2012 Year-End Sanctions Update

March 13, 2013

The year 2012 saw vigorous activity in the creation and implementation of increasingly restrictive sanctions, particularly with respect to Iran.  Enforcement of the sanctions has been accompanied by at times very significant penalties.

This update reviews sanctions developments in the United States, European Union and the United Kingdom in 2012 in four areas — legislation, Executive Orders, regulatory developments, and enforcement — and assesses what the experiences in 2012 suggest about how business practices might evolve to adapt to current sanctions.

OFAC SANCTIONS

I.  Legislation

During 2012 the United States enacted some of its most restrictive sanctions, isolating Iran with trade barriers similar to those imposed on Cuba, to devastating effect.  Augmented sanctions spelled disaster for Iran’s economy while reminding us of their crippling power.  The most recent volley targets specific deficiencies in the Iran sanctions regime, constraining bartering and non-monetary means of carrying out transactions.  Turkey, a strong U.S. ally and trading partner with Iran, in fact exploited this bartering loophole, trading gold for fossil fuels. 

Near the end of the year, a law targeting Russia’s failures to protect human rights and the rule of law led to retaliatory actions from the Duma at the behest of the Kremlin.  Meanwhile bills contemplating more extensive sanctions on Syria languish in committee.  Given the high stakes involved and effectiveness of the U.S. program to date, expect Iran to remain the focus of sanctions activity in 2013.

            A.  Iran Threat Reduction and Syria Human Rights Act (Pub.  L. No. 112-158).

On Friday, August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act ("TRA"), greatly expanding the scope of Iran sanctions.  According to Representative Ileana Ros-Lehtinen, a principal proponent, the Act "seeks to tighten the choke hold on the regime beyond anything that has been done before."[1]

The TRA vastly expands the reach of sanctioned activity under the International Emergency Economic Powers Act ("IEEPA").  Section 218 of the TRA directs the President to prohibit:

[A]n entity owned or controlled by a United States person and established or maintained outside the United States from knowingly engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited by an order or regulation issued pursuant to the [IEEPA] if the transaction were engaged in by a United States person or in the United States.[2]

This language represents a tidal shift, as it effectively bars trade with Iran through foreign subsidiaries.  Following regulatory implementation of Section 218, Iran sanctions now closely resemble the prohibitions against U.S. companies and their foreign subsidiaries doing business with Cuba.

Congress has for years attempted to enact similar expansions.  Prior legislation met stiff opposition from both Republican and Democratic administrations, because of fears that the extraterritorial reach of such a restriction would conflict with diplomatic considerations.  U.S. allies, desiring to govern under their own laws, saw the expansion of U.S. law as an infringement on their ability to regulate domestic business.  Indeed, the European Union and Canada have gone so far as to set up "blocking" statutes, which prohibit compliance with Cuba sanctions.  And yet election-year politics appears to have pushed the Obama administration to embrace this latest round of escalated Iran sanctions.

Violators face civil penalties of $250,000 or twice the value of the illegal transaction.[3]  But the TRA also provides a safe harbor, foreclosing liability if the U.S. person divests or terminates its business with the entity by February 6, 2013.[4]

Public companies face additional reporting requirements, if they engage in certain prohibited transactions involving Iran.  The TRA amends Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") to require an issuer that knowingly engaged in a sanctionable transaction involving blocked persons (e.g., terrorist organizations or the government of Iran), the proliferation of weapons of mass destruction, or substantial investment in the Iranian petroleum industry to disclose such violation in its quarterly and annual reports.[5]  The disclosure must describe the activity in detail and include:

• the nature and extent of the activity;

• the gross revenue and profit attributable to the activity; and

• whether the issuer or its affiliate intends to continue the activity.[6]

Additionally, if a company discloses in its quarterly or annual report that it knowingly engaged in this prohibited activity, the company must file a separate notice of such disclosure for publication on the SEC’s website.[7]  The SEC must send this notice to the President; the House Committees on Foreign Affairs and Financial Services; and the Senate Committees on Foreign Relations and Banking, Housing, and Urban Affairs.[8]  The TRA also provides that, as a consequence of receiving such notice, the President must investigate the disclosed activity and, within 180 days of initiating the investigation, determine whether to impose sanctions.[9]  These reporting provisions will "take effect with respect to reports required to be filed .  .  .  after" February 6, 2013.[10] Because the TRA amends the Exchange Act directly, it is not conditioned on SEC rulemaking, although the SEC does have the authority to clarify the reporting obligation.

The TRA includes several other provisions that are likely to have a narrower effect than those discussed above.  Certain provisions, for example, augment the United States’ ability to identify officers in Iran’s Revolutionary Guard Corps and impose greater sanctions on those who provide support to it[11]; whereas others expand restrictions on Iran’s energy sector[12] and financial instruments issued by the Government of Iran.[13] Finally, the law augments sanctions against Syria in response to the Assad regime’s myriad human-rights violations.[14]

            B.  National Defense Authorization Act for Fiscal Year 2013 (Pub.  L. No. 112-239)

Among many other things, the Iran Freedom and Counter-Proliferation Act, Subtitle D of the larger National Defense Authorization Act for Fiscal Year 2013 (the "NDAA 2013") tightens Washington’s grip on sectors critical to Iran’s energy industry.  These measures include naming as entities of proliferation concern Iranian port operators and entities in the energy, shipping, and shipbuilding industries.[15]  The NDAA 2013 also prohibits knowingly supplying goods and services for use in these industries.[16]  Some provisions for heading off Iran’s innovative methods of circumventing sanctions have also been tucked into the legislation.[17]

In November 2012, Turkey’s deputy prime minister acknowledged that Ankara had been exporting gold to Tehran in exchange for natural gas.  According to press accounts, the $6.4 billion in gold transfers was so large that it almost eliminated Turkey’s long-standing trade deficit with Iran.[18]  This bartering practice apparently arose in response to U.S. and EU restrictions on dollar- and euro-denominated financial transactions with Iran that were implemented earlier this year.

The NDAA 2013 imposes sanctions on persons who knowingly sell, supply, or transfer, directly or indirectly, to Iran precious metals, materials that are used to barter, or certain materials that are used in connection with Iran’s energy, shipping, or shipbuilding sectors.[19]  The NDAA 2013 also bars material-based transactions that involve any sector controlled or directed by the Iranian Revolutionary Guard or that are relevant to the nuclear, military, or ballistic missile programs of Iran.[20]  Suspect materials include graphite, raw or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes.[21]

The President takes on new reporting responsibilities under the NDAA 2013, as well.  He is charged with submitting a report on whether Iran is bartering with, swapping, or otherwise exchanging any of the materials listed above.[22]  And, continuing with Congress’s focus on the transportation of Iranian goods, the NDAA 2013 requires the President to report on "large or otherwise significant vessels that have entered seaports in Iran controlled by the Tidewater Middle East Company" and the airports to which Iranian-controlled air carriers under U.S. sanctions fly.[23]

            C.  Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act (Pub.  L. No. 112-208)

With the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act (the "Magnitsky Act") Congress gives with one hand and takes with the other.  As a first step, the Magnitsky Act rolls back Cold War–era trade restrictions imposed by the Jackson-Vanik amendment.  This repeal grants Russia and Moldova permanent normal trade relations with the United States.[24]  But the Magnitsky Act also imposes travel and financial sanctions on human-rights violators and persons involved in the death of Russian businessman Sergei Magnitsky.[25]  In retaliation for what Russian politicians see as meddling in their country’s domestic policies, Russia enacted a ban on American adoption of Russian children.[26] 

Magnitsky died in a Moscow prison on November 16, 2009.[27]  Illegally jailed "by the same law enforcement officers whom he had accused of stealing" funds from his client, the Hermitage Fund companies, Magnitsky was beaten by eight prison guards the day he died.[28] The Magnitsky Act criticizes Russia’s investigation of the event and failure to prosecute Magnitsky’s killers.[29]  Further, Congress stated that the episode "appears to be emblematic of a broader pattern of disregard for the numerous domestic and international human rights commitments of the Russian Federation and impunity for those who violate basic human rights and freedoms."[30] Citing examples like the convictions of former Yukos executives Mikhail Khodorkovsky and Platon Lebedev, Congress also questioned the independence and integrity of the Russian judicial system.[31]

The Magnitsky Act requires the President to create and maintain a list of those responsible for the detention, abuse, or death of Sergei Magnitsky and those who participated in the criminal conspiracy he uncovered.[32]  The list will also include those responsible for extrajudicial killings, torture, or other gross violations of human rights perpetrated against government whistleblowers or those fighting to defend human rights in Russia.[33]  The act requires the President to freeze the U.S. assets of those appearing on the list.[34]  And, finally, it bars listed persons from possessing a U.S. visa.[35]

Minutes after President Obama signed the Magnitsky Act into law, the Russian foreign ministry issued a statement calling it "open meddling" in Russia’s internal affairs and "a blind and dangerous position."[36] Shortly thereafter, President Vladimir Putin signed into law a tit-for-tat reprisal that bars Americans from adopting Russian children.[37]  Russian politicians dubbed this the "Dima Yakovlev Law," invoking the name of a two-year-old boy who died in Virginia after his adopted father left him in a locked car in the sun.[38]

II.  Executive Orders

President Obama signed eight sanctions-related Executive Orders during 2012.  Unsurprisingly, five Executive Orders deal with Iran and Syria.  The other three Executive Orders cover Burma, Somalia, and Yemen.  This section will review 2012’s Executive Orders by country, starting with Iran and Syria.  Two Executive Orders cover Iran specifically, while three others cover both Iran and Syria.

