Nations, and the European Union is available here.

This post was co-authored by Reed Smith Intern Henry R. Barnes.

When Ambiguity Can Mean Criminal Indictment: the FCPA and the Case of Establishing the Elements

This post was written by Anne E. Borkovic.

As everyone can cite, the Foreign Corrupt Practices Act (“FCPA”) in part prohibits offering or providing anything of value to a foreign official to obtain or retain business. But what does that mean in practice? Two federal courts are grappling with defining “foreign official” and, in turn, whether the prosecution can establish all the elements of a violation.

In U.S. v. Stuart Carson et al., defendants moved to dismiss and argued that the officers and employees of state-owned companies are not “foreign officials” because the companies are not instrumentalities, departments, or agencies of the foreign government. The FCPA Professor Mike Koehler filed a declaration in support of the motion, detailing the legislative history of the FCPA and the “foreign official” element. A hearing on the motion is set for March 21.

In U.S. v. Enrique Faustino Aguilar, defendants also moved to dismiss under the same argument and have asked the judge to take judicial notice of the Carson declaration.

Of course, we will keep you apprised of developments as the Courts decide this important issue.

Regulatory Roundup 3.4.11


Federal Filing Requirements for Logistics Companies Eased

This post was written by Matthew J. Thomas.

The US Federal Maritime Commission (FMC), which regulates US international ocean shipping services, has made life easier for thousands of logistics companies and their import/export customers.

The FMC regulates a broad range of “ocean transportation intermediaries,” the logistics providers and forwarders who connect importers and exporters with global shipping lines. Many of these (called “non-vessel-operating common carriers or “NVOCCs” ) act as resellers of ocean transportation services. NVOCCs buy space in bulk from vessel operators, then resell it, often bundled with additional services, to manufacturers and retailers.

On February 16th the FMC announced a plan to waive longstanding requirements that licensed NVOCCs publish their pricing in public freight tariffs and file all individual customer contracts with the FMC. Cutting these anachronistic filing rules will help over 3300 companies, according to the FMC, and should help encourage more individualized negotiations for international transportation solutions. The changes should take effect later this spring, but logistics companies still will need to comply with FMC licensing, bonding and recordkeeping rules.

The FMC cited the White House’s latest mandate for agencies to review rules and reduce burdens, set out in President Obama’s January 18, 2011 Executive Order 13563, and signaled a willingness to consider further cuts.

Hopefully the FMC’s zeal for streamlining will be contagious, given the rigorous regulatory landscape for logistics providers. Companies providing integrated supply chain solutions must navigate an impressive array of agencies, including the FMC, the Department of Transportation (air freight forwarding), Federal Motor Carrier Safety Administration (motor carrier forwarding and broking), Transportation Security Administration (facility security) and Customs and Border Protection (carrier bonding and manifest filing). With additional requirements and regulators for dual-use goods, arms, food, drugs, and hazardous materials, compliance planning quickly becomes an exceptionally sophisticated undertaking.  

Regulatory Round Up 2.3.11

With a title like "Tactical Secrets" I was expecting a insiders look into fly fishing for Steelhead trout . But then I realized I was reading the New York Times. Instead, this piece addresses the government's assertion of the state-secrets privilege in General Dynamics Corp v. US.

Déjà vu all over again. Nick Silver compares the political landscape that President Clinton faced with the current congressional make up now facing President Obama.

When blogs reference other blogs, we here in the Round Up office get excited. Howard Sklar at Open Air Blog explains why he disagrees with the FCPA Professor and Alexandra Wrange (of TRACE) over the impact of the UK Bribery Act.

Sudan Watch: With referendum results showing overwhelming support for secession, Khartoum is calling for an end to the US embargo. In news that should surprise absolutely no one, the US has decided to wait and see.

The National Institute of Standards and Technology has issued new guidelines for cloud computing. If "safeguarding data in the public cloud" is something you are in to, or have no idea what it means, you may want to read this.

Regulatory Round Up 1.24.11


Regulatory Round Up 1.13.11

U.S. Citizenship and Immigration Office To Assist in Enforcing U.S. Export Regulations

This post was written Christopher B. Monahan.

