362 Search Results

February 11, 2019 |
2018 Year-End Sanctions Update

Click for PDF 2018 was another extraordinary year in sanctions development and enforcement.  This past year may take its place in history as the point at which the United States abandoned the Iran nuclear deal—the Joint Comprehensive Plan of Action (the “JCPOA”)—and re-imposed nuclear sanctions on Iran.  Defying the expectations of many observers, the Trump administration went further than anticipated and re-imposed all nuclear-related sanctions on Iran, culminating in the November 5, 2018 addition of over 700 individuals, entities, aircraft, and vessels to the Specially Designated Nationals and Blocked Persons (“SDN”) List—the largest single set of sanctions designations to date.  This action increased the SDN List by more than 10 percent and brought the total number of persons designated in 2018 to approximately 1,500—50 percent more than has ever been added to the SDN List in any single year. Source: Graph Compiled from Data Released by the Office of Foreign Assets Control In any prior year, the U.S. decision to abandon the JCPOA would have dominated the pages of our client alerts.  But 2018 was no ordinary year, and OFAC continued to enhance the impact of U.S. sanctions against Russia while rumors of election interference filled the airwaves.  On April 6, 2018, the Trump Administration announced a bold set of new designations, including nearly 40 Russian oligarchs, officials, and related entities, including major publicly traded companies.  After the companies took significant steps to disentangle from Russian oligarch Oleg Deripaska, OFAC delisted EN+, Rusal, and JSC EuroSibEnergo (“ESE”) on December 19, 2018. But that’s not all.  Political and economic conditions in Venezuela continued to deteriorate, and in May Venezuelan President Nicolás Maduro was elected to a new six-year term in an election that the United States government has described as a “sham” and “neither free nor fair.”  Venezuela’s economy—which remains heavily dependent on the state-owned oil company, Petroleos de Venezuela, S.A. (“PdVSA”)—continued its sharp decline amid a collapse in oil production.  Against that grim backdrop, the United States continued to gradually expand sanctions targeting members of President Maduro’s inner circle and sources of financing for the Venezuelan state.  On January 28, 2019, OFAC formally designated PdVSA. As with years past, 2018 witnessed the expanding use of sanctions as a foreign policy tool and will provide much fodder for those debating the long-term geopolitical impact of economic sanctions.  But our purpose here is more circumspect: a recap of the continuing evolution of sanctions in 2018 and preparation for what may come next. I.    Major U.S. Program Developments A.    Iran We have spilled much ink on the changing contours of the Iran sanctions regime.  As we first described in our May 9 client alert, the re-imposition of Iran sanctions was subject to 90- and 180- day “wind-down” periods, expiring on August 6 and November 5, respectively.  During these periods, companies were instructed to terminate Iran-related operations that would be targeted by the pending sanctions.  OFAC placed the remaining sanctions relief into wind-down on June 27, as we described here, by withdrawing general authorizations that had permitted U.S. persons to negotiate contingent contracts related to commercial passenger aviation; import and deal in Iranian-origin carpets and foodstuffs; and facilitate the engagement of their non-U.S. subsidiaries in transactions involving Iran. Upon the termination of the first wind-down period on August 6, as we described here, President Trump issued a new executive order authorizing the re-imposition of “secondary” sanctions targeting non-U.S. persons who engage in certain Iran-related transactions involving U.S. dollars, precious metals, the Iranian rial, certain metals, or Iranian sovereign debt.  On November 5, as we described here, the remaining secondary sanctions were re-imposed.  These included sanctions targeting non-U.S. person participation in transactions with Iran’s port operators or its shipping, ship building, and energy sectors; involving petroleum, petroleum products, petrochemicals, the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), or the Central Bank of Iran; providing underwriting services, insurance, or reinsurance for sanctionable activities with or involving Iran; or involving Iranian SDNs.  The United States also added a record number of individuals and entities to the SDN List, including entities that had previously been granted sanctions relief under the JCPOA, Iranian government or financial entities transferred from the List of Persons Blocked Solely Pursuant to E.O. 13599 (the “E.O. 13599 List”), and 300 first-time designees. November 5 also marked the end of the wind-down period for General License H, which had authorized non-U.S. entities owned or controlled by U.S. persons to provide goods, services, or financing to Iranian entities under the terms of the JCPOA.  The withdrawal of this authorization effectively subjected these non-U.S. entities to the same limitations on engagement with Iran that restrict their U.S. parents. This broad array of re-imposed restrictions does not, however, entirely prevent U.S. persons or non-U.S. persons from engaging in Iran-related transactions.  The Trump administration has provided sanctions waivers to eight countries that have pledged to significantly reduce their imports of Iranian crude oil, and has also purportedly waived sanctions for dealing with Iran’s Chabahar port—which is strategically important to the reconstruction of Afghanistan—and for certain nonproliferation efforts ongoing at several Iranian nuclear sites.  Certain exceptions, including for transactions related to the Shah Deniz gas field (which is partly owned by the Government of Iran) and for transactions involving the export of agricultural commodities, food, medicine, or medical devices to Iran, also continue to apply.  Additionally, General License D-1—which allows for the export of certain telecommunications goods and services to Iran—remains in force, as does General License J—which permits temporary visits to Iran by U.S.-origin aircraft (thus allowing international carriers to continue flying to Iran).  Additionally, U.S. secondary sanctions do not apply to dealings with Iranian banks that are designated solely because of their status as “Iranian financial institutions” pursuant to Executive Order 13599, leaving certain payment channels open for otherwise permissible operations in Iran. With the full array of pre-JCPOA sanctions re-imposed, we are now awaiting further reaction from the Trump administration, the Iranian leadership and the other signatories to the JCPOA.  The Trump administration has stressed that it plans to adopt “the toughest sanctions regime ever imposed on Iran,” warning that “[m]ore are coming.”  To date, OFAC has designated several tranches of individuals, entities, and aircraft linked to Iranian militias operating in Syria, including those announced on January 24, 2019.  The Trump administration may also be likely to pursue aggressive enforcement efforts against persons that attempt to violate or circumvent U.S. sanctions, although the brief window between the re-imposition of sanctions and the U.S. government shutdown in late 2018 and early 2019 may have stalled such efforts.  Additionally, Iranian entities could begin to react to the new, more restricted business environment, by for example pursuing legal action against their non-U.S. trading partners who have begun to exit Iran—sometimes with outstanding contractual obligations—given the risk of facing sanctions pursuant to the re-imposed secondary sanctions. In response to the U.S. decision, as we described here, the EU supplemented its existing blocking statute to prohibit compliance by EU entities with the new U.S. sanctions on Iran.  In early 2019, Britain, France and Germany established a European special purpose vehicle to facilitate non-U.S. dollar trade with Iran, circumventing many of the risks that EU entities face in complying with U.S. sanctions.  The new measure, called the Instrument in Support of Trade Exchanges (“Instex”), will allow trade between the EU and Iran without relying on direct financial transactions.  Instex has been registered in France, will be run by a German executive, and will have a supervisory board consisting of diplomats from Britain, France, and Germany. B.    Russia 1.    New Designations In addition to a significant expansion of U.S. sanctions on Iran, OFAC also continued to enhance the impact of U.S. sanctions against Russia while tensions between the two superpowers increased and rumors of election interference filled the airwaves.  On April 6, 2018, as we analyzed here, the Trump administration announced a bold set of new designations, targeting nearly 40 Russian oligarchs, officials, and related entities, including major publicly traded companies such as EN+ and Rusal.  In announcing the sanctions, Treasury Secretary Steven Mnuchin cited Russia’s involvement in “a range of malign activity around the globe,” including the continued occupation of Crimea, instigation of violence in Ukraine, support of the Bashar al-Assad regime in Syria, attempts to subvert Western democracies, and malicious cyber activities. These new sanctions carried broad macroeconomic implications for Russia’s business partners, including investors in the designated public companies.  To minimize the immediate disruptions, OFAC issued two time-limited general licenses permitting companies and individuals to undertake certain transactions to “wind down” business dealings related to the designated parties.  These licenses were extended numerous times throughout the course of the year, as the targeted companies attempted to extricate themselves from relationships with key leaders and investors that had triggered OFAC’s scrutiny. As OFAC Director Andrea Gacki explained in a letter to Congress, the designation of three companies—EN+, Rusal, and ESE—was not OFAC’s primary intention but rather a reflection of their “entanglement” with Russian oligarch Oleg Deripaska.  On December 19, 2018, OFAC announced its intention to de-list all three entities (though Deripaska himself remains on the SDN List). The three companies’ actions may serve as a roadmap for other entities seeking to distance themselves from sanctioned persons.  EN+ made arrangements for Deripaska to reduce his ownership to less than 45 percent of its shares through transactions that would not involve transfers of funds to Deripaska, to reduce his voting rights in EN+ to no more than 35 percent, and to restructure its board, with eight out of 12 directors selected through a process intended to ensure their independence from Deripaska and half of the new board comprised of U.S. and UK nationals.  Rusal and ESE—which are majority-owned by EN+—undertook specific commitments that, combined with the ownership and governance changes at EN+, similarly reduced Deripaska’s ownership and control.  The three companies also agreed to significant OFAC reporting requirements to ensure transparency with respect to their compliance. OFAC proceeded with the de-listings on January 27, 2019, which resulted in an immediate blowback from members of the newly elected Congress.  Many members on both sides of the aisle clamored for a legislative response that would re-impose sanctions on the Russian entities, as the special counsel investigation lead by Robert Mueller continued to generate headlines.  These efforts—much like the numerous pieces of legislation that were proposed in 2018 to ratchet up sanctions pressure on Russia—were ultimately unsuccessful. 2.    CAATSA Implementation Also in 2018, the Trump administration took steps toward the implementation of sanctions under the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), discussed in our November 21, 2017 alert.  On September 20, 2018, President Trump issued Executive Order 13849, formally authorizing the Treasury and State Departments to issue sanctions under four sections of CAATSA:  (i) Section 224(a)(2), which relates to materially assisting Russian government efforts to undermine cybersecurity; (ii) Section 231(a), which relates to significant transactions involving persons in or acting on behalf of the Russian defense or intelligence sectors; (iii) Section 232(a), which relates to the provision of goods or services that support the construction of Russian energy export pipelines; and (iv) Section 233(a), which relates to investments in the privatization of Russian state-owned enterprises to the benefit of government officials and their family members. On the same day, the administration announced 33 additions to the list of individuals associated with the Russian defense and intelligence sectors under Section 231 of CAATSA (the “Section 231 List”), with whom significant transactions are prohibited.  At the same time, the administration announced its first two SDN designations based on participation in significant transactions with an entity on the List of Specified Persons:  the Chinese entity Equipment Development Department (“EDD”) and its director, Li Shangfu.  EDD was designated based upon transactions with Russian arms exporter Rosoboronexport involving the purchase of ten Russian Sukhoi fighter jets and a “batch” of surface-to-air missiles. Over the course of the year, OFAC also designated two dozen individuals and entities associated with Russian intelligence and election interference operations. 3.    Chemical and Biological Weapons Act Sanctions On August 8, 2018, the United States announced plans to impose additional sanctions on Russia in response to Russia’s alleged use of a nerve agent in the United Kingdom.  The Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the “CBW Act”) requires, in the event that the President determines that a foreign government has used chemical or biological weapons, two rounds of sanctions. The first round of sanctions, imposed on August 22, 2018, expanded U.S. export controls to prohibit the export to Russia of items subject to the Export Administration Regulations (“EAR”) and controlled for national security reasons.  Previously applicable exceptions—such as those covering exports for servicing and repair and for temporary exports—continue to apply.  Further export authorizations may also be granted on a case-by-case basis.  However, if, for example, no exception or authorization applies and the items are to be exported to a state-owned or -funded enterprise, requests for authorization to export covered items will be denied and their export prohibited. The second round of sanctions, expected November 6, 2018 but now months overdue, must include at least three of six sanctions set forth in the CBW Act, unless waived by the President for national security reasons.  Possible sanctions include restrictions on bank loans to the Russian government, the downgrade or suspension of diplomatic relations, and/or an expansion of export controls to broadly prohibit the export to Russia of all U.S.-origin items, regardless of the reason for their control.  Despite its delay and the mandatory obligation, as of this writing it is not clear that the Trump administration will ever impose this second round of restrictions. C.    Venezuela The United States sent shockwaves through markets on January 31, 2019, when it designated Venezuela’s state-owned oil company, PdVSA, to the SDN List, as we described here.  The events of 2018 laid the groundwork for that decision, as the United States gradually increased sanctions pressure on the regime of Venezuelan President Nicolás Maduro, who had been elected to a new six-year term in a May 2018 election that critics described as a “sham” and “neither free nor fair.”  At the same time, Venezuela’s economy—which remains heavily dependent on PdVSA—continued its sharp decline amid a collapse in oil production.  New measures imposed by the United States over the course of 2018 included a warning about transacting in Venezuela’s new cyber currency, further sanctions on certain debt and equity of the Government of Venezuela, as well as new sanctions targeting both Venezuela’s gold sector and corruption in government programs. In February 2018, President Maduro announced that his government would begin issuing a new “cyber currency” known as the petro, in an effort to circumvent the use of U.S. dollars and the concomitant reach of OFAC regulations.  In response, OFAC on March 19, 2018 issued its first official guidance discussing cyber currencies.  Though perhaps not broadly applicable to the world’s more mainstream cyber currencies, it is noteworthy that OFAC held that its jurisdiction explicitly extended to the use of any new Venezuelan cyber currencies and that U.S. persons could face enforcement if they undertook dealings in the new currency.  In a sign of things to come, OFAC also warned that it may add digital currency addresses associated with blocked persons to the SDN List and put the onus on individuals engaging in such transactions to screen potential counterparties and ensure that they are not dealing with banned persons.  For a more detailed discussion of OFAC’s approach to cyber currencies like the petro, see our client alert, OFAC Issues Economic Sanctions Guidance on Digital Currencies (Oct. 5, 2018). To further constrain the Maduro regime’s access to capital, the Trump administration in May 2018 expanded sanctions on certain financial instruments issued or sold by the Government of Venezuela.  The “Government of Venezuela” is broadly defined to include not only its political subdivisions, agencies, and instrumentalities but also the Central Bank of Venezuela, PdVSA, and any entity that is at least 50 percent owned or controlled by these targeted entities. The Trump administration first began targeting Venezuelan financial instruments in August 2017 with the issuance of Executive Order 13808, which was modeled in part on sectoral sanctions targeting Russia.  Under that executive order, U.S. persons are prohibited from engaging in transactions involving (1) new debt owed by the Government of Venezuela with payment terms greater than 30 or 90 days (depending on the debtor), (2) new equity of the Government of Venezuela, (3) bonds issued by the Government of Venezuela, (4) dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela, and (5) the purchase of securities from the Government of Venezuela.  The scope of those sanctions is then cabined by four general licenses issued by OFAC.  Executive Order 13808 is described at length in our client alert, President Trump Issues New Sanctions Targeting Certain Activities of PdVSA and the Government of Venezuela (Sept. 1, 2017). Shortly following President Maduro’s re-election, President Trump on May 21, 2018 issued Executive Order 13835, which built on the measures described above by prohibiting U.S. persons from engaging in certain transactions involving debt owed to the Government of Venezuela, as well as certain transactions involving equity of Venezuelan state-owned entities. The policy rationale behind those measures was twofold.  The new restrictions on debt—which apply to transactions that involve either purchasing or pledging as collateral any debt owed to the Government of Venezuela, including accounts receivable—were designed to curtail the government’s ability to use accounts receivable financing to support its continued operations.  (For example, a U.S. person would likely be prohibited from participating in transactions between a PdVSA customer and a PdVSA creditor where the customer paid its outstanding debt to the creditor, in lieu of payment to PdVSA.)  At the same time, the restrictions on equity—which apply to transactions that involve the sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest—were calculated to prevent the Maduro regime from selling off valuable state-owned assets in “fire sales,” which deprive the Venezuelan people of “assets the country will need to rebuild its economy.”  Executive Order 13835 and its implications are described at length in our client alert, President Trump Issues Additional Sanctions Further Targeting PdVSA and the Government of Venezuela (May 31, 2018). In tandem with measures directed at Venezuela’s cyber currency and other more traditional financial instruments, the Trump administration also imposed new sanctions targeting Venezuela’s gold sector, which represents a vital source of hard currency (the cash-starved economy is home to some of the world’s largest known gold deposits).  In 2018, Venezuela exported more than 23 tons of gold worth an estimated U.S. $900 million, giving rise to concerns on the part of U.S. officials that Venezuela’s natural resources were being “plundered” to enrich senior regime officials.  More broadly, U.S. officials expressed concern that gold originating from Venezuela could find its way into the hands of other regimes the U.S. government views as unsavory, such as Iran, where it could be used to evade U.S. financial sanctions. In response, the Trump administration on November 1, 2018 issued an executive order which imposed sanctions on persons who operate in the gold sector of the Venezuelan economy, engage in corruption involving Venezuelan government projects and programs, or who facilitate such activities.  Additionally, the executive order gave the Treasury Secretary discretion to extend those sanctions to any other sector of the Venezuelan economy he deems appropriate, providing the basis for PdVSA’s designation in January 2019. D.    Other Programs 1.    Sudan On June 28, 2018, OFAC announced that it would be removing the Sudanese Sanctions Regulations (“SSR”) from the Code of Federal Regulations following the formal revocation of the SSR in October 2017.  As we reported in our 2017 Sanctions Year-End Update, the Obama administration initiated the revocation process in January 2017.  In addition to the removal of the SSR—which historically had included a trade embargo; a prohibition on the export or re-export of U.S. goods, technology and services; a prohibition on transactions relating to Sudan’s petroleum or petrochemical industries; and a freeze on the assets of the Sudanese government—OFAC officially incorporated into the Terrorism List Government Sanctions Regulations a general license authorizing certain exports of agricultural commodities, medicines, and medical devices to the Government of Sudan. Sudan, however, remains subject to sanctions due to its inclusion on the State Sponsors of Terrorism List (“SST”), and sanctions previously imposed relating to the conflict in Darfur remain in place.  Similarly, OFAC’s separate sanctions program relating to South Sudan remains in effect.  Indeed, in June 2018 OFAC entered into a settlement agreement with two subsidiaries of Telefonaktiebolaget LM Ericsson, Ericsson AB and Ericsson, Inc. (collectively, “Ericsson”), for an apparent violation of the SSR that occurred years earlier, and on December 18, 2018, OFAC sanctioned three individuals and their related entities for providing weapons, vehicles, and soldiers to fuel the conflict in South Sudan. 2.    Nicaragua The regime of Nicaraguan President Daniel Ortega—which the Trump administration has condemned for its human rights abuses and anti-democratic measures in response to civil protests—has become the subject of a new list-based sanctions program.  On November 1, 2018, National Security Advisor John Bolton denounced the governments of Cuba, Venezuela, and Nicaragua, dubbing them the “Troika of Tyranny” and threatening that “we will no longer appease dictators and despots near our shores.”  Shortly thereafter, on November 27, 2018, President Trump issued Executive Order 13851 and declared a national emergency with respect to “the situation in Nicaragua, including the violent response by the Government of Nicaragua to the protests that began on April 18, 2018, and the Ortega regime’s systematic dismantling and undermining of democratic institutions and the rule of law,” violence against civilians, and corruption. The executive order authorizes OFAC to block the property of anyone who, inter alia, with respect to Nicaragua:  (1) commits human rights abuses; (2) undermines “democratic processes or institutions;” (3) threatens the country’s peace, security, or stability; (4) conducts transactions involving deceptive practices or corruption related to the Government of Nicaragua; or (5) has materially assisted in any of the activities described by categories 1 through 4.  The sanctions also empower OFAC to designate anyone who is or has been a government official since January 10, 2007.  Pursuant to this new program, OFAC has already added to the SDN list Rosario Maria Murillo de Ortega, the Vice President and First Lady, and Nestor Moncada Lau, the National Security Advisor to President Ortega.  Prior to the issuance of this new sanctions program, FinCEN, in October 2018, also issued an advisory alerting the financial system to the risks posed by corruption in Nicaragua, particularly relating to the possibility that members of the Ortega government may try to move proceeds of corruption out of the country because of the threat of unrest and the specter of potential sanctions.  The advisory noted that four Nicaraguan officials have already been sanctioned under the Global Magnitsky Human Rights Accountability Act (the “Global Magnitsky Act”). Further targeting the Ortega regime, on December 20, 2018, President Trump signed into law the Nicaragua Human Rights and Anticorruption Act, which had passed in the Senate on November 27, the same date Nicaragua sanctions went into effect.  The statute instructs the U.S. executive directors at the World Bank Group and Inter-American Development Bank to oppose any loan for the Nicaraguan government’s benefit unless certain steps strengthening democratic institutions have been met.  It is still too early to tell what effect this legislation, together with the new sanctions program, will have, but it is clear that companies must now take precautions when considering business opportunities in Nicaragua.  The Nicaraguan government is firmly within the sights of the U.S. government. 3.    North Korea Although 2018 witnessed brief warming of relations between the United States and North Korea—marked by the June 12, 2018 summit between President Trump and Supreme Leader Kim Jong-un—relations between the countries have remained volatile, and OFAC has continued to push forward with its renewed focus on North Korea in connection with the U.S. government’s policy of denuclearizing the Korean Peninsula.  In our 2017 Sanctions Year-End Update, we discussed the intensification of the North Korea sanctions program in the face of North Korea’s increasing bellicosity.  New measures taken in 2017 included the enactment of a new section of CAATSA focusing on North Korea, the re-addition of North Korea to the state sponsors of terrorism list, and the issuance of a new executive order imposing sanctions on specific sectors of the North Korean economy and threatening to cut off access to the U.S. banking system for non-U.S. persons involved in North Korean trade. OFAC continued to add North Korean individuals and entities to the SDN List throughout 2018, kicking off the year with a January 24, 2018 designation of nine entities, 16 individuals, and six vessels in response to North Korea’s “ongoing development of weapons of mass destruction” and violations of Security Council resolutions.  One month later, on February 23, OFAC added to the SDN List what was billed as “the largest North Korea-related sanctions tranche to date,” aimed primarily at disrupting the regime’s shipping and trading companies.  This action—which was focused on disrupting the activities of shipping companies that have been used to evade sanctions—designated an outstanding 56 individuals and entities  across nine countries.  That same day, OFAC joined the State Department and U.S. Coast Guard in issuing an advisory which highlighted the deceptive practices used by North Korea to evade U.S. sanctions so that companies, including financial institutions, can adequately implement controls to account for these practices.  OFAC, together with the State Department and Department of Homeland Security, issued another similar advisory on July 23, 2018.  This second advisory highlights North Korea’s evasion tactics that could expose businesses involved in the supply chain—such as manufacturers, buyers, and service providers—to risk and urged the implementation of proper controls and due diligence measures. Last, though largely procedural, it is also worth noting that on March 1, 2018, OFAC amended and reissued the North Korea Sanctions Regulations and issued 14 new FAQs relating to the North Korea sanctions program. As the year drew to a close and the new year began, the U.S. government’s position vis-à-vis North Korea once again was thrown into question.  Although in December 2018 there were media reports of a new ballistic missile base being constructed in North Korea, in January 2019 the President reiterated that the United States is “doing very well” with respect to North Korea and is moving forward with scheduling a second summit to discuss the complete denuclearization of the Korean Peninsula.  Regardless, based on developments in 2017 and 2018, it is likely that OFAC’s intensification of its North Korea program will continue apace in the coming year. II.    U.S. Enforcement A.    Designations 1.    Designations of Iran-Based Persons with Digital Currency Addresses On November 28, 2018, pursuant to its cyber-related sanctions program, OFAC designated Iranian residents Ali Khorashadizadeh and Mohammad Ghorbaniyan for facilitating the exchange of bitcoin payments into Iranian rial on behalf of cyber actors involved with the “SamSam” ransomware scheme, and depositing the rial into Iranian banks.  Perpetrators of this scheme gain control of a victim’s computer network by installing unauthorized malicious software, and then demand the victim pay a ransom to regain control.  There are at least 200 known victims of this scheme, including corporations, hospitals, universities, and government agencies. In connection with these designations, OFAC listed identifying information that included two digital currency addresses associated with Khorashadizadeh and Ghorbaniyan.  Digital currency addresses are alphanumeric identifiers linked to online wallets, from which and to which bitcoins or other digital currency can be transferred.  According to OFAC, these two addresses were subject to over 7,000 bitcoin transactions (worth millions of U.S. dollars)—at least some of which were derivative of SamSam ransomware attacks.  In the past, OFAC has listed a designee’s date of birth, email address, and nicknames, but this marks the first time it has listed a digital currency address.  The Treasury Department had flagged this possibility earlier in 2018 when it published guidance stating that digital currency addresses may be listed “to alert the public” to specific property associated with a designated person.  Like funds stored in a traditional bank account, digital currency associated with a digital currency address must be blocked by U.S. financial institutions if they are the property of designated persons. We fully expect OFAC to continue this practice of listing a designated person’s digital currency address, particularly where the person operates in the digital currency space.  Undersecretary of the Treasury for Terrorism and Financial Intelligence Sigal Mandelker has stressed that the administration is “aggressively pursuing Iran and other rogue regimes attempting to exploit digital currencies and weaknesses in cyber AML/CFT safeguards” and the importance of “publishing digital currency addresses to identify illicit actors” in this space.  Indeed, as former senior Treasury adviser David Murray has pointed out, these addresses may be the most reliable identifiers for these bad actors. 2.    Designations Related to Jamal Khashoggi On October 10, 2018, a bipartisan group of 22 U.S. senators sent a letter to President Trump demanding that he investigate Saudi journalist Jamal Khashoggi’s disappearance and determine whether to impose sanctions on any culpable foreign government officials pursuant to the Global Magnitsky Act.  President Trump was statutorily required to respond to the demand within 120 days.  His response came a little over a month later, on November 15, 2018, when OFAC imposed Magnitsky sanctions on certain individuals it found were involved in the killing of Khashoggi.  These individuals included senior Saudi government official Saud al-Qahtani; his subordinate, Maher Mutreb; Saudi Consul General Mohammed Alotaibi; and 14 other Saudi government officials. The Global Magnitsky Act gives the President the authority to sanction individual perpetrators of serious human rights abuse and corruption.  Trump’s use of Magnitsky sanctions with respect to the Khashoggi disappearance is not surprising.  As we noted last year, President Trump issued an executive order in December 2017 effectively broadening his authority under the statute.  Since then, more than one hundred individuals and entities have been sanctioned under this executive order.  Moreover, President Trump has shown a willingness to act fast when imposing Magnitsky sanctions.  As Senator Robert Menendez (D-NJ) put it, “When President Trump wants to move quickly on human rights sanctions he does.”  For example, in early 2018, the Trump administration swiftly sanctioned two government ministers in Turkey over the imprisonment of American pastor Andrew Brunson. While President Trump has been applauded for previous Magnitsky sanctions, a recurring critique of the Khashoggi-related sanctions is that they do not go far enough.  Some in Congress have called for much tougher action against the Saudi government, such as curtailing arms sales or forcing a wind-down of Saudi involvement in Yemen’s destructive civil war.  Indeed, although the United States has imposed Magnitsky sanctions on certain Saudi government officials, the government itself has escaped any direct punishment.  Setting aside the merits of this critique, it appears the United States’ approach has been mirrored by its Western allies:  Canada, France, and Germany have all imposed sanctions on individuals culpable in the killing of Khashoggi, but not on the Saudi government. B.    Enforcement Actions 2018 was a deceptively quiet year for OFAC sanctions enforcement.  The agency netted U.S. $71,510,561 in penalties through seven enforcement actions in 2018, compared to 16 enforcement actions and over U.S. $119,527,845 in penalties in the prior year.  But the numbers belie a more aggressive approach to enforcement, masked in certain circumstances by OFAC’s relatively small stake of large global settlements with other regulators.  Moreover, in December 2018 Treasury Undersecretary Sigal Mandelker announced significant changes already underway in sanctions enforcement with a goal of “better enforcement through compliance.”  Mandelker explained that OFAC would be outlining the hallmarks of an effective sanctions compliance program in an effort to aid the compliance community in strengthening defenses against sanctions violations.  Foreshadowing a more aggressive approach to enforcement, she noted that compliance commitments would become an essential element in settlement agreements between OFAC and apparent violators. As we were going to press, OFAC settlement with the Kollmorgen Corporation provided a clear indication of the new frontiers in OFAC enforcement.  The case concerned the company’s Turkish affiliate’s alleged violations of Iran sanctions.  Especially noteworthy was that this was the first time OFAC concurrently concluded a settlement action while also designating an individual who allegedly managed the Iranian operations for evading sanctions. Undersecretary Mandelker noted that the action was “a clear warning that anyone in supervisory or managerial positions who directs staff to provide services, falsify records, commit fraud, or obstruct an investigation into sanctions violations exposes themselves to serious personal risk.” 1.    Zhongxing Telecommunications Equipment Corporation On April 15, 2018, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) activated a denial order against Chinese telecommunications company Zhongxing Telecommunications Equipment Corporation (“ZTE”) for its alleged failure to abide by terms of a March 2017 settlement agreement.  As we described in our 2017 Sanctions Year-End Update, ZTE previously agreed to settle its potential civil liability for alleged violations of OFAC’s Iran sanctions for U.S. $100,871,266, part of a combined U.S. $1.19 billion civil and criminal settlement with BIS and the U.S. Department of Justice (“DOJ”).  As part of the settlement, ZTE agreed to a seven-year suspended denial of export privileges, which could be activated if any aspect of the agreement was not met. BIS decided to impose the order based on information suggesting that ZTE made false statements regarding the disciplinary measures imposed on employees responsible for the illegal activity.  Specifically, ZTE informed U.S. authorities that the company had taken or would take action against 39 employees and officials that ZTE identified as having a role in the violations.  But letters of reprimand were not issued until after BlS requested further information in February 2018, and all but one of the individuals involved in the underlying misconduct received his or her 2016 bonus. Denial orders are among the most powerful weapons BIS has in its civil enforcement tool box, and would have imposed strict penalties and licensing requirements on U.S. and non-U.S. persons involved, directly or indirectly, in any transaction related to the export or reexport of U.S. origin items to ZTE.  However, in July 2018, after initial trade negotiations with Chinese President Xi Jinping, President Trump instructed BIS to work out an arrangement that would ultimately lift the restrictions.  BIS subsequently terminated the order after ZTE paid a U.S. $1 billion penalty, replaced its board, and placed U.S. $400 million in escrow pursuant to the superseding settlement agreement, in addition to the U.S. $361 million in penalties ZTE had already paid to BIS under the original March 2017 settlement.  ZTE was also required to retain an external compliance coordinator for a period of ten years to monitor and report on ZTE’s compliance. 2.    