2011 Year-End OFAC Update

January 18, 2012

The year 2011, like the year 2010, saw substantial fines and continuing focus on export enforcement at the Office of Foreign Assets Control (“OFAC”) within the United States Department of the Treasury.  But it was the flurry of regulatory and legislative initiatives coming out of the executive branch and Congress, in response to events arising from the “Arab Spring” that distinguished 2011.

This article reviews OFAC developments in 2011 in four areas — legislation, Executive Orders, regulatory developments, and enforcement — and assesses what the experience in 2011 suggests about how business practices might evolve to adapt to OFAC’s ongoing role.

I.   Legislation

With respect to Congress’s attention to U.S. sanctions-related legislation, initiatives targeting nuclear proliferators characterize Congress’s 2011 legislative activities.

          A.   Iran Sanctions

On the last day of 2011, President Obama signed into law the National Defense Authorization Act for Fiscal Year 2012.  Included within the Act is a measure that designates the entire Iranian financial sector as a primary money laundering concern.[1]  The measure requires the President to freeze the assets of Iranian financial institutions and prohibit all transactions with respect to Iranian financial institutions’ property and interests in property if the property or interest in property comes within the United States’ jurisdiction or the possession and control of a United States person. In addition, the measure broadly authorizes the President to impose sanctions on the Central Bank of Iran.

The measure further requires the President to prohibit foreign financial institutions from establishing correspondent accounts or pay-through accounts in the United States if the President determines that that foreign financial institution has knowingly facilitated or conducted large transactions with the Central Bank of Iran or any other Iranian financial institution that the Secretary of the Treasury has designated for sanctions under IEEPA.[2]   The legislation also requires the President to either prohibit or establish strict conditions for the maintenance of such correspondent or pay-through accounts in the United States.  These sanctions will only apply to foreign central banks and other financial institutions owned by foreign governments if these financial institutions are engaging in a financial transaction for the sale or purchase of petroleum or petroleum products to or from Iran.[3]  Within ninety days of the legislation’s enactment and every 180 days thereafter, the President shall also make a determination, based on a report on petroleum availability and pricing from the Energy Information Administration, as to whether it is feasible for businesses and other purchasers to significantly reduce their purchases of petroleum products from Iran.  If such a reduction is feasible, the President must also prohibit foreign financial institutions from establishing correspondent accounts or pay-through accounts in the United States if they conduct or facilitate financial transactions for the purchase of petroleum or petroleum products from Iran.[4]  This process of reporting to Congress will continue on an ongoing basis.  The President may waive the imposition of sanctions for 120 days and renew such waiver for periods of 120 days if he determines that the sanctions are not in the United States’ national security interest and reports to Congress with a justification of the waiver and an indication of any cooperation received in exchange for the waiver.[5]

On December 15, the House also passed the Iran Threat Reduction Act, H.R. 1905,[6] which goes even further than the amendment to the Defense Authorization Act and contains a host of new sanctions provisions.  Portions of the Act echo and expand upon the Defense Authorization Act and recent Obama administration efforts.  The Act increases the sanctions available under the Iran Sanctions Act, adding a ban on visas for the principal officers or controlling shareholders of sanctioned firms and their subsidiaries, parents and affiliates; and allowing for the application of existing Iran Sanctions Act sanctions to the principal officers of a sanctioned firm.  The Act further requires that the President impose a majority of the sanctions available to any firm sanctioned under the Act and impose the majority of available sanctions to any firm that assists Iran or an Iran-controlled entity in its issuance of sovereign debt.  If the President determines that the Central Bank of Iran assisted Iran with its nuclear program or facilitated transactions for certain sanctioned persons, the Central Bank of Iran will be subject to sanctions–including the blocking of assets, prohibitions on transactions, and the exportation of property–until such time as the President certifies to Congress that the Central Bank is no longer engaged in such activities.

The Act further targets the Iranian government by requiring that the Administration ban visas for certain government officials; the President must also investigate and designate for inclusion in the Annex to Executive Order 13382 members of the Revolutionary Guard, its affiliates, and entities that it controls.  The Act also subjects to criminal penalties persons who knowingly conduct business with the Revolutionary Guard, entities controlled by the Revolutionary Guard, the Revolutionary Guards’ affiliates, or foreign persons that knowingly conduct business with the Revolutionary Guard, entities controlled by it, or its affiliates.  United States officials are prohibited from contacting Iranian officials who pose a threat to the United States or are affiliated with terrorist organizations.  This is just a highlight of the key aspects of the bill, which contains many other detailed provisions.  The bill has now been referred to the Senate Committee on Foreign Relations for its consideration.