The new Form I-129 has highlighted the restrictions on deemed exports of technology to foreign national employees. Originally effective December 23, 2010, the new form requires employers to certify that they will not "release" controlled technology or data to an H-1B, L-1 or O-1 worker without the appropriate "export license," if one is required. Technology or data can be controlled for export purposes under either the Export Administration Regulations (“EAR”) or the International Traffic in Arms Regulations (“ITAR”). Both the EAR and the ITAR already prohibit the unauthorized disclosure of controlled technical data to foreign persons. U.S. Citizenship and Immigration Services’ (“USCIS”) new form will now require employers to certify that they are acting in compliance with the current law.

The ITAR and EAR are complex and classification can be burdensome depending on the technology involved, the available resources to devote to the project, and the IT issues in identifying and segregating the data. Restrictions on disclosure of controlled data to foreign persons apply even if the technology is not shared outside of the United States and even if the employer does not do any international business.

Due to the concerns and questions raised about the new Form I-129, USCIS has postponed the new form’s requirement that employers certify that they will not release controlled technical data. Employers will not have to complete the portion of the form requiring the certification until February 20, 2011. 

Regulatory Round Up 1.7.11

Curtain Drops (For Now) on First Hollywood Couple Charged with FCPA Violations

This post was written by Joelle E.K. Laszlo.

While it’s usually good to be the first to do something in Hollywood, it is decidedly not good when that something is violate the Foreign Corrupt Practices Act (“FCPA”). Former power couple Gerald and Patricia Green are learning that lesson the hard way, as they spend the holidays and beyond in Federal prison. Though the Greens and the Government are appealing the six-month sentences handed down in August, it’s safe to say the Greens’ post-conviction lifestyle won’t come close to matching what it was before.

The Greens were originally indicted in January 2008 for bribing the former governor of the Tourism Authority of Thailand (“TAT”) in exchange for contracts to operate and manage the annual Bangkok International Film Festival (“BIFF”) from 2002 through 2007. In October 2008 the plot thickened as a superseding indictment added bribery charges related to several other TAT tourism programs. In all, and among other things, the Greens were accused of violating the FCPA ten times, ultimately paying out $1.8 million to generate nearly $14 million in revenue. In September 2009 a Los Angeles jury found the Greens guilty of nine FCPA violations and nearly all of the other charges against them.

Sentencing of the Greens was postponed numerous times over several months, as both sides battled to sway the court’s final act. The Justice Department, arguing that FCPA defendants who do not plead guilty or otherwise cooperate with the Government generally receive stricter sentences, asked for ten years in prison for each Green. Defense counsel requested five years’ probation, noting both that Mr. Green suffers from emphysema and that the BIFF generated substantial revenue for Thailand and its people, and thus there were no real victims from the Greens’ actions. After a final lengthy hearing, in August 2010 the Greens were sentenced to six months in prison each, followed by six months of home confinement.

Though the Greens’ prison sentences are some of the lightest ever received by FCPA defendants, there is no Hollywood ending to their story. Under a forfeiture agreement approved along with their sentences, each Green personally owes the Government nearly $1.05 million and any amount of their production company’s pension that can be traced to their offenses. The Justice Department intends to seize and sell a home owned by Mrs. Green to satisfy the judgment. And unable to muster any more funds for his defense, Mr. Green will be represented in his sentencing appeal by a court-appointed attorney. Thus the Greens’ saga is not really fodder for a future blockbuster, or even a movie of the week, though it may make for a good public service announcement on complying with the FCPA.

Regulatory Round Up 12.16.10

Around this time of year many people look forward to the ringing of bells. Bryan Rahija wants your help in ensuring that we have year-round blowing of the whistles.

If the estate tax was called the death tax, would we all try to live a little healthier? (It’s the holidays – I'll make and break my resolutions in a few weeks). Regardless of its title, the tax is on the table. So what should congress do about it?

As a child, my parents coerced my siblings and I to get along through the promise of presents from Santa. Turns out FCPA violators who play nice with the DOJ may be able to secure a present of their own: a Non-Prosecution Agreement.

Holiday takeaways: good = presents; bad = coal; Microsoft engineer who attempts to export ITAR controlled goods to China  = criminal complaint.