DOJ Charges Russian and Syrian Nationals for Syrian Sanctions Violations In June 2018, eight businessmen, including five Russian nationals and three Syrian nationals, were indicted on federal charges alleging that they conspired to violate U.S. economic sanctions against Syria and Crimea by sending jet fuel to Syria and making U.S. wire transfers to Syria and to sanctioned entities in Syria absent a license from the U.S. Treasury Department. According to the indictment, beginning in 2011, the alleged conspirators started using front companies and falsifying information in shipping records and the related U.S. dollar wires in order to circumvent sanctions.  From 2011 to 2017, the alleged conspirators engaged in business with various blocked entities and used front companies to do so. C.    Select OFAC Enforcement Actions 1.    Ericsson In June 2018, two subsidiaries of Ericsson agreed to pay U.S. $145,893 in a settlement with OFAC for an apparent violation of U.S. sanctions on Sudan, scarcely three weeks before OFAC announced that it would be removing the Sudan sanctions from the CFR.  The Sudan sanctions were revoked in October 2017, and the Ericsson enforcement action provides a warning regarding OFAC’s willingness to pursue historical violations, even in the face of changing U.S. policies. In late 2011, some of Ericsson’s telecom equipment located in Sudan malfunctioned.  Consequently, two Ericsson employees and a senior director requested assistance from an EUS specialist in an attempt to repair the damaged equipment.  The specialist informed them that Ericsson could be fined for engaging in such business activities in Sudan.  Despite this, Ericsson’s subsidiary and personnel continued to discuss repairing the damaged equipment, but removed any references to Sudan from the correspondence.  Despite being warned on another occasion by Ericsson’s compliance department that replacing the equipment in Sudan would violate U.S. sanctions, Ericsson personnel continued to plan the replacement of the equipment and also engaged a third party in doing so.  Ultimately, Ericsson personnel decided to solve the issue by purchasing an export-controlled U.S.-origin satellite hub capable of withstanding the heat in Sudan, and then engaged in a multistage transaction involving transshipping the hub through Switzerland and Lebanon en route to its final destination in Sudan. Notably, this enforcement action involved alleged violations that took place as far back as 2012 and earlier, prior to the revocation of certain Sudan sanctions.  While the statute of limitations for violations of U.S. sanctions is generally five years from the offending conduct, Ericsson entered into a tolling agreement with OFAC in order to fully cooperate with the investigation. 2.    Epsilon In September 2018, Epsilon Electronics Inc. (“Epsilon”) agreed to pay U.S. $1,500,000 to settle liability for alleged violations of OFAC’s Iran sanctions.  OFAC issued Epsilon a penalty notice in 2014, alleging that, from August 2008 to May 2012, Epsilon had committed 39 violations for its sales to a company that Epsilon knew or had reason to know distributed most, if not all, of its products to Iran. The settlement followed a decision by a split panel of the D.C. Circuit Court of Appeals in 2017 to set aside OFAC’s initial $4.07 million penalty.  The case considered OFAC’s prohibition of the transshipment of U.S. goods to Iran through third countries, or the “general inventory rule,” which sets forth a standard of liability based on an exporter’s “knowledge or reason to know” that such goods are ultimately intended specifically for Iran.  The D.C. Court of Appeals upheld OFAC’s determination that an exporter could be liable where substantial evidence supported a conclusion that all of the relevant third-country customer’s sales were to Iran during one set period of time.  However, it also held that OFAC’s determination of a violation was arbitrary and capricious with respect to alleged violations that took place during another period of time because the agency failed to adequately consider all evidence presented by the company regarding sales it reasonably believed to have been made outside of Iran. OFAC considered the following in determining a penalty: (1) the violations constituted a systematic pattern of conduct; (2) Epsilon exported goods valued at U.S. $2,823,000 or more; (3) Epsilon had no compliance program at the time of the violations; (4) Epsilon had not received a penalty notice in the five years preceding the transactions at issue; (5) Epsilon is a small business; and (6) Epsilon provided some cooperation to OFAC in addition to taking independent remedial action. 3.    JPMorgan Chase In October 2018, JP Morgan Chase Bank, N.A. (“JP Morgan”) agreed to remit U.S. $5,263,171 to OFAC to settle its potential civil liability for apparent violations of U.S. sanctions.  This action demonstrates the culpability that U.S. financial institutions may face for processing transactions involving sanctioned targets—in this case, JP Morgan operated a net settlement mechanism that resolved billings by and among various airlines and airline industry participants, including several parties that were at various times on the SDN List.  Between January 2008 and February 2012, JP Morgan processed 87 transactions with a total value of over U.S. $1 billion, U.S. $1,500,000 (0.15%) of which were attributable to the interests of designated entities. Separately, OFAC issued a Finding of Violation to JP Morgan—with no concomitant penalty—for violations relating to deficiencies in its sanctions screening mechanism.  Between August 2011 and April 2014, the bank’s screening system failed to identify six customers as SDNs, resulting in the processing of 85 transactions totaling $46,127.04 in violation of U.S. sanctions.  JP Morgan’s screening logic capabilities purportedly failed to identify customer names with hyphens, initials, or additional middle or last names as potential matches to similar or identical names on the SDN List.  Despite strong similarities between the accountholder’s names, addresses, and dates of birth in JP Morgan’s account documentation and on the SDN List, JP Morgan maintained accounts for, and/or processed transactions on behalf of, the six customers. Notably, JP Morgan identified weaknesses in the screening tool’s capabilities as early as September 2010 and implemented a series of enhancements during the period 2010 to 2012.  After transitioning to a new screening system in 2013, the bank re-screened 188 million clients’ records through the new system and identified the suspect transactions.  JP Morgan voluntarily self-disclosed the matter to OFAC. 4.    Société Générale In November 2018, OFAC joined regulators from the Federal Reserve, DOJ, New York County District Attorney’s Office, U.S. Attorney for the Southern District of New York, and New York State Department of Financial Services (“DFS”) in a combined settlement agreement with Société Générale (“SocGen”) for apparent violations of U.S. sanctions, among other matters.  SocGen agreed to pay U.S. $53,966,916 to OFAC as part of a $1.34 billion global settlement agreement.  Unlike in any other major banking case of which we are aware—and in line with the increasing aggressiveness of enforcement that Undersecretary Mandelker would make public a month later—OFAC did not credit the penalties assessed by other regulators or agencies.  The OFAC penalty was to be paid on top of the other penalties assessed. The settlement documents alleged that SocGen processed transactions involving countries and persons subject to U.S. sanctions programs through U.S. financial institutions for five years up to and including 2012.  OFAC alleged that SocGen processed such transactions after removing, omitting, obscuring, or failing to include references to sanctioned parties in the information submitted to U.S. financial institutions and ignored warning signs that its conduct was in violation of U.S. sanctions regulations. In addition to enforcement actions by federal regulators, DFS entered into two consent orders with SocGen and its New York branch under which SocGen will pay fines totaling $420 million for violations under U.S. sanctions programs and New York anti-money laundering laws. The DFS investigation found that from 2003 to 2013 SocGen failed to take sufficient steps to ensure compliance with U.S. sanctions laws and regulations.  Namely, individuals responsible for originating U.S. dollar transactions outside of the United States had a minimal understanding of U.S. sanctions laws as they pertained to Sudan, Iran, Cuba, North Korea, and other sanctions targets. 5.    Mashreqbank In addition to the SocGen matter, in October 2018 DFS fined United Arab Emirates-based bank, Mashreqbank PSC (“Mashreqbank”) and its New York branch in the amount of U.S. $40 million for deficiencies in its compliance programs, including its compliance policy regarding U.S. sanctions, and for violations to the U.S. Bank Secrecy Act and anti-money laundering (“AML”) laws in its U.S. dollar clearing operations.  Under the consent order announced by DFS and the Federal Reserve Bank of New York, Mashreqbank must immediately hire a third-party compliance consultant to oversee and address deficiencies in the branch’s compliance function, including compliance with AML requirements, federal sanctions laws, and New York law and regulations.  In addition, Mashreqbank must hire a third-party “lookback consultant” to conduct a review of the branch’s transaction clearing activity for April 2016 to September 2016, along with other remedial actions. DFS conducted a safety and soundness examination of the New York branch’s operations in 2016, finding that the branch had been unable to meet its compliance commitments.  DFS identified defects in the bank’s OFAC compliance program and found that its OFAC policies lacked detail, nuance or complexity.  The examination also found that each transaction monitoring alert would be reviewed only once by a single reviewer, who would then determine whether the alert should be closed or escalated, but without adequate quality assurance reviews.  The branch’s OFAC program also suffered from certain deficiencies in important aspects of its recordkeeping.  Specifically, Mashreqbank maintained inadequate documentation concerning its dispositions of OFAC alerts and cases, with branch compliance staff failing to properly record its rationales for waiving specific alerts. III.    European Union Developments and Enforcement In 2018, the European Union (“EU”) broadly stayed the course it set in 2017 and modestly extended the scope of its sanctions programs on Iran and Russia.  Additional sanctions were adopted, namely with respect to Venezuela and Mali. The most significant sanctions-related development this year at the EU level has been that, following the unilateral withdrawal of the United States from the JCPOA, the so-called “EU Blocking Statute” was expanded, prohibiting EU nationals from complying with requirements or prohibitions contained in those sanctions or applied by means of rulings under those sanctions.  While there has not been enforcement action to date, the first lawsuits and judgments making reference to the EU Blocking Statute have begun to emerge.  This divergence between U.S. and EU policy on Iran sanctions has caused and is likely to cause in the future significant compliance hurdles for multinational companies. A.    Legislative Developments 1.    Iran In response to the U.S. decision to abandon the JCPOA, on August 6, 2018 the European Union enacted Commission Delegated Regulation (EU) 2018/1100 (the “Re-imposed Iran Sanctions Blocking Regulation”), which amended the EU Blocking Statute.  The EU Blocking Statute is a 1996 European Commission Regulation (EC) No 2271/96 that was designed as a countermeasure to what the EU considers to be the unlawful effects of third-country (primarily U.S.) extra-territorial sanctions on “EU operators.”  The combined effect of the EU Blocking Statute and the Re-imposed Iran Sanctions Blocking Regulation is to prohibit compliance by EU entities with U.S. sanctions which have been re-imposed following the U.S. withdrawal from the JCPOA. The EU Blocking Statute applies to a wide range of actors including: any natural person being a resident in the EU and a national of an EU Member State; any legal person incorporated within the EU; any national of an EU Member State established outside the EU and any shipping company established outside the EU and controlled by nationals of an EU Member State, if their vessels are registered in that EU Member State in accordance with its legislation; any other natural person being a resident in the EU, unless that person is in the country of which he or she is a national; and any other natural person within the EU, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of an EU Member State, acting in a professional capacity. Accompanying the Blocking Statute, the EU issued a Guidance Note: Questions and Answers: adoption of update of the Blocking Statute, which notes that subsidiaries of U.S. companies formed in accordance with the law of an EU Member State and having their registered office, central administration or principal place of business within the EU are subject to the EU Blocking Statute; although mere branch offices of U.S. companies, without separate legal personality, are not. The EU Blocking Statute requires (Article 2) parties to which it applies whose economic and/or financial interests are affected, directly or indirectly, by certain extra-territorial U.S. sanctions laws (including those re-imposed in 2018) or by actions based thereon or resulting therefrom, to inform the European Commission accordingly within 30 days from the date on which it obtained such information.  With respect to companies, this obligation applies to the directors, managers and other persons with management responsibilities.  We refer to this as the “Notification Obligation.” The EU Blocking Statute also prohibits (Article 5) EU operators from complying, whether directly or through a subsidiary or intermediary, and whether actively or by omission, with any prohibition or requirement contained in a set of specific extra-territorial laws or any decisions, rulings, or awards based on those laws.  However, the EU Blocking Statute does also provide for authorization to engage in such activities. The U.S. sanctions laws to which the EU Blocking Statute applies are explicitly listed, and include six U.S. sanctions laws and one set of U.S. regulations (OFAC’s Iranian Transactions and Sanctions Regulations). The Blocking Statute entered into effect on August 7, 2018 and does not allow for any grandfathering of pre-existing contracts or agreements.  The EU Guidance noted above indicates that EU operators are prohibited from even requesting a license from the United States to maintain compliance with U.S. sanctions.  Requesting such permission—without first seeking authorization from the European Commission or a competent authority in a Member State to apply for it—is tantamount to complying with U.S. sanctions. The Blocking Statute also provides that decisions rendered in the United States or elsewhere made due to the extraterritorial measures blocked by the EU Blocking Statute cannot be implemented in the EU.  This means, for instance, that any court decision made in light of the extraterritorial measures cannot be executed in the EU, even under existing mutual recognition agreements. Finally, the EU Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures.  Though it is unspecified how this would work under the various laws of the EU member states, it appears to allow an EU operator suffering damages because of a company’s compliance with the U.S. sanctions to assert monetary damage claims.  For instance, if a European company has a contract to provide certain goods to Iran, non-fulfillment of that contract to comply with U.S. sanctions would be a violation of the Blocking Statute.  However, if some of the European company’s goods are supplied from companies that decided to comply with U.S. sanctions and, therefore, refuse to further supply these goods, this may result in the European company not being able to meets its obligations vis-à-vis its Iranian customer.  In such a case, the Iranian company could sue the European company for breach of contract, and the European operator could in turn sue its supplier for the damages caused due to the supplier’s compliance with the extraterritorial U.S. sanctions. We have described the generally available possible options for affected companies here. As an EU Regulation, the EU Blocking Statute is directly applicable in the courts of any Member State without the need for domestic implementing legislation.  However, it is the competent domestic authorities of the EU Member States (not the European Commission) that are responsible for the enforcement of the EU Blocking Statute, including implementation of penalties for possible breaches.  Such penalties are laid down in national legislation and vary by Member State.  Some EU member states have in place, or have introduced, criminal offences applicable to violations of the EU Blocking Statute (notably the UK, Ireland and Germany); others maintain administrative penalties, but not criminal offences (notably Spain and Italy).  Certain member states, notably France and Belgium, appear not to have introduced legislation to implement the EU Blocking Statute. 2.    Russia Since March 2014, the EU has progressively imposed EU Economic and EU Financial Sanctions against Russia.  The EU Russia Sanctions were adopted in response to deliberate destabilization of (particularly Eastern) Ukraine and the annexation of Crimea. EU Russia Economic Sanctions include an arms embargo, an export ban for dual-use goods for military use or military end users in Russia, limited access to EU primary and secondary capital markets for major Russian majority state-owned financial institutions and major Russian energy companies, and limited Russian access to certain sensitive technologies and services that can be used for oil production and exploration. In particular, in broad alignment with U.S. sanctions, EU Russia Economic Sanctions prohibit the sale, supply, transfer, or export of products to any person in Russia for oil and natural gas exploration and production in waters deeper than 150 meters, in the offshore area north of the Arctic Circle and for projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing.  The provision of associated services (such as drilling or well testing) is also prohibited, while authorization must be sought for the provision of technical assistance, brokering services, and financing relating to the above. However, there are certain noteworthy differences in the nuances.  The above-detailed latest round of U.S. Russia Sectoral Sanctions due to CAATSA have created some disparities between the U.S. and the EU regimes.  The EU Russia Economic Sanctions are currently in place until July 31, 2019.  Also, the EU Russia Financial Sanctions were further extended in September 2018 until March 15, 2019.  As of now, 164 people and 44 entities are subject to a respective asset freeze and travel ban. For those subject to EU Financial Sanctions, EU member states may authorize the release of certain frozen funds or economic resources to satisfy the persons and their dependents’ basic needs, for payment of reasonable professional fees, for payment for contracts concluded before the sanction and for claims secured to an arbitral decision rendered prior to the sanction. In a recent development, the EU on January 21, 2018 targeted with EU Financial Sanctions two senior Russian military intelligence officials and two of their officers accused of the poisoning of a former Russian double agent in Britain, Mr. Skripal, and his daughter. The EU still does not recognize the annexation of Crimea and Sevastopol by Russia, and the EU imposed broad sanctions against these territories in 2014.  The EU Crimea Sanctions included an import ban on goods from Crimea and Sevastopol, broad restrictions on trade and investment related to economic sectors and infrastructure projects in Crimea and Sevastapol, an export ban for certain goods and technologies to Crimea and Sevastapol and a prohibition to supply tourism services in Crimea or Sevastopol.  On June 18, 2018, the EU Council extended the EU Crimea Sanctions until June 23, 2019.  These restrictions are similar to those in place in the United States. 3.    Venezuela Following the U.S. lead on Venezuela sanctions, on November 13, 2017, the EU had decided to impose an arms embargo on Venezuela, and also to introduce a legal framework for travel bans and asset freezes against those involved in human rights violations and non-respect for democracy or the rule of law.  Subsequently, on January 22, 2018, the EU published an initial list of seven individuals subject to these sanctions. On June 25, 2018, the EU added an additional eleven individuals holding official positions to the EU Venezuela Financial Sanctions for human rights violations and for undermining democracy and the rule of law in Venezuela. Though these measures are not yet as severe as U.S. measures on Venezuela—and the EU stated that the sanctions can be reversed if Venezuela makes progress on these issues— the Council was also explicit previously in its warning that the sanctions may be expanded if the situation worsens. On November 11, 2018, the EU Venezuela Sanctions were prolonged until November 14, 2019. 4.    North Korea As noted in last year’s sanction update and above with respect to U.S. measures, the events on the Korean Peninsula in 2017 also gave rise to significant new EU measures against North Korea.  While the first half saw a further increase in EU North Korea Financial and Economic Sanctions, the second half of 2018 eased some of the tension due to, inter alia, high-level meetings between South and North Korean, the United States, and China, without however (yet) changing the EU North Korea Sanctions Framework. On January 8, 2018, the EU Council added 16 persons and one entity to the EU North Korea Financial Sanctions, making them subject to an asset freeze and travel restrictions.  This decision implemented a part of the sanctions imposed by the UN Security Council on December 22, 2017 with resolution 2397 (2017). On January 22, 2018, the EU Council autonomously added 17 citizens of the DPRK to the EU North Korea Financial Sanctions, due to their involvement in illegal trade activities and activities aimed at facilitating the evasion of sanctions imposed by the UN. On February 26, 2018, the EU implemented further UN Security Council resolution 2397 (2017) and accordingly expanded its EU North Korea Economic Sanctions regime and strengthened the export ban on North Korean refined petroleum products by reducing the amount of barrels that North Korea may export from two million barrels to 500,000 barrels per year; banned imports of North Korean food and agricultural products, machinery, electrical equipment, earth, stone, and wood; banned exports to North Korea of all industrial machinery, transportation vehicles as well as iron, steel, and other metals; introduced further sanctions against vessels where there are reasonable grounds to believe that the vessel has been involved in the breach of UN sanctions; and demanded the repatriation of all North Korean workers abroad within 24 months. On April 6, 2018, the EU added one person and 21 entities to the EU North Korea Financial Sanctions, implementing a decision of March 30, 2018 by the UN Security Council Committee.  Also, the EU has implemented the asset freeze targeting 15 vessels, the port entry ban on 25 vessels and the de-flagging of 12 vessels. On April 19, 2018, the EU—in yet another round of autonomous EU North Korea Sanctions—added four persons to the EU North Korean Financial Sanctions.  The four individuals were targeted due to their involvement in financial practices suspected of contributing to the nuclear-related, ballistic-missile-related or other weapons of mass destruction-related programs of North Korean. By the end of 2018, accordingly, 59 individuals and 9 entities were designated autonomous by EU North Korea Financial Sanctions; and in addition, 80 individuals and 75 entities are subject to EU Financial Sanctions due to the implementation of respective sanctions of the UN. 5.    Mali On September 28, 2017, the European Union Council Decision (CFSP) 2017/1775 implemented UN Resolution 2374 (2017), which imposes travel bans and assets freezes on persons who are engaged in activities that threaten Mali’s peace, security, or stability.  Interestingly, the imposition of this regime was requested by the Malian Government, due to repeated ceasefire violations by militias in the north of the country.  Affected persons will be determined by a new Security Council committee, which has been set up to implement and monitor the operation of this new regime, and will be assisted by a panel of five experts appointed for an initial 13-month period.  For a long time no individuals were actually designated. On December 20, 2018, the Security Council Committee added three individuals to its Mali sanctions list: Ahmoudou Ag Asriw, Mahamadou Ag Rhissa, and Mohamed Ousmane Ag Mohamedoune.  Each of them were targeted with a travel ban. On January 10, 2019, the EU implemented these UN listings in respective EU Mali sanctions by Council Implementing Decision (CFSP) 2019/29. As a result of this implementation, the above-mentioned individuals will now be subject to EU-wide travel bans. B.    Judgments 1.    Mamancochet Mining v Aegis On October 12, 2018, the High Court handed down a judgment making reference to the EU Blocking Statute.  The case, which involved a non-U.S. subsidiary of a U.S. insurance entity, could provide importance guidance for U.S. companies and their EU, or at least UK, subsidiaries. The case arose from a dispute between UK-based insurers that are owned or controlled by U.S. persons and their customer, regarding the scope of contractual provisions excusing the parties from performance if transactions pursuant to the contract created sanctions exposure.  The insured had submitted a claim under its marine insurance contract to recover the cost of goods stolen in Iran.  The insurance underwriters asserted they were not required to pay that Iran-related claim pursuant to a provision in the insurance contract excusing performance if “payment…would expose that insurer to any sanction, prohibition or restriction” under applicable sanctions. The court held that, prior to the revocation of General License H on November 4, payment of a valid claim by the insured did not “expose” the insurers to sanctions because it would not breach applicable sanctions.  While General License H was in effect, non-U.S. subsidiaries of U.S. entities would not be prohibited from engaging in such transactions.  These transactions would have only breached sanctions—and therefore created sanctions exposure—after November 4, when non-U.S. subsidiaries of U.S. persons were no longer generally authorized to engage in transactions involving Iran.  For the UK Commercial Court, conduct creating the risk of sanctions exposure—rather than actual exposure through breach of applicable restrictions—did not excuse the insurers’ performance.  Had the insurers wanted to suspend performance when faced only with risk of sanctions exposure, the court suggests they could have expressly indicated that performance would be excused if “payment…would expose that insurer to any risk of being sanctioned.” The case suggests that insurance providers and brokerages, should be precise and comprehensive when describing the sanctions-related circumstances that trigger suspension or excuse-of-performance clauses and must describe clearly the effect of such provisions when triggered. These clauses must also clearly describe the effect of their invocation.  In this case, the contract provided that “no (re)insurer shall be liable to pay any claim . . . to the extent that the provision of such . . . claim . . . would expose that (re)insurer” to applicable sanctions.  The court found this provision would only suspended the insurers’ payment obligations, rather than terminate them.  This suggests that, just as insurers should be precise in describing the circumstances that trigger these excuse-of-performance clauses, they must also be precise in describing the effect of those provisions when they are triggered. In this case, the insured also sought to rely upon the EU Blocking Regulation in the event that the insurance underwriters were otherwise entitled to rely upon the sanctions clause to resist payment.   While this issue did not arise for determination, the court noted, rather than held, that considerable force was inherit in the argument that the EU Blocking Regulation is not engaged where the insurer’s liability to pay a claim is suspended under a sanctions clause such as the one in the policy at hand.  In such a case, the court noted, the insurer is not “complying” with a third country’s prohibition but is simply relying upon the terms of the policy to resist payment. 2.    EU Blocking Statute Challenge by Rotenberg In October, Russian oligarch Boris Rotenberg filed a law suit with the Helsinki District Court against Nordea, Danske Bank and Svenska Handelsbanken.  Rotenberg claims that the banks refused to provide certain services in order to comply with secondary U.S. sanctions.  The case is pending. C.    Enforcement 1.    France In France, “l’affaire Lafarge” remains the most prominent enforcement action.  In June 2018, the French judiciary initiated a formal investigation to examine whether LafargeHolcim had paid nearly $13 million to the Islamic State to protect one of its cement plants in Syria.  The corporation as a legal entity has been charged by a panel of three French judges appointed by the Paris High Court with violating the European embargo on oil purchases.  In addition, the charges also include financing a terrorist organization, endangering the lives of former employees and complicity in crimes against humanity. 2.    Belgium Belgian authorities started prosecution of three Belgian companies AAE Chemie, Anex Customs and Danmar Logistics and two of their managers.  Allegedly, the firms exported chemicals used to produce sarin gas to Syria without applying for the necessary export licenses.  Prior to the proceedings, the Belgian Finance Ministry had offered a financial settlement but the companies refused. The trial started in Antwerp in May 2018, a verdict is expected for January 2019. 3.    Germany The German government is facing resistance against its recent decision to halt arms exports to Saudi Arabia.  While not based on EU sanctions, but rather based on a political decision, the result for German defense suppliers remains the same.  German defense suppliers recently announced a plan to sue for damages resulting from the ban of all arms exports to Saudi Arabia.  The ban was established in November 2018 after details about the murder of journalist Jamal Khashoggi surfaced.  The restrictions apply to exports that had previously been approved by the German government. 4.    The United Kingdom There have been a number of enforcement actions in respect of sanctions and export control violations completed in 2018, the two most significant of which are: (i)    terms of imprisonment ranging from six months suspended (on a married couple associated with a small UK company Pairs Aviation) to 2½ years in respect of UK businessman, Alexander George, convicted of exporting certain military aircraft items to Iran, through  companies in a number of jurisdictions, including Malaysia and Dubai; and (ii)    the imposition by the Financial Conduct Authority in June 2018 of a financial penalty of almost £900,000 (reduced by 30 percent on account of early settlement) on Canara Bank for systems and controls inadequacies relating, inter alia, to sanctions.  This matter related to that institution’s trade finance operations. There were also three prosecutions of UK companies in 2018 in respect of unlicensed exports of military or dual-use goods, including chemicals and metals, with relatively modest fines imposed. IV.    United Kingdom Developments and Enforcement A key focus of attention of sanctions professionals in the United Kingdom this year has been the likely treatment of EU sanctions post-Brexit. On October 12, 2018, the UK’s Office for Financial Sanctions Implementation, which is part of HM Treasury, circulated a technical notice issued by another UK Ministry, the Department for Exiting the European Union (“DEXEU”), considering the implications for sanctions law in the UK in the event of a “no-deal Brexit.”  A no-deal Brexit is a scenario in which the UK does not reach an agreement with the European Union in connection with the future trading relationship between them by 11pm March 29, 2019 (midnight on March 30, 2019 CET), the date on which the UK is currently due to exit the EU. Whilst the UK does introduce its own sanctions legislation from time to time (and can be expected to do so following Brexit), the majority of UK sanctions instruments are introduced in implementation of EU sanctions.  EU sanctions regimes are brought into effect by legislative instruments passed at EU level, typically Decisions and Regulations of the Council of the EU.  EU Decisions are binding only on the persons to whom they are addressed; EU Regulations are binding on all persons and are automatically applicable in the domestic courts of the EU member states. However, the EU Member States have not given the EU competence to create criminal offences; only the Member States themselves can do that.  As such, EU sanctions instruments do not, by themselves, create criminal offences in the domestic legal orders of the EU Member States.  In order to create such criminal offences, domestic implementing legislation is generally required.  EU Member States take a variety of different approaches to such implementing legislation.  Some Member States have a standing implementing law which creates a criminal offence of violation of EU sanctions in force, so that as soon as a new EU Regulation implementing sanctions is brought into force, breach thereof will be an offence in the domestic legal order.  The UK does not take this approach.  Instead, in the UK, new delegated legislation (in the form of implementing regulations) is adopted each time the EU introduces (and sometimes when it amends) a sanctions regime, and it is those new implementing regulations that create the criminal offences in question. The UK’s future relationship with EU law in its national legal orders following Brexit will depend on the final terms of the Withdrawal Agreement that the UK is currently seeking to negotiate with the EU and any subsequent trade agreements regarding the future trading relationship.  There remains some uncertainty as to what these agreements will contain—and there is a possibility that no agreement will be reached.  In the event of a “no deal” Brexit, the UK will not be obliged automatically to adopt EU sanctions following Brexit. The question also arises as to the legal basis of EU sanctions in effect at the point the UK leaves the EU, given that the underlying EU legal basis for those sanctions will no longer apply to the UK.  In order to avoid legal lacunae resulting from Brexit, the UK passed in 2018 the European Union (Withdrawal) Act 2018, which enacts certain savings for EU-derived legislation, direct EU legislation and EU law-derived rights.  This Act provides, in broad summary, that all of these will be deemed to have effect as domestic law in the UK (i.e., English law, Scots law and the law of Northern Ireland) on and after Brexit day, save to the extent that Parliament enacts regulations modifying or negating the relevant law. The technical notice sets out the policy of the UK Government regarding sanctions in the event of a “no deal” Brexit.  The relevant section of the technical notice reads as follows: As international law requires, we will implement UN sanctions in UK domestic law after the UK leaves the EU. If the UK leaves the EU without a deal, we will look to carry over all EU sanctions at the time of our departure. We will implement sanctions regimes through new legislation, in the form of regulations, made under the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act). The Act will provide the legal basis for the UK to impose, update and lift sanctions after leaving the EU. We propose to put much of this legislation before Parliament before March 2019, to prepare for the possibility of the UK leaving the EU without a deal. Any sanctions regimes that we did not address, through regulations under the Sanctions Act by March 2019, would continue as retained EU law under the EU (Withdrawal) Act 2018. This means there will be no gaps in implementing existing sanctions regimes. We expect that the UK’s sanctions regulations will include: the purposes of the sanctions regime (what the UK hopes will be achieved through imposing sanctions) the criteria to be met before sanctions can be imposed on a person or group details of sanctions, such as trade and financial sanctions details of exemptions that may apply, such as exemptions which allow people to trade with a certain country that would otherwise be prohibited by the regulations how we will enforce the sanctions measures other areas, such as circumstances in which information about sanctions may be shared We would publish the names of sanctioned persons or organisations. Regulations would be published as normal. After the UK leaves the EU, in addition to implementing UN sanctions, and looking to carry over existing EU sanctions, we will also have the powers to adopt other sanctions under the Sanctions Act. We will work with the EU and other international partners on sanctions where this is in our mutual interest. It is also noted that, in its December 2018 Mutual Evaluation Report on the United Kingdom, the Financial Action Task Force (an independent inter-governmental body which promotes policies to protect the global financial system against, inter alia, money laundering) criticized the UK’s recent lack of public-enforcement actions in relation to sanctions breaches, and recommended that the U.K. Office of Financial Sanctions Implementation and other UK enforcement authorities “ensure” that they pursue such actions. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Patrick Doris, Michael Walther, Stephanie Connor, Laura Cole, Helen Galloway, Jesse Melman, R.L. Pratt, Richard Roeder, Audi Syarief and Scott Toussaint. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 31, 2019 |
Venezuela Update: The Trump Administration Imposes Oil Sanctions to Effect Regime Change

