June 12, 2017
As we pass the four-month mark of the Trump Administration, uncertainty remains regarding how the new administration will implement its international trade agenda. In light of President Trump’s strong campaign criticisms of President Obama’s trade policies, we continue to vigilantly monitor all developments surrounding the new administration’s economic sanctions policies. Despite strong rhetoric to the contrary, early developments within the U.S. Department of the Treasury Office of Foreign Asset Control ("OFAC") reflect only limited change from the previous administration. However, it remains to be seen if this trend will continue as the new administration becomes fully staffed and moves beyond its tumultuous beginnings.
Due to President Trump’s biting critiques of the Iran nuclear deal, the Joint Comprehensive Plan of Action ("JCPOA"), during his campaign, Iran has remained an area of chief focus in analyzing the Trump Administration’s trade policies. While many speculated that the Trump Administration would act swiftly to withdraw from JCPOA, we thought that the new administration would formally maintain the agreement and rely on other, non-nuclear authorities to continue to exert economic pressure on Iran. In light of the developments during the first four months of the Trump Administration, we stand by that analysis.
Towards the end of the Obama Administration, OFAC issued a general license to allow for the exportation and re-exportation of most medical supplies to civilian entities in Iran. However, specific licenses are still required to export those devices that OFAC includes on the List of Medical Devices Requiring Specific Authorization. On February 2, 2017, as one its first actions under President Trump, OFAC updated this list to clarify precisely which medical devices require further authorization.[1] This action, which continues the implementation of a shift liberalizing restrictions on U.S. trade in certain items with Iran, was the first indication that the Trump Administration is willing to maintain some continuity with Obama-era sanctions policy.
Thereafter, OFAC has added various individuals and entities in Iran to the Specially Designated National ("SDN") List, which bans U.S. persons, and often non-U.S. persons, from engaging in transactions with listed parties.[2] The United States has been careful to assert that these actions are in compliance with its obligations under JCPOA, and it has stressed that it will continue to levy non-nuclear sanctions as is necessary to curb Iran’s human rights abuses and its development of ballistic missiles.[3] In light of these developments and President Trump’s strong stance against Iran, which was especially apparent in his recent trip throughout the Middle East,[4] we remain concerned about the longevity of JCPOA.
In addition to these changes to Iran sanctions, there have been three significant enforcement actions relating to the Iranian Transactions and Sanctions Regulations ("ITSR"), 31 C.F.R. part 560. It may be too soon to tell, but these actions seem to indicate a renewed emphasis on sanctions enforcement. As increasing sanctions enforcement coincides with President Trump’s desire to maintain economic pressure on Iran, we expect to OFAC to become more active in this regard.
On February 3, 2017, OFAC issued a Finding of Violation to B Whale Corporation, a Taiwanese shipping company. OFAC determined that B Whale Corporation had violated §§560.201 and 560.211 of the ITSR when it received over two million barrels of condensate crude oil from an Iranian ship included on the SDN List at the time of the transfer.[5]
On February 28, 2017, OFAC reached a settlement with California-based United Medical Instruments, Inc. ("UMI"). UMI allegedly violated the ITSR fifty-six times from December 5, 2007 through April 30, 2009 by selling medical imaging equipment that it knew would be re-exported into Iran. OFAC found that UMI was eligible for relief from its high liability because a single employee was responsible for these violations, UMI undertook subsequent efforts to implement remedial measures, UMI lacked prior violations in the preceding five years, and it cooperated with OFAC’s investigation after receiving an initial notice of the violation. UMI settled its potential civil liability for $515,400, which was considered satisfied by UMI’s payment of $15,400 to the U.S. Department of Treasury and its compliance with an earlier settlement agreement it had reached with U.S. Department of the Commerce Bureau of Industry and Security.[6]
On March 7, 2017, OFAC concluded its largest settlement with a non-financial entity to date when it settled with Zhongxing Telecommunications Equipment Corporation, ZTE Kangxun Telecommunications Ltd., and their subsidiaries and affiliates (collectively "ZTE") for $100,871,266. ZTE, a Chinese company, allegedly violated the ITSR on 251 occasions between 2010 and 2016 through a company-wide plan, approved by upper management, that involved the sale of U.S.-origin goods to third-party companies that would then sell the products into Iran.[7] After a 2012 media report surfaced about ZTE’s dealings with Iran, the United States began an investigation into the company. Despite initially informing the U.S. government that it had cease its activities with the country, ZTE resumed its Iran-related business in 2013 and proceeded to delete and alter evidence as the U.S. government’s investigation proceeded. This settlement was concluded as part of a multi-agency negotiation through which ZTE agreed to pay close to $1.2 billion to the Departments of Commerce, the Treasury, and Justice for its civil and criminal liability for these violations.[8]
The disparity between the settlements with UMI and ZTE demonstrates both the significant weight OFAC placed on the fact that upper-management had approved of the scheme to use shell transactions to evade U.S. sanctions and the importance of cooperating with OFAC during its investigations and attempting to rectify violations when possible. Clearly, the ZTE settlement reflects that violations of U.S. sanction policy should not be viewed simply as a cost of doing business. Altogether, these enforcement actions may indicate that the Trump Administration will enforce more stringently the sanctions against Iran in effort to compensate for its inability to levy nuclear related sanctions.