All Dressed Up

On Monday, December 6, in an effort to run some names against the SDN list, I headed over to OFAC’s website. Much to my surprise I discovered that the Treasury Department had unveiled its newly designed website.  To make things even more serendipitous, I stumbled across the Treasury blog.  The first post is penned by the one and only Tim Geithner, with the second post highlighting some of the new features. One of the features is the highly anticipated automated Trade Sanctions Reform Act application (commonly referred to as Ag-Med) for licensing exports of agricultural and medical goods to Iran and Sudan. OFAC indicated at BIS Update that they invested significant amounts of time into the process and we hope it will help speed up the application review times.

Rest assured loyal OFAC fans, you can still find all the same information as before but now in a more “user friendly” format. Spend a few minutes learning your way around. If nothing else, the government will like the increased traffic.

Regulatory Round Up 12.02.10

Regulatory Round Up 11.04.10

I bet you think pretty highly of yourself. I know I do … come on, I’m a lawyer! (Please insert stereotypical lawyer joke here – put a good one in the comments if you dare). From time to time, I’m “gently” reminded that not all of my accomplishments are oh-so noteworthy. As my brother used to say after I would regale him with some of my more humdrum endeavors: “what do you want, a cookie?” It looks like I’m not the one in search of a cookie.

As the great state of Wisconsin bids farewell to Russ Feingold, the rest of us begin to say goodbye to the legislation he is most known for.

When I think of auditors, the first thing I think of (after the Grim Reaper) is efficiency. So why then is the Defense Contract Audit Agency amending its procedures in a way that “could expose the government to massive overcharges by prime contractors?”

Interested in potentially saving millions of dollars? Yep, I thought so. Now lets play: Follow the Blogosphere Link Machine. This post is my reference to the FCPA Blog’s reference to an article written by Andrew Weissmann and Alixandra Smith discussing the potential for substantive FCPA revision.

Regulatory Round-up

This post was written by Michael A. Grant.

Hello good-looking regulatory attorneys. Welcome to the first installment of the Regulatory Round-up (catchy, I know). If you are reading this post, odds are someone in an office larger than yours is wondering why you aren't working -- but I'm glad you stopped by. The goal of this weekly installment will be to connect you to stories from around the blogosphere that impact those of us practicing in regulated industries. While the primary focus of the Round-up (look, I already gave it a trendy nickname) will be the 7 topics to the left, I'll be sure to mix in other stories that catch the eye. Here's hoping you see something new, have a laugh, or at least get some legitimate "professional reading" time.


The Freakonomics of the Iran Sanctions?

This post was written by Anne Borkovic.

After months of intense global negotiations, and facing increased sanctions from the United States, the EU, and the United Nations, what is life like in Iran?  As expected, Iranians are experiencing increased gas prices, and the Iranian Revolutionary Guard is having some financing difficulties.  Some of the more interesting effects, though, are the ban on mullets and fatwa against puppies. 

In July, Iran’s Ministry of Culture and Islamic Guidance announced a ban on certain “decadent Western” hair styles for men, including the mullet. The full catalog of acceptable styles was presented at the Modesty and Veil Festival. Some interesting concessions were made – including allowing a modest amount of hair gel and a goatee – but mullets, pony tails, and elaborate spikes are out.

This past week, the Ministry announced a ban on advertising that promotes pets, pet care, and pet food in response to a June fatwa against pets from Ayatollah Shirazi, because pet owners were “blindly imitating the West.”  He explained that “Many people in the West love their dogs more than their wives and children,” and that the devotion to pets would result in “evil outcomes.”

While it is unclear whether the ban on mullets and puppy food advertising will change Iran’s stance regarding nuclear power, we are interested to see what the Ministry will do in response to the June announcement from prayer leader Hojjat ol-eslam Kazem Sediqi that "Many women who do not dress modestly lead young men astray and spread adultery in society which increases earthquakes.”

Dunder Mifflin Angered by the State Department Eliminating the Need for Seven Collated Copies

This post was written by Leigh Hansson and Chris Monahan.