Click for PDF On January 28, 2019, amid mounting tensions between Washington and Caracas, the Trump Administration imposed the most stringent sanctions to date on Venezuela by designating the state-owned oil company Petroleos de Venezuela, S.A. (“PdVSA”) on the Specially Designated Nationals and Blocked Persons (“SDN”) List administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”).[1]  This measure is especially noteworthy because it targets not just the most significant actor in Venezuela’s oil-dependent economy but also an entity that is very closely tied to the United States – owning U.S. assets, employing thousands of U.S. workers and providing 500,000 barrels of oil per day to the United States.  By virtue of being added to the SDN List, all of PdVSA’s property and interests in property that are subject to U.S. jurisdiction are frozen and U.S. persons are, except as otherwise authorized by general or specific OFAC license, generally prohibited from engaging in transactions with PdVSA and its majority-owned subsidiaries. This was a sprawling action, including not just the designation of a major, multi-billion dollar company, but also the issuance by OFAC of eight new General Licenses (“GLs”).  The interpretation of some of the language in the GLs will require OFAC to issue additional Frequently Asked Questions (“FAQs”) beyond the one published to date. As a policy matter, the primary driver behind the decision to designate PdVSA appears to have been a desire on the part of the United States to prevent the looting of state assets by the regime of current Venezuelan President Nicolás Maduro and to facilitate a change in control of Venezuela’s government.  The designation comes just days after the Trump administration declared President Maduro’s recent re-election illegitimate and recognized Juan Guaidó, the head of Venezuela’s National Assembly, as the country’s interim leader.[2]  According to Secretary of State Mike Pompeo, the new sanctions on PdVSA “will prevent Maduro and other corrupt actors from further enriching themselves at the expense of the long-suffering Venezuelan people.  It will also preserve the core pillar of Venezuela’s national assets for the people and a democratically elected government.”[3] Treasury Secretary Steven Mnuchin similarly stressed that U.S. sanctions are by design reversible, and raised the possibility that PdVSA could in the future be de-listed.[4]  In that sense, the measures announced this week may best be viewed as a form of protective measure designed to safeguard Venezuelan state assets—for example, by placing them in blocked accounts—until they can be delivered to a non-Maduro government for use in the re-building of Venezuela’s shattered economy. Overview of New Sanctions The designation of PdVSA represents an extension of existing U.S. sanctions policy toward Venezuela, which for the last several years has been implemented in a series of steadily expanding sanctions targeting both President Maduro’s inner circle and sources of financing for the Venezuelan state.  Up to this point, those measures have generally been narrow and incremental.  For example, during the past 12 months, OFAC has issued a warning about transacting in Venezuela’s new cyber currency[5] and imposed sectoral sanctions on certain debt and equity of the Government of Venezuela.[6]  The most recent step, which laid the groundwork for the designation of PdVSA, came on November 1, 2018, when President Trump issued Executive Order 13850, imposing sanctions on persons who operate in the gold sector of the Venezuelan economy, who engage in corruption involving Venezuelan government projects and programs, or who facilitate such activities.[7]  Crucially, Executive Order 13850 grants the Secretary of the Treasury discretion to extend these sanctions to any other sector of the Venezuelan economy he deems appropriate.[8]  That is the authority that Secretary Mnuchin employed this week to determine that persons operating in Venezuela’s oil sector may be subject to sanctions and on that basis designated PdVSA.[9] Through this designation, and except as otherwise authorized in any of several general licenses described below, the United States government has frozen all PdVSA property and interests in property that are in the United States, that later come into the United States, and that are within the possession and control of U.S. persons worldwide.  By operation of OFAC’s “50 Percent Rule,” any property or interest in property that is owned 50 percent or more by PdVSA is also deemed to be blocked.[10]  Accordingly, U.S. persons can no longer deal with PdVSA’s majority-owned subsidiaries without OFAC authorization. General Licenses In connection with these sanctions, OFAC issued eight new GLs that will enable many U.S. persons to continue temporarily engaging with PdVSA and its affiliated entities, either to wind down their operations or to continue other kinds of engagement with PdVSA for specified periods of time.  This approach is consistent with OFAC’s recent past practice of issuing strong and broad sanctions that are then calibrated through the issuance of general licenses and FAQs. While OFAC has not yet issued FAQs that will further construe the scope of these licenses, the structure of these licenses suggest an attempt by OFAC to incrementally redirect PdVSA revenue streams away from the Maduro government and Maduro’s associates while maintaining the value and viability of PdVSA and its U.S. subsidiaries PDV Holding, Inc. (“PDVH”) and CITGO Holding, Inc. (“CITGO”). In moving to sanction a state asset like PdVSA, OFAC appears to be following the playbook it developed in Iraq and Libya in an effort to secure and preserve state assets from the grasp of a dictator.  In 2011, OFAC employed sanctions to secure Libyan state assets just as Muammar Gaddafi was about to launch his forces on the opposition in Benghazi.  In 1990, OFAC took similar action with respect to Kuwait after Iraq invaded the state in 1990.  In both cases, OFAC froze core state assets as a “protective” measure and then de-listed the assets once the threat had been definitively removed.  The challenge in Venezuela is that PdVSA is much bigger and far more intertwined in the United States, giving rise to potential domestic collateral consequences in the United States that were far more limited in the case of Libya and Kuwait. Authorizations that expire on February 27, 2019 GL 12(b) is a wind-down license and authorizes, until February 27, 2019, all transactions and activities ordinarily incident and necessary to an ordered termination of involvement in operations, contracts, or other agreements, including the importation into the U.S. of goods, services, or technology, involving PdVSA or any entity in which PdVSA owns a 50 percent or greater interest. Authorizations that expire on March 29, 2019 GL 11 is a maintenance and wind down license and authorizes, until March 29, 2019, U.S. person employees and contractors of any non-U.S. entities except those non-U.S. entities located in Venezuela and the United States (“Certain Non-U.S. Entities”), to engage in all transactions and activities that are ordinarily incident and necessary to maintain or wind down operations, contracts or agreements involving PdVSA or any entity in which PdVSA owns a 50 percent or greater interest.  This license additionally authorizes U.S. financial institutions to reject (rather than block and freeze) fund transfers involving both (i) PdVSA or any entity in which PdVSA owns a 50 percent or greater interest, and (ii) Certain Non-U.S. Entities, provided that neither the originator nor the beneficiary is a U.S. person and the funds are not destined for a blocked account on the books of a U.S. person.  For reasons that are unclear, this License specifically excludes U.S. person employees and contractors of non-U.S. entities located in the United States from its authorization, and it appears that multinational corporations with a business presence in the United States whose employees and contractors are supporting PdVSA and its subsidiaries now require specific licensing from OFAC to continue doing so. Authorizations that expire on April 28, 2019 GL 12(a) is a wind down license and authorizes, until April 28, 2019, all transactions and activities ordinarily incident and necessary to the purchase and importation into the United States of petroleum and petroleum products from PdVSA and/or from any entity in which PdVSA owns a 50 percent or greater interest.  However, all payments for these products to or for the benefit of PdVSA or other blocked persons must be made into a blocked, interest-bearing account located in the United States.  OFAC likely issued this license to ensure that U.S. persons have sufficient time to switch to alternate sources of these products and to try to avoid any short term supply shocks to the price of these products in the United States that an immediate cessation of these imports would have otherwise caused. GL 7(b) authorizes, until April 28, 2019, all transactions and activities by PDVH, CITGO, and any of their subsidiaries that are ordinarily incident and necessary to the purchase and importation of petroleum and petroleum products from PdVSA or from any entity in which PdVSA owns a 50 percent or greater interest. This license is not styled as a wind down license, but as a license with a specific expiration.  From a policy perspective, this is likely an effort by the Trump administration to allow PDVH and CITGO, which are now blocked persons, to complete delivery of currently scheduled imports from PdVSA to U.S. refiners without disrupting U.S. oil prices, but then pause any new orders of Venezuelan crude until the Maduro regime is replaced.  Like General License 12(a), General License 7(b) and 7(a)(see below) require that any payments made by PDVH and CITGO for these transactions to PdVSA and its subsidiaries be made into blocked U.S. accounts. Activities that must be complete by July 27, 2019 GL 7(a) authorizes, until July 27, 2019, all activities with respect to PDVH, CITGO, and their subsidiaries, where the only PdVSA entities involved are these entities and their subsidiaries.  Notably, however, OFAC makes clear in GL 7(d)(1) that its license does not extend to authorizing PDVH, CITGO, or any other U.S. persons supporting them, to export or reexport any goods, services, or technology to PdVSA in the context of other transactions authorized by the license. GL 8 authorizes, until July 27, 2019, five named corporations to engage in all transactions and activities ordinarily incident and necessary to operations in Venezuela involving PdVSA or any entity in which PdVSA owns a 50 percent or greater interest.  Notably, this is not styled as a wind down license, which suggests that the U.S. government’s policy will be to allow U.S. multinational companies to continue supporting PdVSA’s oil production and maintaining PdVSA’s general viability as a future asset of the Venezuelan people and any transitional government. GL 13 authorizes, until July 27, 2019, any transactions that would otherwise be prohibited (except payments to or for the benefit of a blocked person, which must be placed into a blocked account) involving PdVSA and Nynas AB or any of Nynas AB’s subsidiaries. General Licenses with No Expiration GL 9 authorizes U.S. persons to continue engaging in any dealings in debt (including certain listed bonds, promissory notes, and other receivables) in which PdVSA owns a 50 percent or greater interest, provided that the debt was issued prior to August 25, 2017 and that any divestment or transfer of any U.S. person holdings are to a non-U.S. person. General License 9 effectively bifurcates a prior-issued OFAC license, General License 3, which is now replaced with General License 3A.  General License 9 now continues OFAC’s authorization for trade in debt issued by PdVSA and by PDVH, CITGO, and Nynas AB. General License 3A continues to authorize secondary market trade in listed bonds issued by the Government of Venezuela and other U.S. entities it owns and controls prior to August 25, 2017. GL 10 authorizes U.S. persons in Venezuela to purchase refined petroleum products for personal, commercial or humanitarian uses from PdVSA or from any entity in which PdVSA owns a 50 percent or greater interest.  This authorization does not, however, extend to any commercial resale, transfer, exportation or reexportation of these products. GL 14 authorizes U.S. persons to engage in all transactions that are for the conduct of official business of the United States government by employees, grantees or contractors. Implications and Opportunities In addition to being one of the largest companies ever designated by OFAC, PdVSA is also more deeply interconnected with the United States than any previously designated entity.  While OFAC’s recent experiences with sanctions involving the Russian oligarch Oleg Deripaska and his holdings (including Rusal, En+ Group and JSC EuroSibEnergo) were complex, we expect that U.S. refiners’ historical reliance on crude imports from PdVSA and the direct sanctioning of a major U.S. person refiner and distributor (CITGO) will present OFAC with many new, unintended collateral effects to work through.  PdVSA currently sells more than 500,000 barrels of oil a day to the United States,[11] and through its subsidiary CITGO owns several refineries along the U.S. Gulf Coast that employ hundreds of Americans.[12]  Accordingly, severing ties between PdVSA, its subsidiaries, both U.S. and non-U.S., and other U.S. persons is an unusually complex undertaking, in connection with which additional FAQs and guidance from OFAC will almost certainly be required. However, with this complexity comes opportunity.  In the past, OFAC has issued FAQs and new GLs to help manage the unintended consequences of its sanctions designations.  In our experience, specific outreach to OFAC on these consequences can help prompt and shape the issuance of FAQs and GLs that can further clarify what activities are and are not specifically authorized.  Moreover, and especially given the strong U.S. policy interests in enabling a rapid, peaceful transfer of power in Venezuela and in preserving PdVSA’s continued viability as a revenue source, we believe that OFAC will be receptive to applications for specific licenses for transactions that can be shown to support both of these policy objectives.  In the interim, and especially given the economic reach of PdVSA and its subsidiaries in Venezuela, the United States, and throughout the region, those continuing to do business with Venezuela’s energy sector and in the many ancillary businesses, products and services that support it should take due care to identify any potential connection to PdVSA and U.S. persons that may require OFAC authorization.    [1]   Press Release, Treasury Sanctions Venezuela’s State-Owned Oil Company Petroleos de Venezuela, S.A., U.S. Dep’t of Treasury (Jan. 28, 2019), https://home.treasury.gov/news/press-releases/sm594.    [2]   See, e.g., Ana Vanessa Herrero, After U.S. Backs Juan Guaidó as Venezuela’s Leader, Maduro Cuts Ties, N.Y. Times (Jan. 23, 2019), https://www.nytimes.com/2019/01/23/world/americas/venezuela-protests-guaido-maduro.html.    [3]   Press Statement, Sanctions Against PDVSA and Venezuela Oil Sector, U.S. Dep’t of State (Jan 28, 2019), https://www.state.gov/secretary/remarks/2019/01/288623.htm.    [4]   See Press Release, Treasury Sanctions Venezuela’s State-Owned Oil Company Petroleos de Venezuela, S.A., U.S. Dep’t of Treasury (Jan. 28, 2019), https://home.treasury.gov/news/press-releases/sm594.    [5]   OFAC, FAQ No. 566 (Mar. 19, 2018), https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#566.    [6]   Exec. Order No. 13835, 83 Fed. Reg. 24001 (May 21, 2018).    [7]   Exec. Order No. 13850, 83 Fed. Reg. 55243 (Nov. 1, 2018).    [8]   Exec. Order No. 13850, 83 Fed. Reg. 55243 (Nov. 1, 2018).  OFAC has emphasized, however, that it intends to interpret these potentially sweeping authorities narrowly.  For example, OFAC has stressed that these measures are not meant to target legitimate transactions involving the Venezuelan gold sector, or any other sector that might be targeted in the future.  OFAC, FAQ No. 629 (Nov. 1, 2018), https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#629.  Rather, OFAC has indicated that it intends to sanction only transactions in targeted sectors that feature some added element of wrongdoing, such as “dishonest or fraudulent conduct” or transactions whose purpose or effect is to “misappropriate[e] Venezuelan resources . . . for personal, professional, or political gain.”  Id.    [9]   Press Release, Treasury Sanctions Venezuela’s State-Owned Oil Company Petroleos de Venezuela, S.A., U.S. Dep’t of Treasury (Jan. 28, 2019), https://home.treasury.gov/news/press-releases/sm594. [10]   See generally OFAC FAQ Nos. 398-402 (Aug. 13, 2014), https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_general.aspx (describing the mechanics of OFAC’s Fifty Percent Rule). [11]   Matthew Lee & Deb Riechmann, US Hits Venezuela with Oil Sanctions to Pressure Maduro, Associated Press (Jan. 28, 2019), https://www.apnews.com/dbc0e01d010d41dba3576393c47c860e. [12]   Steven Mufson, Trump Administration Announces Sanctions Targeting Venezuela’s Oil Industry, Wash. Post (Jan. 28, 2019), https://www.washingtonpost.com/national/health-science/trump-administration-announces-sanctions-targeting-venezuelas-oil-industry/2019/01/28/4f4470c2-233a-11e9-90cd-dedb0c92dc17_story.html; Saleha Mohsin & Jennifer Epstein, Trump Slaps De-Facto Oil Ban on Venezuela, Bloomberg (Jan. 28, 2019), https://www.bloomberg.com/news/articles/2019-01-28/trump-sanctions-venezuela-oil-company-pdvsa-rubio-announces. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, Chris Timura, Stephanie Connor and Scott Toussaint. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 11, 2019 |
2018 Year-End German Law Update