Improving relations with Cuba was a hallmark of the Obama Administration’s international agenda. On December 17, 2014, President Obama announced a historic shift towards normalizing relations with Cuba, and for the remainder of his time in office the Departments of Commerce, the Treasury, and State worked to improve relations between the two countries. We have previously detailed OFAC’s extensive actions in relation to this effort, including amending sections of the Cuban Assets Control Regulations and granting several general and specific licenses. However, President Trump has consistently criticized these actions. While OFAC has yet to make any substantial changes, there have been recent reports that President Trump intends to increase restrictions on travel and commerce with Cuba in the coming months.[9]
In May of 2016, OFAC, acting under the Foreign Narcotics Kingpin Designation Act (the "Kingpin Act"), designated a number of individuals and companies in effort to target the Waked Money Laundering Organization for its role in laundering money on behalf of drug traffickers. Among those entities listed in this effort was Soho Panama S.A., which owns a luxury mall in Panama City known as Soho Mall Panama. In attempt to mitigate the economic fallout of casting such a broad net, OFAC issued a general license to briefly allow for the winding down of Soho Mall Panama.[10] On April 27, 2017, OFAC issued the most recent of three renewals of this general license since President Trump took office. Similar to the previous iterations, General License 4G allows for transactions that would otherwise be prohibited to enable the winding down of the mall through June 15, 2017.[11]
In response to the alleged Russian interference in the 2016 U.S. Presidential election, President Obama issued sanctions against the top two Russian intelligence services—the GRU and the FSB—along with four top GRU officers and three companies that support GRU’s cyber efforts.[12] On February 2, 2017, OFAC issued a general license to correct an impediment created by these sanctions, namely that U.S. technology companies were blocked from exporting into Russia because FSB functions as a licensing agency for components of their products.[13] Beyond authorizing routine transactions typically required for technology companies to receive their required licensure, this general license did not roll back the sanctions that President Obama instituted. Finally, in light of the controversy surrounding former National Security Advisor Michael Flynn, whose conversations with the Russian Ambassador regarding these sanctions ultimately resulted in Flynn’s resignation,[14] newly made public information about the extent of the GRU’s attempts to hack the contractor supporting voter registration rolls in multiple states,[15] and the ongoing investigations into potential collusion between Trump campaign officials and Russia, it is unlikely that these sanctions will be altered in the near future.
The Trump Administration has continued to use sanctions to put economic pressure on Syrian President Bashar al-Assad. On February 23, 2017, OFAC designated Syrian-based Metallic Manufacturing Factory for acting for or on behalf of Mechanical Construction Factory, an entity previously designated for its connection to Syria’s Scientific Studies and Research Center ("SSRC"). SSRC is the Syrian government agency responsible for developing and producing non-traditional weapons.[16] The Syrian regime’s use of chemical weapons against citizens in Khan Sheikhun provoked a U.S. cruise missile attack on one of Syria’s airfields[17] and further sanctions targeting SSRC. On April 24, 2017, OFAC added 271 SSRC employees to the SDN list.[18] Then, on May 16, 2017, OFAC designated SSRC Contracts Director Muhammed Bin-Muhammed Faris Quwaydir and ten other individuals or entities thought to be supporting the Assad regime.[19] While President Trump’s authorization of a missile strike is a significant deviation from President Obama’s use of force against the Assad regime, these sanctions seems to be a continuance of the Obama-era emphasis on Syrian sanctions.