The U.S. State Department spent a little ink in the Federal Register earlier this month in an attempt to get green in the 21st century. On August 4, 2010, the State Department, Directorate of Defense Trade Controls, or DDTC, announced a final rule requiring the electronic submission of requests for Commodity Jurisdiction Determinations, or CJs.  Companies submit a CJ if they have doubts as to whether an article or service is covered by the U.S. Munitions List, or if they want to request consideration of a redesignation of an article or service currently covered by the U.S. Munitions List.

In a stunning departure for the federal government, the State Department developed and issued a new form for CJs.  All kidding aside, this new wrinkle in State Department bureaucracy should be a welcome change for most companies interacting with the agency for a few reasons.

The new CJ form is a more environmentally responsible alternative to the old method that required companies to submit seven collated sets of their request and the supporting documentation. In addition to removing the need for all those copies, the new CJ request form must be submitted electronically as of September 2, 2010.

Applicants will not be required to use the DTRADE system and will also not be required to register with DDTC, as some had feared prior to the new rule. Instead, DDTC has created what appears to be a simple and less-burdensome alternative to the old CJ process. Applicants now download the form, scan and attach necessary supporting documents, and submit everything using an open net, web-based application system. DDTC has posted instructions as well as links here.

Exports, Customs & Trade Sentinel, Vol. VII, No. 3 (Summer 2010)

Articles in This Issue:

  • A Summer of Sanctions: World Leaders Respond to Iranian Obstinacy
  • New Department of Justice Guidance Seeks to Bolster Confidence in the Use of Independent Monitors
  • Round 2: Encryption Controls Streamlining
  • The British Are Coming! The British Are Coming! - Preparing for the Launch of the Bribery Act of 2010
  • Government Procurement in China
  • Enforcement Highlights

Click here to download the full newsletter.

DDTC's New Rules on Electronic Filing

This post was written by Michael Grant.

The U.S. State Department’s DDTC (Directorate of Defense Trade Controls) has finally joined the green revolution. Whether this move should be construed as the State Department’s support of a healthier planet, an attempt to limit the potential for loss of sensitive documents, or an effort to deprive the legal community of its paper obsession, we may never know. What we can be sure of is that beginning September 1, 2010, DDTC’s licensing division will no longer accept certain unclassified paper agreements. See DDTC’s announcement here.

Technical Assistance Agreements, Manufacturing License Agreements, Warehouse Distribution Agreements, and major amendments thereto, as of September 1, 2010, must be submitted through use of the form DSP-5 via D-Trade 2. For those of you unfamiliar with the requirements for electronically submitted TAAs, MLAs, and WDAs, rest assured your government has an answer for you: stop by the DDTC Agreement Guidelines Section and check out the third PDF. It will provide you with a little light reading (165 pages) covering everything you need to know about electronically filing these agreements.

Narcotics Kingpins: How Much Could You Save?

This post was written by Anne Borkovic.

Who knew that gecko was mixed up with such unsavory characters? On June 3, 2010, the U.S. Treasury, Office of Foreign Assets Control (“OFAC”) announced that GEICO General Insurance Company paid $11,000 to settle allegations that, from approximately September 2006 to June 2007, it provided a car insurance policy to an individual listed on the Specially Designated Nationals (“SDN”) List as a narcotics kingpin. The alleged violations involved premium payments totaling $2,265. OFAC’s brief announcement specifies that the settlement amount reflects OFAC’s consideration that GEICO screens its customers against a version of the SDN List updated only annually, but is taking measures to improve its procedures.

The announcement also specifies that the base penalty for the alleged violations was $11,000. This combined with the penalty calculation procedures in OFAC’s penalty guidelines indirectly confirms that the case was likely not voluntarily disclosed. The imposition of a base penalty also indirectly confirms that OFAC did not pursue egregious or “willful” violation penalties in this case. However, it also indicates that OFAC considered the case significant enough to pursue a monetary penalty rather than only issue a cautionary letter or formal finding of a violation.

Many companies struggle with the need to screen customers against the continually-updated SDN List, as well as the Denied Parties, Unverified, Entity, and Debarred Lists. Companies with more standard business models – order placement, shipment, -- can take advantage of screening software, including automatic updates of the lists and friendly interfaces, to screen each order for shipment. However, many companies have such a high volume of customers, international locations, and non-traditional structures, that even implementing a procedure to use the software would require significant changes to the business process.