Click for PDF Looking back at the past year’s cacophony of voices in a world trying to negotiate a new balance of powers, it appeared that Germany was disturbingly silent, on both the global and European stage. Instead of helping shape the new global agenda that is in the making, German politics focused on sorting out the vacuum created by a Federal election result which left no clear winner other than a newly formed right wing nationalist populist party mostly comprised of so called Wutbürger (the new prong for “citizens in anger”) that managed to attract 12.6 % of the vote to become the third strongest party in the German Federal Parliament. The relaunching of the Grand-Coalition in March after months of agonizing coalition talks was followed by a bumpy start leading into another session of federal state elections in Bavaria and Hesse that created more distraction. When normal business was finally resumed in November, a year had passed by with few meaningful initiatives formed or significant business accomplished. In short, while the world was spinning, Germany allowed itself a year’s time-out from international affairs. The result is reflected in this year’s update, where the most meaningful legal developments were either triggered by European initiatives, such as the General Data Protection Regulation (“GDPR”) (see below section 4.1) or the New Transparency Rules for Listed German Companies (see below section 1.2), or as a result of landmark rulings of German or international higher and supreme courts (see below Corporate M&A sections 1.1 and 1.4; Tax – sections 2.1 and 2.2 and Labor and Employment – section 4.2). In fairness, shortly before the winter break at least a few other legal statutes have been rushed through parliament that are also covered by this update. Of the changes that are likely to have the most profound impact on the corporate world, as well as on the individual lives of the currently more than 500 million inhabitants of the EU-28, the GDPR, in our view, walks away with the first prize. The GDPR has created a unified legal system with bold concepts and strong mechanisms to protect individual rights to one’s personal data, combined with hefty fines in case of the violation of its rules. As such, the GDPR stands out as a glowing example for the EU’s aspiration to protect the civic rights of its citizens, but also has the potential to create a major exposure for EU-based companies processing and handling data globally, as well as for non EU-based companies doing business in Europe. On a more strategic scale, the GDPR also creates a challenge for Europe in the global race for supremacy in a AI-driven world fueled by unrestricted access to data – the gold of the digital age. The German government could not resist infection with the virus called protectionism, this time around coming in the form of greater scrutiny imposed on foreign direct investments into German companies being considered as “strategic” or “sensitive” (see below section 1.3 – Germany Tightens Rules on Foreign Takeovers Even Further). Protecting sensitive industries from “unwanted” foreign investors, at first glance, sounds like a laudable cause. However, for a country like Germany that derives most of its wealth and success from exporting its ideas, products and services, a more liberal approach to foreign investments would seem to be more appropriate, and it remains to be seen how the new rules will be enforced in practice going forward. The remarkable success of the German economy over the last twenty five years had its foundation in the abandoning of protectionism, the creation of an almost global market place for German products, and an increasing global adoption of the rule of law. All these building blocks of the recent German economic success have been under severe attack in the last year. This is definitely not the time for Germany to let another year go by idly. We use this opportunity to thank you for your trust and confidence in our ability to support you in your most complicated and important business decisions and to help you form your views and strategies to deal with sophisticated German legal issues. Without our daily interaction with your real-world questions and tasks, our expertise would be missing the focus and color to draw an accurate picture of the multifaceted world we are living in. In this respect, we thank you for making us better lawyers – every day. ________________________ TABLE OF CONTENTS 1.      Corporate, M&A 2.      Tax 3.      Financing and Restructuring 4.      Labor and Employment 5.      Real Estate 6.      Compliance 7.      Antitrust and Merger Control 8.      Litigation 9.      IP & Technology 10.    International Trade, Sanctions and Export Controls ________________________ 1.       Corporate, M&A 1.1       Further Development regarding D&O Liability of the Supervisory Board in a German Stock Corporation In its famous “ARAG/Garmenbeck”-decision in 1997, the German Federal Supreme Court (Bundesgerichtshof – BGH) first established the obligation of the supervisory board of a German Stock Corporation (Aktiengesellschaft) to pursue the company’s D&O liability claims in the name of the company against its own management board after having examined the existence and enforceability of such claims. Given the very limited discretion the court has granted to the supervisory board not to bring such a claim and the supervisory board’s own liability arising from inactivity, the number of claims brought by companies against their (former) management board members has risen significantly since this decision. In its recent decision dated September 18, 2018, the BGH ruled on the related follow-up question about when the statute of limitations should start to run with respect to compensation claims brought by the company against a supervisory board member who has failed to pursue the company’s D&O liability claims against the board of management within the statutory limitation period. The BGH clarified that the statute of limitation applicable to the company’s compensation claims against the inactive supervisory board member (namely ten years in case of a publicly listed company, otherwise five years) should not begin to run until the company’s compensation claims against the management board member have become time-barred themselves. With that decision, the court adopts the view that in cases of inactivity, the period of limitations should not start to run until the last chance for the filing of an underlying claim has passed. In addition, the BGH in its decision confirmed the supervisory board’s obligation to also pursue the company’s claims against the board of management in cases where the management board member’s misconduct is linked to the supervisory board’s own misconduct (e.g. through a violation of supervisory duties). Even in cases where the pursuit of claims against the board of management would force the supervisory board to disclose its own misconduct, such “self-incrimination” does not release the supervisory board from its duty to pursue the claims given the preponderance of the company’s interests in an effective supervisory board, the court reasoned. In practice, the recent decision will result in a significant extension of the D&O liability of supervisory board members. Against that backdrop, supervisory board members are well advised to examine the existence of the company’s compensation claims against the board of management in a timely fashion and to pursue the filing of such claims, if any, as soon as possible. If the board of management’s misconduct is linked to parallel misconduct of the supervisory board itself, the relevant supervisory board member – if not exceptionally released from pursuing such claim and depending on the relevant facts and circumstances – often finds her- or himself in a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. In such a situation, the supervisory board member might consider resigning from office in order to avoid a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. Back to Top 1.2       Upcoming New Transparency Rules for Listed German Companies as well as Institutional Investors, Asset Managers and Proxy Advisors In mid-October 2018, the German Federal Ministry of Justice finally presented the long-awaited draft for an act implementing the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828). The Directive aims to encourage long-term shareholder engagement by facilitating the communication between shareholders and companies, in particular across borders, and will need to be implemented into German law by June 10, 2019 at the latest. The new rules primarily target listed German companies and provide some major changes with respect to the “say on pay” provisions, as well as additional approval and disclosure requirements for related party transactions, the transmission of information between a stock corporation and its shareholders and additional transparency and reporting requirements for institutional investors, asset managers and proxy advisors. “Say on pay” on directors’ remuneration: remuneration policy and remuneration report Under the current law, the shareholders determine the remuneration of the supervisory board members at a shareholder meeting, whereas the remuneration of the management board members is decided by the supervisory board. The law only provides for the possibility of an additional shareholder vote on the management board members’ remuneration if such vote is put on the agenda by the management and supervisory boards in their sole discretion. Even then, such vote has no legal effects whatsoever (“voluntary say on pay”). In the future, shareholders of German listed companies will have two options. First, the supervisory board will have to prepare a detailed remuneration policy for the management board, which must be submitted to the shareholders if there are major changes to the remuneration, and in any event at least once every four years (“mandatory say on pay”). That said, the result of the vote on the policy will continue to remain only advisory. However, if the supervisory board adopts a remuneration policy that has been rejected by the shareholders, it will then be required to submit a reviewed (not necessarily revised) remuneration policy to the shareholders at the next shareholders’ meeting. With respect to the remuneration of supervisory board members, the new rules require a shareholders vote at least once every four years. Second, at the annual shareholders’ meeting the shareholders will vote ex post on the remuneration report (which is also reviewed by the statutory auditor) which contains the remuneration granted to the present and former members of the management board and the supervisory board in the past financial year. Again, the shareholders’ vote, however, will only be advisory. Both the remuneration report including the audit report, as well as the remuneration policy will have to be made public on the company’s website for at least ten years. Related party transactions German stock corporation law already provides for various safeguard mechanisms to protect minority shareholders in cases of transactions with major shareholders or other related parties (e.g. the capital maintenance rules and the laws relating to groups of companies). In the future, in the case of listed companies, these mechanisms will be supplemented by a detailed set of approval and transparency requirements for transactions between the company and related parties. Material transactions exceeding certain thresholds will require prior supervisory board approval. A rejection by the supervisory board can be overcome by shareholder vote. Furthermore, a listed company must publicly disclose any such material related party transaction, without undue delay over media providing for a Europe-wide distribution. Identification of shareholders and facilitation of the exercise of shareholders’ rights Listed companies will have the right to request information on the identity of their shareholders, including the name and both a postal and electronic address, from depositary banks, thus allowing for a direct communication line, also with respect to bearer shares (“know-your-shareholder”). Furthermore, depositary banks and other intermediaries will be required to pass on important information from the company to the shareholders and vice versa, e.g. with respect to voting in shareholders’ meetings and the exercise of subscription rights. Where there is more than one intermediary in a chain, the intermediaries are required to pass on the respective information within the chain. In addition, companies will be required to confirm the votes cast at the request of the shareholders thus enabling them to be certain that their votes have been effectively cast, including in particular across borders. Transparency requirements for institutional investors, asset managers and proxy advisors German domestic institutional investors and asset managers with Germany as their home member state (as defined in the applicable sector-specific EU law) will be required (i) to disclose their engagement policy, including how they monitor, influence and communicate with the investee companies, exercise shareholders’ rights and manage actual and potential conflicts of interests, and (ii) to report annually on the implementation of their engagement policy and disclose how they have cast their votes in the general meetings of material investee companies. Institutional investors will further have to disclose (iii) consistency between the key elements of their investment strategy with the profile and duration of their liabilities and how they contribute to the medium to long-term performance of their assets, and, (iv) if asset managers are involved, to disclose the main aspects of their arrangement with the asset manager. The new disclosure and reporting requirements, however, only apply on a “comply or explain” basis. Thus, investors and asset managers may choose not to make the above disclosures, provided they give an explanation as to why this is the case. Proxy advisors will have to publicly disclose on an annual basis (i) whether and how they have applied their code of conduct based again on the “comply or explain” principle, and (ii) information on the essential features, methodologies and models they apply, their main information sources, the qualification of their staff, their voting policies for the different markets they operate in, their interaction with the companies and the stakeholders as well as how they manage conflicts of interests. These rules, however, do not apply to proxy advisors operating from a non-EEA state with no establishment in Germany. The present legislative draft is still under discussion and it is to be expected that there will still be some changes with respect to details before the act becomes effective in mid-2019. Due to transitional provisions, the new rules on “say on pay” will have no effect for the majority of listed companies in this year’s meeting season. Whether the new rules will actually promote a long-term engagement of shareholders and have the desired effect on the directors’ remuneration of listed companies will have to be seen. In any event, both listed companies as well as the other addressees of the new transparency rules should make sure that they are prepared for the new reporting and disclosure requirements. Back to Top 1.3       Germany Tightens Rules on Foreign Takeovers Even Further After the German government had imposed stricter rules on foreign direct investment in 2017 (see 2017 Year-End German Law Update under 1.5), it has now even further tightened its rules with respect to takeovers of German companies by foreign investors. The latest amendment of the rules under the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, “AWV“) enacted in 2018 was triggered, among other things, by the German government’s first-ever veto in August 2018 regarding the proposed acquisition of Leifeld Metal Spinning, a German manufacturer of metal forming machines used in the automotive, aerospace and nuclear industries, by Yantai Taihai Corporation, a privately-owned industry group from China, on the grounds of national security. Ultimately, Yantai withdrew its bid shortly after the German government had signaled that it would block the takeover. On December 29, 2018, the latest amendment of the Foreign Trade and Payments Ordinance came into force. The new rules provide for greater scrutiny of foreign direct investments by lowering the threshold for review of takeovers of German companies by foreign investors from the acquisition of 25% of the voting rights down to 10% in circumstances where the target operates a critical infrastructure or in sensitive security areas (defense and IT security industry). In addition, the amendment also expands the scope of the Foreign Trade and Payments Ordinance to also apply to certain media companies that contribute to shaping the public opinion by way of broadcasting, teleservices or printed materials and stand out due to their special relevance and broad impact. While the lowering of the review threshold as such will lead to an expansion of the existing reporting requirements, the broader scope is also aimed at preventing German mass media from being manipulated with disinformation by foreign investors or governments. There are no specific guidelines published by the German government as it wants the relevant parties to contact, and enter into a dialog with, the authorities about these matters. While the German government used to be rather liberal when it came to foreign investments in the past, the recent veto in the case of Leifeld as well as the new rules show that in certain circumstances, it will become more cumbersome for dealmakers to get a deal done. Finally, it is likely that the rules on foreign investment control will be tightened even further going forward in light of the contemplated EU legislative framework for screening foreign direct investment on a pan-European level. Back to Top 1.4       US Landmark Decision on MAE Clauses – Consequences for German M&A Deals Fresenius wrote legal history in the US with potential consequences also for German M&A deals in which “material adverse effect” (MAE) clauses are used. In December 2018, for the first time ever, the Supreme Court of Delaware allowed a purchaser to invoke the occurrence of an MAE and to terminate the affected merger agreement. The agreement included an MAE clause, which allocated certain business risks concerning the target (Akorn) for the time period between signing and closing to Akorn. Against the resistance of Akorn, Fresenius terminated the merger agreement based on the alleged MAE, arguing that the target’s EBITDA declined by 86%. The decision includes a very detailed analysis of an MAE clause by the Delaware courts and reaffirms that under Delaware law there is a very high bar to establishing an MAE. Such bar is based both on quantitative and qualitative parameters. The effects of any material adverse event need to be substantial as well as lasting. In most German deals, the parties agree to arbitrate. For this reason, there have been no German court rulings published on MAE clauses so far. Hence, all parties to an M&A deal face uncertainty about how German courts or arbitration tribunals would define “materiality” in the context of an MAE clause. In potential M&A litigation, sellers may use this ruling to support the argument that the bar for the exercise of the MAE right is in fact very high in line with the Delaware standard. It remains to be seen whether German judges will adopt the Delaware decision to interpret MAE clauses in German deals. Purchasers, who seek more certainty, may consider defining materiality in the MAE clause more concretely (e.g., by reference to the estimated impact of the event on the EBITDA of the company or any other financial parameter). Back to Top 1.5       Equivalence of Swiss Notarizations? The question whether the notarization of various German corporate matters may only be validly performed by German notaries or whether some or all of these measures may also be notarized validly by Swiss notaries has long since been the topic of legal debate. Since the last major reform of the German Limited Liability Companies Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung – GmbHG) in 2008 the number of Swiss notarizations of German corporate measures has significantly decreased. A number of the newly introduced changes and provisions seemed to cast doubt on the equivalence and capacity of Swiss notaries to validly perform the duties of a German notary public who are not legally bound by the mandatory, non-negotiable German fee regime on notarial fees. As a consequence and a matter of prudence, German companies mostly stopped using Swiss notaries despite the potential for freely negotiated fee arrangements and the resulting significant costs savings in particular in high value matters. However, since 2008 there has been an increasing number of test cases that reach the higher German courts in which the permissibility of a Swiss notarization is the decisive issue. While the German Federal Supreme Court (Bundesgerichtshof – BGH) still has not had the opportunity to decide this question, in 2018 two such cases were decided by the Kammergericht (Higher District Court) in Berlin. In those cases, the court held that both the incorporation of a German limited liability company in the Swiss Canton of Berne (KG Berlin, 22 W 25/16 – January 24, 2018 = ZIP 2018, 323) and the notarization of a merger between two German GmbHs before a notary in the Swiss Canton of Basle (KG Berlin, 22 W 2/18 – July 26, 2018 = ZIP 2018, 1878) were valid notarizations under German law, because Swiss notaries were deemed to be generally equivalent to the qualifications and professional standards of German-based notaries. The reasons given in these decisions are reminiscent of the case law that existed prior to the 2008 corporate law reform and can be interpreted as indicative of a certain tendency by the courts to look favorably on Swiss notarizations as an alternative to German-based notarizations. Having said that and absent a determinative decision by the BGH, using German-based notaries remains the cautious default approach for German companies to take. This is definitely the case in any context where financing banks are involved (e.g. either where share pledges as loan security are concerned or in an acquisition financing context of GmbH share sales and transfers). On the other hand, in regions where such court precedents exist, the use of Swiss notaries for straightforward intercompany share transfers, mergers or conversions might be considered as an alternative on a case by case basis. Back to Top 1.6       Re-Enactment of the DCGK: Focus on Relevance, Function, Management Board’s Remuneration and Independence of Supervisory Board Members Sixteen years after it has first been enacted, the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK), which contains standards for good and responsible governance for German listed companies, is facing a major makeover. In November 2018, the competent German government commission published a first draft for a radically revised DCGK. While vast parts of the proposed changes are merely editorial and technical in nature, the draft contains a number of new recommendations, in particular with respect to the topics of management remuneration and independence of supervisory board members. With respect to the latter, the draft now provides a catalogue of criteria that shall act as guidance for the supervisory board as to when a shareholder representative shall no longer be regarded as independent. Furthermore, the draft also provides for more detailed specifications aiming for an increased transparency of the supervisory board’s work, including the recommendation to individually disclose the members’ attendance of meetings, and further tightens the recommendations regarding the maximum number of simultaneous mandates for supervisory board members. Moreover, in addition to the previous concept of “comply or explain”, the draft DCGK introduces a new “apply and explain” concept, recommending that listed companies also explain how they apply certain fundamental principles set forth in the DCGK as a new third category in addition to the previous two categories of recommendations and suggestions. The draft DCGK is currently under consultation and the interested public is invited to comment upon the proposed amendments until the end of January 2019. Since some of the proposed amendments provide for a rather fundamentally new approach to the current regime and would introduce additional administrative burdens, it remains to be seen whether all of the proposed amendments will actually come into force. According to the current plan, following a final consultancy of the Government Commission, the revised version of the DCGK shall be submitted for publication in April 2019 and would take effect shortly thereafter. Back to Top 2.         Tax On November 23, 2018, the German Federal Council (Bundesrat) approved the German Tax Reform Act 2018 (Jahressteuergesetz 2018, the “Act”), which had passed the German Federal Parliament (Bundestag) on November 8, 2018. Highlights of the Act are (i) the exemption of restructuring gains from German income tax, (ii) the partial abolition of and a restructuring exemption from the loss forfeiture rules in share transactions and (iii) the extension of the scope of taxation for non-German real estate investors investing in Germany. 2.1       Exemption of Restructuring Gains The Act puts an end to a long period of uncertainty – which has significantly impaired restructuring efforts – with respect to the tax implications resulting from debt waivers in restructuring scenarios (please see in this regard our 2017 Year-End German Law Update under 3.2). Under German tax law, the waiver of worthless creditor claims creates a balance sheet profit for the debtor in the amount of the nominal value of the payable. Such balance sheet profit is taxable and would – without any tax privileges for such profit – often outweigh the restructuring effect of the waiver. The Act now reinstates the tax exemption of debt waivers with retroactive effect for debt waivers after February 8, 2017; upon application debt waivers prior to February 8, 2017 can also be covered. Prior to this legislative change, a tax exemption of restructuring gains was based on a restructuring decree of the Federal Ministry of Finance, which has been applied by the tax authorities since 2003. In 2016, the German Federal Fiscal Court (Bundesfinanzgerichtshof) held that the restructuring decree by the Federal Ministry of Finance violates constitutional law since a tax exemption must be legislated by statute and cannot be based on an administrative decree. Legislation was then on hold pending confirmation from the EU Commission that a legislative tax exemption does not constitute illegal state aid under EU law. The EU Commission finally gave such confirmation by way of a comfort letter in August 2018. The Act is largely based on the conditions imposed by a restructuring decree issued by the Federal Ministry of Finance on the tax exemption of a restructuring gain. Under the Act, gains at the level of the debtor resulting from a full or partial debt relief are exempt from German income tax if the relief is granted to recapitalize and restructure an ailing business. The tax exemption only applies if at the time of the debt waiver (i) the business is in need of restructuring and (ii) capable of being restructured, (iii) the waiver results in a going-concern of the restructured business and (iv) the creditor waives the debt with the intention to restructure the business. The rules apply to German corporate income and trade tax and benefit individuals, partnerships and corporations alike. Any gains from the relief must first be reduced by all existing loss-offsetting potentials before the taxpayer can benefit from tax exemptions on restructuring measures. Back to Top 2.2       Partial Abolition of Loss Forfeiture Rules/Restructuring Exception Under the current Loss Forfeiture Rules, losses of a German corporation will be forfeited on a pro rata basis if within a period of five years more than 25% but not more than 50% of the shares in the German loss-making corporation are transferred (directly or indirectly) to a new shareholder or group of shareholders with aligned interests. If more than 50% are transferred, losses will be forfeited in total. There are exceptions to this rule for certain intragroup restructurings, built-in gains and business continuations, especially in the venture capital industry. On March 29, 2017, the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) ruled that the pro rata forfeiture of losses (a share transfer of more than 25% but not more than 50%) is incompatible with the constitution. The court has asked the German legislator to amend the Loss Forfeiture Rules retroactively for the period from January 1, 2008 until December 31, 2015 to bring them in line with the constitution. Somewhat surprisingly, the legislator has now decided to fully cancel the pro rata forfeiture of losses with retroactive effect and with no reference to a specific tax period. Currently pending before the German Federal Constitutional Court is the question whether the full forfeiture of losses is constitutional. A decision by the Federal Constitutional Court is expected for early 2019, which may then result in another legislative amendment of the Loss Forfeiture Rules. The Act has also reinstated a restructuring exception from the forfeiture rules – if the share transfer occurs in order to restructure the business of an ailing corporation. Similar to the exemption of restructuring gains, this legislation was on hold until the ECJ’s decision (European Court of Justice) on June 28, 2018 that the restructuring exception does not violate EU law. Existing losses will not cease to exist following a share transfer if the restructuring measures are appropriate to avoid or eliminate the illiquidity or the over-indebtedness of the corporation and to maintain its basic operational structure. The restructuring exception applies to share transfers after December 31, 2007. Back to Top 2.3       Investments in German Real Estate by Non-German Investors So far, capital gains from the disposal of shares in a non-German corporation holding German real estate were not subject to German tax. In a typical structure, in which German real estate is held via a Luxembourg or Dutch entity, a value appreciation in the asset could be realized by a share deal of the holding company without triggering German income taxes. Under the Act, the sale of shares in a non-German corporation is now taxable if, at some point within a period of one year prior to the sale of shares, 50 percent of the book value of the assets of the company consisted of German real estate and the seller held at least 1 percent of the shares within the last five years prior to the sale. The Act is now in line with many double tax treaties concluded by Germany, which allow Germany to tax capital gains in these cases. The new law applies for share transfers after December 31, 2018. Capital gains are only subject to German tax to the extent the value has been increased after December 31, 2018. Until 2018, a change in the value of assets and liabilities, which are economically connected to German real estate, was not subject to German tax. Therefore, for example, profits from a waiver of debt that was used to finance German real estate was not taxable in Germany whereas the interest paid on the debt was deductible for German tax purposes. That law has now changed and allows Germany to tax such profit from a debt waiver if the loan was used to finance German real estate. However, only the change in value that occurred after December 31, 2018 is taxable. Back to Top 3.         Financing and Restructuring – Test for Liquidity Status Tightened On December 19, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) handed down an important ruling which clarifies the debt and payable items that should be taken into account when determining the “liquidity” status of companies. According to the Court, the liquidity test now requires managing directors and (executive) board members to determine whether a liquidity gap exceeding 10% can be overcome by incoming liquidity within a period of three weeks taking into account all payables which will become due in those three weeks. Prior to the ruling, managing directors had often argued successfully that only those payables that were due at the time when the test is applied needed be taken into account while expected incoming payments within a three week term could be considered. This mismatch in favor of the managing directors has now been rectified by the Court to the disadvantage of the managing directors. If, for example, on June 1 the company liquidity status shows due payables amounting to EUR 100 and plausible incoming receivables in the three weeks thereafter amounting to EUR 101, no illiquidity existed under the old test. Under the new test confirmed by the Court, payables of EUR 50 becoming due in the three week period now also have to be taken into account and the company would be considered illiquid. For companies and their managing directors following a cautious approach, the implications of this ruling are minor. Going forward, however, even those willing to take higher risks will need to follow the court determined principles. Otherwise, delayed insolvency filings could ensue. This not only involves a managing directors and executive board members’ personal liability for payments made on behalf of the company while illiquid but also potential criminal liability for a delayed insolvency filing. Managing directors are thus well advised to properly undertake and also document the required test in order to avoid liability issues. Back to Top 4.         Labor and Employment 4.1       GDPR Has Tightened Workplace Privacy Rules The EU General Data Protection Regulation (“GDPR”) started to apply on May 25, 2018. It has introduced a number of stricter rules for EU countries with regard to data protection which also apply to employee personal data and employment relationships. In addition to higher sanctions, the regulation provides for extensive information, notification, deletion, and documentation obligations. While many of these data privacy rules had already been part of the previous German workplace privacy regime under the German Federal Data Protection Act (Bundesdatenschutzgesetz – BDSG), the latter has also been amended and provides for specific rules applicable to employee data protection in Germany (e.g. in the context of internal investigations or with respect to employee co-determination). However, the most salient novelty is the enormous increase in potential sanctions under the GDPR. Fines for GDPR violations can reach up to the higher of EUR 20 million or 4% of the group’s worldwide turnover. Against this backdrop, employers are well-advised to handle employee personnel data particularly careful. This is also particularly noteworthy as the employer is under an obligation to prove compliance with the GDPR – which may result in a reversal of the burden of proof e.g. in employment-related litigation matters involving alleged GDPR violations. Back to Top 4.2       Job Adverts with Third Gender Following a landmark decision by the German Federal Constitutional Court in 2017, employers are gradually inserting a third gender into their job advertisements. The Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) decided on October 10, 2017 that citizens who do not identify as either male or female were to be registered as “diverse” in the birth register (1 BvR 2019/16). As a consequence of this court decision, many employers in Germany have broadened gender notations in job advertisements from previously “m/f” to “m/f/d”. While there is no compelling legal obligation to do so, employers tend to signal their open-mindedness by this step, but also mitigate the potential risk of liability for a discrimination claim. Currently, such liability risk does not appear alarming due to the relative rarity of persons identifying as neither male nor female and the lack of a statutory stipulation for such adverts. However, employers might be well-advised to follow this trend, particularly after Parliament confirmed the existence of a third gender option in birth registers in mid-December. Back to Top 4.3       Can Disclosure Obligation Reduce Gender Pay-Gap? In an attempt to weed out gender pay gaps, the German lawmaker has introduced the so-called Compensation Transparency Act in 2017. It obliges employers, inter alia, to disclose the median compensation of comparable colleagues of the opposite gender with comparable jobs within the company. The purpose is to give a potential claimant (usually a female employee) an impression of how much her comparable male colleagues earn in order for her to consider further steps, e.g. a claim for more money. However, the new law is widely perceived as pointless. First, the law itself and its processes are unduly complex. Second, even after making use of the law, the respective employee would still have to sue the company separately in order to achieve an increase in her compensation, bearing the burden of proof that the opposite-gender employee with higher compensation is comparable to her. Against this background, the law has hardly been used in practice and will likely have only minimal impact. Back to Top 4.4       Employers to Contribute 15% to Deferred Compensation Schemes In order to promote company pension schemes, employers are now obliged to financially support deferred compensation arrangements. So far, employer contributions to any company pension scheme had been voluntary. In the case of deferred compensation schemes, companies save money as a result of less social security charges. The flipside of this saving was a financial detriment to the employee’s statutory pension, as the latter depends on the salary actually paid to the employee (which is reduced as a result of the deferred compensation). To compensate the employee for this gap, the employer is now obliged to contribute up to 15% of the respective deferred compensation. The actual impact of this new rule should be limited, as many employers already actively support deferred compensation schemes. As such, the new obligatory contribution can be set off against existing employer contributions to the same pension scheme. Back to Top 5.         Real Estate – Notarization Requirement for Amendments to Real Estate Purchase Agreements Purchase agreements concerning German real estate require notarization in order to be effective. This notarization requirement relates not only to the purchase agreement as such but to all closely related (side) agreements. The transfer of title to the purchaser additionally requires an agreement in rem between the seller and the purchaser on the transfer (conveyance) and the subsequent registration of the transfer in the land register. To avoid additional notarial fees, parties usually include the conveyance in the notarial real estate purchase agreement. Amendment agreements to real estate purchase agreements are quite common (e.g., the parties subsequently agree on a purchase price adjustment or the purchaser has special requests in a real estate development scenario). Various Higher District Courts (Oberlandesgerichte), together with the prevailing opinion in literature, have held in the past that any amendments to real estate purchase agreements also require notarization unless such an amendment is designed to remove unforeseeable difficulties with the implementation of the agreement without significantly changing the parties’ mutual obligations. Any amendment agreement that does not meet the notarization requirement may render the entire purchase agreement (and not only the amendment agreement) null and void. With its decision on September 14, 2018, the German Federal Supreme Court (Bundesgerichtshof – BGH) added another exception to the notarization requirement and ruled that notarization of an amendment agreement is not required once the conveyance has become binding and the amendment does not change the existing real estate transfer obligations or create new ones. A conveyance becomes binding once it has been validly notarized. Before this new decision of the BGH, amendments to real estate purchase agreements were often notarized for the sake of precaution because it was difficult to determine whether the conditions for an exemption from the notarization requirement had been met. This new decision of the BGH gives the parties clear guidance as to when amendments to real estate purchase agreements require notarization. It should, however, be borne in mind that notarization is still required if the amendment provides for new transfer obligations concerning the real property or the conveyance has not become effective yet (e.g., because third party approval is still outstanding). Back to Top 6.         Compliance 6.1       Government Plans to Introduce Corporate Criminal Liability and Internal Investigations Act Plans of the Federal Government to introduce a new statute concerning corporate criminal liability and internal investigations are taking shape. Although a draft bill had already been announced for the end of 2018, pressure to respond to recent corporate scandals seems to be rising. With regard to the role and protection of work product generated during internal investigations, the highly disputed decisions of the Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) in June 2018 (BVerfG, 2 BvR 1405/17, 2 BvR 1780/17 – June 27, 2018) (see 2017 Year-End German Law Update under 7.3) call for clearer statutory rules concerning the search of law firm premises and the seizure of documents collected in the course of an internal investigation. In its dismissal of complaints brought by Volkswagen and its lawyers from Jones Day, the Federal Constitutional Court made remarkable obiter dicta statements in which it emphasized the following: (1) the legal privilege enjoyed for the communication between the individual defendant (Beschuldigter) and its criminal defense counsel is limited to their communication only; (2) being considered a foreign corporate body, the court denied Jones Day standing in the proceedings, because the German constitution only grants rights to corporate bodies domiciled in Germany; and (3) a search of the offices of a law firm does not affect individual constitutional rights of the lawyers practicing in that office, because the office does not belong to the lawyers’ personal sphere, but only to their law firm. The decision and the additional exposure caused by it by making attorney work product created in the course of an internal investigation accessible was a major blow to German corporations’ efforts to foster internal investigations as a means to efficiently and effectively investigate serious compliance concerns. Because it does not appear likely that an entirely new statute concerning corporate criminal liability will materialize in the near future, the legal press expects the Federal Ministry of Justice to consider an approach in which the statutes dealing with questions around internal investigations and the protection of work product created in the course thereof will be clarified separately. In the meantime, the following measures are recommended to maximize the legal privilege for defense counsel (Verteidigerprivileg): (1) Establish clear instructions to an individual criminal defense lawyer setting forth the scope and purpose of the defense; (2) mark work product and communications that have been created in the course of the defense clearly as confidential correspondence with defense counsel (“Vertrauliche Verteidigerkorrespondenz”); and (3) clearly separate such correspondence from other correspondence with the same client in matters that are not clearly attributable to the criminal defense mandate. While none of these measures will guarantee that state prosecutors and courts will abstain from a search and seizure of such material, at least there are good and valid arguments to defend the legal privilege in any appeals process. However, with the guidance provided to courts by the recent constitutional decision, until new statutory provisions provide for clearer guidance, companies can expect this to become an up-hill battle. Back to Top 6.2       Update on the European Public Prosecutor’s Office and Proposed Cross-Border Electronic Evidence Rules Recently the European Union has started tightening its cooperation in the field of criminal procedure, which was previously viewed as a matter of national law under the sovereignty of the 28 EU member states. Two recent developments stand out that illustrate that remarkable new trend: (1) The introduction of the European Public Prosecutor’s Office (“EPPO”) that was given jurisdiction to conduct EU-wide investigations for certain matters independent of the prosecution of these matters under the national laws of the member states, and (2) the proposed EU-wide framework for cross-border access to electronically stored data (“e-evidence”) which has recently been introduced to the European Parliament. As reported previously (see 2017 Year-End German Law Update under 7.4), the European Prosecutor’s Office’s task is to independently investigate and prosecute severe crimes against the EU’s financial interests such as fraud against the EU budget or crimes related to EU subsidies. Corporations receiving funds from the EU may therefore be the first to be scrutinized by this new EU body. In 2018 two additional EU member states, the Netherlands and Malta, decided to join this initiative, extending the number of participating member states to 22. The EPPO will presumably begin its work by the end of 2020, because the start date may not be earlier than three years after the regulation’s entry into force. As a further measure to leverage multi-jurisdictional enforcement activities, in April 2018 the European Commission proposed a directive and a regulation that will significantly facilitate expedited cross-border access to e-evidence such as texts, emails or messaging apps by enforcement agencies and judicial authorities. The proposed framework would allow national enforcement authorities in accordance with their domestic procedure to request e-evidence directly from a service provider located in the jurisdiction of another EU member state. That other state’s authorities would not have the right to object to or to review the decision to search and seize the e-evidence sought by the national enforcement authority of the requesting EU member state. Companies refusing delivery risk a fine of up to 2% of their worldwide annual turnover. In addition, providers from a third country which operate in the EU are obliged to appoint a legal representative in the EU. The proposal has reached a majority vote in the Council of the EU and will now be negotiated in the European Parliament. Further controversial discussions between the European Parliament and the Commission took place on December 10, 2018. The Council of the EU aims at reaching an agreement between the three institutions by the end of term of the European Parliament in May 2019. Back to Top 7.         Antitrust and Merger Control 7.1       Antitrust and Merger Control Overview 2018 In 2018, Germany celebrated the 60th anniversary of both the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB) as well as the German federal cartel office (Bundeskartellamt) which were both established in 1958 and have since played a leading role in competition enforcement worldwide. The celebrations notwithstanding, the German antitrust watchdog has had a very active year in substantially all of its areas of competence. On the enforcement side, the Bundeskartellamt concluded a number of important cartel investigations. According to its annual review, the Bundeskartellamt carried out dawn raids at 51 companies and imposed fines totaling EUR 376 million against 22 companies or associations and 20 individuals from various industries including the steel, potato manufacturing, newspapers and rolled asphalt industries. Leniency applications remained an important source for the Bundeskartellamt‘s antitrust enforcement activities with a total of 21 leniency applications received in 2018 filling the pipeline for the next few months and years. On the merger control side, the Bundeskartellamt reviewed approximately 1,300 merger cases in 2018 – only 1% of which (i.e. 13 merger filings) required an in-depth phase 2 review. No mergers were prohibited but in one case only conditional clearance was granted and three filings were withdrawn in phase 2. In addition, the Bundeskartellamt had its first full year of additional responsibilities in the area of consumer protection, concluded a sector inquiry into internet comparison portals, and started a sector inquiry into the online marketing business as well as a joint project with the French competition authority CNIL regarding algorithms in the digital economy and their competitive effects. Back to Top 7.2       Cartel Damages Over the past few years, antitrust damages law has advanced in Germany and the European Union. One major legislative development was the EU Directive on actions for damages for infringements of competition law, which was implemented in Germany as part of the 9th amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB). In addition, there has also been some noteworthy case law concerning antitrust damages. To begin with, the German Federal Supreme Court (Bundesgerichtshof, BGH) strengthened the position of plaintiffs suing for antitrust damages in its decision Grauzementkartell II in 2018. The decision brought to an end an ongoing dispute between several Higher District Courts and District Courts, which had disagreed over whether a recently added provision of the GWB that suspends the statute of limitations in cases where antitrust authorities initiate investigations would also apply to claims that arose before the amendment entered into force (July 1, 2015). The Federal Supreme Court affirmed the suspension of the statute of limitations, basing its ruling on a well-established principle of German law regarding the intertemporal application of statutes of limitation. The decision concerns numerous antitrust damage suits, including several pending cases concerning trucks, rails tracks, and sugar cartels. Furthermore, recent case law shows that European domestic courts interpret arbitration agreements very broadly and also enforce them in cases involving antitrust damages. In 2017, the England and Wales High Court and the District Court Dortmund (Landgericht Dortmund) were presented with two antitrust disputes where the parties had agreed on an arbitration clause. Both courts denied jurisdiction because the antitrust damage claims were also covered by the arbitration agreements. They argued that the parties could have asserted claims for contractual damages instead, which would have been covered by the arbitration agreement. In the courts’ view, it would be unreasonable, however, if the choice between asserting a contractual or an antitrust claim would give the parties the opportunity to influence the jurisdiction of a court. As a consequence, the use of arbitration clauses (in particular if inconsistently used by suppliers or purchasers) may add significant complexity to antitrust damages litigation going forward. Thus, companies are well advised to examine their international supply agreements to determine whether included arbitration agreements will also apply to disputes about antitrust damages. Back to Top 7.3       Appeals against Fines Risky? In German antitrust proceedings, there is increasing pressure for enterprises to settle. Earlier this year, Radeberger, a producer of lager beer, withdrew its appeal against a significant fine of EUR 338 million, which the Bundeskartellamt had imposed on the company for its alleged participation in the so-called “beer cartel”. With this dramatic step, Radeberger paid heed to a worrisome development in German competition law. Repeatedly, enterprises have seen their cartel fines increased by staggering amounts on appeal (despite such appeals sometimes succeeding on some substantive legal issues). The reason for these “appeals for the worse” – as seen in the liquefied gas cartel (increase of fine from EUR 180 million to EUR 244 million), the sweets cartel (average increase of approx. 50%) and the wallpaper cartel (average increase of approx. 35%) – is the different approach taken by the Bundeskartellamt and the courts to calculating fines. As courts are not bound by the administrative practice of the Bundeskartellamt, many practitioners are calling for the legislator to step in and address the issue. Back to Top 7.4       Luxury Products on Amazon – The Coty Case In July 2018, the Frankfurt Higher District Court (Oberlandesgericht Frankfurt) delivered its judgement in the case Coty / Parfümerie Akzente, ruling that Coty, a luxury perfume producer, did not violate competition rules by imposing an obligation on its selected distributors to not sell on third-party platforms such as Amazon. The judgment followed an earlier decision of the Court of Justice of the European Union (ECJ) of December 2017, by which the ECJ had replied to the Frankfurt court’s referral. The ECJ had held that a vertical distribution agreement (such as the one in place between Coty and its distributor Parfümerie Akzente) did not as such violate Art. 101 of the Treaty on the Functioning of the European Union (TFEU) as long as the so-called Metro criteria were fulfilled. These criteria stipulate that distributors must be chosen on the basis of objective and qualitative criteria that are applied in a non-discriminatory fashion; that the characteristics of the product necessitate the use of a selective distribution network in order to preserve their quality; and, finally, that the criteria laid down do not go beyond what is necessary. Regarding the platform ban in question, the ECJ held that it was not disproportionate. Based on the ECJ’s interpretation of the law, the Frankfurt Higher District Court confirmed that the character of certain products may indeed necessitate a selective distribution system in order to preserve their prestigious reputation, which allowed consumers to distinguish them from similar goods, and that gaps in a selective distribution system (e.g. when products are sold by non-selected distributors) did not per se make the distribution system discriminatory. The Higher District Court also concluded that the platform ban in question was proportional. However, interestingly, it did not do so based on its own reasoning but based on the fact that the ECJ’s detailed analysis did not leave any scope for its own interpretation and, hence, precluded the Higher District Court from applying its own reasoning. Pointing to the European Commission’s E-Commerce Sector Inquiry, according to which sales platforms play a more important role in Germany than in other EU Member States, the Higher District Court, in fact, voiced doubts whether Coty’s sales ban could not have been imposed in a less interfering manner. Back to Top 8.         Litigation 8.1       The New German “Class Action” On November 1, 2018, a long anticipated amendment to the German Code of Civil Procedure (Zivilprozessordnung, ZPO) entered into force, introducing a new procedural remedy for consumers to enforce their rights in German courts: a collective action for declaratory relief. Although sometimes referred to as the new German “class action,” this new German action reveals distinct differences to the U.S.-American remedy. Foremost, the right to bring the collective action is limited to consumer protection organizations or other “qualified institutions” (qualifizierte Einrichtung) who can only represent “consumers” within the meaning of the German Code of Civil Procedure. In addition, affected consumers are not automatically included in the action as part of a class but must actively opt-in by registering their claims in a “claim index” (Klageregister). Furthermore, the collective action for declaratory relief does not grant any monetary relief to the plaintiffs which means that each consumer still has to enforce its claim in an individual suit to receive compensation from the defendant. Despite these differences, the essential and comparable element of the new legal remedy is its binding effect. Any other court which has to decide an individual dispute between the defendant and a registered consumer that is based on the same facts as the collective action is bound by the declaratory decision of the initial court. At the same time, any settlement reached by the parties has a binding effect on all registered consumers who did not decide to specifically opt-out. As a result, companies must be aware of the increased litigation risks arising from the introduction of the new collective action for declaratory relief. Even though its reach is not as extensive as the American class action, consumer protection organizations have already filed two proceedings against companies from the automotive and financial industry since the amendment has entered into force in November 2018, and will most likely continue to make comprehensive use of the new remedy in the future. Back to Top 8.2       The New 2018 DIS Arbitration Rules On March 1, 2018, the new 2018 DIS Arbitration Rules of the German Arbitration Institute (DIS) entered into force. The update aims to make Germany more attractive as a place for arbitration by adjusting the rules to international standards, promoting efficiency and thereby ensuring higher quality for arbitration proceedings. The majority of the updated provisions and rules are designed to accelerate the proceedings and thereby make arbitration more attractive and cost-effective for the parties. There are several new rules on time limitations and measures to enhance procedural efficiency, i.e. the possibility of expedited proceedings or the introduction of case management conferences. Furthermore, the rules now also allow for consolidation of several arbitrations and cover multi-party and multi-contract arbitration. Another major change is the introduction of the DIS Arbitration Council which, similar to the Arbitration Council of the ICC (International Chamber of Commerce), may decide upon challenges of an arbitrator and review arbitral awards for formal defects. This amendment shows that the influence of DIS on their arbitration proceedings has grown significantly. All in all, the modernized 2018 DIS Arbitration Rules resolve the deficiencies of their predecessor and strengthen the position of the German Institution of Arbitration among competing arbitration institutions. Back to Top 9.         IP & Technology – Draft Bill of German Trade Secret Act The EU Trade Secrets Directive (2016/943/EU) on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure has already been in effect since July 5, 2016. Even though it was supposed to be implemented into national law by June 9, 2018 to harmonize the protection of trade secrets in the EU, the German legislator has so far only prepared and published a draft of the proposed German Trade Secret Act. Arguably, the most important change in the draft bill to the existing rules on trade secrets in Germany will be a new and EU-wide definition of trade secrets. This proposed definition requires the holder of a trade secret to take reasonable measures to keep a trade secret confidential in order to benefit from its protection – e.g. by implementing technical, contractual and organizational measures that ensure secrecy. This requirement goes beyond the current standard pursuant to which a manifest interest in keeping an information secret may be sufficient. Furthermore, the draft bill provides for additional protection of trade secrets in litigation matters. Last but not least, the draft bill also provides for increased protection of whistleblowers by reducing the barriers for the disclosure of trade secrets in the public interest and to the media. As a consequence, companies would be advised to review their internal procedures and policies regarding the protection of trade secrets at this stage, and may want to adapt their existing whistleblowing and compliance-management-systems as appropriate. Back to Top 10.       International Trade, Sanctions and Export Controls – The Conflict between Complying with the Re-Imposed U.S. Iran Sanctions and the EU Blocking Statute On May 8, 2018, President Donald Trump announced his decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose U.S. nuclear-related sanctions. Under the JCPOA, General License H had permitted U.S.-owned or -controlled non-U.S. entities to engage in business with Iran. But with the end of the wind-down periods provided for in President Trump’s decision on November 5, 2018, such non-U.S. entities are now no longer broadly permitted to provide goods, services, or financing to Iranian counterparties, not even under agreements executed before the U.S. withdrawal from the JCPOA. In response to the May 8, 2018 decision, the EU amended the EU Blocking Statute on August 6, 2018. The effect of the amended EU Blocking Statute is to prohibit compliance by so-called EU operators with the re-imposed U.S. sanctions on Iran. Comparable and more generally drafted anti-blocking statutes had already existed in the EU and several of its member states which prohibited EU domiciled companies to commit to compliance with foreign boycott regulations. These competing obligations under EU and U.S. laws are a concern for U.S. companies that own or seek to acquire German companies that have a history of engagement with Iran – as well as for the German company itself and its management and the employees. But what does the EU prohibition against compliance with the re-imposed U.S. sanctions on Iran mean in practice? Most importantly, it must be noted that the EU Blocking Statute does not oblige EU operators to start or continue Iran related business. If, for example, an EU operator voluntarily decides, e.g. due to lack of profitability, to cease business operations in Iran and not to demonstrate compliance with the U.S. sanctions, the EU Blocking Statute does not apply. Obviously, such voluntary decision must be properly documented. Procedural aspects also remain challenging for companies: In the event a Germany subsidiary of a U.S. company were to decide to start or continue business with Iran, it would usually be required to reach out to the U.S. authorities to request a specific license for a particular transaction with Iran. Before doing so, however, EU operators must first contact the EU Commission directly (not the EU member state authorities) to request authorization to apply for such a U.S. special license. Likewise, if a Germany subsidiary were to decide not to start or to cease business with Iran for the sole reason of being compliant with the re-imposed U.S. Iran sanctions, it would have to apply for an exception from the EU Blocking Statute and would have to provide sufficient evidence that non-compliance would cause serious damage to at least one protected interest. The hurdles for an exception are high and difficult to predict. The EU Commission will e.g. consider, “(…) whether the applicant would face significant economic losses, which could for example threaten its viability or pose a serious risk of bankruptcy, or the security of supply of strategic goods or services within or to the Union or a Member State and the impact of any shortage or disruption therein.” As such, any company caught up in this conflict of interests between the re-imposed U.S. sanctions and the EU Blocking Statute should be aware of a heightened risk of litigation. Third parties, such as Iranian counterparties, might successfully sue for breach of contract with the support of the EU Blocking Regulation in cases of non-performance of contracts as a result of the re-imposed U.S. nuclear sanctions. Finally, EU operators are required to inform the EU Commission within 30 days from the date on which information is obtained that the economic and/or financial interests of the EU operator are affected, directly or indirectly, by the re-imposed U.S. Iran sanctions. If the EU operator is a legal person, this obligation is incumbent on its directors, managers and other persons with management responsibilities of such legal person. Back to Top The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Silke Beiter, Lutz Englisch, Daniel Gebauer, Kai Gesing, Maximilian Hoffmann, Philipp Mangini-Guidano, Jens-Olrik Murach, Markus Nauheim, Dirk Oberbracht, Richard Roeder, Martin Schmid, Annekatrin Schmoll, Jan Schubert, Benno Schwarz, Balthasar Strunz, Michael Walther, Finn Zeidler, Mark Zimmer, Stefanie Zirkel and Caroline Ziser Smith. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices: General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 121, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 510, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 121, sbeiter@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 521, apelster@gibsondunn.com Finance, Restructuring and Insolvency Sebastian Schoon (+49 89 189 33 160, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 518, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 218, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 4, 2019 |
Government Shutdown Update – Sanctions, Export Controls and Other International Trade Operations