These efforts build on the Obama administration’s recent expansion of Iran sanctions, but some believe that Congress’s efforts–particularly the Iran Threat Reduction Act–go too far.  The Administration has pressured Congress to dilute the legislation, arguing that the Act would “undercut a carefully calibrated international effort” to deal with the Iranian threat and drive up oil prices.[7]  However, this pressure has so far been unsuccessful; the Defense Authorization Act passed both houses of Congress and was signed into law on December 31^st.  Once enacted, these bills are likely to have a significant economic impact on the United States and other countries.  In light of this legislation and other expanded Iran sanctions imposed by other countries, some estimate that by next year, oil prices will top $150 a barrel.[8]

In addition to the economic impact of the sanctions, the international efforts to expand Iran sanctions are likely to have a dramatic impact on Iran’s relations with the United States and its allies.[9]  Already, the United Kingdom has closed its embassy in Iran after a mob protesting the United Kingdom’s expanded Iran sanctions stormed the British embassy in Tehran.[10]

          B.   Iran, North Korea, and Syria Nonproliferation Reform and Modernization Act of 2011

In addition to the legislation described above, the House also passed the Iran, North Korea, and Syria Nonproliferation Reform and Modernization Act, H.R. 2105, on December 14, 2011.[11]

H.R. 2015 shares many similarities with the Iran Threat Reduction Act but goes even further.  Generally, H.R. 2015 states that it is the United States’ policy to fully implement and enforce sanctions against Iran, North Korea, and Syria for their activities in support of nuclear proliferation.  It requires the President to issue regular reports identifying persons and entities with respect to whom there is credible information indicating that that person or entity has provided specific types of support to Iranian, North Korean, and Syrian nuclear proliferation activities. Such parties will be subject to a variety of sanctions, including a prohibition on any investment by United States persons in entities identified in the report.  Visas will also be denied to: persons identified in the report; spouses, minor children, and agents of persons identified in the report; corporate officers, principals, and shareholders with a controlling interest in the entities identified in the report; and corporate officers, principals, and shareholders with a controlling interest in affiliates of entities named in the report if the affiliates engage in similar activity.  A more limited set of sanctions must be applied to anyone who is providing to or acquiring from Iran, North Korea, or Syria, goods or technology that according to a Presidential determination is used or likely to be used for military applications.  The Act also prohibits ships from entering ports in the United States without certifying that they have not entered an Iranian, North Korean, or Syrian port any time within the previous 180 days.

II.   Executive Orders

In 2011, President Obama signed eight Executive Orders implementing sanctions and export controls on Iran, Libya, North Korea, Syria, and transnational criminal organizations.

          A.   Iran

President Obama signed two Executive Orders relating to Iran in 2011.  First, on May 23, 2011, President Obama signed Executive Order 13574[12], implementing Treasury Department responsibilities under the Iran Sanctions Act (“ISA”), as amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act (“CISADA”).  The Executive Order (1) prohibits any United States financial institution from making loans or providing credits to an ISA-sanctioned person; (2) prohibits any transactions in foreign exchange that are subject to the jurisdiction of the United States and in which an ISA-sanctioned person has any interest; (3) prohibits transfers of credit or payments between financial institutions or by, through, or to any financial institution, to the extent that such transfers or payments are subject to the jurisdiction of the United States and involve any interest of an ISA-sanctioned person; (4) blocks all property and interests in property that are in the United States, that come within the United States, or that are or come within the possession or control of any United States person, including any overseas branch, of an ISA-sanctioned person, and provides that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in; and (5) restricts or prohibits imports of goods, technology, or services, directly or indirectly, into the United States from any ISA-sanctioned person.

Six months later, on November 20, 2011, President Obama signed Executive Order 13590[13], which introduced sanctions against Iran’s petrochemical industry and expanded existing sanctions against its oil and gas industries.  Entities that knowingly sell, lease, or provide to Iran goods, services, technology or support (above certain monetary thresholds) that contribute to Iran’s ability to develop petroleum resources or petrochemical products are subject to sanctions and the denial of access to the Export-Import Bank, the U.S. Federal Reserve, and other U.S. agencies.  The sanctions also apply to successor entities or persons who own or control entities providing such goods, services, technology, or support and knew or should have known about such exports.  Potential sanctions include denial of credit by the Export-Import Bank, the denial of licenses to export or reexport goods or technology that require the prior review and approval by any agency of the United States Government, denial of U.S. agency procurement contracts for any goods or services, and, for sanctioned persons that are financial institutions, the denial or termination of any designation as a primary dealer in United States Government debt instruments or as a repository for United States Government funds.

