Iran sanctions: United States reimposes sanctions and the EU responds

In the early hours of Tuesday, 7 August 2018, and as foreshadowed by President Trump’s announcement on 8 May 2018, the United States reimposed certain secondary sanctions on Iran, being those which apply to non-U.S. persons. The imposition of these sanctions follows the conclusion of a 90-day wind-down period and, as mentioned in our previous blog post, will impact (among other things) trade in graphite, raw or semi-finished metals and the Iranian automotive sector. Importantly, the new Iran sanctions permit the U.S. government to impose sanctions on non-U.S. persons who provide significant support to those acting in violation of the sanctions. Note that a second wind-down period expires in early November, at which time further secondary sanctions will be reimposed, affecting, among other things, shipping, the petroleum and petrochemical industry, and insurance.

The new Executive Order signed by the President, however, makes clear that the sanctions do not apply to any person conducting or facilitating a transaction for the provision or sale of agricultural commodities, food, medicine, or medical devices to Iran. Additionally, the Frequently Asked Questions published by the Office of Foreign Assets Control reiterate that the sale of agricultural commodities, food, medicine and medical devices is not sanctionable provided no designated parties are involved.

Just hours after the sanctions came into effect, President Trump tweeted that “[a]nyone doing business with Iran will NOT be doing business with United States.” We therefore expect the United States to actively enforce violations of these sanctions.

In response, the EU has now activated its so called ‘blocking’ Regulation, with a view to supporting the continuation of the Joint Comprehensive Plan of Action. The EU is seeking to ensure that Iran adheres to its nuclear-related obligations under that agreement and to encourage EU companies to continue to do business in Iran. One of the key aspects of this legislation is that it makes it a breach of EU law to stop doing business with Iran if you take that step in order to comply with the U.S. secondary sanctions.

The potential result is that EU companies, including shipping companies, banks, trading houses and others, may be faced with a choice of continuing to do certain business in Iran at the risk of breaching U.S. law, or refraining from doing such business at the risk of breaching EU law.

The Reed Smith sanctions team, with lawyers experienced in advising on both the U.S. and EU positions, are on hand to help you navigate these potentially mutually exclusive obligations.

Iran Sanctions Update: August implementation deadline is approaching, are you ready?

President Trump announced that the United States would withdraw from the Joint Comprehensive Plan of Action (JCPOA) on 8 May 2018. In conjunction with that announcement, the president issued a National Security Presidential Memorandum directing the re-imposition of certain secondary sanctions, being those that apply to non-U.S. persons even where there is no U.S. nexus. Depending on the economic sector targeted, the particular sanction will be imposed either 90 or 180 days after the president’s announcement (and so, on 6 August or 5 November 2018).

Implementation of the first batch of sanctions is rapidly approaching. On 6 August, the United States will re-impose the following secondary sanctions that were lifted as part of the JCPOA:

  • Sanctions on the purchase or acquisition of U.S. dollar banknotes by the government of Iran
  • Sanctions on Iran’s trade in gold or precious metals
  • Sanctions on the direct and indirect sale, supply, or transfer to or from Iran of graphite, raw or semi-finished metals such as aluminium and steel, and software for integrating industrial processes
  • Sanctions on significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in Iranian rials
  • Sanctions on the purchase of, subscription to, or facilitation of the issuance of, sovereign debt
  • Sanctions on Iran’s automotive sector

Note, however, that the sanctions will also apply to the provision of associated services. By way of example, a person or entity providing indirect financing or transportation to Iran’s automotive sector would also face potential exposure to secondary sanctions. Shipping companies, therefore, need to be mindful of these changes.

To the extent that you are a non-U.S. person involved in activities falling into any of the above categories, you should urgently seek advice as to how the secondary sanctions may impact your business, as failure to wind down any such activity by 6 August 2018 may be a breach of the secondary sanctions. To the extent that you are an EU person, your position may be further complicated by the EU’s so-called Blocking Regulation, which is anticipated to take effect in early August in order to meet the 6 August 2018 deadline. Be sure you understand your obligations pursuant to this legislation, as well.