Click for PDF The U.S. Government is now approaching the second week of a partial shutdown that has affected nine departments, several agencies, and approximately 800,000 federal workers.  The U.S. Government agencies responsible for administering U.S. sanctions, export controls, and other trade-related functions are among those affected by the lapse in federal appropriations.  As a result, these agencies have substantially reduced their operations.  While some of these agencies’ core functions will continue to operate, the shutdown will certainly increase wait times for licenses, advisory opinions, or other responses and will generally hamper communication with the agencies, even on time-sensitive requests.  A brief overview of the current operating status of these international trade-related agencies follows below. OFAC The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), which administers U.S. sanctions programs, remains functional but in limited capacity.[1]  OFAC continues to administer the Specially Designated Nationals and Blocked Persons (“SDN”) List and to enforce U.S. sanctions and will administer newly authorized sanctions should the need arise.  OFAC is situated in the U.S. Treasury Department’s Office of Terrorism and Financial Intelligence, which will continue to perform certain limited national security-related functions. Guidance from the Department indicates that OFAC will also have limited capacity to communicate with financial institutions and other affected industries during the shutdown.  As a result of these restrictions, the public can expect increased wait times for responses to license applications, voluntary disclosures, advisory opinions, and other communications.  In our experience, most efforts to contact OFAC policy personnel have gone unanswered and messages to compliance officers have been met with out-of-office replies citing the shutdown. BIS and DDTC Although the U.S. Department of Commerce is closed, its Bureau of Industry and Security (“BIS”), which is responsible for administering U.S. export controls applicable to dual use items, remains relatively well-staffed.  According to the Department’s shutdown guidance, almost 70 percent of the Bureau’s 358 employees are excepted from the shutdown either because they are considered essential or because funding for their positions comes from alternative sources.[2]  The Department’s shutdown guidance also notes that ongoing export enforcement will continue during the lapse in appropriations.[3]  However, as with the other agencies described here, even a slight reduction in personnel may make it more difficult to receive responses from BIS. The U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”) administers restrictions on the export of defense articles, defense services, and related technical data.  While the State Department has provided relatively little information regarding its shutdown operations, DDTC has helpfully set forth certain specifics regarding its “significantly curtailed” operations.[4]  During the shutdown DDTC will have limited ability to process license requests, advisory opinions, and retransfers.  DTrade, the portal for requesting and receiving license requests, automatically rejects new submissions, and the Directorate’s daily pick-up and drop-off service is cancelled.  Requests in-process at the time of the shutdown will remain in-process but further action will not occur until funding is restored.  DDTC may, however, respond to certain emergency requests. Other Trade-Related Functions Other offices and agencies responsible for performing trade-related functions are differently impacted by the ongoing shutdown.  For example, The Committee on Foreign Investment in the United States (“CFIUS”), the interagency committee tasked with reviewing foreign investment in the United States, is also operating at reduced capacity.  According to guidance published by the Department of the Treasury, CFIUS will be able to perform “caretaker functions” related to existing reviews or investigations of inbound investment initiated before the recently enacted Foreign Investment Risk Review Modernization Act (“FIRRMA”), but ongoing cases will be tolled.[5]  Although the Committee will continue to perform certain national security functions, other CFIUS activities are suspended. Although BIS is experiencing only limited personnel reductions, the Department of Commerce’s International Trade Administration and the Bureau of Economic Analysis are operating with a fraction of their normal operating personnel.  The U.S. International Trade Commission is closed, which could delay the release of the Commission’s report on the economic impact of the new U.S.-Mexico-Canada Agreement.[6]  The Office of the U.S. Trade Representative, which administers the new tariffs on Chinese imports, remains operational.[7]    [1]   U.S. Dep’t of the Treasury, Lapse of Appropriations Plan 7 (Dec. 2018), available at https://home.treasury.gov/system/files/266/DO-Lapse-Contingency-Plan-2018-12-18.pdf.    [2]   U.S. Dep’t of Commerce, Plan for Orderly Shutdown Due to Lapse of Congressional Appropriations 6 (Dec. 17, 2018), available at https://www.commerce.gov/sites/default/files/2018-12/DOC%20Lapse%20Plan%20-%20OMB%20Approved%20-%20Dec%2017%2C%202018.pdf.    [3]   U.S. Dep’t of Commerce, Shutdown Due to Lapse of Congressional Appropriations, Blog (Dec. 22, 2018), https://www.commerce.gov/news/blog/2018/12/shutdown-due-lapse-congressional-appropriations.    [4]   DDTC, U.S. Dep’t of State, Industry Notice: Lapse in Funding, News & Events (Dec. 22, 2018), https://www.pmddtc.state.gov/?id=ddtc_public_portal_news_and_events.    [5]   U.S. Dep’t of the Treasury, Lapse of Appropriations Plan 7 (Dec. 2018), available at https://home.treasury.gov/system/files/266/DO-Lapse-Contingency-Plan-2018-12-18.pdf.    [6]   Jennifer Scholtes, Caitlin Emma, and Katy O’Donnell, How the Shutdown Is Reaching a Breaking Point, Politico (Jan. 3, 2018), https://www.politico.com/story/2019/01/01/how-the-shutdown-is-reaching-a-breaking-point-1053885.    [7]   Press Release, Office of the U.S. Trade Representative, USTR Operating Status (Dec. 28, 2018), available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/december/ustr-operating-status. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, R.L. Pratt and Stephanie Connor. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 21, 2018 |
Gibson Dunn Ranked in the 2019 UK Legal 500

The UK Legal 500 2019 ranked Gibson Dunn in 13 practice areas and named six partners as Leading Lawyers. The firm was recognized in the following categories: Corporate and Commercial: Equity Capital Markets Corporate and Commercial: M&A – Upper Mid-Market and Premium Deals, £250m+ Corporate and Commercial: Private Equity – High-value Deals Dispute Resolution: Commercial Litigation Dispute Resolution: International Arbitration Finance: Acquisition Finance Finance: Bank Lending: Investment Grade Debt and Syndicated Loans Human Resources: Employment – Employers Public Sector: Administrative and Public Law Real Estate: Commercial Property – Hotels and Leisure Real Estate: Commercial Property – Investment Real Estate: Property Finance Risk Advisory: Regulatory Investigations and Corporate Crime The partners named as Leading Lawyers are Sandy Bhogal – Corporate and Commercial: Corporate Tax; Steve Thierbach – Corporate and Commercial: Equity Capital Markets; Philip Rocher – Dispute Resolution: Commercial Litigation; Cyrus Benson – Dispute Resolution: International Arbitration; Jeffrey Sullivan – Dispute Resolution: International Arbitration; and Alan Samson – Real Estate: Commercial Property and Real Estate: Property Finance. Claibourne Harrison has also been named as a Next Generation Lawyer for Real Estate: Commercial Property.