            A.  Iran

                  1.  Executive Order 13,599: "Blocking Property of the Government of Iran and Iranian Financial Institutions" (Feb. 5, 2012).[39]

Executive Order 13,599 targets Iran’s access to the global financial system, expanding U.S. sanctions to include all Iranian financial institutions, and not only those that had been specifically designated.  After Executive Order 13,599, U.S. persons must block (i.e. seize) all property and interests in property that come into the U.S., or into the possession of a U.S. person, wherever located, for the following entities: the Government of Iran; the Central Bank of Iran; all Iranian financial institutions; and persons owned, controlled by, or acting on behalf of any such persons whose property is blocked.[40]  The Executive Order’s definitions of "Government of Iran" and "Iranian Financial Institution" are consistent with, though not identical to, the definitions of the same terms in the Iranian Transactions and Sanctions Regulations ("ITSR").[41]  

In addition to the blanket coverage of Iranian financial institutions, we mention two other noteworthy features of Executive Order 13,599 here: 1) it requires U.S. persons to block the property of any individual or entity that meets the definitional criteria–an entity need not be included on the Specially Designated Nationals and Blocked Persons List ("SDN List"),[42] and 2) it mandates that financial institutions and U.S. persons affirmatively "freeze" any funds associate with prohibited transactions, a requirement that had not been required under the ITSR.[43]

OFAC also issued two general licenses to accompany Executive Order 13,599.  General License A authorizes the continuation of many transactions already permitted under existing licenses, such as those general licenses set forth under the ITSR and those specific licenses previously issued by OFAC.[44]  General License A does not, however, permit closing accounts of the Government of Iran or Iranian financial institutions, to permit transfer of the balances to accounts outside of the United States.[45]  General License B authorizes U.S. depository institutions and U.S. registered brokers or securities dealers to process non-commercial, personal remittances to or from Iran as long the payments are not made to any person or entity included in the term "Government of Iran," and that the person receiving the remittances is designated only pursuant to Executive Order 13,599, and not under other sanctions regulations.[46] 

                  2.  Executive Order 13,622: "Authorizing Additional Sanctions with Respect to Iran" (July 30, 2012).[47]

Executive Order 13,622 can be viewed as a parallel measure to Executive Order 13,599, with the focus shifted to non-Iranian financial institutions that support Iran’s ability to transact business in the oil, petrochemical, or shipping trade sectors that would circumvent energy-related sanctions under the National Defense Authorization Act for Fiscal Year 2012 ("NDAA 2012").  Executive Order 13,622 authorizes the Secretaries of State and the Treasury to impose new sanctions on foreign financial institutions ("FFIs") that have "knowingly conducted or facilitated any significant financial transaction": (1) for the purchase or acquisition of Iranian petroleum, petroleum or petrochemical products;[48] or, (2) with the National Iranian Oil Company ("NIOC") or Naftiran Interade Company ("NICO").[49]  FFIs that have been found to have conducted or facilitated such transactions may be prohibited from opening or maintaining correspondent or payable-through accounts in the United States.  The Secretary of the Treasury may also block the property and interests in property of any person determined to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of NIOC, NICO, or the Central Bank of Iran ("CBI"), or the purchase or acquisition of U.S. bank notes or precious metals by the Iranian Government.[50]

Transactions for the sale of food, medicine, or medical devices to Iran are exempt from the restrictions imposed by Executive Order 13,622, provided that OFAC has licensed the underlying transactions.[51]  Furthermore, while existing NDAA 2012 prohibitions remain in effect, Executive Order 13,622’s restrictions do not apply to FFIs from countries if the Secretary of State determines that those countries have significantly reduced their purchases of Iranian crude oil.[52]  Otherwise, the NDAA 2012 restrictions apply.[53]

            B.  Iran and Syria

Three Executive Orders cover both Iran and Syria.  Syria’s inclusion with Iran reflects the U.S. Government’s increasing focus on Syria as that country’s rebellion has been met with human rights abuses by an increasingly desperate Assad regime. 

                  1.  Executive Order 13,606: "Blocking the Property and Suspending Entry into the United States of Certain Persons with Respect to Grave Human Rights Abuses by the Governments of Iran and Syria via Information Technology" (Apr. 22, 2012).[54]

Executive Order 13,606, "Blocking the Property and Suspending Entry into the United States of Certain Persons with Respect to Grave Human Rights Abuses by the Governments of Iran and Syria via Information Technology" ("GHRAVITY E.O."), targets the use of information and communications technology by Iran and Syria to commit human rights abuses against their citizens.[55]  Balancing the desire to prevent and halt such abuses, however, is the U.S. Government’s recognition "of the vital importance of providing technology that enables the Iranian and Syrian people to freely communicate with each other and the outside world."[56]

The GHRAVITY E.O. targets persons that have operated or directed the operation of information and communications technology that "facilitates computer or network disruption, monitoring, or tracking that could assist in or enable serious human rights abuses by or on behalf of the Government of Iran or the Government of Syria."[57]  This includes persons that have sold, leased, or provided goods, services, or technology to Iran and Syria likely to be used to facilitate malign use of information technology, in addition to persons that have materially assisted, sponsored, or provided financial, material, or technological support.[58]  The Order also freezes the property of entities that are 50 percent or more owned by persons blocked under the order– regardless of whether or not they appear on the SDN List–as well as persons or entities that have acted or purported to act for or on behalf of such blocked persons.[59]  It defines "information and communications technology" as "any hardware, software, or other product or service primarily intended to fulfill or enable the function of information processing and communication by electronic means, including transmission and display, including via the Internet."[60]

The GHRAVITY E.O., however, goes further than blocking the property and interests in property of designated individuals and entities.  It also prohibits the making of any contribution or provision of funds, goods, and services by, to, or for persons designated under the order, as well as the receipt of any such items from a blocked person.[61]  In addition, the Order suspends the immigrant and nonimmigrant entry into the United States of aliens who meet one or more of the criteria for designation listed in Section 1 of the Order.[62]  These additional measures expand the sanctions regime beyond merely freezing assets to preventing specific conduct–the use of information and communications technology to commit human rights abuses–and restricting the ability of designated to persons to receive donations of any funds, goods, or services, as well as to enter the United States.

                  2.  Executive Order 13,608: "Prohibiting Certain Transactions with and Suspending Entry into the United States of Foreign Sanctions Evaders With Respect to Iran and Syria" (May 1, 2012).[63]

One week after issuing the GHRAVITY E.O., the President signed Executive Order 13,608, "Prohibiting Certain Transactions With and Suspending Entry Into the United States of Foreign Sanctions Evaders With Respect to Iran and Syria" ("FSE E.O.").[64]  This order targets foreign individuals and entities that have violated, attempted to violate, conspired to violate, or caused a violation of any U.S. sanction against Iran or Syria.[65]  It also targets individuals and entities that have facilitated deceptive transactions for or on behalf of individuals and entities subject to U.S. sanctions.[66]  The order defines a "deceptive transaction" as "any transaction where the identity of any person subject to United States sanctions concerning Iran or Syria is withheld or obscured from other participants in the transaction or any relevant regulatory authorities."[67]

As a result, the FSE E.O. provides OFAC with "a powerful new tool to prevent, deter, and respond to the risks posed by sanctions evaders to the U.S. and global financial system."[68]  In addition, by publicly identifying foreign individuals and entities that have engaged in or facilitated sanctions evasions, it helps U.S. persons avoid unknowingly engaging in transactions that potentially violate U.S. sanctions against Iran and Syria.[69]

Pursuant to the FSE E.O., the Secretary of the Treasury may prohibit all transactions or dealings involving designated foreign sanctions evaders.[70]  This includes any exporting, reexporting, importing, selling, purchasing, transporting, swapping, brokering, approving, financing, facilitating, or guaranteeing in or related to any goods, services, or technology provided by U.S. persons, regardless of their location.[71]  It also includes any transaction or dealing in or related to any goods, services, or technology in or intended for the United States.[72]  As a result of this expansive new authority granted to the Department of Treasury, the FSE E.O. effectively bars access to the U.S. financial and commercial systems for designated foreign sanctions evaders.[73]

Similar to the GHRAVITY E.O., the FSE E.O. prohibits the making of any contribution or provision of funds, goods, and services by, to, or for persons designated as foreign sanctions evaders.[74]  In addition, it suspends the immigrant and nonimmigrant entry into the United States of aliens that qualify as foreign sanctions evaders under the order.[75]

The TRA and its implementing executive order, Executive Order 13,628[76], drastically increase sanctions applicable to persons who engage in unauthorized transactions with Iran.  They also prohibit U.S. persons from insulating Iran-related business activities by means of foreign subsidiaries–closing the foreign-subsidiary loophole.   