OFAC’s actions during this period reflect that relations between the U.S. and Venezuelan governments continue to cool. On February 13, 2017, OFAC added Venezuelan Executive Vice President Tareck Zaidan El Aissami Maddah, El Aissami’s "primary frontman" Samark Jose Lopez Bello, and thirteen companies owned by Lopez Bello to the SDN list. These actions were taken pursuant to the Kingpin Act roughly a month after El Aissami was appointed Vice President due to his role in international drug trafficking.[20] The same day, OFAC issued a statement of policy in the form of a new Frequently Asked Question ("FAQ"). This FAQ clarifies that the designation of officials within the Venezuelan government does not block transactions with the government itself, but it cautions that those working with the Venezuelan government should be careful that their transactions do not benefit any person or entity on the SDN list, including listed government officials.[21]
On March 18, 2018, OFAC designated eight members of the Venezuelan Supreme Court of Justice to the SDN list in response to a series of the Court’s decisions that OFAC describes as "usurp[ing] the authority of the Venezuela’s democratically-elected legislature." Through these decisions the court granted additional powers to the Executive Branch, limited the legislature’s ability to carry out its duties, and delegated some the legislature’s constitutional obligations to the Court itself.[22] If the relationship between the U.S. and Venezuela continue to deteriorate in this fashion, we expect further sanctions to be implemented.
The actions taken by OFAC during the first four months of the Trump Administration can largely be characterized as a continuation of Obama-era sanctions policy. Yet, the area of most divergence is Iran. If President Trump continues to maintain a hard line on Iran, as we have every reason to believe that he will, we expect to see further designations of Iranian entities and individuals to the SDN list and increased enforcement of the sanctions already in place. We further expect Iran to view such acts as hostile to or violations of the agreement, despite indications that Iran is currently trying to open its economy to outside investors.[23] For this reason, and for those we have explained elsewhere, we remain concerned about the longevity of JCPOA. It is not clear if the relative continuity between administrations will be maintained as the Trump Administration becomes fully staffed and moves past its scandal ridden early stages.
Especially for those companies that have sought to take advantage of the Obama’s Administration’s moves to relax sanctions in Cuba and Iran, either through the use of new general licenses or through specific licenses, any possible changes by the Trump Administration could have significant impacts on existing and planned business, and companies should plan contingencies and consider potential additional outreach to OFAC and other relevant officials to mitigate the impact of any potential reversals in policy.
[1] OFAC, "Update to the Iranian Transactions and Sanctions Regulations, 31 CFR Part 560, Section 560.530(a)(3), List of Medical Devices Requiring Specific Authorization" (Feb. 2, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170202.aspx.
[2] OFAC, "Iran-related Designations; Non-proliferation Designations; Counter Terrorism Designations; Balkans Designation Update" (Feb. 3, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170203.aspx; OFAC, "Counter Terrorism Designations" (Mar. 17, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170317.aspx; OFAC, "Iran-related Designations; Counter Terrorism Designations; Libya Designations" (Apr. 13, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170413.aspx; OFAC, "Iran-related Designations; Non-proliferation Designations" (May 17, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170517.aspx.
[3] OFAC Press Release, "Treasury Sanctions Iranian Defense Officials and a China-Based Network for Supporting Iran’s Ballistic Missile Program" (May 17, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0088.aspx; Bureau of Economics and Business Affairs, U.S. Dep’t of State, "Report Pursuant to the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), as Amended" (May 17, 2017), https://www.state.gov/e/eb/rls/othr/2017/270917.htm; OFAC Press Release, "Treasury Sanctions Supporters of Iran’s Ballistic Missile Program and Iran’s Islamic Revolutionary Guard Corps – Qods Force" (Feb. 3, 2017), https://www.treasury.gov/press-center/press-releases/Pages/as0004.aspx.
[4] Steve Holland & Jeff Mason, "Trump Says Concerns About Iran Driving Israel, Arab States Closer," Reuters (May 22, 2017), http://www.reuters.com/article/us-usa-trump-israel-idUSKBN18I0BB.
[5] OFAC, "Enforcement Information for February 3, 2017" (Feb. 3, 2017), https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170203_bwc.pdf.
[6] OFAC, "Enforcement Information for February 28, 2017" (Feb. 28, 2017), https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170228_united_medical_technologies.pdf.