Unfortunately, even with robust processes, there are no safe harbors available for screening transactions to ensure that the customer is not included on a list. The GEICO enforcement action demonstrates that even one slip in the screening can result in an administrative investigation and civil money penalty. It also shows that OFAC is willing to undertake enforcement actions in industries with less traditional distribution models.

Increased Iranian Sanctions: Washington Responds to Continued Nuclear Development by Tehran

This post was written by Leigh Hansson and Michael Grant.

On July 1, 2010, President Barack Obama, preceded by Congressional voting signaling overwhelming support, signed into law the Comprehensive Iran Sanctions Accountability and Divestment Act ("Act"). The Act is an effort by the United States to hinder what appears to be Iran's intent to develop nuclear weapons. Action by the United States comes at a time when several countries are modifying their sanction policies in response to Iran's actions. In recent weeks, the United Nations, the European Union, and the United Kingdom, among others, have all enacted resolutions or sanctions directed at Iran. While many elements of the Act must be implemented by regulations, and are therefore unknown at this time, this article summarizes the major changes that are now known.

To view the entire alert, please click here.

Iran Sanctions Update

This post was written by Paul Skeet, Dan Gallagher, and Leigh Hansson.


  • Recent weeks have seen the United Nations, the United States and the European Union all tightening sanctions against Iran with the aim of impeding the country's nuclear programme.
  • As many of the new sanctions are directed particularly at Iran's trade, transport links and banks, it is important that all those involved in international trade should be aware of them. This client alert summarises the latest developments in sanctions against Iran pursuant to the latest UN Security Council Resolution 1929 (2010) as well as under the sanctions regimes in force in the United Kingdom, United States, European Union and Switzerland.

Exports, Customs & Trade Sentinel, Vol. VII, No. 2 (Spring 2010)

Articles in This Issue:

  • Reading, Writing, and Export Control: Lessons Learned from Professor Roth
  • Conducting Discovery in the United States for Cases Pending Abroad
  • The Evolution of the FCPA’s ‘Knowledge’ Requirement
  • Twitter, Facebook and Instant Messaging – The Export of Personal Communication Capabilities to Iran, Cuba and Sudan
  • Daimler Statement Over Corrupt Practices Approved
  • Enforcement Highlights

Click here to download the full newsletter.

Comments Sought on China's New Proposed Regulations to Promote Indigenous Innovation

This post was written by Hugh Scogin, Mao Rong, and Zack Dong.

In November 2009, the Ministry of Science and Technology, the National Development and Reform Commission and the Ministry of Finance jointly issued Notice No. 618, requiring enterprises registered in China to apply for accreditation of indigenous innovation products. The program would have provided the Ministry of Science and Technology with authorization to prioritize accredited products for government procurement. Of particular interest to foreign enterprises were requirements that an applicant's use, disposal and improvements to a relevant product's intellectual property (IP) must not be subject to foreign restrictions, while any trademark used would first require registration in China and would also need to be free of restrictions from any related foreign brands. Under this program, foreign-invested companies whose products are not locally developed would not be able to participate equally with their Chinese competitors in government procurement unless they agreed to take the risk of removing licensing restrictions from their IP. In response to the notice, foreign associations and business leaders expressed concern that the system promoted domestic favoritism and would potentially result in discriminatory requirements for companies looking to take part in the government procurement market, while also restricting the capacity for innovation and development in China.

To view the entire alert, please click here.

Pending Iranian Sanctions Could Significantly Impact European Entities

This post was written by Leigh Hansson, Michael Lowell, Michael Grant, and Anne Borkovic.

The United States Congress is currently considering legislation that would increase the scope and application of the U.S. sanctions against Iran: The Comprehensive Iran Sanctions, Accountability and Divestment Act of 2009 (S. 2799) and the Iran Refined Petroleum Sanctions Act of 2009 (H.R. 2194). These changes could significantly impact the ability of non-U.S. companies to do business with both Iran and the United States. This article summarizes the proposals under consideration and highlights key provisions that could affect the international operations of European companies.

To view the entire alert, please click here.