                  3.  Executive Order 13,628 : "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" (Oct. 9, 2012).[77]

Executive Order 13,628 implements Sections 204, 402, and 403 of the TRA, including amendments to the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA").[78]  Additionally, Section 4 of Executive Order 13,628 re-emphasizes the foreign subsidiary provisions in Section 218 of the TRA.[79]

Consistent with Section 218 of the TRA, Section 4 of Executive Order 13,628 prohibits foreign subsidiaries of United States persons from knowingly violating the Iranian Transactions Regulations ("ITR"), Executive Order 13,599, Section 5 of Executive Order 13,622, or Section 12 of Executive Order 13,628.[80]  In its FAQ, OFAC explains that the prohibitions extend to:

[K]nowingly engaging in any transaction, either directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran, if that transaction would be prohibited by certain executive orders prohibiting trade and other dealings with, and investment in, Iran and blocking the Government of Iran and Iranian financial institutions, or any regulation issued pursuant to the foregoing, if the transaction were engaged in by a United States person or in the United States.[81] 

Further, Section 218 provides for civil penalties on the U.S. parent company for any such violations by its foreign subsidiaries.[82]  For the purposes of Section 218, a foreign subsidiary is an entity established or maintained outside the United States, but which is owned or controlled by a U.S. person.[83]  Section 218 also defines ownership or control as holding more than 50 percent of the equity interest by vote or value in an entity; holding a majority of seats on the board of directors of an entity; or otherwise controlling the actions, policies, or personnel decisions of an entity.[84]

Subsection 4(c) of Executive Order 13,628, consistent with Section 218(d) of the TRA, provides a "safe harbor" against civil penalties, provided that the U.S. person divests or terminates its business with the foreign subsidiary by February 6, 2013.[85]

OFAC’s FAQs also make clear that liability only attaches for a subsidiary’s actions that would be violations if conducted by a U.S. person.[86]  For instance, a foreign subsidiary’s transaction that was permissible under the "information or informational materials" exemption would not subject a U.S. parent to civil liability.

Closing the "foreign subsidiary" loophole requires a considerable shift in management by U.S. persons with foreign subsidiaries.  Previously, U.S. parents had incentive to minimize or avoid knowledge of their subsidiaries’ Iran-related activities, to avoid the prospect of "facilitation" under the ITR (now the Iranian Transactions and Sanctions Regulations ("ITSR)).  It is also possible that information exchange practices evolved such that subsidiaries avoided providing Iran-related information to their U.S. parents.  Now, the situation is reversed.  Although the foreign subsidiary must "knowingly" conduct prohibited transactions to trigger U.S. parent liability, the law contains no similar knowledge element on the part of the parent.  Thus, the parent is strictly liable to civil penalties for transactions that its foreign subsidiary knowingly conducts.  As a result, U.S. parents are more likely to implement affirmative due diligence measures to assess their subsidiaries’ business entanglements, and to ensure that subsidiaries are forthcoming with information.

            C.  Yemen

                  Executive Order 13,611: "Blocking Property of Persons Threatening the Peace, Security, or Stability of Yemen" (May 16, 2012).[87]

Executive Order 13,611 — which aims to deter political violence in Yemen — blocks the property of any person found to 1) have engaged in acts that directly or indirectly threaten the peace, security, or stability of Yemen, such as acts that obstruct the implementation of the agreement of November 23, 2011; 2) be a political or military leader of an entity that has engaged in such acts; 3) have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of such acts; or 4) be owned, controlled by, or acting on behalf of any person whose property has been blocked pursuant to the order.[88] 

            D.  Burma

                  Executive Order 13,619: "Blocking Property of Persons Threatening the Peace, Security, or Stability of Burma" (July 11, 2012).[89]

Issued along with two related General Licenses, Executive Order 13,619 blocks the assets of certain persons who undermine or obstruct the political reform process and movement towards peace and security.[90]  Analogous to the situations in Iraq and Libya, Executive Order 13,619 strikes a balance between removing economic restraints, while still retaining the necessary tools to deal with elements that may seek to thwart reform efforts.

Specifically, Executive Order  13,619 authorizes freezing property and interests in property of: 1) persons who have engaged in acts that threaten the peace, security, or stability of Burma, including direct and indirect acts that undermine political reform or threaten the peace process with ethnic minorities; 2) persons who are responsible for or complicit in the commission of human rights abuses, and; 3) persons who have directly or indirectly supplied arms or related material from North Korea to Burma.[91]  In addition, OFAC may target persons who qualify as senior officials of an entity that has engaged in the foregoing acts; who have "materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of" the foregoing acts; or who are owned or controlled by, or have acted on or behalf of any person whose assets are blocked pursuant to Executive Order  13,619.[92]

            E.  Somalia

                  Executive Order 13,620: "Taking Additional Steps to Address the National Emergency With Respect to Somalia" (July 20, 2012).[93]

Executive Order 13,620 addresses the ongoing situation in Somalia.  The Order targets destabilizing influences in Somalia, blocking the assets of, among others, persons found to have threatened the Djibouti Agreement of August 18, 2008 and international peacekeeping operations, or engaged in acts to misappropriate Somali public assets.[94] 

III.  Significant OFAC Regulations Published in 2012

OFAC issued a number of new regulations in 2012.  Many of the regulations implemented key legislation targeting Iran and Syria, while others eased restrictions and clarified a number of existing regulations.

            A.  Burma

OFAC regulations in 2012 eased sanctions on Burma in response to progress made in the country as a result of historic economic and political reforms that the Burmese Government has made over the past year.[95]

On July 11, 2012, OFAC issued General License No. 16, authorizing the exportation of U.S. financial services to Burma.[96]  General License No. 16 replaced and superseded General Licenses Nos.  14-C and 15, which authorized certain financial transactions in support of humanitarian, religious, and other not-for-profit activities in Burma, and authorized noncommercial, personal remittances to Burma.[97]  General License No. 16 authorizes the activities formerly covered by General License Nos. 14-C and 15.[98]  General License No. 16 does not permit the exportation of financial services to the Burmese Ministry of Defense, state or non-state armed groups, or any entity owned by the Burmese Ministry of Defense or an armed group.[99]  The license also does not authorize the exportation of financial services to any person whose property and interests in property are blocked under the Burma sanctions program.[100]

General License No. 17, issued July 11, 2012, authorizes new investment in Burma by waiving the ban on new U.S. investment set forth in the Foreign Operations, Export Financing and Related Programs Appropriations Act of 1997.[101]  The license does not authorize new investment undertaken pursuant to an agreement with the Burmese Ministry of Defense, any state or non-state armed group, or any entity owned by the Burmese Ministry of Defense or an armed group.  The license also does not authorize transactions with any person whose property and interests in property are blocked.

General License No. 17 also requires that any U.S. person investing in Burma abide by new reporting requirements.  Persons whose aggregate new investment exceeds $500,000 must provide the State Department with information set forth in the "Reporting Requirements on Responsible Investment in Burma."[102] Pursuant to these requirements, investors must file reports with the State Department on an annual basis that include information about policies and procedures with respect to human rights, workers’ rights, environmental stewardship, land acquisitions, arrangements with security service providers, and aggregate annual payments exceeding $10,000 to Burmese government entities, including state-owned enterprises.[103]  In addition, persons undertaking new investment pursuant to an agreement with the Myanmar Oil and Gas Enterprise must notify the State Department within 60 days of their new investment.[104]

On November 16, 2012, OFAC issued General License No. 18, which eases the ban on imports into the United States by authorizing the importation of products from Burma, except for jadeite or rubies mined or extracted from Burma, or any articles of jewelry containing jadeite or rubies mined or extracted from Burma.[105]  Although General License No. 18 loosens restrictions on trade with Burma, the license does not authorize transactions with persons whose property or interests in property are blocked.[106]

            B.  Cuba

OFAC amended the Cuban Assets Control Regulations, 31 C.F.R. part 515, to authorize the processing of funds transfers for the operating expenses or other official business of third-country diplomatic or consular missions in Cuba.[107]  The amendments also add a general license authorizing certain payments in connection with overflights of Cuba or emergency landings in Cuba by United States aircraft, which prior to the amendment required the issuance of a specific license.[108]

            C.  Côte d’Ivoire, Darfur, and the Democratic Republic of the Congo

OFAC added a definition to the Côte d’Ivoire Sanctions Regulations, the Darfur Sanctions Regulations, and the Democratic Republic of Congo Sanctions Regulations.  Under these regulations, any person who provides "financial, material, or technological support" for proscribed activities shall have his or her property blocked.[109]  OFAC revised these regulations, 31 C.F.R. part 543, 31 C.F.R. part 546, and 31 C.F.R. part 547, respectively, to include the following definition of "financial, material, or technological support":

[A]ny property, tangible or intangible, including but not limited to currency, financial instruments, securities, or any other transmission of value; weapons or related materiel; chemical or biological agents; explosives; false documentation or identification; communications equipment; computers; electronic or other devices or equipment; technologies; lodging; safe houses; facilities; vehicles or other means of transportation; or goods.[110]

            D.  Iran

OFAC tightened sanctions against Iran significantly in 2012.  Although most of the action targeted Iran’s alleged WMD proliferation, new regulations also target perpetrators of grave human rights abuses within the Government of Iran, as well as foreign sanctions evaders with respect to the Iran sanctions program.