[7] OFAC, "Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Zhongxing Telecommunications Equipment Corporation" (Mar. 7, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170307.aspx.
[8] OFAC Press Release, "Treasury Department Reaches $100 Million Settlement With Zhongxing Telecommunications Equipment Corporation" (Mar. 7, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0023.aspx.
[9] Julie Hirschfeld Davis, "Trump Considers Rolling Back Obama’s Opening with Cuba" N.Y. Times (May 31, 2017), https://www.nytimes.com/2017/05/31/world/americas/cuba-trump.html?_r=0.
[10] OFAC Press Release, "Treasury Sanctions the Waked Money Laundering Organization" (May 5, 2016), https://www.treasury.gov/press-center/press-releases/Pages/jl0450.aspx.
[11] OFAC, "Issuance of General License No. 4G Authorizing Certain Transactions Involving the Panamanian Mall and Associated Complex, Soho Panama, S.A. (a.k.a. Soho Mall Panama)" (Apr. 27, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170427_33.aspx; OFAC "General License No. 4F Authorizing Certain Transactions Involving the Panamanian Mall and Associated Complex, Soho Panama, S.A. (a.k.a. Soho Mall Panama)" (Mar. 9, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170309.aspx; OFAC, "?Publication of Kingpin Act/Panama-related General License" (Feb. 1, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170201.aspx.
[12] Exec. Order No. 13757, 82 Fed. Reg. 1 (Jan. 3, 2017), https://fas.org/irp/offdocs/eo/eo-13757.pdf. For more analysis of these sanctions, please see our client alert, "President Obama Announces New Russian Sanctions in Response to Election-Related Hacking" (Dec. 30, 2016), http://www.gibsondunn.com/publications/Pages/President-Obama-Announces-New-Russian-Sanctions-in-Response-to-Election-Related-Hacking.aspx.
[13] OFAC, "Publication of Cyber-related General License " (Feb. 2, 2017), https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170202_33.aspx.
[14] Maggie Haberman, et. al, "Michael Flynn Resigns as National Security Adviser," N.Y. Times (Feb. 13, 2017), https://www.nytimes.com/2017/02/13/us/politics/donald-trump-national-security-adviser-michael-flynn.html.
[15] Pam Fessler, "Report: Russia Launched Cyberattack on Voting Vendor Ahead of Election," NPR (June 5, 2017), http://www.npr.org/2017/06/05/531649602/report-russia-launched-cyberattack-on-voting-vendor-ahead-of-election.
[16] OFAC Press Release, "Treasury Sanctions Senior Al-Nusrah Front Leaders Concurrently with UN Designations" (Feb. 23, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0011.aspx.
[17] Kareem Shaheen, "Assad Forces Carried Out Sarin Attack, Says French Intelligence," The Guardian (Apr. 26, 2017), https://www.theguardian.com/world/2017/apr/26/syria-assad-forces-carried-out-sarin-attack-says-french-intelligence.
[18] OFAC Press Release, "Treasury Sanctions 271 Syrian Scientific Studies and Research Center Staff in Response to Sarin Attack on Khan Sheikhoun" (Apr. 24, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0056.aspx.
[19] OFAC Press Release, "Treasury Sanctions Additional Individuals and Entities In Response to Continuing Violent Attacks on Syrian Citizens by the Syrian Government" (May 16, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0087.aspx.
[20] OFAC Press Release, "Treasury Sanctions Prominent Venezuelan Drug Trafficker Tareck El Aissami and His Primary Frontman Samark Lopez Bello" (Feb. 13. 2017), https://www.treasury.gov/press-center/press-releases/Pages/as0005.aspx.
[21] OFAC, "OFAC FAQs: Other Sanctions Programs—Venezuela Sanctions", Q. 505 https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela (last updated Apr. 27, 2017, 3:47 pm).
[22] OFAC Press Release, "Treasury Sanctions Eight Members of Venezuela’s Supreme Court of Justice" (May 18, 2017), https://www.treasury.gov/press-center/press-releases/Pages/sm0090.aspx.
[23] Thomas Erdbrink, "Rouhani Wins Re-election in Iran by a Wide Margin," N.Y. Times (May 20, 2017), https://www.nytimes.com/2017/05/20/world/middleeast/iran-election-hassan-rouhani.html?_r=1.
The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith and Christopher Timura.
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