          B.   Libya

In response to the political upheaval in Libya and the Qadhafi government’s violent response, President Obama signed Executive Order 13566 on February 25, 2011[14].   The Order blocks the property of former Libyan ruler Muammar Qadhafi, enumerated members of his family, senior officials in the former Libyan government, and individuals who were responsible for or facilitated human rights violations.  The Executive Order further blocks the property of Libya and its agents and instrumentalities, including its central bank.  Finally, the Executive Order prohibits entities with a U.S. presence from making or receiving donations to or from persons whose property is blocked.

Subsequent to the end of the Libyan civil war and the fall of the Qadhafi government, OFAC issued General License No. 11 on December 16, 2011[15], under Executive Order 13566, unblocking the property of Libya, its agencies and instrumentalities, and its central bank.  However, the property of the Libyan Investment Authority (“LIA”), and that of entities owned or controlled by the LIA, remains blocked.

          C.   North Korea

On April 18, 2011, President Obama signed Executive Order 13570[16], adding new sanctions against North Korea.  The Executive Order prohibits the importation into the United States directly or indirectly, of any goods, services, or technology from North Korea, in addition to transactions or conspiracies by U.S. persons that evade or avoid the aforementioned restrictions.  The Executive Order also notes that Executive Orders 13466 (blocking the property and interests of North Korea and North Korean nationals on nuclear proliferation grounds) and 13551 (prohibiting imports from and exports to North Korea of luxury goods, arms, or military assistance) remain in effect.

          D.   Syria

President Obama signed three Executive Orders relating to Syria in response to the Syrian government’s pattern of human rights abuses and continued violent suppression of the peaceful protest of the “Arab Spring” movements.  First, on April 29, 2011, President Obama signed Executive Order 13572[17], which blocks the property of the Syrian intelligence directorate and the Islamic Revolutionary Guard and three individuals by adding them to the Specially Designated National (“SDN”) list.  Second, on May 18, 2011, President Obama signed Executive Order 13573[18], which added seven senior Syrian government officials to the SDN list, including the president, vice president, and prime minister of Syria.

Finally, President Obama signed Executive Order 13582[19] on August 17, 2011, which blocks all Syrian government property subject to U.S. jurisdiction.  Additionally this Executive Order announced several further sanctions, including prohibitions on new investment in Syria; a prohibition on the export or re-export of services to Syria; and provisions specifically targeting the Syrian petroleum industry.  The Executive Order also included a “facilitation” provision, which addresses U.S. involvement in foreign transactions, in a manner similar to the Iranian Transactions Regulations.[20]  Rather than blocking specific persons and entities, President Obama’s latest Executive Order more closely approaches an embargo on dealings with Syria, with carve-outs granted under OFAC general licenses issued after August 17, 2011.

          E.   Transnational Criminal Organizations

On July 24, 2011, President Obama signed Executive Order 13581[21], blocking the property of transnational criminal organizations within U.S. jurisdiction and prohibiting donations for the benefit of any persons whose property is blocked.  The Executive Order applies to any person determined by the Secretary of the Treasury, in consultation with the Attorney General and the Secretary of State, to be a foreign person that constitutes a significant transnational criminal organization and to four specifically named transnational criminal organizations: The Brothers’ Circle, a Russian crime syndicate, the Camorra, an Italian crime syndicate, the Yakuza, a Japanese crime syndicate, and Los Zetas, a Mexican crime syndicate.

III.   Significant OFAC Regulations Published in 2011

OFAC added three new sanctions programs (Iranian Human Rights Abuse, Western Balkans Stabilization, and Libya), and canceled four programs (Taliban, and three programs relating to the former Federal Republic of Yugoslavia) in 2011.  Not surprisingly in the year of the “Arab Spring,” many of OFAC’s notices involved licenses related to the developing situation, especially in Libya and Syria.

          A.   Cuba[22]

OFAC amended the Cuban Assets Control Regulations (“CACR”) to implement policy changes announced by the President on January 14, 2011[23], designed to increase people-to-people contact, support civil society in Cuba, enhance the free flow of information to, from, and among the Cuban people, and help promote independence from Cuban authorities. To implement these policy changes, these amendments allow for greater licensing of travel to Cuba for educational, cultural, religious, and journalistic activities and expand licensing of remittances to Cuba. These amendments also modify regulations regarding authorization of transactions with Cuban national individuals who have taken up permanent residence outside of Cuba, as well as implement certain technical and conforming changes.