DOJ and State AGs clash in Emoluments Clause arguments

On June 11, 2018, arguments were held in Maryland District Court in the challenge brought by the D.C. and Maryland attorneys general over the president’s alleged violation of the Emoluments Clause of the Constitution.
In Maryland v. Trump, D.C. Attorney General Karl Racine and Maryland Attorney General Brian Frosh have challenged President Donald Trump’s continued operation of and profit from his downtown Washington hotel, which they say violates the constitutional prohibition against the president receiving emoluments from foreign governments. The Justice Department filed a motion to dismiss the case, which was the subject of the day’s arguments.

At issue was the definition of an emolument, with the Justice Department arguing that only favors given in return for the initial benefit count, and the members of the AG offices arguing that any profit, gain or advantage given to the president by a foreign government would violate the clause.

Following each party’s conclusion, U.S. District Judge Peter J. Messitte told the courtroom that he expected to issue a decision on the motion by the end of July, and that he appreciated the opportunity to address a constitutional issue of first impression.

Deferred prosecution agreements introduced in Singapore

Following the much-publicized US$422 million trilateral Keppel Offshore & Marine resolution, Singapore has introduced a DPA framework. The resolution was reached in late 2017 to settle anti-corruption charges posed by regulators in the United States, Brazil and Singapore. As part of the resolution, KOM entered into a deferred prosecution agreement with the United States’ Department of Justice, while Singapore’s Corrupt Practices Investigation Bureau (CPIB) issued a conditional warning in lieu of prosecution. Consequently, this resolution triggered a landmark change in Singapore’s anti-corruption legislative framework. Click here to read our summary of the new framework.

Malaysia has introduced “corporate liability” bill

The lower house of the Malaysian parliament has recently passed amendments to Malaysia’s anti-corruption law. The most high profile of these amendments is the introduction of corporate liability into Malaysian anti-corruption laws. Before this amendment, the Malaysian Anti-Corruption Commission Act (MACCA), which is the primary anti-corruption legislation in Malaysia and was enacted in 2009, was confined to individual liability for corruption offenses. Read our practical summary of the Malaysian Anti-Corruption Commission (Amendment) Bill 2018 and the next steps that your business should take here.

ALJ Upholds FTC Judgement of Antitrust Violations for Ad Tech Agreements Against 1-800 Contacts

With the holiday marketing season upon us, marketers launch the month-long, relentless scramble for consumer visibility and coveted advertising space on high-traffic inventory. One matter likely not on marketers’ radars? Antitrust violations. A recent ruling on a case brought by the Federal Trade Commission (“FTC”) against 1-800 Contacts scrutinizes the brand’s ad tech playbook through an antitrust lens, calling into question the legality of certain private agreements.

The crux of the FTC’s unfair competition case against 1-800 Contacts lays in the brand’s online search engine optimization (“SEO”) bidding agreements with its competitors. By way of context, in 2004, Google modified its proprietary online advertising service, AdWords, to allow advertisers to link their ads to other brands’ trademarks. In the online lens market, this means 1 800 Contacts’ competitors could bid on search terms like “1-800 Contacts” for the chance that their advertisement could show up alongside the retail giant’s search results.

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Blockchain Technology and Securities Markets are the Focus of Recent SEC Investor Advisory Committee Meeting

On October 12, 2017, the U.S. Securities and Exchange Committee (“SEC”) held an Investor Advisory Committee (“IAC”) meeting which largely focused on blockchain technology and the implications for securities markets.  Based on the discussion at this meeting, the SEC is currently considering both the merits and risks linked to blockchain technology. Several IAC members in attendance expressed concern about the risk of fraud and abuse. To learn more about the presenters and topics discussed click here.

Released CFIUS Annual Report Shows Heightened Scrutiny

CFIUS recently published a summary of their 2015 CFIUS Annual Report to Congress.  CFIUS is charged with reviewing foreign investments and advising the President on appropriate actions that may be necessary to suspend or prohibit foreign acquisitions, mergers, or takeovers which threaten to impair the national security of the United States. The Annual Report reflects a trend over the last two years that CFIUS is closely scrutinizing more foreign investment transactions and increasingly taking action. To learn the key points from the 2015 CFIUS Annual Report and other recent developments click here.