                  1.  Iranian Financial Sanctions Regulations

OFAC amended the Iranian Financial Sanctions Regulations ("IFSR") and republished them in their entirety to implement Section 1245(d) of the NDAA 2012, which, inter alia, targets the Iranian petroleum sector and the Central Bank of Iran.[111] OFAC amended the ISFR in multiple ways.  First, the IFSR now includes the prohibitions and exceptions set forth in Section 1245(d) of the NDAA.  Second, the IFSR defines key terms in line with NDAA 2012 definitions, including petroleum, petroleum products, food, medicine, and medical devices.  Third, the IFSR now interprets the phrase "country with primary jurisdiction over the foreign institution" in the same way as the NDAA 2012.  Fourth and finally, the IFSR sets forth the types of factors considered in determining whether a transaction is "significant" under 31 C.F.R. §§ 561.201 and 561.203.[112]

On November 8, 2012, OFAC further amended the IFSR to implement the changes made by Sections 214 through 216 of the TRA.[113]  These changes add additional categories of sanctionable activities for which foreign financial institutions may lose their ability to establish correspondent account relationships with United States financial institutions.[114]  OFAC revised Section 561.201(a)(2) of the IFSR to incorporate the TRA’s expansion of sanctionable activity to include facilitating the activities of "a person acting on behalf of or at the direction of, or owned or controlled by" a person sanctioned under United Nations Security Council resolutions.[115] Section 561.201(a)(5)(ii) and the accompanying note were revised to authorize the imposition of sanctions on a foreign financial institution that knowingly facilitates significant transactions or provides significant financial services for a "person" (formerly, a "financial institution") whose property interests in the property are blocked in connection with Iran’s proliferation of weapons of mass destruction or delivery systems for such weapons or Iran’s support for international terrorism.[116] OFAC also added new paragraph (a)(6) to authorize sanctions on a foreign financial institution that knowingly facilitates, or participates or assists in, an activity described in 31 CFR section 561.201(a)(1) through (a)(5), including by acting on behalf of, at the direction of, or as an intermediary for, or otherwise assisting, another person with respect to the activity.[117] Finally, OFAC amended the definitions of "foreign financial institution" and "Iranian financial institution" to add "dealers in precious metals, stones, or jewels" to the examples of entities included in the definitions.[118]

                  2.  Iranian Transactions and Sanctions Regulations

This fall, OFAC published a final rule changing the heading of the Iranian Transactions Regulations ("ITR"), 31 C.F.R. part 560, to the "Iranian Transactions and Sanctions Regulations" ("ITSR"), 31 C.F.R.  part 560 and amended the ITSR to implement Executive Order 13,599 (other than Section 11) and Sections 1245(c) and (d)(1)(B) of NDAA 2012.[119]  Due to the extensive nature of the amendments, OFAC reissued the ITSR in their entirety.[120]  OFAC added numerous new sections to the ITSR, including prohibitions, definitions, interpretations, and licensing provisions.[121]  OFAC also revised many existing sections of the ITSR in order to take account of the new government-wide blocking as well as the blocking of all Iranian financial institutions required by Executive Order 13,599 and Section 1245 of NDAA 2012.[122]

OFAC added new Section 560.211 to the ITSR to implement the blocking prohibitions set forth in Executive Order 13,599 and NDAA 2012.[123]  New Sections 560.212 through 560.214 add certain consequences and requirements that stem from the blocking prohibitions, including, inter alia, the requirement to hold blocked funds in interest-bearing accounts.[124]  New paragraphs (e) and (f) were added to section 560.210 to incorporate two exemptions from the blocking prohibitions set forth in Executive Order 13599 concerning the official business of the Federal Government and the property and interests in property of the Government of Iran.[125]  There have also been revisions and additions to subpart C, which defines key terms used throughout the ITSR.[126]  There was an important change to Section 560.405, which now provides that transfers of funds no longer are considered ordinarily incident to a licensed transaction, and instead must be authorized by a general or specific license.[127]

Furthermore, certain general licenses that previously appeared in the ITR have been removed and not added to the ITSR, either because they are out of date or no longer consistent with U.S. policy.[128]  Additionally, OFAC incorporated General License A[129] and General License B[130] into the ITSR, as Sections 560.502(d) and 560.550, respectively.[131]  General License A had previously permitted transactions involving property and interests in property of the Government of Iran or Iranian financial institutions authorized under certain licenses in the ITR and 31 C.F.R. chapter V. General License B had authorized U.S. depository institutions and U.S. registered securities brokers or dealers to process transfers of funds to or from Iran or on behalf of a resident of Iran who is not included within the term "Government of Iran" in certain cases where the transfer involved a noncommercial, personal remittance.

            3.  General Licenses Issued

OFAC issued General License No. 5B under the Weapons of Mass Destruction Proliferators Sanctions Regulations and Iranian Transactions Regulations.[132]  General License No. 5B permits transactions related to the MV Dianthe, a vessel seized in India and identified as blocked property pursuant to Executive Order 13,382 "Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters."[133]  The license replaces General License 5A, which expired on November 30, 2012.[134] Among the transactions permitted, one can bid on the purchase of the vessel, provide financing or funding in connection with its purchase, and repair the vessel for commercial use.[135]  OFAC also noted that if the vessel is sold pursuant to judicial sale, the purchaser may provide OFAC with evidence demonstrating that blocking is no longer applicable and request the vessel’s expedited removal from the Specially Designated Nationals list.[136]

In response to the earthquake that struck Iran on August 11, 2012, OFAC issued General License C-1 on October 9, 2012.[137]  General License C-1 replaced and superseded General License C, which expired on October 5, 2012.[138] General License C-1 authorized, until November 19, 2012, U.S.-based NGOs to collect donations of funds to be used in direct support of humanitarian relief and reconstruction activities being undertaken in response to the earthquake, provided the transfer was not for the benefit of any person whose property and interests in property are blocked pursuant to executive orders other than Executive Order 13,599.[139]  The transfers of funds were not permitted to exceed $300,000 in the aggregate over the 90-day period authorized by the license, and U.S. depository institutions or registered brokers or dealers were permitted to rely on the originator of the funds transfer regarding compliance with the license requirements, so long as they did not know or have reason to know of any noncompliance.[140]  U.S. NGOs transferring funds under the license were required to submit reports to OFAC upon the first funds transfer, and on specified dates during the 90-day period.[141]

            E.  Syria

OFAC issued General License No. 4A, which aligns the U.S. Department of Treasury’s sanctions regulations with the U.S. Department of Commerce’s regulations, and General License No. 15, which provides for certain patent-related exceptions.  In particular, General License No. 4A authorizes the export or re-export of items to Syria from the United States to any person whose property is blocked if such items are authorized by the Department of Commerce.[142] General License No. 15 authorizes certain patent, trademark, copyright, and intellectual property transactions that would otherwise be prohibited by Executive Order 13,582 "Blocking Property of the Government of Syria and Prohibiting Certain Transactions With Respect to Syria," including the filing and prosecutions of applications, receipt and renewal of patents and trademarks, the filing and prosecution of opposition or infringement proceedings, and payment of fees due to the United States or Syrian governments in connection with such transactions.[143]

            F.  Transnational Criminal Organizations Sanctions Regulations

OFAC continued its implementation of Executive Order 13,581 "Blocking Property of Transnational Criminal Organizations" by issuing a final rule regarding Reporting, Procedures and Penalties.[144]  The rule prohibits all transactions which violate Executive Order 13,581 and require that any person holding funds subject to 31 C.F.R. § 590.201, which prohibits transactions in violation of Executive Order 13,581, must hold or place such funds in a blocked, interest-bearing account located in the United States.[145]  OFAC will continue to supplement these regulations, potentially including additional guidance, licenses, and statements of licensing policy. 