These sanctions regulations implemented the policy changes announced by President Obama on January 14, 2011. OFAC implemented the regulations to comport with policy changes to “continue efforts to reach out to the Cuban people in support of their desire to freely determine their country’s future.”  The amendments expand licensing for educational, cultural, religious, and journalism-related travel.  Additionally, the amendments loosen restrictions on remittances, both those associated with travel licenses for certain remittances not tied to any category.  The amendments also eased restrictions on transactions with regulations regarding transactions with Cuban national individuals who have taken up permanent residence outside of Cuba.

Travel

Education-Related Travel.  Section 515.565 implemented policy changes for travel-related transactions, and established a new general license authorizing accredited U.S. graduate and undergraduate degree-granting academic institutions to engage in Cuba travel-related transactions incident to certain educational activities.  Education-related general licenses replace the former one-year specific license regime for similar activities.  Additionally, the general license significantly loosened institutional affiliation requirements and requirements for educational activities within Cuba.

Revised Section 515.565(b)(1) provides that OFAC may authorize specific licenses for travel-related transactions for educational activities that are not covered under the newly authorized general license.  New Section 515.565(b)(3) also provides that certain accredited U.S. institutions may, under specific licenses, sponsor academic seminars, conferences, and workshops related to Cuba or global issues involving Cuba.  This provision also permits faculty, students, and staff of such institutions to attend the academic institution-sponsored event.

People-to-people exchanges. OFAC added a new paragraph to section 515.565(b)(2), restoring a prior specific licensing policy for ‘‘people-to-people” exchanges. This category provides for education-related travel not associated with an academic institution, but which is instead conducted by organizations that promote people-to-people contact.

Travel to Cuba for religious activities. Similar to the change for academic institutions, OFAC amended Section 515.566 to replace a specific licensing policy statement with a general license.  Also similar to the academic institution provisions, OFAC revised Section 515.566(b) to implement a specific license policy for religious activity-related travel not covered under the general license.

Other travel to Cuba. OFAC amended Section 515.567, to restore a prior policy statement regarding specific licenses participation in clinics or workshops, with a condition that any such event in Cuba must, at least in part, be run by the licensee.[24] New paragraph (b)(3) of section 515.567 includes a condition that any clinics or workshops in Cuba must be organized and run, at least in part, by the licensee. OFAC also amended section 515.563(b) to expand the scope of the specific licensing policy statement such that free-lance journalistic projects in Cuba may be for purposes other than articles ‘‘articles.”

Transactions and Remittances

Accounts for educational and religious organizations.  In the notes to sections 515.566 and 515.567, OFAC stated that educational institutions and religious organizations were authorized to open accounts at financial institutions within Cuba for the purposes of conducting license-related transactions.  Both notes make clear that nothing in these authorizations permits a U.S. financial institution to establish a direct correspondent relationship with a Cuban financial institution.

Remittances to Cuban nationals.  OFAC amended section 515.570(b) to establish a general license such that persons subject to U.S. jurisdiction were authorized to remit up to $500 per quarter to any Cuban national, except prohibited officials of the Government of Cuba, or prohibited members of the Cuban Communist Party.  Funds under the general license also may not be used for private businesses,  although revised section 515.570(g)(1)  clarifies that specific licenses may be issued to authorize remittances to individuals or independent non-governmental entities to support the development of private businesses, including small farms.  A second remittance general license was added at section 515.570(c), authorizing unlimited remittances to religious organizations in Cuba in support of religious activities.  Newly instituted section 515.570(d) contains a third new general license, authorizing remittances to close relatives who are students in Cuba pursuant to an educational license.

Cuban nationals who have taken up permanent residence outside of Cuba. OFAC changed Section 515.505, to add a general license that permits persons subject to U.S. jurisdiction to engage in transactions with Cuban nationals who have taken up permanent residence outside of Cuba as if they were unblocked Cuban nationals (defined in section 515.307).   The general license has some important restrictions.  Specifically, the general license does not change the status of any property before January 28, 2011–all blocked property remained blocked.  Additionally, a person subject to U.S. must collect two pieces of government-issued documentation that demonstrate that a Cuban national has taken up permanent residence in a new country.