Government Contracts M&A Moving at Breakneck Speed: Contractors Advised to Slow Down and Ensure Compliance

The pace at which government contractors are engaging in mergers & acquisitions has increased notably in recent years, as a stream of recent stories in the Washington Post and New York Times have reported. The acquisition of a government contractor frequently provides the buyer an opportunity to increase its market share and/or strengthen its capabilities in an existing industry. The acquisition may also allow the buyer to develop and market a new government contracting capability that was previously lacking from its portfolio.

In the past few months alone, several multi-billion-dollar acquisitions within the government contracts sector have been announced. For example, in September 2017, Northrup Grumman announced it would acquire Orbital ATK, a rocket and defense contractor. Orbital will bring new capabilities to Northrup’s portfolio, including a missile defense business line and the ability to launch rockets that carry satellites into space. The deal, worth $7.8 billion, will also allow Northrup to bolster its existing satellite capabilities.

Similarly, also in September 2017, defense contractors United Technologies and Rockwell Collins announced that they entered into a deal for United Technologies to acquire Rockwell Collins, an airplane electronic and avionics parts manufacturer, for $30 billion. Through the transaction, UTC Aerospace Systems, which will be renamed Collins Aerospace Systems, will bolster its aerospace capabilities and technology aerospace systems.

Companies and private equity funds seeking to expand their portfolios through the acquisition of large, medium, and small government contractors, however, must take particular caution through the due diligence process, because such acquisitions are fraught with potential land mines that can slow down or even disrupt the proposed transaction. When a company seeks to acquire an entity that holds government contracts, both parties must comply with several different sets of federal regulations to ensure that the government approves of the transaction; recognizes the buyer as a successor-in-interest for the seller’s government contracts or subcontracts; that all compliance obligations transfer to the buyer; and that the buyer is capable of fulfilling its new compliance responsibilities to the satisfaction of the government.

Some of the common issues that arise in government contracts mergers & acquisition include:

  • Analysis of the remaining years and/or receivables under existing and prospective government contracts held by the entity to be acquired
  • The novation or assignment of the government contracts from the entity to be acquired to the buyer
  • The potential loss of small or other socio-economic preferences for the award of government contracts as a result of the acquisition
  • Transfer of facility and top-secret clearances
  • Intellectual property owned by the entity being acquired, or the government, and whether the rights can be transferred
  • Organizational conflicts of interest, which may prevent the buyer from bidding on new contract opportunities
  • Whether the company’s Federal Supply Schedules are up-to-date and compliant with specific regulations, like the Price Reduction Clause
  • Which subcontracts and teaming agreements the entity to be acquired holds, and are they compliant and enforceable
  • Foreign buyers: CFIUS notification and foreign ownership and control mitigation plans
  • Past performance ratings of the company to be acquired by government agencies, and the impact of those ratings on the buyer’s ability to win other government contracts
  • Prior suspensions or debarments that may affect the company to be acquired
  • Disclosure of and indemnification for any contractual or regulatory non-compliance that predates the transaction, including violations of the False Claims Act

Failure to resolve these and similar compliance issues; to analyze and address any of the financial impact from any status change that may be caused by the transaction; or to obtain the necessary government approvals prior to transfer of government assets, may result in the loss of business opportunities for the buyer or merged entity, and in certain situations can result in suspension or debarment of the contractor, or civil and/or criminal penalties. Experienced and careful government contracts due diligence, however, can identify these and other risks in the transaction, ensure that the parties obtain adequate disclosures and indemnifications, make thorough and accurate representation and certifications, and obtain all necessary approvals from the government so that the proposed acquisition is successful and profitable.