November 21, 2018 |
New Export Controls on Emerging Technologies – 30-Day Public Comment Period Begins

Click for PDF On Monday, the Trump administration took the first step toward imposing new controls on the export of cutting-edge technologies.  Pursuant to the Export Control Reform Act of 2018 (“ECRA”), the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published a request for the public’s assistance in identifying “emerging technologies” essential for U.S. national security that should be subject to new export restrictions.[1]  The advance notice of proposed rulemaking (“ANPRM”) reiterates the general criteria for emerging technologies, provides a representative list of targeted technologies, and provides a 30-day period for comment on which technologies should be subject to these new controls. In response to this notice, companies that operate in certain high technology sectors, such as biotechnology, artificial intelligence, computer processing, and advanced materials, should consider filing public comments and prepare for pending controls.  These companies should start by identifying technologies they possess that are likely to be targeted for new export controls and gather important evidence on the efficacy of potential controls on these technologies.  Companies likely to be affected should  also consider the impact that tighter controls on the transfer of these technologies may have on their business operations.  Additionally, U.S. businesses that engage with emerging technologies must be mindful of new CFIUS regulations that require such businesses to declare certain controlling and non-controlling foreign investments to CFIUS before the investment is made. BACKGROUND On August 13, 2018, President Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY 2019 NDAA”), an omnibus bill to authorize defense spending that includes—among other measures—the Export Control Reform Act of 2018 (“ECRA”).[2]  In addition to placing the U.S. export control regime on firm statutory footing for the first time in decades, ECRA significantly expanded the President’s authority to regulate and enforce export controls by requiring the Secretary of Commerce to establish controls on the export, re-export, or in-country transfer of “emerging or foundational technologies.”[3] ECRA was passed alongside the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which reformed the CFIUS review process for inbound foreign investment.[4]  As originally drafted, FIRRMA would have included outbound investments—such as joint ventures or licensing agreements—in the list of covered transactions subject to CFIUS review to limit the outflow of technology important to U.S. national security.  This proposed provision was very controversial and was ultimately removed from the bill.  Instead, the final version of the NDAA included ECRA, which granted BIS the authority to work with the interagency group to identify and regulate the transfer of these emerging and foundational technologies.[5] WHAT ARE EMERGING TECHNOLOGIES? ECRA does not offer a precise definition of the “emerging technologies” to be controlled by BIS.  Instead, it offers criteria for BIS to consider when determining what technologies will fall within this area of BIS control.  Importantly, the definition of “technology” itself in the context of export controls is well established.  Such technology does not, for example, include end-items, commodities, or software.  Instead, technology is the information, in tangible or intangible form, necessary for the development, production, or use of such goods or software.[6]  Technology may include written or oral communications, blueprints, schematics, photographs, formulae, models, or information gained through mere visual inspection.[7]  For example, speech recognition software would not be a technology and therefore would not be subject to these new controls.  However, the source code for such software would be technology that could be considered “emerging,” depending on the criteria BIS applies. The ANPRM broadly describes emerging technologies as “those technologies essential to the national security of the United States that are not already subject to export controls under the Export Administration Regulations (“EAR”) or the International Traffic in Arms Regulations (“ITAR”).”[8]  The ANPRM suggests that technologies will be considered “essential to the national security of the United States” if they “have potential conventional weapons, intelligence collection, weapons of mass destruction, or terrorist applications or could provide the United States with a qualitative military or intelligence advantage.”[9] In narrowing down which of these technologies will be subject to new export controls, BIS will also consider the development of emerging technologies abroad, the effect of unilateral export restrictions on U.S. technological development, and the ability of export controls to limit the spread of these emerging technologies in foreign countries.  In making this assessment and further narrowing the category of affected technologies, BIS will consider information from a variety of interagency sources, as well as public information drawn from comments submitted in response to the ANPRM. Although the ANPRM does not provide concrete examples of “emerging technologies,” BIS does provide a list of technologies currently subject to limited controls that could be considered “emerging” and subject to new, broader controls.  These include the following: (1) Biotechnology, such as: (i)  nanobiology; (ii) synthetic biology; (iii) genomic and genetic engineering; or (iv) neurotech. (2) Artificial intelligence (AI) and machine learning technology, such as: (i) neural networks and deep learning (e.g., brain modelling, time series prediction, classification); (ii) evolution and genetic computation (e.g., genetic algorithms, genetic programming); (iii) reinforcement learning; (iv) computer vision (e.g., object recognition, image understanding); (v) expert systems (e.g., decision support systems, teaching systems); (vi) speech and audio processing (e.g., speech recognition and production); (vii) natural language processing (e.g., machine translation); (viii) planning (e.g., scheduling, game playing); (ix) audio and video manipulation technologies (e.g., voice cloning, deepfakes); (x) AI cloud technologies; or (xi) AI chipsets. (3) Position, Navigation, and Timing (PNT) technology. (4) Microprocessor technology, such as: (i) Systems-on-Chip (SoC); or (ii) Stacked Memory on Chip. (5) Advanced computing technology, such as: (i) memory-centric logic. (6) Data analytics technology, such as: (i) visualization; (ii) automated analysis algorithms; or (iii) context-aware computing. (7) Quantum information and sensing technology, such as: (i) quantum computing; (ii) quantum encryption; or (iii) quantum sensing. (8) Logistics technology, such as: (i) mobile electric power; (ii) modeling and simulation; (iii) total asset visibility; or (iv) distribution-based Logistics Systems (DBLS). (9) Additive manufacturing (e.g., 3D printing). (10) Robotics such as: (i) micro-drone and micro-robotic systems; (ii) swarming technology; (iii) self-assembling robots; (iv) molecular robotics; (v) robot compliers; or (vi) smart Dust. (11) Brain-computer interfaces, such as: (i) neural-controlled interfaces; (ii) mind-machine interfaces; (iii) direct neural interfaces; or (iv) brain-machine interfaces. (12) Hypersonics, such as: (i) flight control algorithms; (ii) propulsion technologies; (iii) thermal protection systems; or (iv) specialized materials (for structures, sensors, etc.). (13) Advanced Materials, such as: (i) adaptive camouflage; (ii) functional textiles (e.g., advanced fiber and fabric technology); or (iii) biomaterials. (14) Advanced surveillance technologies, such as faceprint and voiceprint technologies.[10] BIS REQUEST FOR COMMENT Along with a review of its mandate to regulate emerging technologies and a sample of several potentially affected industries, BIS specifically requested public comments on the following points: how the administration should define emerging technologies what the criteria should be for determining whether there are specific technologies within these general categories that are important to U.S. national security what sources the administration can refer to in order to identify emerging technologies what other general technology categories might be important to U.S. national security and warrant control information about the status of development of the listed technologies in the United States and other countries information about what impact the specific emerging technology controls would have on U.S. technological leadership, and suggestions for other approaches to identifying emerging technologies warranting controls.[11] Comments on these issues are due to BIS by December 19, 2018—only thirty days after the publication of the ANPRM. Critically, comments offered pursuant to this notice will be made public, and there is no express procedure for submitting redacted public comments and complete comments for the agency. HOW TO RESPOND Companies potentially affected by these new controls should simultaneously begin preparing for public comments and for pending controls.  The first step in this process should be the identification of potentially targeted technologies.  Companies should work with in-house engineers, researchers, and product development personnel—as well as export control experts—to begin identifying technology that may be targeted for control. Technologies currently controlled under the ITAR or broadly restricted by the EAR will not be included in the new category of “emerging technologies.”  Given the express limitations provided in ECRA, technologies produced outside of the United States are also unlikely to be targeted by the new controls, as unilateral U.S. export controls would do little to restrict the flow of these technologies.  Once a company identifies such non-controlled technologies predominantly of U.S.-origin, it should evaluate the extent to which it shares or will share this technology with non-U.S. persons and the means by which it makes such transfers. Having identified technology likely to be impacted by the new controls, companies should prepare public comments in response to the request posed in the ANPRM.  For example, companies may wish to suggest a definition for emerging technologies, or a limiting principle for a potential definition, that is based on an evaluation of potentially affected technologies, market concerns, and BIS’s policy objectives.  Concrete evidence of foreign production of comparable technology, the likely impact on U.S. technological superiority of new controls, and the ability of new controls to limit the spread of emerging technologies abroad will also be particularly persuasive.  Where possible, companies may also wish to differentiate their technology from comparable technology that may have conventional weapons, intelligence collection, weapons of mass destruction, or terrorist applications. In addition to providing comments to BIS, companies should also begin preparing to operate under expanded export controls.  Importantly, certain kinds of exports related to emerging technologies will not be subject to new licensing requirements.  For example, the provision of technology associated with the sale or license of finished goods or software will not be subject to a new licensing requirement if the U.S. party to the transaction generally makes the finished items and associated technology available to its customers, distributors, and resellers (e.g., an operation manual exported along with controlled hardware).[12] Similarly, the provision by a U.S. party of technology to a foreign supplier of goods or services to the U.S. party will not be restricted if the foreign supplier has no rights to exploit the technology contributed by the U.S. person other than to supply the procured goods or services.[13]  For example, the provision of blueprints to a foreign manufacturer under these circumstances would not be subject to the new controls.  Additionally, contribution by a U.S. person to an industry organization related to a standard or specification would not generally be subject to the new controls.[14] However, companies should be mindful of the circumstances in which new controls will limit their business operations.  For example, the new controls may limit operations under joint ventures or other cooperative arrangements where emerging technologies are currently exchanged.  In addition, the new controls are likely to limit the availability of certain license exceptions that could be used to facilitate such cooperative arrangements.  Cooperation with individuals and entities in countries subject to U.S. arms embargos, such as China, are likely to be significantly curtailed, as BIS may effectively prohibit exports of emerging technologies to those countries. With these potential impacts in mind, companies should begin evaluating how controls on targeted technologies will affect their operations. WHAT’S NEXT BIS will evaluate public comments offered during the 30-day window provided by the ANPRM, along with additional public and classified information collected through the interagency process, to establish the criteria to be used to identify  “emerging technologies” and related export controls.  As a part of this process, it is likely that BIS will rely on some of its existing mechanisms for monitoring and regulating emerging technologies to provide insight into the appropriate scope and content of the new controls. For example, BIS has indicated it will look to its Emerging Technologies and Research Advisory Committee, an advisory body of academics, industry personnel, and researchers that already assist BIS in identifying new technologies and gaps in existing controls.  BIS may also rely on the surveys and network of company partnerships used by its Office of Technology Evaluation to conduct assessments of defense-related technologies.  Other federal agencies engaged in the development of emerging technologies may also contribute to the identification of emerging technologies and appropriate controls, including for example the various advanced research projects agencies (e.g. DARPA, ARPA-E, and IARPA), the National Science Foundation’s Foundations of Emerging Technologies, and the national laboratories.  The work of these agencies and entities may suggest areas on which BIS could focus new controls. BIS’s current efforts to control emerging technologies and related products may also inform its development of new controls.  In 2012, BIS established a dedicated system for controlling emerging technologies under Export Control Classification Number (“ECCN”) 0Y521.  These new controls were similarly intended to restrict the export of items presenting a significant military or intelligence advantage to the United States.  Technology identified under this ECCN requires a license for export to all destinations, except Canada, with limited license exceptions available.  Although only a few items have been identified for control under this existing mechanism (e.g. X-ray deflecting epoxies, biosensor systems, and tools for tritium production), BIS’s use of the 0Y521 ECCN series may provide further evidence of the types of technologies BIS may target for control and the restrictions it will apply. As it continues to await public comments and identify emerging technologies, BIS plans to publish a similar ANPRM requesting the public’s assistance in identifying and defining “foundational technologies,” which will also be subjected to new ECRA-mandated controls.[15]  Once BIS has arrived at a definition for these terms and a set of potential controls, BIS will likely publish a proposed rule providing this information for another period of public comment.  Those comments will undergo a similar process of interagency review, and BIS will announce its final rule providing the new controls on the export of emerging and foundational technologies. Importantly, any technologies that BIS identifies as emerging or foundational through this rulemaking process will be considered “critical technologies” for the purposes of determining CFIUS jurisdiction.[16]  FIRRMA now requires that certain foreign investment in U.S. companies that deal in these critical technologies receive CFIUS review and approval.  Under CFIUS’s new program to pilot the implementation of these authorities, CFIUS must receive advance notice of certain types of non-controlling foreign investment in U.S. companies that design, test, manufacture, fabricate, or develop critical technologies—including emerging and foundational technologies identified by BIS—for use in one of several listed industries.[17]  In this regard, BIS’s final determination regarding what constitutes “emerging technologies” will also impact the scope of CFIUS’s expanded jurisdiction.    [1]   Review of Controls for Certain Emerging Technologies, 83 Fed. Reg. 58,201 (advance notice of proposed rulemaking Nov. 19, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-11-19/pdf/2018-25221.pdf [hereinafter, “ANPRM”].    [2]   Export Control Reform Act of 2018, Pub. L. No. 115-232, §§ 1751-1781 (2018).    [3]   Id. § 1758.    [4]   Foreign Investment Risk Review Modernization Act of 2018, Pub. L. No. 115-232, §§ 1701-1728 (2018).    [5]   Export Control Reform Act of 2018, Pub. L. No. 115-232, § 1758 (2018).    [6]   15 C.F.R. § 772.1.    [7]   Id.    [8]   ANPRM, supra note 1 at 58,201.    [9]   Id. [10]   Id. at 58,202. [11]   Id. [12]   Export Control Reform Act of 2018, Pub. L. No. 115-232, § 1758(b)(4)(c)(i) (2018). [13]   Id. § 1758(b)(4)(c)(iv). [14]   Id. § 1758(b)(4)(c)(v). [15]   ANPRM, supra note 1 at 58,202. [16]   Foreign Investment Risk Review Modernization Act of 2018, Pub. L. No. 115-232, § 1703 (2018). [17]   31 C.F.R. § 801.101. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, R.L. Pratt and Christopher Timura. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 19, 2018 |
Brexit – The Draft Divorce Deal and Its Fall-Out

Click for PDF 1. Negotiators for the European Union and the United Kingdom have agreed a 585-page draft withdrawal agreement (the “Withdrawal Agreement”).  A copy of the Withdrawal Agreement can be found here. 2. The draft Withdrawal Agreement sets out how and when the UK will leave the EU and will be legally binding.  A separate, non-binding draft declaration (available here) sets out the aspirations for the future trading relationship between the UK and EU (this draft declaration is still being negotiated, with the UK and EU expected to agree a final draft this week). 3. This long-awaited “divorce deal” has been agreed by the UK Government’s senior ministers (the Cabinet) but it now needs to be approved by MPs in the UK House of Commons and by the 27 other EU member states and the European Parliament. Next steps 4. An EU summit is currently due to be held on 25 November 2018, where EU 27 leaders are expected to sign off on the Withdrawal Agreement and the future relationship declaration. 5. Following the EU meeting the deal will be put to the House of Commons in the UK Parliament for a “meaningful vote”. It is not yet clear what the motion will be nor what amendments will be permitted.  But, for all practical purposes, it is a critical vote to approve the deal. 6. The House of Commons vote is expected around 7 December 2018 and at present it looks unlikely that the vote will be passed.  That could change if amendments are agreed to the Withdrawal Agreement or future relationship declaration. 7. If the House of Commons votes the deal down, the Government will have up to 21 days to put forward a new plan.  Any new agreement would need to be agreed with the EU. 8. Two of the key issues relate to (i) the circumstances in which the UK can withdraw from the transition arrangements and whether it can do so without an EU veto and (ii) whether Northern Ireland will have a different regulatory regime to the rest of the UK, creating a border down the Irish Sea.  “Backstop” arrangements are in place to prevent that happening but there is a lack of consensus over whether those arrangements are good enough.  The political debate in the UK is focused on whether improvements can be made to the provisions relating to these two issues in particular.  The EU position is that no changes of substance will be allowed but “some tweaking” of the language in the political declaration may be possible. Some of the EU 27 countries are also thought to be considering comments. 9. The UK Cabinet backed the divorce deal.  However, two cabinet ministers and two junior ministers subsequently resigned, including the Brexit secretary Dominic Raab.  New cabinet appointments have been made, including one Brexit supporter and one Remain supporter. 10. A number of leading backbench Conservative Party MPs have called for the Prime Minister to stand down, and are seeking to move for a vote of no confidence in her leadership of the Conservative Party.  A challenge is triggered if 15% of Conservative MPs (48 in total) write letters to the Party’s Chief Whip demanding a confidence vote.  As of today, at least 24 MPs have publicly confirmed they have submitted letters.  If a confidence vote is called, then it is passed if a simple majority of Conservative MPs vote in favour.  It is not clear that this will happen and, if Theresa May wins, the rules then prevent another vote of confidence for twelve months.  If she lost, there would be a separate process to elect a new leader but Theresa May, or a caretaker, would remain as Prime Minister until a new leader was elected. Content of Withdrawal Agreement 11. The UK is due to leave the EU at 11 pm on Friday 29 March 2019 (midnight CET on 30 March 2019).  The Withdrawal Agreement sets out the terms of the UK’s departure from the EU: Transition period: The Withdrawal Agreement proposes a 21-month transition period after the UK’s departure at the end of March 2019.  That end date can be extended once if more time is needed for a trade deal to be secured and to avoid the UK entering into the backstop (see below).  The draft Withdrawal Agreement does not yet give a specific end-date for this extension, stating only that it will end by “20xx”. Governance: During the transition period, and if the transition period is extended into a backstop, the UK will have to follow all EU rules and abide by Court of Justice of the European Union (CJEU) rulings.  Opponents argue this leaves the UK as a rule taker and no longer a rule maker. Financial arrangement: The Withdrawal Agreement does not specify the “divorce bill” but additional notes provided by the Government estimate a “fair financial settlement” of around £39 billion from the UK.  This covers financial liabilities accrued but not yet paid during the UK’s membership of the EU and payments to be made to the EU Budget during the transition period. Future trading relations: The Withdrawal Agreement does not include a trade deal, which will be hammered out in the transition period.  Under the Withdrawal Agreement, there will be a “single customs territory” until the end of the transition period on 31 December 2020.  The UK will then remain indefinitely in a customs union with the EU if a new trade agreement is not reached in that time.  This arrangement is intended to avoid a “hard border” between Northern Ireland and the Republic of Ireland – see below.  Among the political difficulties with this proposed arrangement is that a customs union is, along with the single market, essentially one of the key structures of the EU, and remaining in such a customs union is likely to be characterised as hollowing out the whole purpose of Brexit. Northern Ireland backstop: The management of the flow of goods and people across the Irish land border, and between Northern Ireland and the UK, have become critical issues in the Brexit debate and negotiations.  Both sides want to avoid a “hard border” (physical checks or infrastructure between Northern Ireland and Ireland), and a key part of the negotiations for the Withdrawal Agreement has been agreeing the position of last resort in the event that the UK leaves the EU without securing an all-encompassing deal (the so-called “backstop”).  The agreed backstop would involve Northern Ireland being in the same customs territory as the rest of the UK and the EU.  It would, however, mean different (EU) regulations for Northern Ireland in agriculture, the environment, state aid and other areas.  There would also be checks on goods traded from Northern Ireland to the rest of the UK.  The agreement states that the EU and the UK will use their “best endeavours” to come to a future trade agreement to avoid the backstop, and notes the transition period can also be extended.  While this arrangement can likely command the support of the other 27 EU member states, including, critically, the Republic of Ireland, the fact that it creates trade barriers, however technical, between Northern Ireland and Great Britain is likely to render it unacceptable to a large minority of Conservative MPs and to the DUP. Exiting the backstop: There will be no unilateral right of withdrawal from any backstop arrangement and Britain will not be able to implement free trade deals during this time.  It can request to pull out, but the final decision will rest with an independent arbitration panel with members nominated by both sides: two from the UK-side, two from the EU-side and one chairperson agreed by both parties. Immigration: EU nationals who have lived in the UK continually for five years, and UK citizens who have lived in EU countries, will have the right to stay permanently in the UK (or the EU, as the case may be), along with their family members.  Free movement of workers between the EU and UK will come to an end, although there will be visa-free travel to EU countries. Conclusion 12. Some UK business leaders and senior City figures have backed the deal as a significant breakthrough in Brexit negotiations.  If Brexit is to happen, many businesses will be pleased that the Withdrawal Agreement offers at least a foundation for moving forward.  Other commentators are critical of the “half-way house” set out in the Withdrawal Agreement and doubt whether Theresa May’s strategy can hold.  EU negotiations typically go right to the wire but the political state in the UK remains volatile while this plays out and there can be no certainty of outcome. This client alert was prepared by London partners Nicholas Aleksander, Patrick Doris and Charlie Geffen and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 9, 2018 |
Iran Sanctions 2.0: The Trump Administration Completes Its Abandonment of the Iran Nuclear Agreement