            G.  Yemen

On November 9, 2012, OFAC issued the new Yemen Sanctions Regulations to implement Executive Order 13,611, "Blocking Property of Persons Threatening the Peace, Security, or Stability of Yemen."[146]  The new regulations prohibit all transactions that are prohibited pursuant to Executive Order 13,611, which includes transactions with persons who have been determined to:

a.  have engaged in acts that directly or indirectly threaten the peace, security, or stability of Yemen;

b.  be a political or military leader of an entity that has engaged in such acts;

c.  have provided support to any person whose property and interests in property are blocked pursuant to these regulations; and

d.  be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to these regulations.[147]

The names of persons who have been determined to meet these criteria will be published in the Federal Register and incorporated into OFAC’s SDN List with the identifier ”[YEMEN].”  The SDN List is accessible on OFAC’s website: www.treasury.gov/sdn.[148]  The new regulations also detail the effect of transfers violating the provisions of these regulations, and require that any funds subject to the prohibitions be held in a blocked interest-bearing account in the United States.[149]  OFAC intends to supplement these regulations with a more comprehensive set of regulations in the future.[150]  The regulations also address general and specific licensing procedures relating to the Yemen sanctions.[151]  Executive Order 13,611, and therefore the Yemen Sanctions Regulations that incorporate the Executive Order by reference, do not impose broad-based sanctions against the country of Yemen or its government or people.[152]

IV.  Major OFAC Enforcement Actions

            A.  Richland Trace Homeowners Association, Inc.  ("Richland Trace")

Richland Trace violated the Former Liberian Regime of Charles Taylor Sanctions Regulations when it used $9,500 in proceeds from a sale of a property in which a person designated pursuant to Executive Order 13,348 "Blocking Property of Certain Persons and Prohibiting the Importation of Certain Goods from Liberia" had an interest to reimburse itself for past assessments and late fees that had accrued against the property.[153] This reimbursement violated the prohibition against dealing in blocked property pursuant to 31 C.F.R.  § 593.201.  Though the base penalty for such a violation was $10,000, OFAC assessed a $9,000 penalty because — despite Richland’s reckless disregard in failing to comply with OFAC regulations and its lack of voluntary self-disclosure — it had no prior OFAC violations.[154]

            B.  Online Micro, LLC ("Online")

OFAC alleged that Online and one of its principal owners violated the ITR when they exported unlicensed computer goods from the United States — through Dubai, United Arab Emirates — to Iran between 2009 and 2010.[155] OFAC, Online, and its owner agreed to a settlement in the amount of $1,054,388.[156]  That settlement is related to criminal plea agreements reached by Online, its owner, and the office of the U.S. Attorney for the District of Columbia, as well as a settlement agreement between Online, its owner, and the U.S. Department of Commerce’s Bureau of Industry and Security ("BIS").[157]  Online and its owner each pleaded guilty in the U.S. District Court for the District of Columbia to one count of criminal conspiracy to violate IEEPA and the ITR.[158]  They also agreed — pursuant to their settlement with BIS — to forfeit $1,899,964 and accept a suspended Export Denial Order that would prohibit them from exporting any goods from the United States for a ten-year period if they do not remain in compliance with the terms of their settlement agreements and Export Administration Regulations.[159]  Because of their acceptance of criminal responsibility, the Export Denial order, and their financial forfeiture, OFAC deemed its settlement with Online and its owner already satisfied.[160] 

            C.  Essie Cosmetics, Ltd.  ("Essie")

OFAC alleged that Essie and a former corporate officer violated the ITR when they knowingly sold and exported unlicensed nail care products worth $33,299 to an Iranian distributor in apparent violation of 31 C.F.R.  § 560.204.[161] Essie and its corporate officer sold and exported nail care products on or about September 17, 2009, December 8, 2009, and February 23, 2010, pursuant to an Exclusive Distributorship Agreement.[162]  The base penalty for the violations was $750,000, however Essie, its corporate officer, and OFAC agreed to a settlement in the amount of $450,000. [163] In determining the size of this settlement, OFAC took into consideration a number of aggravating and mitigating factors.  OFAC’s determination that Essie and its corporate officer intentionally attempted to evade sanctions and did not voluntarily self-disclose the apparent violation constituted aggravating factors.[164]  Essie and its corporate officer’s lack of prior OFAC violations and their cooperation with an investigation by U.S. Immigrations and Customs Enforcement – which resulted in an executed Non-Prosecution Agreements with the U.S. District Attorney’s Office for the Southern District of New York, and pursuant to which they agreed to the civil forfeiture of $200,000 — mitigated the penalty.[165]  Further, OFAC considered $200,000 of its total settlement of $450,000 satisfied by Essie and its corporate officer’s agreement with the U.S. Attorney’s Office and the $200,000 forfeiture. 

            D.  Sandhill Scientific, Inc.  ("Sandhill")

OFAC alleged that Sandhill violated the ITR in May 2007 when it exported unlicensed medical equipment to Dubai, United Arab Emirates, with knowledge or reason to know that the goods were intended for shipment to Iran.[166] This violation carried a base penalty of $250,000.[167]  OFAC further alleged that Sandhill violated OFAC’s Reporting, Procedures and Penalties Regulations ("RPPR") in May and July 2008 when it failed to provide documents responsive to two administrative subpoenas issued by OFAC during its investigation of the alleged ITR violation.[168]  The two alleged violations of the RPPR carried a total penalty of $40,000.[169]  In agreeing to a settlement of $126,000, OFAC noted that Sandhill’s actions constituted an egregious violation of sanctions laws because: 1) the unlicensed export resulted from willful and deliberate conduct in which the company’s management was directly involved; 2) Sandhill appeared to deliberately conceal that the goods were destined for Iran; 3) Sandhill did not fully cooperate with the investigation.[170]  Additionally Sandhill did not appear to have any compliance program in place at the time of the alleged violations.[171]  Mitigating factors included the fact that the export may have been eligible for an OFAC license pursuant to § 560.530 of the ITR and that OFAC has no record of any prior sanctions enforcement actions involving Sandhill.[172] 

            E.  Genesis Asset Managers, LLP ("GAM US")

OFAC alleged that GAM US violated the ITR when its UK-based subsidiary, Genesis Investment Management, LLP ("GIM UK"), purchased approximately $3 million of shares in the First Persian Equity Fund ("FPEF"), a Cayman Islands company that invests exclusively in Iranian securities.[173] In agreeing to settle for $112,500 for the August 1, 2007 alleged violation, OFAC identified a number of aggravating and mitigating factors.  Aggravating factors included: GAM US’s failure to exercise a minimal degree of caution or care in the conduct leading to the apparent violation; GAM US’s officers were aware of the conduct giving rise to the apparent violations; substantial economic benefit was conferred to Iran, undermining the objectives of the ITR; and GAM US did not have an OFAC compliance program in place at the time of the apparent violations.[174]  Mitigating factors included: GAM US had not received a penalty notice from OFAC for similar violations; GAM US substantially cooperated with OFAC’s investigation by responding promptly and completely to OFAC’s requests for information, by voluntarily self-disclosing the violation, and by agreeing to settle the matter without the issuance of a Pre-Penalty Notice; and GAM US also took remedial action and may not have fully understood its OFAC obligations under U.S. law.[175] 

            F.  ING Bank N.V.  ("ING Bank")

OFAC alleged that ING Bank violated the Cuban Assets Control Regulations ("CACR"), the Burmese Sanctions Regulations ("BSR"), the Sudanese Sanctions Regulations ("SSR"), the Libya Sanctions Regulations ("LSR"), and the ITR from October 2002 until September 2007.[176]  ING Bank allegedly violated the CACR by processing 20,452 electronic fund transfers, trade finance transactions, and travelers checks in which Cuba had an interest, in the amount of $1,654,657,318, through financial institutions located in the United States.[177]  ING Bank allegedly violated the BSR when it processed 41 electronic fund transfers and trade finance transactions, in the amount of $15,469,938, through financial institutions located in the United States.[178]  OFAC alleged that ING Bank allegedly violated the SSR when it processed 44 electronic wire transfers and trade finance transactions worth a total $1,976,483.[179]  ING Bank allegedly violated the ITR when it processed one $153,000 electronic fund transfer, to the benefit of the Government of Iran, through a financial institution located in the United States and processed — through financial institutions located in the United States — a $1,205,000 export letter of credit issued by an Iranian bank related to the export of an aircraft engine from the United States to Iran.[180] 

ING Bank and OFAC agreed to a multi-part settlement, including: the payment of $619,000,000; the institution of policies and procedures designed to minimize the risk of recurrence of such violations; a review process whereby after one year following the settlement, ING Bank will review its compliance policies and submit the results of that review to OFAC; and the opportunity for OFAC — should it determine that ING Bank has willfully and materially breached its settlement obligations — to declare the settlement null and void.[181]  In reaching this settlement, OFAC determined that ING Bank took substantial steps to mitigate the alleged violation, including: voluntarily self-disclosing all of the alleged violations except the export letter of credit for an aircraft engine; taking prompt and thorough remedial action, including adopting a consolidated sanctioned countries and export control policy; implementing new training sessions and new software designed to prevent violations; disengaging from any new business in any currency involving Cuba, Iran, Burma, North Korea, Sudan, and Syria; and closing its office in Havana, among other steps.[182]  Other factors OFAC used to determine the terms of the settlement included ING Bank’s clean violation record in the previous five years and that, while ING Bank cooperated closely with OFAC in identifying weaknesses in its compliance programs, it did not respond promptly or completely to explicit requests for information.[183]  In particular, requested information was ultimately provided but only after multiple requests and with heavy redactions.[184] 

            G.  National Bank of Abu Dhabi ("NBAD")

OFAC alleged that the National Bank of Abu Dhabi violated the SSR when it removed Sudan-related references in 45 transactions — worth approximately $4.39 million — that were routed through financial institutions located in the United States.[185] NBAD allegedly committed these violations from November 2004 until December 2005.[186]  Despite a base penalty of $4,276,000 for such violations, OFAC and NBAD ultimately settled the matter for $855,000.[187]  NBAD’s substantial cooperation with OFAC during the investigation process, its prompt remedial efforts, and its lack of violations over the previous five years resulted in this reduction.[188] 