The limits of the expanded travel provisions were a source of confusion for some.  OFAC published its 51-page “Comprehensive Guidelines for License Applications to Engage in Travel-Related Transactions Involving Cuba” in April 2011.  But to correct media misperceptions, OFAC published a Cuba Travel Advisory on July 25, 2011, specifically targeting the limitations and license requirements for “people-to-people” group travel.

B.   Belarus[25]

OFAC amended 31 C.F.R. Section 548 to remove previously authorized general licenses permitting transactions with two entities, Lakokraska OAO and Polotsk Steklovolokno OAO.  The general licenses had been issued after Belarus released political prisoners in 2008.  However, the general license removal followed a series of crackdowns by the Belarusian government in the wake of the December 19, 2010 presidential election.  Opposition candidates and their supporters protested in Minsk, after official reports cited that President Lukashenko received approximately 80 percent of the vote.  Belarusian riot police arrested some 600 protestors, including journalists and human rights activists.  The Organization for Security and Cooperation in Europe (“OCSE”) had noted that the 2010 election did have certain improvements over previous elections.  But, OCSE termed lack of transparency, flawed vote, and post-election violence as an “unfortunate step backwards” for democracy and human rights.[26] The flawed election and post-election events, which included a decision by the Government of Belarus to close OCSE’s Minsk office, led to a decision to revoke the general licenses, allowing U.S. persons until February 11, 2011 to wind down and terminate any transactions.

C.   Iranian Human Rights[27]

OFAC implemented the new regulations at 31 C.F.R. 562, pursuant to Executive Order 13553 of September 28, 2010.  These were “placeholder” regulations issued in abbreviated form, which incorporate EO 13553 as Appendix A to Section 562.  Eight individuals, all senior Iranian government officials were designated in the Annex to EO 13553, including the Commander of the Islamic Revolutionary Guard Corps, the Minister of Intelligence, and the Prosecutor-General of Iran.

D.   Taliban (Afghanistan)[28]

OFAC removed the Taliban-specific sanctions at Part 545 from Chapter V of 31 CFR.  Interestingly, this removal occurred nearly a decade after the Executive Order, upon which the sanctions were based, had been canceled.  The President issued Executive Order 13129 on July 7, 1999, declaring a national emergency, establishing a trade embargo, and additional blocking of Taliban-related property used to provide support for Al-Qaida.  OFAC issued 31 C.F.R. 545 in January 2001.  The President issued EO 13224 on September 23, 2001, and OFAC subsequently issued the Global Terrorism Sanctions Regulations (31 C.F.R. 594) to carry out the purposes of EO 13224, although this did not occur until June 2003.  The President issued EO 13268 in July 2002, which had affected Taliban sanctions in two ways.  First, EO 13268 revoked EO 13129 (the basis for 31 C.F.R. 545).  Second, EO 13268 amended EO 13224 to add the Taliban and one individual (Mohamed Omar) to the Annex to 13224.  Thus, the sanctions targeting the Taliban became subject to the GTSR when it was implemented in 2003.

E.   Actions Related to North Korea[29]

Like the Taliban sanctions withdrawal, the North Korea-related actions reflect a bit of administrative housekeeping by OFAC, by canceling Trading With the Enemy Act -based Parts 500 (Foreign Assets Control Regulations) and 505 (Transactions Control Regulations) from Chapter V of 31 CFR.  Although TWEA authority had been revoked for North Korea in 2008, EO’s based on the International Emergency Economic Powers Act  did not prohibit importation of goods, services, and technology of North Korean-origin to the United States.  Thus, the only North Korea import ban was contained in Subpart B of the TWEA-based Foreign Assets Control Regulations (31 C.F.R. 500).  In EO 13570, the President banned North Korean imports.

The President had issued EO 13466 in June 2008 stating that he would issue a proclamation terminated exercise of authority under the Trading with the Enemy Act (“TWEA”).  The termination of TWEA authority came via Proclamation 8271, issued in September 2008.  In EO 13466, the President declared a national emergency under IEEPA to continue blocking provisions associated with the proliferation risk of weapons-capable fissile material on the Korean Peninsula, effectively shifting blocking provisions to IEEPA.  OFAC issued “placeholder” regulations at 31 C.F.R. 510 in 2010, shortly after President Obama issued EO 13551, restricting certain transactions, including those associated with luxury goods in August 2010.  Neither EO 13466 nor EO 13551, however, prohibited importation of North Korean goods, services, or technology into the United States.    EO 13570, issued in April 2011, established the import ban.  OFAC added EO 13570 as an Appendix to the 31 C.F.R. 510 placeholder regulations at the same time that it canceled Parts 500 and 505.