Click for PDF Six months ago, President Donald Trump announced his decision to abandon the 2015 Iran nuclear deal—the Joint Comprehensive Plan of Action (the “JCPOA”)—and re-impose U.S. nuclear-related sanctions on the Iranian regime.[1]  The second and final wind-down period for those sanctions expired on November 5, 2018, triggering the “snap back” of remaining U.S. secondary sanctions on Iran’s oil, energy, and financial sectors, among other measures.  As of this week, the primary and secondary U.S. sanctions that were in place prior to the JCPOA have been restored, U.S.-owned or -controlled foreign entities are once again prohibited from engaging with Iran, and over 700 parties have been added to the U.S. Department of the Treasury’s Specially Designated Nationals and Blocked Persons (“SDN”) List, increasing the total number of SDNs by 10 percent—the largest single-day set of designations in the history of the Office of Foreign Assets Control (“OFAC”).[2] The Trump administration’s May 2018 decision to re-impose sanctions on Iran went further than many had anticipated, leading many to believe that the sanctions imposed this week would result in an aggressive expansion of U.S. economic pressure on Iran.  In fact, a number of waivers and exceptions should mitigate the impact of these new measures.  The United States has agreed to temporarily waive prohibitions on oil imports for eight countries: China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey.[3]  The U.S. administration stopped short of pressuring the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) to disconnect each and every Iranian financial institution, which leaves some international payment channels open to Iran for the time being.[4]  Furthermore, OFAC has issued guidance expressly noting that non-U.S. persons will not be targeted by sanctions for engaging in transactions with or involving non-designated Iranian entities and non-sanctionable goods and services.[5] Nevertheless, the task of complying with these complex regulations will be a heavy burden for multinational companies in the coming months.  Complicating matters, the Trump administration’s decision to abandon the JCPOA sowed discord with European allies, and has given rise to competing compliance obligations for multinational companies.  As we described here, and discuss further below, in August 2018 the European Union implemented a blocking statute to prevent European firms from complying with U.S. sanctions on Iran. Background As we described here, the JCPOA, signed between Iran and the five permanent members of the United Nations Security Council (the United States, the United Kingdom, France, Russia, and China) and Germany (the “P5+1”) in 2015, committed both sides to certain obligations related to Iran’s nuclear development.[6]  Iran committed to various limitations on its nuclear program, and in return the international community (the P5+1 alongside the European Union and the United Nations) committed to relieving substantial portions of the sanctions that had been placed on Iran to address that country’s nuclear activities.  This relief included the United States’ agreement to ease certain secondary sanctions, thus opening up the Iranian economy for non-U.S. persons without risking their access to the U.S. market to pursue Iranian deals. On May 8, 2018, President Donald Trump announced his decision to withdraw from the JCPOA and re-impose U.S. nuclear-related sanctions.[7] Though this announcement was in accord with the President’s long-stated opposition to the JCPOA, his decision went further than many observers had anticipated.  In conjunction with the May announcement, the President issued a National Security Presidential Memorandum (“NSPM”) directing the Secretary of State and the Secretary of the Treasury to prepare immediately for the re-imposition of all U.S. sanctions lifted or waived in connection with the JCPOA, to be accomplished as expeditiously as possible and in no case later than 180 days from the date of the NSPM—November 4, 2018.  As described in an initial set of frequently asked questions (“FAQs”) set forth by OFAC, the re-imposition of sanctions was subject to certain 90- and 180-day wind-down periods that expired on August 6 and November 4, respectively.[8] As we discussed here, on August 6, 2018 the President issued a new executive order authorizing OFAC to re-impose sanctions that had been subject to the 90-day wind-down period.[9] That executive order consolidated Iran-related sanctions authorities and re-imposed the first tranche of secondary sanctions on transactions involving Iranian rials, Iranian sovereign debt, certain metals, and the Iranian automotive sector, among other measures.[10] The August executive order also set forth the tranche of sanctions authorizations that were subsequently imposed this week. New Sanctions With the expiration of the 180-day wind-down period on November 5, 2018, the United States has now re-imposed sanctions on the following:[11] Iranian port operators, shipping and shipbuilding; Petroleum-related transactions; Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions; Provision of specialized financial messaging services to the Central Bank of Iran and certain Iranian financial institutions; Underwriting services, insurance and reinsurance; and Iran’s energy sector. Pursuant to the executive order issued on August 6, the following types of secondary sanctions may be imposed on non-U.S. persons: Blocking sanctions on non-U.S. persons who materially assist, sponsor, or provide support for or goods or services in support of: the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), or the Central Bank of Iran;[12] Iranian SDNs;[13] or any other person included on the SDN List pursuant to Section 1(a) of the New Iran E.O. or Executive Order 13599 (i.e., the Government of Iran and certain Iranian financial entities);[14] Blocking sanctions on non-U.S. persons who: are part of the Iranian energy, shipping, or shipbuilding sectors;[15] operate Iranian ports;[16] or provide significant support to or goods or service in support of persons that are part of Iran’s energy, shipping, or shipbuilding sectors; Iranian port operators; or Iranian SDNs (excluding certain Iranian financial institutions);[17] “Menu-based” sanctions on non-U.S. persons who: knowingly engage in significant transactions in Iranian petroleum, petroleum products, or petrochemical products;[18] are successors, subsidiaries, parents, or affiliates of persons who have knowingly engaged in significant transactions in Iranian petroleum, petroleum products, or petrochemical products or in Iran’s automotive sector;[19] provide underwriting services, insurance, or reinsurance for sanctionable activities with or involving Iran;[20] or provide specialized financial messaging services to the Central Bank of Iran;[21] Correspondent and payable-through account sanctions on foreign financial institutions that conduct or facilitate significant transactions: on behalf of Iranian SDNs or other SDNs (as described above);[22] with NIOC or NICO;[23] or for transactions in Iranian petroleum, petroleum products, or petrochemical products.[24] Key Issues Oil Waivers The recently re-imposed U.S. restrictions on the export of Iran’s oil could have a significant impact on the Iranian economy.  Iranian oil exports have already dropped by one-third since hitting a peak of 2.8 million barrels per day in April 2018—shortly before the Trump administration announced it would re-impose nuclear-related sanctions.[25]  South Korea and Japan have stopped buying Iranian oil, and India has reduced its imports.[26]  Chinese imports are more difficult to determine given a robust black market oil trade.[27] Notably, the United States has agreed to temporarily waive these sanctions for eight jurisdictions that have agreed to significantly reduce or eliminate their imports of Iranian oil, including China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey.[28]  The revenue owed to Iran for continued trade subject to these waivers will not be paid directly to Iran, but instead will be held in escrow accounts in the waiver jurisdictions for use by Iran, but only for humanitarian trade or bilateral trade with waiver jurisdictions in non-sanctioned goods.  This is the same model that existed during the Obama administration and that, given trade surpluses (and the value of oil), resulted in the buildup of billions of dollars of “trapped” Iranian money in bank accounts around the world.  This money represented the difference between the revenue paid to Iran by jurisdictions who had waivers and the remaining funds after Iran purchased various non-sanctioned goods from those jurisdictions. The waivers are only temporary—lasting for six months—and their extension is dependent on the Trump administration’s assessment that the benefiting jurisdictions have continued their efforts to significantly reduce their dependence on Iranian oil.  The United States has indicated that it expects two of the eight exempt jurisdictions to eliminate their Iranian oil imports within the first six-month period.  These waivers were granted despite initial indications from Trump administration officials that OFAC would only grant waivers if countries entirely eliminated their Iranian oil imports.  Interestingly, as with the waivers granted prior to the JCPOA, none of these documents or materials have yet been made public. SWIFT In connection with the re-imposition of sanctions, the United States has successfully cut off certain Iranian financial institutions from access to the SWIFT network,[29] the financial messaging system by which more than 11,000 banks worldwide facilitate transactions.[30] According to Secretary of the Treasury Steven Mnuchin, the United States has advised the Belgium-based cooperative that runs the messaging service that it must disconnect certain designated Iranian financial institutions “as soon as technologically feasible” or else become subject to U.S. sanctions.[31]  In that sense, the approach taken by the Trump administration represents a sort of compromise in that the United States has stopped short of pressuring SWIFT to disconnect each and every Iranian financial institution.[32]  Instead, the United States has (for now) left open at least some international payment channels. In response, without specifically mentioning the re-imposition of U.S. sanctions, SWIFT on November 5, 2018 announced that it would suspend certain unspecified Iranian financial institutions from the messaging service.[33]  (In a brief statement, SWIFT attributed its decision instead to its interest in maintaining “the stability and integrity of the wider global financial system,” an explanation likely calculated to avoid running afoul of Council Regulation (EC) No 2271/96 (as amended, the “EU Blocking Statute”).[34]) Viewed in broader context, there is certainly precedent for cutting off Iranian access to the messaging network.  SWIFT did precisely that in 2012 at the behest of the United States and the European Union, before restoring Iranian access in 2016 in connection with implementation of the JCPOA.[35]  However, given that the European Union strongly supports the JCPOA, it is possible that SWIFT—which is headquartered in Belgium and subject to European law—could have declined to disconnect the Iranian financial institutions designated by the United States.[36]  For now, however, the practical result of SWIFT’s action is that targeted Iranian banks will be almost entirely severed from the international financial system, severely complicating Iran’s ability to move funds in and out of the country. SDN Designations OFAC has also added 700 individuals, entities, aircraft, and vessels to the SDN List.  This is OFAC’s largest single addition to the SDN List and it increases the total number of SDNs by over 10 percent.  These 700 additions to the SDN List include the re-designation of persons previously granted sanctions relief under the JCPOA, the transfer of Iranian government or financial entities from the List of Persons Blocked Solely Pursuant to E.O. 13599 (the “E.O. 13599 List”), and the imposition of sanctions on 300 first-time designees.  U.S. persons, including their non-U.S. subsidiaries, are broadly prohibited from engaging in transactions with or involving these persons. Notably, the restrictions on non-U.S. persons engaging with SDNs vary based on the authority under which such SDNs were designated.  For example, U.S. secondary sanctions do not apply to dealings with Iranian banks that are designated solely because of their status as “Iranian financial institutions” pursuant to Executive Order 13599.[37]  That said, some entities moved to the SDN List from the E.O. 13599 List also have been designated under additional authorities and, therefore, have received new unique identification numbers (“UIDs”) when added to the SDN List.[38]  In October and November 2018, OFAC designated multiple Iranian financial institutions and other persons previously blocked solely pursuant to E.O. 13599 under E.O. 13224 (relating to counterterrorism), E.O. 13382 (relating to WMD proliferation), and E.O. 13553 (relating to serious human rights abuses by the Government of Iran).[39] Furthermore, the volume of SDNs in Iran means that non-U.S. persons must continue to assess the risks of a transaction on the basis of the sectoral sanctions that may apply, as well as the restrictions that pertain to SDNs based on the nature of their designation. Foreign Subsidiaries of U.S. Companies U.S. sanctions again prohibit non-U.S. entities owned or controlled by U.S. persons (e.g., foreign subsidiaries of U.S. companies) from generally engaging in business operations with or involving Iran.  Under the JCPOA, General License H had permitted U.S.-owned or -controlled non-U.S. entities to engage in Iran.  On June 27, 2018, the U.S. government revoked General License H, replacing it with a narrower authorization permitting the wind-down of such activities on or before the end of the 180-day wind-down period on November 4, 2018.[40]  These non-U.S. entities are now no longer permitted to provide goods, services, or financing to Iranian counterparties, even pursuant to agreements pre-dating the U.S. withdrawal from the JCPOA.  In this regard, these non-U.S. entities now are generally subject to the same limitations on engagement with Iran that restrict their U.S. parents.  We discuss the implications with respect to the EU Blocking Statute below. Iranian Ports While U.S. sanctions have now been re-imposed on certain Iranian port operators, the Trump administration has preserved a lenient regulatory interpretation adopted during the Obama era.  Transactions at Iranian ports that do not involve one particular port operator or other designated entities will not generally trigger secondary sanctions. As a general matter, non-U.S. persons can trigger secondary sanctions by engaging in significant transactions involving two types of entities: (i) designated entities identified as “port operators,” and (ii) other designated Iranian entities performing shipping and logistics services inside Iranian ports.  In an FAQ published this past August, OFAC clarified that to the extent that a shipping company transacts with port operators in Iran that have not been designated, except as “port operators” under the Iran Freedom and Counter-Proliferation Act of 2012, and “as long as such payments are limited strictly to routine fees including port dues, docking fees, or cargo handling fees, paid for the loading and unloading of non-sanctioned goods at Iranian ports,” such transactions are unlikely to be considered “significant.”[41]  As of now, there are no Iranian entities designated solely as “port operators” that would qualify for this exception. To date, only one identified Iranian “port operator,” Tidewater Middle East Co., has been added to the SDN List, in this case for its involvement in Iran’s proliferation of weapons of mass destruction.[42]  Critically, although Tidewater is the only port operator identified as such, the company has operations at many of Iran’s largest ports.  Tidewater has historically had operations at seven Iranian ports, including Bandar Abbas’ main container terminal, Shahid Rajaee, and played a key role in facilitating the Government of Iran’s weapons trade prior to the implementation of the JCPOA.  Importantly, when the JCPOA was implemented, OFAC announced that Tidewater was no longer the port operator of Bandar Abbas and that transactions with that port would not be prohibited if other designated entities were not involved.[43]  However, OFAC now cautions that companies should “exercise great caution to avoid engaging in transactions” with Tidewater in ports where Tidewater currently operates, as transactions with Tidewater may trigger secondary sanctions. Additionally, as a result of Monday’s designations, several Iranian shipping and logistics companies with operations at Bandar Abbas, Fujairah Port, the B.I.K. Port Complex, and Assaluyeh Port, among others, were designated to the SDN List.  As noted above, non-U.S. persons may face secondary sanctions for providing goods, services, or support to these entities.  However, non-U.S. persons are not broadly restricted from engaging with the ports where these entities operate.  The designations of both Tidewater and the Iranian shipping and logistics companies do not result in the blocking of all Iranian ports or port operators. Interestingly, the United States has purportedly carved out an exception from the imposition of sanctions with regard to Iran’s Chabahar port, the construction of an associated railway, the shipment of non-sanctionable goods through the port for Afghanistan’s use, and Afghanistan’s continued imports of Iranian petroleum products.  The exemption for Chabahar is most likely linked to the port’s importance for both India and Afghanistan, and likewise the importance of India and Afghanistan to U.S. foreign policy aims.[44]  India has invested heavily in developing the Chabahar port, which provides strategic access not just to Iran but Central Asia, bypassing Pakistan.  After U.S. sanctions were relaxed pursuant to the JCPOA, India announced its plans to spend $500 million on developing Chabahar and in December 2017 Iran inaugurated the latest phase of the port, including five new piers.  Plans to link the port to the Iranian rail system, which connects to Afghanistan and on to Central Asia, likely featured in the U.S. State Department’s decision.  Landlocked Afghanistan also has few better options for importing petroleum products than Iran for the time being.[45]  It is not clear whether the reported waiver extends to erstwhile prohibited engagements with SDNs—in our view that would be unlikely.  Indeed, the mention of the Chabahar port is likely tangential to the waiver for Afghanistan and India’s oil imports. Permissible Post-Wind Down Activities At the same time that the Trump administration is promising to conduct a “maximum pressure” economic campaign against the regime in Tehran,[46] OFAC has also clarified that U.S. persons and non-U.S. persons are expressly permitted to engage in certain narrow categories of transactions involving Iran.  Among the general licenses and authorizations that remain in effect even after U.S. nuclear-related sanctions have been fully re-imposed are the following: Collecting Payment for Goods, Services, Loans or Credits Provided to an Iranian Counterparty During the Wind-Down Period In the event a non-U.S., non-Iranian person is owed payment after the applicable wind-down period for goods, services, loans or credits lawfully provided to an Iranian counterparty during the wind-down period, the U.S. government will allow that person to receive payment according to the terms of the written contract or written agreement.[47]  The policy rationale behind this allowance appears to be that, in order to promote an orderly wind-down of existing activities involving Iran, OFAC felt that such persons needed to be given comfort that they would be made whole for any final goods, services, loans or credits they might deliver to an Iranian counterparty.[48]  Absent such an allowance, Iranian counterparties could conceivably have continued to receive goods, services, loans and credits during the 90- and 180-day wind-down periods and then use the re-imposition of U.S. sanctions as a pretext to refuse payment. In order to avail itself of this allowance, a non-U.S., non-Iranian person must satisfy three criteria.  First, the goods, services, loans or credits must have been provided to an Iranian counterparty pursuant to a written contract or written agreement entered into prior to May 8, 2018.[49]  Second, the goods or services must have been fully provided or delivered, or the loans or credits extended, to an Iranian counterparty prior to the end of the applicable wind-down period.[50]  Third, any payments would need to be consistent with U.S. sanctions, including that payments could not involve U.S. persons or the U.S. financial system, unless the transactions are exempt from regulation or authorized by OFAC.[51] OFAC has also indicated that, prior to the receipt of payment, non-U.S., non-Iranian persons can seek guidance from OFAC or the U.S. Department of State, as appropriate, regarding whether a particular payment would satisfy the criteria described above.[52]  Non-U.S., non-Iranian persons are encouraged to seek such guidance if the counterparty from whom they are seeking repayment has subsequently been added to the SDN List.[53] Authorized Activities General License J-1: Civil Aircraft on Temporary Sojourn to Iran General License J-1, which authorizes non-U.S. persons to fly U.S.-origin civil aircraft into Iran, remains in effect.[54]  This license represents a recognition that almost any aircraft that flies into Iran is “U.S.-origin” under U.S. law and that without such a license nearly all international flights to and from Iran would violate U.S. sanctions.[55]  With this license still in effect, non-U.S. air carriers may continue to fly U.S.-origin civil aircraft into and out of Iran, subject to the conditions in the license and the U.S. Export Administration Regulations. General License D-1: Services, Software and Hardware Incident to Personal Communications General License D-1, which authorizes U.S. persons to export or reexport to Iran certain hardware, software and services “incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging,” also remains in effect.[56]  The fact that the Trump administration has elected to leave this license undisturbed is not altogether surprising and implies a continued U.S. policy interest in facilitating the ability of the Iranian people to communicate and organize among themselves, which requires access to certain telecommunications services and equipment. Humanitarian Exceptions Finally, humanitarian exceptions for transactions involving the export of agricultural commodities, food, medicine and medical devices to Iran, continue to apply.[57]  As they have previously, these exceptions extend to transactions by both U.S. persons and non-U.S. persons and are limited only in that such transactions cannot involve persons on the SDN List.[58]  These authorities have likely remained in effect for several reasons.  First, as a technical matter, they were not provided pursuant to the JCPOA and thus did not need to be removed in order for the United States to withdraw from the JCPOA.  Second, and more broadly, these humanitarian exceptions are consistent with long-standing U.S. policy that sanctions should target only the Iranian regime, and not the Iranian people.[59] Despite the flexibility afforded by the general licenses and authorizations described above—which will be very helpful to certain industries active in the implicated sectors (such as airlines and telecommunications)—it is important to remember that these exceptions operate at the margins.  In general, the Trump administration has stressed that it plans to adopt “the toughest sanctions regime ever imposed on Iran,” including aggressive enforcement efforts against persons that attempt to violate or circumvent U.S. sanctions.[60] The EU Response As we described here, on August 6, 2018 the European Union enacted Commission Delegated Regulation (EU) 2018/1100 (the “Re-imposed Iran Sanctions Blocking Regulation”), which supplements the EU Blocking Statute.  The combined effect of the EU Blocking Statute and the Re-imposed Iran Sanctions Blocking Regulation is to prohibit compliance by EU entities with U.S. sanctions on Iran which have been re-imposed following the U.S. withdrawal from the JCPOA.  To date, the dominance of the U.S. dollar, together with robust U.S. sanctions enforcement, forces many global firms to comply with the re-imposed U.S. sanctions described above, even in light of legal risks arising from the EU Blocking Statute and other national anti-boycott legislation. European Union leaders have discussed creating a clearinghouse to manage trade with Iran denominated in Euros,[61] but no EU member state is as of yet willing to play host.[62]  Major European companies have already abandoned their Iranian deals,[63] yet others are moving away from the use of U.S. dollar and/or business with the United States altogether in an attempt to be able to continue business with Iran.  Additionally, while not all Iranian banks have been disconnected, the significant new restrictions on Iranian access to the SWIFT network discussed above will further discourage European engagements with Iran.[64] These competing obligations are a concern for U.S. companies seeking to acquire EU firms that have a history of engagement with Iran.  Once acquired and as discussed above, the EU “target” would be considered a U.S. person from an U.S. sanctions perspective and thus obliged to comply with U.S. sanctions—in potential violation of the EU Blocking Statute, due to being considered an EU person by EU jurisdictions.  We have described the generally available possible options for affected companies here.  In the discussion below we shall focus on the option to acquire respective licenses to remain compliant with both the re-imposed U.S. sanctions and the EU Blocking Statute. One way forward in such situations is to reach out to the U.S. authorities to request a specific license for a particular transaction with Iran.  Apart from the time such process might take and the potentially limited chance of success, according to the EU Commission, requesting from the U.S. authorities an individual license granting a derogation/exemption from the listed extra-territorial legislation, which include the re-imposed U.S. sanctions, would amount to complying with the latter.  The EU Commission notes that this would necessarily imply recognizing the U.S. jurisdiction over EU operators[65] which should be subject to the jurisdiction of the EU/Member States.  Applying for a special license is thus considered a breach of the EU Blocking Statute.  EU operators may, nevertheless, under a new streamlined process, request the EU Commission directly, not the EU member state authorities, to authorize them to apply for a special license with the U.S. authorities, pursuant to Article 5, second paragraph of the EU Blocking Statute. Another way forward is to apply directly for an exception from the EU Blocking Statute to be able to comply with the re-imposed U.S. sanctions in a fashion that is legally permissible.  This will not only limit the risk of prosecution and litigation, but also ease reasonable worries of management and employees of the acquired EU subsidiary.  According to article 5 (2) of the EU Blocking Statute the applicant will have to provide in their application sufficient evidence that non-compliance would cause serious damage to at least one protected interest. “Protected interests” are defined as the interest of any EU operator, the interest of the EU or both. The EU has legislated that when assessing whether serious damage to the protected interests as referred to in the second paragraph of Article 5 of Regulation (EC) No 2271/96 would arise, the Commission will consider, among other things, “the existence of a substantial connecting link with the third country which is at the origin of the listed extraterritorial legislation (including the re-imposed U.S. sanctions) or the subsequent actions; for example the applicant has parent companies or subsidiaries, or participation of natural or legal persons subject to the primary jurisdiction of the third country which is at the origin of the listed extra-territorial legislation or the subsequent actions.”[66] As first cases appear, any company caught between the re-imposed U.S. sanctions and the EU Blocking Statute should also be aware of a heightened risk of litigation and position themselves accordingly.  Third parties might successfully sue under using the EU Blocking Regulation, for example if the above mentioned EU company with a U.S. parent were to decide to not deliver a product to Iran based on compliance with the re-imposed U.S. sanctions, despite a prior contractual obligation, a European court will likely not accept termination merely on the grounds of such U.S. sanctions compliance. Finally, EU operators are required to inform the EU Commission within 30 days from the date on which information is obtained that the economic and/or financial interests of any EU operator is affected, directly or indirectly, by the laws specified in the Annex of the EU Blocking Statute (including the re-imposed U.S. sanctions) or by actions based thereon or resulting therefrom.  If the EU operator is a legal person, this obligation applies to the directors, managers and other persons with management responsibilities of such legal person. Conclusion In our assessment, November 5, 2018 marks a new phase in U.S. sanctions implementation against Iran.  National Security Adviser John Bolton warned on November 5 that the administration will impose “sanctions that even go beyond” those imposed this week or which existed under the Obama administration.[67]  “More are coming,” he noted, adding that the United States would “have very strict, very tight enforcement of the sanctions that exist.”[68] In particular, we assess that this new phase will be marked by robust U.S. government activities across three distinct work streams.  First, we assess that the U.S. government will continue and likely expand diplomatic outreach efforts to negotiate, cajole, and perhaps threaten states and corporations that do not comply with U.S. measures.  The eight oil waiver jurisdictions are likely to receive significant attention, as will jurisdictions of concern with respect to sanctions evasion and subversion—among others, we expect U.S. outreach to Qatar, Oman, Turkey, the Caucasus, Iraq, Central Asia, and perhaps Sri Lanka and South Africa.  All were the focus of sustained attention during the last round of robust secondary sanctions under President Obama.  Second, we assess that OFAC and other agencies will be active in enforcement of violations.  We note that OFAC has only published three enforcement actions this year—which is comparatively very light for an agency that historically has published 20 or more.  We assume that there are other enforcement actions that have yet to be published—even if those actions concern activities that far pre-dated November 5, there could be a significant deterrent benefit in announcing substantial enforcement actions shortly after the resumption of the Iran sanctions.  The unilateral approach to Iran sanctions under President Trump may compel a more public and robust enforcement action to achieve the same level of deterrence as the multilateral approach achieved under President Obama.  Finally, the third work stream involves the continuing efforts of OFAC’s Office of Global Targeting (which constructs the evidentiary material needed to list entities).  We are confident that OFAC will be very active in both identifying more Iranian actors for listing and potentially changing the designations of some already listed entities so as to impose secondary sanctions as needed. Even so, uncertainty abounds.  It is unknown whether an aggressive approach to U.S. enforcement will lead European signatories to the JCPOA to enforce the EU Blocking Statute.  Or will the U.S. steamroll such efforts by virtue of its economic power?  Will Iranian president Hassan Rouhani consider renegotiating the nuclear deal to meet U.S. demands, or will he be replaced by a hardliner when he leaves office in 2021?  Whatever happens next, we anticipate a continuing fluidity in the sanctions environment and consequently an increasingly complex set of compliance challenges for global companies.    [1]   Press Release, White House, Remarks by President Trump on the Joint Comprehensive Plan of Action (May 8, 2018), available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-joint-comprehensive-plan-action; see also Presidential Memorandum, Ceasing U.S. Participation in the JCPOA and Taking Additional Action to Counter Iran’s Malign Influence and Deny Iran All Paths to a Nuclear Weapon (May 8, 2018), available at https://www.whitehouse.gov/presidential-actions/ceasing-u-s-participation-jcpoa-taking-additional-action-counter-irans-malign-influence-deny-iran-paths-nuclear-weapon.    [2]   See Press Release, U.S. Dep’t of Treasury, U.S. Government Fully Re-Imposes Sanctions on the Iranian Regime as Part of Unprecedented U.S. Economic Pressure Campaign (Nov. 5, 2018), available at https://home.treasury.gov/news/press-releases/sm541.    [3]   Press Release, U.S. Dep’t of State, Press Availability With Secretary of Treasury Steven T. Mnuchin (Nov. 5, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287132.htm.    [4]   Eli Lake, Opinion, Trump Bank Sanctions Will Hit Iran Where It Hurts, Bloomberg (Nov. 2, 2018), available at https://www.bloomberg.com/opinion/articles/2018-11-02/trump-s-iran-bank-cutoff-from-swift-will-make-u-s-sanctions-hurt.    [5]   U.S. Dep’t of Treasury, Frequently Asked Questions Related to the “Snap-Back” of Iranian Sanctions in November, 2018, FAQ No. 637 (Nov. 5, 2018), available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#630.    [6]   U.S. Dep’t of State, Joint Comprehensive Plan of Action (July 14, 2015), available at https://www.state.gov/documents/organization/245317.pdf.    [7]   Press Release, White House, Remarks by President Trump on the Joint Comprehensive Plan of Action (May 8, 2018), available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-joint-comprehensive-plan-action; see also Presidential Memorandum, Ceasing U.S. Participation in the JCPOA and Taking Additional Action to Counter Iran’s Malign Influence and Deny Iran All Paths to a Nuclear Weapon (May 8, 2018), available at https://www.whitehouse.gov/presidential-actions/ceasing-u-s-participation-jcpoa-taking-additional-action-counter-irans-malign-influence-deny-iran-paths-nuclear-weapon; Press Release, U.S. Dep’t of Treasury, Guidance Relating to the Lifting of Certain U.S. Sanctions Pursuant to the Joint Comprehensive Plan of Action on Implementation Day (Jan. 16, 2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/implement_guide_jcpoa.pdf.    [8]   Press Release, U.S. Dep’t of Treasury, Statement by Secretary Steven T. Mnuchin on Iran Decision (May 8, 2018), available at https://home.treasury.gov/news/press-releases/sm0382.    [9]   Exec. Order No. 13,846, 83 Fed. Reg. 38,939 (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf. [10]   In connection with the end of the 90-day wind-down period, the U.S. government also revoked authorizations to import into the United States Iranian carpets and foodstuffs and to sell to Iran commercial passenger aircraft and related parts and services.  U.S. Dep’t of Treasury, Revocation of JCPOA-Related General Licenses; Amendment of the Iranian Transactions and Sanctions Regulations; Publication of Updated FAQs (June 27, 2018), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180627.aspx. [11]   U.S. Dep’t of Treasury, Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA) (May 8, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf, FAQ No. 1.3. [12]   Exec. Order No. 13,846 § 1(a)(ii) (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf. [13]   Id. § 1(a)(iii). [14]   Id. [15]   Id. § 1(a)(iv). [16]   Id. [17]   Id. [18]   Id. § 3(a)(ii)-(iii). [19]   Id. § 3(a)(iv)-(vi). [20]   Id. § 5. [21]   Id.  This provision refers to the electronic messaging provided principally by the SWIFT inter-bank messaging system. [22]   Id. § 2(a)(ii). [23]   Id. § 2(a)(iii). [24]   Id. § 2(a)(iv)-(v). [25]   Turning the Screws, The Economist (Nov. 3, 2018). [26]   Id. [27]   Id. [28]   Press Release, U.S. Dep’t of State, Press Availability With Secretary of Treasury Steven T. Mnuchin (Nov. 5, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287132.htm. [29]   Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm. [30]   SWIFT, Introduction to SWIFT, https://www.swift.com/about-us/discover-swift (last visited Nov. 4, 2018); see also Peter Eavis, Trump’s New Iran Sanctions May Hit Snag with Global Financial Service, N.Y. Times: DealBook (Oct. 12, 2018), available at https://www.nytimes.com/2018/10/12/business/dealbook/swift-sanctions-iran.html (“The messaging service is run by a Belgian cooperative called Swift.  The service, which is owned and used by banks around the world, plays a central role in the flow of money across the globe.  If, say, a Bank of America customer wants to send money to a client of Barclays, Bank of America will send a message over Swift’s network to Barclays, notifying it of its intention to move the money.  Swift does not hold any of the money itself.”). [31]   See Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm.  Secretary Mnuchin has also indicated that a narrow class of humanitarian transactions (e.g., providing food or medicine to non-designated entities) will still be allowed to use the SWIFT network. [32]   Eli Lake, Opinion, Trump Bank Sanctions Will Hit Iran Where It Hurts, Bloomberg (Nov. 2, 2018), available at https://www.bloomberg.com/opinion/articles/2018-11-02/trump-s-iran-bank-cutoff-from-swift-will-make-u-s-sanctions-hurt. [33]   Arshad Mohammed, SWIFT Says Suspending Some Iranian Banks’ Access to Messaging System, Reuters (Nov. 5, 2018), available at https://www.reuters.com/article/us-usa-iran-sanctions-swift/swift-says-suspending-some-iranian-banks-access-to-messaging-system-idUSKCN1NA1PN. [34]   Id. [35]   E.g., Peter Eavis, Trump’s New Iran Sanctions May Hit Snag with Global Financial Service, N.Y. Times: DealBook (Oct. 12, 2018), https://www.nytimes.com/2018/10/12/business/dealbook/swift-sanctions-iran.html. [36]   See id. [37]   See Exec. Order No. 13,846 § 1(a)(iii) (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf.  In accordance with this authority and OFAC FAQ No. 3.1, the SDN List entries for these Iranian financial institutions do not have the notation warning that they are “Subject to Secondary Sanctions.” [38]   OFAC FAQ No. 638 (Nov. 5, 2018). [39]   OFAC FAQ No. 639 (Nov. 5, 2018). [40]   U.S. Dep’t of Treasury, Revocation of JCPOA-Related General Licenses; Amendment of the Iranian Transactions and Sanctions Regulations; Publication of Updated FAQs (June 27, 218), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180627.aspx. [41]   See OFAC FAQ No. 315. [42]   Id. [43]   See U.S. Dep’t of Treasury, Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the Joint Comprehensive Plan of Action (JCPOA) on Implementation Day (updated Dec. 15, 2016), FAQ No. 3.2, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_faqs.pdf. [44]   See Catherine Putz, Iran’s Chabahar Port Scores an India- and Afghanistan-Inspired Sanctions Exemption, The Diplomat (Nov. 8, 2018), available at https://thediplomat.com/2018/11/irans-chabahar-port-scores-an-india-and-afghanistan-inspired-sanctions-exemption. [45]   Id. [46]   See, e.g., Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm. [47]   OFAC FAQ No. 631 (Nov. 5, 2018). [48]   See id. [49]   Id.  The logic behind this requirement appears to be a desire on the part of OFAC to avoid an unseemly rush to generate new business inside Iran on the eve of sanctions being re-imposed.  Contracts entered into after President Trump’s May 8, 2018 announcement do not enjoy any such assurance of the ability to collect payment after the wind-down periods end. [50]   OFAC FAQ Nos. 630 and 631 (Nov. 5, 2018).  According to OFAC, “[a]s a general matter, goods or services will be considered fully provided or delivered when the party providing or delivering the goods or services has performed all the actions and satisfied all the obligations necessary to be eligible for payment or other agreed-to compensation.  With respect to goods exported to or from Iran, at a minimum, title to the goods must have transferred to the relevant party.”  OFAC FAQ No. 633 (Nov. 5, 2018).  To the extent a non-U.S., non-Iranian person continues to perform under such a contract after the applicable wind-down period has ended, they would not only have no assurance of being repaid, but would also risk incurring secondary sanctions liability. [51]   OFAC FAQ No. 631 (Nov. 5, 2018). [52]   OFAC FAQ No. 632 (Nov. 5, 2018). [53]   OFAC FAQ No. 636 (Nov. 5, 2018). [54]   OFAC, General License J-1: Authorizing the Reexportation of Certain Civil Aircraft to Iran on Temporary Sojourn and Related Transactions (Dec. 15, 2016), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_glj_1.pdf. [55]   Foreign-made items incorporating more than 10 percent U.S.-origin content by value, including civilian aircraft, may not be reexported by non-U.S. persons to Iran without authorization (31 C.F.R. § 560.205).  Most civilian aircraft—even those produced by non-U.S. manufacturers outside the United States—exceed this threshold. [56]   OFAC, General License D-1: General License with Respect to Certain Services, Software, and Hardware Incident to Personal Communications (Feb. 7, 2014), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_gld1.pdf. [57]   Exec. Order No. 13,846, 83 Fed. Reg. 38,939, 38,941 (Aug. 6, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf; see also Fact Sheet, President Donald J. Trump Is Reimposing All Sanctions Lifted Under the Unacceptable Iran Deal, White House (Nov. 2, 2018), available at https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-reimposing-sanctions-lifted-unacceptable-iran-deal (“Sales of food, agricultural commodities, medicine and medical devices to Iran have long been—and remain—exempt from our sanctions.”). [58]   OFAC FAQ Nos. 630 and 637 (Nov. 5, 2018). [59]   E.g., Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm (“[O]ur actions today are targeted at the regime, not the people of Iran, who have suffered grievously under this regime.  It’s why we have and will maintain many humanitarian exemptions to our sanctions including food, agricultural commodities, medicine, and medical devices.”). [60]   See, e.g., Fact Sheet, President Donald J. Trump Is Reimposing All Sanctions Lifted Under the Unacceptable Iran Deal, White House (Nov. 2, 2018), available at https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-reimposing-sanctions-lifted-unacceptable-iran-deal. [61]   Europe Accelerates Work on So-Called SPV to Counter U.S.’s Iran Sanctions, Bloomberg (Nov. 8, 2018), available at https://www.bloomberg.com/news/articles/2018-11-07/europe-accelerates-work-on-spv-to-counter-u-s-s-iran-sanctions. [62]   Turning the Screws, The Economist (Nov. 3, 2018). [63]   How Companies Around the World are Reversing Course on Iran Business, Iran Watch (Nov. 5, 2018), available at https://www.iranwatch.org/our-publications/policy-briefs/how-companies-around-world-are-reversing-course-iran-business. [64]   Michael R. Pompeo & Steven T. Mnuchin, Briefing on Iran Sanctions, U.S. Dep’t of State (Nov. 2, 2018), available at https://www.state.gov/secretary/remarks/2018/11/287090.htm; see also SWIFT, Introduction to SWIFT, available at https://www.swift.com/about-us/discover-swift (last visited Nov. 4, 2018); Peter Eavis, Trump’s New Iran Sanctions May Hit Snag with Global Financial Service, N.Y. Times: DealBook (Oct. 12, 2018), available at https://www.nytimes.com/2018/10/12/business/dealbook/swift-sanctions-iran.html (“The messaging service is run by a Belgian cooperative called Swift.  The service, which is owned and used by banks around the world, plays a central role in the flow of money across the globe.  If, say, a Bank of America customer wants to send money to a client of Barclays, Bank of America will send a message over Swift’s network to Barclays, notifying it of its intention to move the money.  Swift does not hold any of the money itself.”). [65]   The respective EU Guidance refers to EU operators when referring to the natural and legal persons for whom the EU Blocking Statute applies according to Article 11 of the EU Blocking Statute.  Those are (i) any natural person being a resident in the Community (EU) (whereas “being a resident in the Community” means: being legally established in the Community for a period of at least six months within the 12-month period immediately prior to the date on which, under this Regulation, an obligation arises or a right is exercised) and a national of a EU Member State, (ii) any legal person incorporated within the Community, (iii) any natural or legal person referred to in Article 1 (2) of Regulation (EEC) No 4055/86 (i.e. nationals of the Member States established outside the Community and to shipping companies established outside the Community and controlled by nationals of a Member State, if their vessels are registered in that Member State in accordance with its legislation), (iv) any other natural person being a resident in the Community, unless that person is in the country of which he is a national, and (v) any other natural person within the Community, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of a Member State, acting in a professional capacity. [66]   Article 4(c) of Commission Implementing Regulation (EU) 2018/1101 of 3 August 2018 laying down the criteria for the application of the second paragraph of Article 5 of Council Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom. [67]   Emily Birnbaum, Bolton: Even More Iran Sanctions Planned, The Hill (Nov. 5, 2018), available at https://thehill.com/policy/finance/414891-bolton-even-more-iran-sanctions-planned. [68]   Id. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, Stephanie Connor, R.L. Pratt, Richard Roeder and Scott Toussaint. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 2, 2018 |
Gibson Dunn Ranked in Chambers UK 2019