            H.  Brasseler USA ("Brasseler")

OFAC alleged that Brasseler USA violated the ITR based on three transactions valued at $5,241 in which Brasseler allegedly exported goods or services without authorization from OFAC despite having knowledge or reason to know that the goods or services were intended for transshipment to Iran.[189]  These transactions took place on February 24, 2006, January 21, 2009, and March 20, 2009 and the base penalty for the alleged violations was $21,000.[190]  In determining that Brasseler should pay $18,900, OFAC took into account a variety of factors, including: the fact that Brasseler concealed Iranian customers’ identities, the involvement of management, and the lack of a compliance program at the time of the alleged violations. [191] On the other hand, OFAC also considered Brasseler’s cooperation (including signing a tolling agreement), the fact that OFAC likely would have licensed the transactions under existing licensing policy, and the fact that Brasseler has not previously been the subject of an OFAC enforcement action.[192]

            I.  Sogda Limited, Inc. ("Sogda")

OFAC alleged that Sogda Limited, Inc. violated the ITR by engaging in export transactions involving transshipment of goods through Bandar Abbas, Iran.[193]  Allegedly, seven export transactions occurred between March 25, 2009 and August 26, 2010.[194]  The base penalty was $570,000, but Sogda and OFAC settled for $128,250.[195]  This figure reflects the fact that Sogda developed an OFAC compliance program, had no prior history of OFAC violations, and cooperated with OFAC.[196]  This cooperation included informing OFAC of similar transactions.[197]

            J.  Natoli Engineering Company, Inc. ("Natoli")

OFAC alleged that Natoli Engineering Company, Inc. violated the Foreign Narcotics Kingpin Sanctions Regulations.[198]  Between November 2008 and January 2010, Natoli allegedly sold products to an entity on the SDN List–Productos Farmaceuticos Collins, S.A. de C.V.–and attempted to reimburse the company for prior overpayments.[199]  The base penalty was $98,000, but Natoli and OFAC settled for $52,920 because of Natoli’s cooperation with the investigation and lack of prior history of OFAC violations.[200]

            K.  Standard Chartered Bank ("SCB")

OFAC alleged that Standard Chartered Bank violated the BSR the ITR, the now-repealed Libyan Sanctions Regulations, the SSR, and the Foreign Narcotics Kingpin Sanctions Regulations ("FNKSR").[201]

SCB allegedly violated the various sanctions regulations by processing 874 wire transfers totaling approximately $133,320,297.[202]  The only apparent violations OFAC deemed non-egregious were the 8 wire transfers totaling approximately $243,506.69 that were in apparent violation of the FNKSR.[203]  OFAC determined that the remaining apparent violations were egregious because of SCB’s recklessness; certain employees and senior managers’ awareness of the relevant conduct; significant harm to the U.S. sanctions programs; SCB’s sophistication as a financial institution; SCB’s failure to maintain adequate compliance policies and procedures; and the need for a civil penalty to be sufficiently proportional to the conduct’s seriousness in order to ensure compliance and deter violations by other financial institutions.[204] 

OFAC also identified several mitigating factors–namely, the fact that some of the alleged violations could have been eligible for an OFAC license; SCB had not been the subject of OFAC actions within the preceding five years; all of the alleged violations were voluntarily self-disclosed; SCB provided substantial cooperation to OFAC; and SCB responded to the alleged violations with remedial action and agreed to settle the matter.[205]  Accordingly, although the base penalty was $209,747,769, OFAC and SCB settled for $132 million.[206] 

Under the terms of the settlement agreement, SCB is required to maintain policies and procedures that reduce SCB’s risk of recurring violations; provide OFAC with copies of its submissions to the Board of Governors of the Federal Reserve System regarding its OFAC compliance review; and the opportunity for OFAC, if it determines that SCB has willfully and materially breached its settlement obligations, to declare the settlement null and void.[207]

OFAC, the U.S. Department of Justice, the New York County District Attorney’s Office, and the Federal Reserve Board of Governors negotiated a global settlement.[208]  OFAC agreed to deem SCB’s obligation to pay $132 million satisfied by its payments to other federal or county officials.[209]  SCB entered into a separate settlement with the New York Department of Financial Services.

            L.  HSBC Holdings plc ("HSBC Holdings")

OFAC alleged that HSBC Holdings violated the CACR, the BSR, the SSR, the former Libyan Sanctions Regulations, and the ITR.[210]  HSBC Holdings agreed to pay $375 million on behalf of it and certain of its affiliates (collectively "HBSC Group").[211]

Between March 15, 2004 and June 15, 2010, HSBC Group allegedly processed a total of 2,335 wire or funds transfers totaling approximately $430,078,225 in violation of the U.S. sanctions regulations.[212]  Because the alleged violations were not voluntarily disclosed and OFAC determined that they were egregious, the total base penalty for the alleged violations was over one billion dollars–$1,159,872,734.[213]

OFAC determined those apparent violations were egregious because: (1) HSBC Group did not exercise a minimal degree of caution; (2) senior management and other employees allegedly were aware of conduct that led to the alleged violations; 3) the apparent violations allegedly resulted in significant harm to the U.S. sanctions program; 4) HSBC Group is a sophisticated global financial organization; and 5) HSBC Group did not maintain adequate compliance policies and procedures.[214] 

The settlement also encompassed unrelated, non-egregious alleged violations with a base penalty of $467,000.[215]  These alleged transactions were in apparent violation of the BSR, the ITR, the SSR, and Executive Order 13,469 (regarding Zimbabwe).[216]

Despite the fact that OFAC determined most of the apparent violations to be egregious, OFAC found the following factors to be mitigating: some alleged violations could have been eligible for an OFAC license; HSBC Group had not been the subject of OFAC actions within the preceding five years; HSBC Group provided substantial cooperation to OFAC; HSBC Group responded to the alleged violations by taking remedial action; the comprehensive nature of the settlement; and HSBC Group’s willingness to settle the matter.[217]

In addition to the monetary penalty, the settlement agreement also obligates HSBC Group to maintain the policies and procedures that it has put in place to reduce HSBC Group’s risk of recurring violations; provide OFAC with copies of its submissions to the Federal Reserve Bank of Chicago regarding its OFAC compliance review; and the opportunity for OFAC, if it determines that HSBC Group has willfully and materially breached its settlement obligations, to declare the settlement null and void.[218]

This settlement was part of a global sanctions and Bank Secrecy Act-related settlement with OFAC, the U.S. Department of Justice, the New York County District Attorney’s Office, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency, and the Department of the Treasury’s Financial Crimes Enforcement Network.[219]  HSBC Holdings’ obligation to pay $375 million to OFAC was deemed satisfied by its payments to the Department of Justice and the New York County District Attorney’s Office.[220] 

            M.  Bank of Tokyo-Mitsubishi UFJ, Ltd. ("BTMU")

OFAC alleged that Bank of Tokyo-Mitsubishi UFJ, Ltd. violated the BSR, the ITR, the SSR, the CA, and Executive Order 13,382.[221]  BTMU employees in a Tokyo operations center allegedly concealed information in payment messages that referenced countries or persons subject to U.S. sanctions in order to prevent the blocking or rejection of transactions being sent through the United States.[222]  BTMU allegedly processed at least 97 funds transfers through United States banks between April 3, 2006 and March 16, 2007, with an approximate total value of $5,898,943.[223] 

BTMU voluntarily disclosed the alleged violations after BTMU senior management discovered these alleged practices in 2007 and conducted an internal review of past transactions.[224]  However, OFAC also determined that the apparent violations were an egregious case.  BTMU and OFAC settled for $8,571,634.[225]  Aggravating factors included: concealment of U.S. sanctions targets’ involvement in transactions and the alleged reckless disregard displayed for the sanctions programs; OFAC’s conclusion that a general manager of the Operations Center in Tokyo knew or had reason to know about the procedures ; the alleged conferral of a substantial economic benefit to sanctions targets; and the fact that BTMU is a sizable, sophisticated financial institution.[226]  Mitigating factors included: BTMU’s implementation of significant remedial measures to improve compliance; BTMU’s lack of any prior history of OFAC violations; and BTMU’s substantial cooperation with the investigation, which involved signing a tolling agreement and providing OFAC with additional details about the apparent violations.[227] 

EUROPEAN UNION AND UNITED KINGDOM

I.  Regulation

            A.  European Union

The European Union ("EU") has the competence to adopt restrictive measures within the framework of its Common Foreign and Security Policy.  To that effect, Article 215 of the Treaty on the Functioning of the European Union ("TFEU") enables the Council to adopt sanctions against natural or legal persons, State or non-State entities, of third countries.

As a general rule, the EU’s sanctions apply:

• within the territory of the EU, including its airspace;

• on aircraft and ships registered in a Member State;

• to all EU nationals whether inside or outside the EU;

• to all legal persons incorporated or constituted in the EU; and

• to all legal persons "in respect of any business done in whole or in part" within the EU.[228]

While much of the legislation during 2012 has merely amended existing lists of targeted persons or entities, 2012 also saw a number of more substantial developments.