F.   Balkans-Related Actions[30]

OFAC removed Parts 585, 586, and 587 from Chapter V of 31 CFR.  The national emergencies upon which the sanctions were based had been terminated by EO 13304 in 2003, to include revocation of related EO’s.  The Federal Register entry also indicated that the successor states to the former Socialist Federal Republic of Yugoslavia had reached agreement regarding division of the former Republic’s assets, and that the statutes of limitations for other claims had run.  EO 13304 provided for sanctions on parties subject to open indictment by the International Criminal Tribunal for the former Yugoslavia, in addition to parties who threatened peace and stability in the Western Balkans, or who obstructed any of the frameworks associated with development of successor states.

G.   Change to Web-Based SDN listing; Republication of List of Parties Designated as “Government of Iran[31]

This change generally revises sanctions programs to provide guidance for how to access updated web-based listings to determine the parties that appear on the list of Specially Designated Nationals and Blocked Persons, in lieu of having the SDN List updated annually at Appendix A to Chapter V of 31 CFR.  Additionally, OFAC deleted Appendix B, covering the list of Blocked Vessels, with this information to be included on the SDN List.  OFAC cited that certain programs would continue to have individual appendices, and republished the alphabetical listing of parties considered to be “Government of Iran” in Appendix A to the ITR.

H.   Libya[32]

After the Gaddafi government attempted to repel the spread of the “Arab Spring” movement that had originated in neighboring Tunisia, the President, invoking the authority of, inter alia, the International Emergency Economic Powers Act[33] and the National Emergencies Act[34] issued Executive Order 13566[35] (“E.O. 13566”), effective on February 25, 2011.  OFAC established “placeholder” regulations for Libya at 31 C.F.R. 570 to implement E.O. 13566.

I.   Sudan and Iran

TSRA[36]

OFAC published in revised form, final rules that cover exports to Sudan and Iran made under the Trade Sanctions Reform and Export Enhancement Act of 2000[37]  Both programs have similar structures, including general licenses for exportation of food to the designated areas of Sudan and Iran, with certain restrictions, along with specific license requirements for TSRA-covered exports other than food.  OFAC may exclude any person general license does not permit engaging in transactions with persons whose interests in property are blocked under terrorism programs.  Additionally, OFAC has the authority, under 31 C.F.R. 501.803, to revoke or modify general licenses.  The general licenses also exclude certain food categories, including castor beans and seeds, raw eggs, most fertilized eggs, and live animals.  Both the SSR and ITR require specific licensing for agricultural commodities other than food, the food items not permitted under the general license for food, food intended for military or law enforcement purchasers or importers, medicine, and medical devices.

Diplomatic Missions; Human Remains[38]

OFAC added provisions dealing with third-country diplomatic missions and processing of human remains to the Sudanese Sanctions Regulations and Iranian Transaction Regulations.  New Sections 538.534 (SSR) and 560.541 (ITR) provide that U.S. depository institutions, U.S. registered brokers or dealers in securities, and U.S. registered money transmitters are authorized to process financial transactions for the official business of third-country diplomatic or consular missions in Sudan or Iran.  OFAC explains in the background section of the Federal Register entry that the change was implemented so that SSR and ITR provisions did not impede diplomatic or consular efforts.  The ITR provision adds the requirement that transfers under Section 560.541 must be in accordance with the special rules for dollar-clearing transactions involving Iran in ITR Section 560.516.

The new human remains provisions were inserted as SSR Section 538.535 and ITR Section 560.542.  Both provisions permit the importation into the U.S. of human remains for burial, cremation, or interment, to include coffins or other receptacles, and non-commercial import of finished tombstones or grave markers.  Remains and their receptacles may also be exported from the U.S., either directly or indirectly, although neither provision permits export of tombstones or grave markers.  Both newly added sections state that the human remains provisions cannot be used to import cultural property, or other items of archaeological, historical, or rare scientific importance.

J.   Sudan[39]

Through these changes to the SSR, OFAC loosened certain restrictions to allow more open development in the newly established state of South Sudan.  SSR 538.536 permits all activities and transactions relating to the petroleum and petrochemical industries in South Sudan, which may include Sudanese-origin goods, services, and technology, in addition to payments to the Government of Sudan or government-controlled entities.  Also newly added, Section 538.537 permits transshipment through Sudan of goods, technology, or services to or from South Sudan.  Also relating to transshipments, OFAC modified Section 538.532 to permit transshipment of humanitarian goods through Sudan when those goods are bound for the Specified Areas of Sudan.