 

Significant FCA Decision Affirms the Importance of Materiality

The U.S. Court of Appeals for the Fifth Circuit recently issued a well-reasoned decision that takes the rare step of overruling a jury finding of False Claims Act (FCA) liability, and erasing the damages award of more than $663 million, after trebling and inclusion of civil penalties. See United States ex rel. Harman v. Trinity Indus. Inc., No. 15-41172, 2017 WL 4325279 (5th Cir. Sept. 29, 2017). The decision applied the U.S. Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), and held that the qui tam relators failed to establish the materiality element required to establish FCA liability.

In Harman, a qui tam relator (“Relator”) (a private citizen authorized by the FCA’s unique qui tam provisions to bring claims of fraud on behalf of the government) pursued claims that the defendants defrauded the government by falsely certifying that highway guardrails satisfied Federal Highway Administration testing requirements. The Relator’s claim amounted to an allegation that the defendants (collectively, “Trinity”) failed to disclose to the government modifications in their design and manufacturing process, and that the government would not have purchased Trinity’s guardrail products had it known about the changes.

A significant problem with Relator’s theory was that the government did not agree. In fact, after conducting its own analysis prior to trial, and after commissioning additional and independent testing following the jury verdict, the Federal Highway Administration repeatedly concluded that Trinity’s guardrails satisfied applicable standards and were eligible to be purchased and reimbursed by the federal government, despite omissions in the paperwork Trinity submitted to the government. Harman, 2017 WL 4325279, at *3, 4.

The Fifth Circuit analyzed whether those omissions – the purported fraudulent certifications, in Relator’s view – had a tendency to influence the government’s decision to pay for Trinity’s guardrails under the FCA’s statutory definition of materiality. See 31 U.S.C. § 3729(b)(4). Along with a detailed survey of FCA cases analyzing the materiality element, the court relied on the Supreme Court’s guidance in Escobar:

[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.

Harman, 2017 WL 4325279, at *11 (quoting Escobar, 136 S. Ct. at 2003-04). Applying this standard, the Fifth Circuit found that the government’s continued payments for Trinity guardrails, after being advised of alleged fraud and after conducting repeated testing, represented “very strong” and unrebutted evidence that Trinity’s certification inconsistencies were not material. Id. at *14, 16-17. In its decision, the Fifth Circuit cautioned against allowing relators to second-guess administrative decisions – like the decision to pay for Trinity guardrails – made by those elected and appointed through the democratic process. Id. at *17. In light of the unrebutted evidence to support the materiality element, the decision reversed the jury verdict and entered judgment as a matter of law for Trinity, providing complete vindication for the defendants. Id. at *18.

Key takeaways from the decision:

  • The Supreme Court’s decision in Escobar has invigorated and provided heft to the “rigorous” materiality standard, both at the pleading stage and beyond, which should assist defendants in cases where factual allegations and evidence of materiality are weak or lacking.
  • The Fifth Circuit’s opinion also provided a well-reasoned analysis strongly suggesting that Relator’s claims likewise could not satisfy the falsity element of FCA liability, in noting that disagreements over the quality of professional judgment are “not the stuff of fraud.” Id. at *9. This commentary is consistent with a burgeoning line of cases that underscore conventional wisdom that the FCA requires objective falsity, and that opinions, or mere disagreement among experts, in themselves are insufficient to establish falsity under the FCA.
  • The Fifth Circuit’s opinion similarly provided a thoughtful analysis strongly suggesting that Relator’s claims could not satisfy the FCA’s scienter requirements. Emphasizing evidence that Trinity’s omissions from its certification paperwork were “inadvertent,” id. at *10, the Fifth Circuit’s analysis was consistent with the long line of cases indicating that honest mistakes, and even negligence, are insufficient to establish scienter to satisfy the FCA. Likewise, the decision noted that Trinity reasonably relied on the expert advice and opinions of its partner, id. at *11, which is consistent with FCA cases holding that reasonable reliance on experts or third-party professional analyses may undermine an attempt to establish the necessary “knowledge” under the FCA.
  • Finally, the circumstances in Harman were relatively unique. Parties intending to rely on the Harman decision should compare the circumstances in that case with their own facts to evaluate the extent to which the Fifth Circuit’s comments may be applicable.

 

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