                  1.  Belarus, Myanmar, Guinea-Bissau, Tunisia

In response to sustained concerns over human rights in Belarus under the Lukashenko regime, the Council adopted an embargo on arms, a ban on exports of equipment for internal repression and ordered the freezing of assets.[229]

By comparison, the Council noted the progress made towards democracy in Myanmar and lifted existing sanctions with the exception of the embargo on arms and the embargo on equipment which might be used for internal repression.[230]

In addition, Council Regulation imposed sanctions on five individuals in Guinea-Bissau for their involvement in the coup d’état which occurred on April 12, 2012.[231]

Finally, the freezing of assets held by persons responsible for the misappropriation of Tunisian state funds has been extended until the end of January 2014.[232]

                  2.  Iran

The long list of existing sanctions against Iran was significantly supplemented over this past year.[233]  Deepening concerns over Iran’s nuclear activities have led to more stringent restrictive measures being adopted.  New sanctions include an embargo on telecommunications monitoring and interception equipment and an embargo on equipment which might be used for internal repression.[234]

Sanctions against Iran are increasingly targeting the country’s economy in order to reduce funding for the regime.  The National Iranian Oil Company, the National Iranian Tanker Company and their subsidiaries have been particularly affected, as they are understood to be major sources of funding for the Iranian government.  Recent restrictive measures include a ban the purchase of Iranian crude oil, petroleum, petrochemical and natural gas products, a ban on trade in precious metals and diamonds with the Government of Iran, a ban on the provision of Iranian banknotes and coins and a ban on Member States’ commitments to provide financial support for trade with Iran.[235] Iranian banks have also been a particular point of interest, with a prohibition on all transactions between European and Iranian banks being imposed unless granted prior authorization by national authorities.[236]

The export to Iran of materials which could be used to support Iran’s nuclear activities (e.g. graphite or software for integrating industrial processes) faces significant restrictions.[237] Industries controlled by the Islamic Revolutionary Guard Corps are also targeted by the EU’s sanctions.[238]

In addition, effective as from March 2012, Council Decision 2012/152/CFSP excluded a list of more than 20 Iranian banks and, in some instances, their foreign subsidiaries, from the SWIFT system for the electronic transfer of funds.[239]  European entities will find it that much more difficult hereafter to conduct any business via these banks. 

Finally, on December 21, 2012, the European Union adopted new restrictive measures against Iran by means of two regulations.  Regulation No 1263/2012[240] (which took effect on December 23, 2012) addressed restrictions relating to financial and credit institutions (largely mirroring regulations adopted in the UK in November 2011, discussed in our Client Alert of December 6, 2011), while Regulation No 1264/2012[241] (which took effect on December 22, 2012), updated the list of persons subject to restrictive measures.

By virtue of Regulation No 1263/2012, EU financial and credit institutions are prohibited from transferring funds to or from:

• Iranian credit and financial institutions and bureaux de change, their branches and subsidiaries, wherever located; and

• credit and financial institutions and bureaux de change that are not domiciled in Iran but are controlled by persons, entities or bodies domiciled in Iran.[242]

Some transactions may be executed, subject to Member States’ authorization, which include: 

• transfers regarding foodstuffs, healthcare, medical equipment, agriculture or humanitarian purposes (transfers below €100,000 only require prior written notification);

• transfers regarding personal remittances (please note that transfers below €40,000 only requiring prior written notification);

• certain transfers in connection with a specific trade contract (to be considered on a discretionary basis);

• transfers regarding diplomatic missions, consular posts and international organisations enjoying immunities according to international law;

• transfers regarding payments to satisfy claims by or against an Iranian person; and

• transfers necessary for the execution of contracts referred to in Article 12(1)(b) of the amended Regulation (contracts concluded before January 23, 2012 relating to supply of crude oil and petroleum products, the proceeds of which serve to reimburse of outstanding amounts).[243]

Transactions below €10,000 do not require prior authorisation or notification.[244]

For the purposes of calculating any of the above thresholds the Regulations look upon the following as a single transfer:

• transfers effected through several operations which appear to be linked;

• transfers which are individually below relevant financial thresholds but which, in the aggregate, meet the criteria for notification or authorisation; and

• a chain of transfers involving different payment service providers which effects a single obligation to make a transfer of funds.[245]

Regulation 1263/2012 furthermore allows competent authorities to release certain frozen funds or economic resources of the Central Bank or Iran, for the purpose of providing liquidity for the financing of trade or the servicing of trade loans.[246]   Competent authorities may also do so for the reimbursement of a claim due under a contract concluded by an Iranian person and a person under the jurisdiction of Member States before October 16, 2012.[247]

                  3.  Syria

Following a Council Decision in December 2011, Syria has been subjected to a significant number of sanctions throughout 2012. These restrictive measures include an embargo on equipment which might be used for internal repression[248], a ban on purchase of Syrian crude oil and petroleum products[249] and a ban on the trade of precious metals and diamonds with the Government of Syria.[250]

In November 2012 the European Union intensified pressure on Syria.  The sanctions regime was supplemented by a Council Decision banning the purchase, sale or brokering of precious metals and diamonds from or for the government of Syria[251], and a similar ban was put in place for luxury goods.[252]

 It should be recalled that the decision adopted in December 2011 had already imposed significant restrictions.  Member States of the European Union were asked to exercise restraint regarding their financial support for trade, specifically in relation to short and medium term commitments with long term commitments being prohibited.[253]  Loans to the Government of Syria were also disallowed, except those for humanitarian and development purposes.[254]  Relations between Syrian and European banks were very much restricted by means of a prohibition on the sale or purchase of Syrian public bonds[255] and a prohibition on the provision of insurance or reinsurance to entities affiliated with the State.[256]  The EU further required the freezing of funds held by persons participating or benefiting from the violent repression.[257]

            B.  The United Kingdom

In common with other EU member states, the EU law measures set out above apply in their totality in the UK.  In addition, as we explained in our Client Alert of December 6, 2011, on November 21, 2011 the UK introduced the Financial Restrictions (Iran) Order 2011, directing all financial or credit institutions operating in the UK and all of their branches, regardless of location[258], to terminate all transactions (including those conducted through one or more intermediaries) and existing business relationships with all credit institutions (including banks) incorporated in Iran[259], all subsidiaries and branches of credit institutions incorporated in Iran regardless of location[260], and the Central Bank of Iran (subject to very limited exceptions)[261].

On the first anniversary (and expiry date) of the 2011 Order, the UK introduced the Financial Restrictions (Iran) Order 2012, requiring UK credit and financial institutions to cease all business with banks incorporated in Iran and their branches and subsidiaries[262], thus prohibiting UK credit and financial institutions from entering into transactions or business relationships with Iranian banking entities and from continuing existing transactions and business relationships with them[263], unless licensed to do so by HM Treasury.[264]  The 2012 Order will have effect until November 19, 2013.[265]

In light of the EU’s December 2012 adoption of sanctions on financial transfers regarding Iran — as discussed above — the UK revoked its Iran sanctions on January 31, 2013[266]. The UK’s sanctions regime is now, therefore, identical to that in place in the rest of the EU.

The stated reason for the revocation was that "Article 30 (as amended) of EU Regulation 267/2012 contains effectively the same prohibition" as those in place in the UK.[267]  This may be an over-simplification. In two significant ways the regimes differed from each other.  In the first, the UK’s sanctions were significantly broader, and in the second, it is the EU’s sanctions that cast the wider net.

Firstly, the UK regime looked primarily at the ultimate source of the funds.  The use of layered intermediaries did not alter the fact that the funds were Iranian.  Although there is a general anti-avoidance provision within the new EU Regulations[268], the Regulations themselves do not treat the situation where the transfer is routed from Iran to an EU bank via intermediaries.  The definitions of "linked operations" are, as mentioned above, specific to the calculation of the applicable thresholds.[269]

The second major difference is that the EU Regulations will, in certain circumstances, apply even if neither the paying nor receiving banks are operating within the EU.  If the banks used are outside the EU, but either the underlying sender or receiver of the funds is operating within the EU, then the Regulations still require the appropriate authorization or notification.[270]  The UK’s sanctions contained no such provisions.

            C.  Britain’s Offshore Jurisdictions

Isle of Man: The Isle of Man broadly adopts UN and EU sanctions, which are enforced by the island’s Customs and Excise Division of Treasury. Links to local sanctions legislation and forms can be found here.

The Isle of Man chose to follow the UK’s sanctions regime against Iran, by adopting the Financial Restrictions (Iran) Order 2012.[271] This Order carries the same direction to cease all business with Iranian banks. Although the UK has since revoked its Iran sanctions, the Isle of Man is yet to take this step.

Jersey: Jersey implements both UN and EU sanctions, the latter by regulation under the European Communities Legislation (Implementation) (Jersey) Law 1996, and the former under the United Nations Act 1946. All new sanctions are published locally in the Gazette section of the Jersey Evening News, and on-line via the Jersey Legal Information Board website. Sanctions relating to export and travel restrictions are enforced by the Jersey Customs and Immigration Service and those relating to financial services by the Jersey Financial Services Commission.

Like the Isle of Man, Jersey followed the UK by introducing the Money Laundering and Weapons Development (Directions) (Iran) (Jersey) Order 2012,[272] which carries the same direction to cease all business with Iranian banks.  As with the Isle of Man, Jersey is yet to revoke its Iran sanctions.  It may be expected that both jurisdictions will do so in the near future.