The SSR changes also revise Section 538.509 to permit certain Sudanese- and U.S.-origin services for Sudanese-national travel to the U.S. for participation in a public conference, performance, exhibition, or similar event.  The net result is that the SSR contains three levels of applicability.  The least-restrictive provisions apply to the independent nation of South Sudan.  The Specified Areas of Sudan, of which South Sudan formerly was a part, have certain relaxations that permit the flow of aid.  Sudan outside the Specified Areas and the Government of Sudan are subject to the most restrictive regulations.

IV.   Major OFAC Enforcement Actions

          A.   JPMorgan Chase Bank, N.A. (“JPMC”)

OFAC alleged that JPMC violated the Cuban Assets Control Regulations (“CACR”), the Weapons of Mass Destruction Proliferators Sanctions Regulations (“WMDPSR”), the Global Terrorism Sanctions Regulations (“GTSR”), the Iranian Transactions Regulations (“ITR”), the Sudanese Sanctions Regulations (“SSR”), the Former Liberian Regime of Charles Taylor Sanctions Regulations (“FLRCTSR”), and the Reporting, Procedures, and Penalties Regulations (“RPPR”).[40]  JPMC allegedly violated the CACR by processing 1,711 wire transfers worth a combined $178.5 million, involving the Government of Cuba or a Cuban national.  JPMC allegedly violated the WMDPSR by making a $2.9 million trade loan in which the underlying transaction involved an OFAC-blocked vessel.  JPMC allegedly violated the RPPR by failing to produce several documents responsive to an OFAC administrative subpoena regarding a transfer that referenced “Khartoum.”  OFAC determined that these preceding alleged violations were egregious, and they had computed base penalties of $111.2 million, $2.9 million, and $250,000 respectively.  OFAC determined the remaining alleged violations to be non-egregious.  These include that JPMC allegedly violated the ITR, GTSR, SSR, FLRCTSR, and WMDPSR by failing to reject nine transfers worth $609,309.  JMPC allegedly violated the WMDPSR and SSR by advising and confirming a $2.7 million letter of credit involving an OFAC-blocked vessel and a $79,308 letter of credit regarding goods exported to Sudan.  JPMC allegedly violated the ITR by transferring $20.6 million worth of gold bullion to the benefit of a bank in Iran. The allegations were settled for $88,300,000.  Mitigating factors included: (1) JPMC’s substantial cooperation, (2) that OFAC had not issued a penalty notice or a finding of violation to JPMC in the preceding five years, and (3) that JPMC agreed to settle the allegations.

          B.   Sunrise Technologies and Trading Corporation (“Sunrise”) and its principal owner

OFAC alleged that Sunrise and its principal owner violated the ITR.[41]  Sunrise and its principal owner allegedly exported 711 computer-related goods worth $780,933 to Iran without a license, between January 2007 and April 2011.[42]  These actions were investigated by OFAC, which referred the matter to criminal law enforcement, and ultimately resulted in criminal charges.  The alleged violations were not voluntarily disclosed.  The matter was settled for $1,661,672.  Sunrise and its principal owner entered into settlement agreements with OFAC and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), and entered into a criminal plea agreement with the Office of the United States Attorney for the District of Columbia.  Sunrise and its principal owner accepted criminal responsibility, forfeited assets worth $1,250,000, and had BIS Export Denial Orders imposed for a 10-year period.

          C.   Flowserve Corporation (“Flowserve”)

OFAC alleged that Flowserve violated the ITR, the SSR, and the CACR.[43]  The alleged violations were voluntarily disclosed.  Flowserve informed OFAC and BIS that its affiliates exported restricted items to Iran and Sudan without a license, and that its affiliates entered into restricted transactions in which Cuba or a Cuban national was an interested party.  The OFAC matter was settled for $502,408, with a computed base penalty of $661,053.  The BIS matter was settled for an additional $2,500,000.  The OFAC settlement considered the following factors: (1) there appeared to be reckless disregard for U.S. sanctions, (2) facility supervisors were aware of the conduct, and (3) the actions harmed U.S. sanction program objectives.  Mitigating factors included: (1) Flowserve has not been subject to OFAC enforcement actions in the previous five years, (2) Flowserve substantially cooperated with the investigation, and (3) Flowserve took remedial steps to eliminate business with sanctioned countries.