Guernsey: Guernsey also adopts the UN and EU sanctions regimes into local law.[273] Details of the local implementation of these sanctions can be found on the States of Guernsey website. Guernsey did not adopt the UK-specific sanctions against Iran, preferring to limit itself to the EU’s sanctions.

British Overseas Territories (including Gibraltar, British Virgin Islands, Cayman Islands, Turks & Caicos Islands): The UK has the power to implement sanctions in the British Overseas Territories.[274]  Over the past two years, a large number of Orders have been issued in relation to sanctions against Afghanistan, Al-Qaida, Belarus, Myanmar, Democratic Republic of Congo, Egypt, Eritrea, Former Yugoslav Republic of Serbia, Iran, Iraq, Liberia, Libya, Sudan and South Sudan, Syria, Terrorist Financing, Tunisia, and Zimbabwe.  These do not always replicate the UK’s own sanctions (including, for instance those against Iran), and it should not be assumed that the sanctions regimes in these jurisdictions are the same as those that apply in the UK.  In the case of Gibraltar, given that it is formally part of the EU, the EU sanctions regime applies automatically.[275] 

            D.  Other Member States

Other EU Member States tend to simply adopt the EU’s sanctions.  However, it should be noted that, in April 2012, following Argentina’s expropriation of YPF (Spanish Repsol’s Argentinian subsidiary), Spain announced retaliatory measures against that country.[276]  Spain obtained the support for the European Parliament on April 20, 2012.[277]

II.  Main Case Law in 2012

            A.  European Union

                  1.  Melli Bank[278]

Melli Bank plc ("Melli Bank"), a UK-based subsidiary of an Iranian State-owned bank known as Bank Melli Iran, contested a European Council ("Council") Decision[279] concerning sanctions against Iran.  It claimed before the General Court that the Council’s decision had wrongly identified it as an entity owned or controlled by another which facilitated proliferation-sensitive nuclear activities and the development of nuclear weapon delivery systems.  The Council’s decision followed United Nations Security Council Resolutions which held that all funds or financial assets owned or controlled by designated entities participating in Iran’s proliferation-sensitive nuclear activities should be frozen.[280] 

The General Court dismissed the action, and Melli Bank appealed before the Court of Justice ("ECJ").  The ECJ rejected the appeal and upheld the General Court’s ruling on the grounds that even as a subsidiary of the Iranian State-owned bank, the UK branch Melli Bank plc should be included in the EU measures.  The debate was mainly focused on the meaning of the expression "owned and controlled".  The ECJ first held that the test is not a legal one determined by percentages of shareholding, but is a factual test determined, on a case-by-case basis, by the actual influence.[281]  Second, the ECJ held that the decision to freeze funds and assets does not need to be motivated by the fact that the entity owned or controlled by a parent company effectively engages in proliferation-sensitive nuclear activities.[282]  In fact, the Court underlined the significant risk that the parent company would exercise pressure on its subsidiaries and would therefore circumvent the effects of the restrictive measures.[283]  The effectiveness of such measures would thus be undermined.  For this reason, the inclusion of the subsidiaries in the restrictive measures was held not to be disproportionate to the aims being pursued by such measures.[284] 

                  2.  Tay Za[285]

A number of restrictive measures have been implemented against Myanmar for its failure to make progress towards democracy and persistent human rights violations.[286]  These measures include the freezing of funds of members of Government and those persons and entities associated with them.[287]

Mr. Pye Phyo Tay Za, a Burmese national, son of the leading business man Mr. Tay Za, challenged the sanctions imposed by the Council[288] because he was included in the Council’s list by virtue of being the "Son of Tay Za". 

The case turned on two main issues: first, the conditions under which a system of sanctions introduced by the Council against a third country may apply to natural persons; and second, how closeness of the links between those persons and the governing regime.  The Court held that restrictive measures imposed on third countries should only apply to the leaders of such countries and the persons associated with them and that the interpretation of the family link had been too wide.[289]  The application of such measures to natural persons solely on the basis of a family link is contrary to EU law.  The Court recalled that precise and concrete evidence should be provided (e.g., the particular conduct of such natural persons and the extent to which they benefitted from any tainted policies) before an asset freeze should be applied against them.[290]  

                  3.  Parliament / Council[291]

In a case concerning restrictive measures against Osama bin Laden, members of the Al-Qaida organisation and the Taliban and other individuals, groups, undertakings and entities associated with them, the Court made a procedural clarification.  Before the entry into force of the Lisbon Treaty (December 1, 2009), the Council adopted Common Positions rather than Decisions on common foreign and security policy.  A claim was made that these Common Positions were no longer applicable after 2009.  However, the Court held that, as long as these Common Positions are neither revoked nor modified, they should continue to have effect.[292]  In any event in this case the Court recalled that the fight against international terrorism and its funding, in order to safeguard peace and security at the international level, correspond to the objectives of the Treaty provisions on EU External Action.[293]  Finally, the Court held that the adoption of measures by the Council, excluding the European Parliament (a symbol of EU democracy) and having an impact on the fundamental rights of individuals, should not be contrary to EU law.  That is because the Charter of Fundamental Rights binds any EU institution and hence, the Council.[294] 

                  4.  Tarif Akhras[295]

Tarif Akhras is a Syrian national, allegedly a cousin of the Syrian first lady Bachar el Assad.  He is a businessman close to the Syrian regime and, as a result, was subject to attacks and death threats from Syrian opponents.  Mr. Akhras has been listed by Council Decision 2011/522 regarding restrictive measures against Syria[296] as a person benefiting from or supporting the regime, in particular financing the regime, or providing logistical support to it.   Mr. Akhras contested these measures, challenged them before the General Court and applied for interim measures to suspend their application.  The President of the General Court, held that there was no justification for interim measures and dismissed Mr. Akhras’ application.[297]  He stated that it had not been proven that the attacks on Mr Akhras had been caused by his inclusion on the sanctions list, but rather that in all likelihood the that attacks carried out against the appellant were carried out in the context of a situation approaching civil war in Syria.[298]  The appeal was dismissed. 

III.  EU Member State Enforcement Actions in 2012

            A.  The United Kingdom

In 2009, Mabey & Johnson Limited was convicted of breaching UN sanctions against Iraq through the making of improper payments to Saddam Hussein’s regime to win contracts.[299] During the course of 2011, two directors and a sales manager were jailed for breaching those sanctions.[300]  On January 13, 2012 the parent company of Mabey & Johnson — Mabey Engineering (Holdings) Limited — agreed to a Civil Recovery Order in the sum of £131,201.[301]  This was the value of dividends paid to it by its subsidiary, partly funded out of contracts won in breach of UN sanctions.[302]

On August 24, 2012, Michael Ranger was jailed for three and a half years for his role in shipping surface to air missiles and pistols from North Korea to Azerbaijan in breach of arms embargoes against Azerbaijan.[303]

On December 5, 2012, Gary Hyde was sentenced to seven years in jail for his role in organizing an unlicensed shipment of arms from China to Nigeria, contrary to the Export Control Order 2008, and then for laundering the profits from the shipment.[304]

The Export Control Organisation (part of the Department of Business Innovation and Skills) lists four instances of exporters being fined during the course of 2012, with penalties ranging from £1,000 to £113,000.[305]

There have been no known enforcement actions during 2012 in any of Britain’s offshore jurisdictions.

            B.  Other Member States

In April, the French Administration published a Guide de Bonne Conduite in relation to international sanctions.[306]  It provides a clear overview of the French legal framework allowing for the implementation of United Nations Security Council Resolutions and European Union decisions.  The Guide also provides information on national enforcement measures.  For instance, Article 459 of the code des douanes provides that a breach or an attempted breach of legislation on sanctions is punishable by five years’ imprisonment, the confiscation of the means used to achieve the unlawful conduct and a fine ranging between 100% and 200% of the sum in question.[307]

In August it was reported that German prosecutors had raided various properties across Germany and arrested four men on suspicion of supplying Iran with parts needed to build a nuclear reactor.[308]

In November, Spanish customs officials raided a company’s premises as part of an investigation into the alleged shipment of goods destined for Iran’s nuclear industry via Turkey.[309]

In December, Swedish prosecutors charged a man for breach of Iranian sanctions for attempting to export dual-use items that could be used in Iran’s nuclear industry.[310]

IV.  Future Directions

Doing business with Iran is only likely to get more difficult in the future, as the UK and the EU appear intent on adopting increasingly restrictive measures.

The same may be said in relation to Syria and North Korea. At the 3209th Foreign Affairs Council meeting of December 10, 2012 the European Union expressed its disapproval of the increasingly deteriorating situation in Syria,[311] and its concern over the potential transfer or use of chemical weapons. The adoption of an even more onerous sanctions regime against Syria cannot be ruled out.

Similarly, North Korea’s rocket launch of December 12, 2012 may lead to tougher restrictions. Catherine Ashton, High Representative of the European Union for Foreign Affairs and Security Policy, issued a statement warning North Korea about future violations of its international obligations.[312]