D.   CMA CGM (America) LLC (“CCA”)

OFAC alleged that CCA violated the CACR, the ITR, and the SSR.[44]  CCA, a container shipping company, allegedly violated these regulations by twice shipping goods to Sudan and by collecting twenty-eight payments on behalf of its parent company or affiliates for shipments to Cuba, Iran, or Sudan.  The alleged violations were not voluntarily disclosed.  The matter was settled for $374,400, with a computed base penalty of $640,000.  The settlement considered the following factors: (1) the alleged violations appeared to be the result of a pattern of conduct over more than three years, (2) CCA appeared to lack an adequate compliance program, and (3) some of the shipped goods may have been eligible for licenses.  Mitigating factors included: (1) CCA took remedial steps to strengthen its OFAC compliance program, (2) CCA has not received OFAC penalties in the preceding five years, and (3) CCA agreed to toll the statute of limitations.

E.   Commerzbank AG, New York Branch (“Commerzbank”)

OFAC alleged that Commerzbank, in acting as an advising and confirming bank regarding a letter of credit, violated the CACR by presenting “four sets of trade documents, in which a Cuban Specially Designated National (‘SDN’) had an interest, to the Miami branch of the foreign bank that issued the letter of credit.”[45]  The alleged violations were not voluntarily disclosed.  The matter was settled for $175,500, with a computed base penalty of $260,000.  The settlement considered the fact that Commerzbank was expected to have been aware of the prohibited interest due to repeated references within the trade documents.  Mitigating factors included: (1) Commerzbank took remedial steps to strengthen its OFAC compliance program, (2) cooperated with the OFAC investigation, and (3) agreed to toll the statute of limitations.

V.   (Immediate) Past As Prologue — Future Directions In OFAC Sanctions and Enforcement

Although predictions are necessarily imprecise, the recent U.S. sanctions activity merit attention from anyone doing business in the global marketplace.  The year 2011 was marked by fast-paced international events and the U.S. Government’s responses thereto.  We anticipate ongoing legislative and regulatory activity as Congress and the Obama Administration seek to maintain or increase pressure on Iran.  We also expect legislative and regulatory responses to the “Arab Spring” movements and to Libya’s ongoing efforts as it emerges from the dictatorship of Muammar Gaddafi.  Finally, we anticipate that the ongoing crisis in Syria could cause Congress and OFAC to intensify sanctions pressure.

The recent flurry of activity underscores the importance of maintaining robust and up-to-date compliance procedures.  The willingness of Congress and the Obama Administration to use sanctions as a behavior-shaping tool in foreign policy is more apparent than ever, as can be seen by use of sanctions to respond to human rights violations, particularly in the context of the “Arab Spring.”  Taken together with President Obama’s focus on exports generally, including through the establishment of the Export Enforcement Coordination Center, the confluence of trends indicate that OFAC’s portfolio will only grow.

Businesses must respond to the changing landscape by establishing effective internal controls.  Deep scrutiny of every transaction would be wasteful, but a risk-based approach can identify potential concerns, with minimal impact on operations.  Penalty magnitude is strongly influenced by aggravation and mitigation factors, and by whether disclosure of the behavior is voluntary.  As a result, prudent internal controls, and swift reporting when potential violations are found, are critical factors in reducing risk.  Protective considerations include:

a.         Risk-based assessment of vulnerabilities associated with transactions, based on their magnitude, location, and the history of prior dealing;

b.         Training for personnel involved with cross-border transactions, to sensitize them to the potential risks, and to provide guidance on what procedures should be followed in the event that possible inappropriate activity is discovered;

c.         Escalation provisions that allow senior compliance officials to evaluate unusual situations detected by employees. This allows problems to be avoided, or to be minimized and rapidly reported if they do occur;

d.         Routine monitoring of compliance procedures, to verify operation within established parameters;

e.         Pre-planned responses established by corporate leadership, to ensure that possible violations are correctly reported. Because promptness is a factor, leaders should have had discussions in advance about what will be done, and who will do it, when apparent violations are to be reported. A time-consuming internal investigation to gain greater fidelity about whether a violation actually occurred may not be the most prudent approach.

Well-crafted compliance programs might also consider integration of a wider constellation of risk, since OFAC issues frequently overlap with other U.S. laws that touch on cross-border transactions.  Anti-money laundering procedures, FCPA compliance, along with monitoring for International Transactions in Arms Regulations and EAR issues, are examples of additional elements beyond U.S. sanctions that might be included in a thoughtfully constructed global transaction compliance program.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.