Gibson Dunn was recognized with two firm and 14 individual rankings in the 2019 edition of Chambers UK.  The firm was recognized in the categories: International Arbitration – UK-wide and Real Estate Finance – London.  The following partners were recognized in their respective practice areas:  Cyrus Benson in International Arbitration – UK-wide, Sandy Bhogal in Tax – London, James Cox in Employment: Employer – London, Charlie Geffen in Corporate/M&A: High End – London and Private Equity – UK-wide, Chris Haynes in Capital Markets: Equity – UK-wide, Anna Howell in Energy & Natural Resources: Oil & Gas – UK-wide, Penny Madden in International Arbitration – UK-wide, Ali Nikpay in Competition Law – London, Alan Samson in Real Estate – London and Real Estate Finance – London, Jeff Sullivan in International Arbitration – UK-wide and Public International Law – London, and Steve Thierbach in Capital Markets: Equity – UK-wide.

November 1, 2018 |
U.S. News – Best Lawyers® Awards Gibson Dunn 132 Top-Tier Rankings

U.S. News – Best Lawyers® awarded Gibson Dunn Tier 1 rankings in 132 practice area categories in its 2019 “Best Law Firms” [PDF] survey. Overall, the firm earned 169 rankings in nine metropolitan areas and nationally. Additionally, Gibson Dunn was recognized as “Law Firm of the Year” for Litigation – Antitrust and Litigation – Securities. Firms are recognized for “professional excellence with persistently impressive ratings from clients and peers.” The recognition was announced on November 1, 2018.

October 18, 2018 |
Webcast: CFIUS Reform and the Implications for Real Estate Transactions

On August 13, 2018, President Trump signed legislation that will significantly expand the scope of inbound foreign real estate investments subject to review by the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”).  The Foreign Investment Risk Review Modernization Act (“FIRRMA”) provides CFIUS with authority to review real estate transactions—including leases, sales, and concessions—involving air or maritime ports or in close proximity to sensitive U.S. government facilities.  In this CLE webcast presentation, Gibson Dunn attorneys discuss the Committee’s view of relevant national security risks and anticipated implementing regulations for such transactions. Topics to be covered: CFIUS Overview National Security Risks Associated with Real Estate Transaction FIRRMA’s Real Estate Provisions Impact on Real Estate Investments and Transactions View Slides [PDF] PANELISTS: Judith Alison Lee, a partner in our Washington, D.C. office, is Co-Chair of the firm’s International Trade Practice Group. She practices in the areas of international trade regulation, including USA Patriot Act compliance, economic sanctions and embargoes, export controls, and national security reviews (“CFIUS”). She also advises on issues relating to virtual and digital currencies, blockchain technologies and distributed cryptoledgers. Jose W. Fernandez, a partner in our New York office and Co-Chair of the firm’s Latin America Practice Group, previously served as Assistant Secretary of State for Economic, Energy and Business Affairs during the Obama Administration, and led the Bureau that is responsible for overseeing work on sanctions and international trade and investment policy. His practice focuses on mergers and acquisitions and finance in emerging markets in Latin America, the Middle East, Africa and Asia. Andrew A. Lance, a partner in our New York office, is Co-Head of the Real Estate Practice Group’s Hotel and Hospitality Practice. His practice focuses on real estate capital markets, transactional and finance matters, including rated commercial real estate structured financings, multistate mortgage financings, mezzanine financing, management and finance. Stephanie L. Connor, a senior associate in the Washington D.C. office, practices primarily in the areas of international trade compliance and white collar investigations. She focuses on matters before the U.S. Committee on Foreign Investment in the United States (“CFIUS”) and has served on secondment to the Legal and Compliance division of a Fortune 100 company. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.25 hours. Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.25 hours. Regulated by the Solicitors Regulation Authority (Number 324652). Application for approval is pending with the Colorado, Texas and Virginia State Bars. Most participants should anticipate receiving their certificates of attendance via e-mail in approximately 4 to 6 weeks following the webcast. Members of the Virginia Bar should anticipate receiving the applicable certification forms in approximately 6 to 8 weeks.

October 10, 2018 |
Why We Think the UK Is Heading for a “Soft Brexit”

Click for PDF Our discussions with politicians, civil servants, journalists and other commentators lead us to believe that the most likely outcome of the Brexit negotiations is that a deal will be agreed at the “softer” end of the spectrum, that the Conservative Government will survive and that Theresa May will remain as Prime Minister at least until a Brexit deal is agreed (although perhaps not thereafter).  There is certainly a risk of a chaotic or “hard” Brexit.  On the EU side, September’s summit in Salzburg demonstrated the possibility of unexpected outcomes.  And in the UK, the splits in the ruling Conservative Party and the support it relies upon from the DUP (the Northern Irish party that supports the Government) could in theory result in the ousting of Prime Minister May, which would likely lead to an extension of the Brexit deadline of 29 March 2019.  However, for the reasons set out below we believe a hard or chaotic Brexit is now less likely than more likely. Some background to the negotiations can be found here.  It should be noted that any legally binding deal will be limited to the terms of the UK’s departure from the EU (“the Withdrawal Agreement”) and will not cover the future trading relationship.  But there will be a political statement of intent on the future trading relationship (“the Future Framework”) that will then be subject to further detailed negotiation. There is a European Council meeting on 17/18 October although it is not expected that a final agreement will be reached by then.  However, the current expectation is that a special meeting of the European Council will take place in November (probably over a weekend) to finalise both the Withdrawal Agreement and the Future Framework. Whatever deal Theresa May finally agrees with the EU needs to be approved by the UK Parliament.  A debate and vote will likely take place within two or three weeks of a deal being agreed – so late November or early December.  If Parliament rejects the deal the perceived wisdom is that the ensuing political crisis could only be resolved either by another referendum or a general election. However: the strongest Brexiteers do not want to risk a second referendum in case they lose; the ruling Conservative Party do not want to risk a general election which may result in it losing power and Jeremy Corbyn becoming Prime Minister; and Parliament is unlikely to allow the UK to leave without a deal. As a result we believe that Prime Minister May has more flexibility to compromise with the EU than the political noise would suggest and that, however much they dislike the eventual deal, ardent Brexiteers will likely support it in Parliament.  This is because it will mean the UK has formally left the EU and the Brexiteers live to fight another day. The UK’s current proposal (the so-called “Chequers Proposal”) is likely to be diluted further in favour of the EU, but as long as the final deal results in a formal departure of the UK from the EU in March 2019, we believe Parliament is more likely than not to support it, however unsatisfactory it is to the Brexiteers. The key battleground is whether the UK should remain in a Customs Union beyond a long stop date for a transitional period.  The UK Government proposes a free trade agreement in goods but not services, with restrictions on free movement and the ability for the UK to strike its own free trade deals.  This has been rejected by the EU on the grounds that it seeks to separate services from goods which is inconsistent with the single market and breaches one of the fundamental EU principles of free movement of people.  The Chequers Proposal is unlikely to survive in its current form but the EU has acknowledged that it creates the basis for the start of a negotiation. There has also been discussion of a “Canada style” free-trade agreement, which is supported by the ardent Brexiteers but rejected by the UK Government because it would require checks on goods travelling across borders.  This would create a “hard border” in Northern Ireland which breaches the Good Friday Agreement and would not be accepted by any of the major UK political parties or the EU.  The consequential friction at the borders is also unattractive to businesses that operate on a “just in time” basis – particularly the car manufacturers.  The EU has suggested there could instead be regulatory alignment between Northern Ireland and the EU, but this has been accepted as unworkable because it would create a split within the UK and is unacceptable to the DUP, the Northern Ireland party whose support of the Conservatives in Parliament is critical to their survival.  This is the area of greatest risk but it remains the case that a “no deal” scenario would guarantee a hard border in Ireland. If no deal is reached by 21 January 2019 the Prime Minister is required to make a statement to MPs.  The Government would then have 14 days to decide how to proceed, and the House of Commons would be given the opportunity to vote on these alternate plans.  Although any motion to reject the Government’s proposal would not be legally binding, it would very likely catalyse the opposition and lead to an early general election or a second referendum.  In any of those circumstances, the EU has already signalled that it would be prepared to grant an extension to the Article 50 period. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 5, 2018 |
OFAC Issues Economic Sanctions Guidance on Digital Currencies

Click for PDF Over the last several months, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has expressed a clear interest in protecting the U.S. financial system from illicit activities in the digital currency space and has posited that transactions involving digital currencies be treated similarly to transactions involving traditional fiat currency.[1]  OFAC released Frequently Asked Questions (FAQs) on March 19 and June 6, 2018 that addressed the treatment of digital currencies.  In particular, the FAQs suggest that compliance obligations apply to digital currencies in the same manner as they would apply to traditional fiat currencies.[2]  Moreover, the FAQs note that OFAC may add digital currency addresses associated with blocked persons to its List of Specially Designated Nationals (SDN List) and put the onus on individuals[3] engaging in such transactions to screen and ensure that they are not dealing with banned persons.[4]  Finally, an Executive Order from President Trump and related guidance from OFAC prohibited transactions involving “petro,” a digital currency issued by the Venezuelan government to evade U.S. sanctions.[5] Through this series of FAQs, OFAC has begun to stake out its position on certain compliance obligations for digital currency transactions as well as OFAC sanctions for those who use digital currency for illicit transactions.  However, key questions still remain around the scope and application of such obligations.  We discuss OFAC’s guidance on digital currencies in more detail below. FAQ 559: Definitions of “virtual currency,” “digital currency,” “digital currency wallet,” and “digital currency address” for purposes of OFAC sanctions programs OFAC’s FAQ 559 defined “virtual currency” as “a digital representation of value that functions as (i) a medium of exchange; (ii) a unit of account; and/or (iii) a store of value; is neither issued nor guaranteed by any jurisdiction; and does not have legal tender status in any jurisdiction.”[6]  Similarly, OFAC defined the broader term, “digital currency,” which involves “sovereign cryptocurrency, virtual currency (non-fiat), and a digital representation of fiat currency.”[7]  Next, it was explained that a “digital currency wallet” is typically a software application that holds, stores, and transfers digital currency.[8]  And finally, the FAQ explained that a “digital currency address” consists of “an alphanumeric identifier that represents a potential destination for a digital currency transfer.”[9]  These definitions are used throughout OFAC’s other FAQs. FAQ 560: Compliance obligations for digital currency and traditional fiat currency In FAQ 560, OFAC indicated its view that individuals are subject to identical compliance obligations regardless of whether a transaction involves digital currency or traditional fiat currency,[10] including prohibitions on the following:  trade or other transactions with persons on OFAC’s SDN List; “unauthorized transactions prohibited by OFAC sanctions, such as dealings with blocked persons or property, or engaging in prohibited trade or investment-related transactions”; and transactions involving entities in which a blocked person has an ownership interest of 50 percent or more.[11]  These restrictions include “transactions that evade or avoid, have the purpose of evading or avoiding, cause a violation of, or attempt to violate prohibitions imposed by OFAC under various sanctions authorities.”[12]  Accordingly, OFAC warns that “persons that provide financial, material, or technological support for or to a designated person may be designated by OFAC under the relevant sanctions authority.”[13] OFAC recommends that individuals should develop a compliance solution that is tailored to each circumstance.  In particular, the FAQ states that “technology companies; administrators, exchangers, and users of digital currencies; and other payment processors should develop a tailored, risk-based compliance program, which generally should include sanctions list screening and other appropriate measures.”[14] FAQ 561: Using the SDN List to sanction the illicit use of digital currencies OFAC recognizes in FAQ 561 that there is a “growing and evolving threat posed by malicious actors using new payment mechanisms” and is determined to sanction those who use digital currency and other emerging payment systems to conduct prohibited financial transactions and evade United States sanctions.[15]  Accordingly, the FAQ explains that in order “[t]o strengthen our efforts to combat the illicit use of digital currency transactions under our existing authorities, OFAC may include as identifiers on the SDN List specific digital currency addresses associated with blocked persons” (emphasis added).[16]  This practice of using the SDN list would mirror OFAC’s current practice of adding people and governments to such list and would enable OFAC and other users to screen for digital currency addresses. FAQ 562: Identifying digital currency-related information on the SDN List In FAQ 562, OFAC recognizes that although it may add digital currency addresses to the SDN List, those address listings are not likely to be exhaustive.[17]  Consequently, OFAC states that individuals should take the necessary steps to block questionable digital currencies and file reports with OFAC if and when they identify digital currency identifiers or wallets that they believe are owned by or are “associated with[] an SDN” (emphasis added).[18] FAQ 563: Format of digital currency addresses on the SDN List OFAC explains that the structure of a digital currency address on the SDN List will include a currency’s unique alphanumeric identifier and will identify the specific digital currency to which the address corresponds (e.g., Bitcoin (BTC), Litecoin (LTC), petro (PTR), etc.).[19] FAQ 594: Querying a digital currency address using OFAC’s Sanctions List Search tool OFAC confirmed that it is not possible to query for digital currency addresses using OFAC’s Sanctions List Search Tool.[20]  Instead, FAQ 594 recommends that OFAC will use its SDN List to screen for listed digital currency addresses.[21] OFAC’s Guidance and President Trump’s Executive Order Concerning Venezuela On March 19, 2018, OFAC released a set of FAQs to deal with the situation in Venezuela at the same time President Trump issued Executive Order 13827 on “Taking Additional Steps to Address the Situation in Venezuela” (“Executive Order”).[22]  The Executive Order aimed to combat Venezuela’s attempts to use digital currencies to bypass sanctions that were implemented against it by the United States.[23]  Specifically, the Executive Order bans individuals from engaging in transactions involving “any digital currency, digital coin, or digital token that was issued by, for, or on behalf of the Government of Venezuela on or after January 9, 2018.”[24]  In February 2018, the Venezuelan government launched a digital currency known as the “petro” to try to enable the national oil company of Venezuela, Petróleos de Venezuela, S.A., to engage in transactions that were not denominated in U.S. Dollars.  OFAC’s FAQ 564 confirmed that the phrases “digital currency, digital coin, or digital token” referenced in the Executive Order include the petro and petro-gold.[25] Concluding Thoughts Through issuing a series of FAQs, OFAC has begun to stake out its position on certain compliance obligations for digital currency transactions as well as OFAC sanctions for those who use digital currency for illicit transactions.  However, key questions still remain around the scope and application of such obligations.  For example, it is unclear how broadly OFAC will apply its definitions of “virtual currency” and “digital currency” to various cryptoassets that are fundamentally unlike major cryptocurrencies such as bitcoin.  Also, under FAQ 562, it is unclear to what extent an entity is “associated” with an SDN and when parties are obligated to block questionable digital currencies and file reports with OFAC.  Further, it is unclear under FAQ 560 as to what specifically should be included within a “tailored, risk-based compliance program, which include[s] . . . sanctions list screening and other appropriate measures.” The FAQs also fail to address significant practical concerns.  For example: To what extent do parties have the technical abilities to block incoming transactions?  Are there exceptions for companies that are hacked and subsequently forced to pay ransom to an address on the SDN List?  How will OFAC address the use of private blockchain addresses?  These uncertainties highlight the complexity and evolving nature of digital currency transactions and blockchain technology and, perhaps more importantly, they suggest the need for additional guidance from OFAC. [1] See Statements & Remarks, U.S. Department of the Treasury, U.S. Department of the Treasury Under Secretary Sigal Mandelker Speech before the Securities Industry and Financial Markets Association Anti-Money Laundering & Financial Crimes Conference (Feb. 13, 2018), https://home.treasury.gov/news/press-release/sm0286. [2] Office of Foreign Assets Control, Frequently Asked Questions, Questions 559-63, 594, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_compliance.aspx [hereinafter “OFAC FAQ”]. [3] The term “individual,” as used by OFAC in its FAQs, generally encompasses persons, parties, corporations, and other entities subject to OFAC jurisdiction. See OFAC FAQ, Question 560. [4] Id. [5] Exec. Order No. 13827, 83 Fed. Reg. 12469 (Mar. 21, 2018). [6] OFAC FAQ, Question 559. [7] Id. [8] Id. [9] Id. [10] OFAC FAQ, Question 560. [11] Id. [12] Id. [13] Id. [14] Id. [15] OFAC FAQ, Question 561. [16] Id. (emphasis added). [17] OFAC FAQ, Question 562. [18] Id. (emphasis added). [19] OFAC FAQ, Question 563. [20] OFAC FAQ, Question 594. [21] Id. [22] Exec. Order No. 13827, 83 Fed. Reg. 12469 (Mar. 21, 2018). [23] Id. [24] Id. [25] Office of Foreign Assets Control, Frequently Asked Questions, Question 564, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Lee and Jeffrey Steiner. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade or Financial Institutions practice groups: International Trade Group – United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) International Trade Group – Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) Financial Institutions Group: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Carl E. Kennedy – New York (+1 212-351-3951, ckennedy@gibsondunn.com) James O. Springer – Washington, D.C. (+1 202-887-3516, jspringer@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 25, 2018 |
U.S. Authorizes Sanctions for Election Interference

Click for PDF In a recent client alert we foreshadowed the Trump administration taking an aggressive stance on its sanctions policy in the lead-up to the U.S. midterm elections in November. In a new development, on Wednesday, September 12, 2018, President Trump signed Executive Order 13848 on Imposing Certain Sanctions in the Event of Foreign Interference in a United States Election (“E.O. 13848”). E.O. 13848 declares the threat of foreign interference in U.S. elections a national emergency and authorizes sanctions on various non-U.S. actors to address the threat of future election meddling. E.O. 13848 (i) introduces broad sanctions with respect to targeted foreign persons determined to have interfered with a U.S. election directly or indirectly; (ii) introduces a specific analysis and reporting process to identify foreign interference with U.S. elections as well as the foreign persons responsible for it; and (iii) requests recommendations for the President, including remedial measures and whether additional sanctions against targeted foreign persons may be appropriate. The issuance of E.O. 13848 should be seen against the background of ongoing discussions on alleged Russian efforts to target the United States in the 2016 election and amid fears that similar interference and discussion will impact the November midterm elections.  Specifically, E.O. 13848 references the 2017 Intelligence Community Assessment—a report from the Central Intelligence Agency, the Federal Bureau of Investigation and the National Security Agency—which assessed that Russian activities in the run-up to the 2016 presidential election represented a significant escalation in a long history of Russian attempts to interfere in U.S. domestic politics. With E.O. 13848, President Trump acted both on the perceived threat to the U.S. electoral process and also, some might argue, in an effort to avoid proposed sanctions legislation in Congress, discussed below.  The fact that President Obama had already issued an E.O.[1] which provided for sanctions against any person found to be involved in election interference, means that, at very least, some of the provisions of this new E.O. are redundant and that President Trump wanted to emphasize that he, too, was concerned about election interference. In the E.O., President Trump explains the reason for the E.O. as follows “[a]lthough there has been no evidence of a foreign power altering the outcome or vote tabulation in any United States election, foreign powers have historically sought to exploit America’s free and open political system.  In recent years, the proliferation of digital devices and internet-based communications has created significant vulnerabilities and magnified the scope and intensity of the threat of foreign interference, as illustrated in the 2017 Intelligence Community Assessment.” While the current public discussion and pending Congressional legislation focus on Russia, the new E.O. 13848 does not.  Instead, its sanctions could target foreign persons anywhere in the world through the imposition of secondary sanctions, measures that have been developed to penalize non-U.S. persons for sanctions violations.  Director of National Intelligence Dan Coats stated that, in addition to Russia, the U.S. intelligence community is focused on the activities of China, Iran, and North Korea.[2]  So far, no foreign persons have yet been identified and targeted under the authority set forth in E.O. 13848. Post-Election Review Process Section 1 of E.O. 13848 provides for a detailed process in which the Director of National Intelligence, in consultation with other U.S. government agencies, will undertake an assessment not later than 45 days of the conclusion of the election, analyzing any information indicating that a foreign government, or any person acting as an agent of or on behalf of a foreign government, has acted with the intent or purpose of interfering in that election is to be prepared.[3] This will then be followed by the preparation of a report by the Attorney General and the Secretary of Homeland Security.  This report must evaluate, within 45 days of receiving the assessment, (i) the extent to which any foreign interference that targeted election infrastructure materially affected the security or integrity of that infrastructure, the tabulation of votes, or the timely transmission of election results; and (ii) if any foreign interference involved activities targeting the infrastructure of, or pertaining to, a political organization, campaign, or candidate, the extent to which such activities materially affected the security or integrity of that infrastructure, including by unauthorized access to, disclosure or threatened disclosure of, or alteration or falsification of, information or data. The report also must include recommendations regarding remedial actions to be taken by the U.S. Government, other than sanctions against targeted foreign persons. Determination of Targeted Foreign Persons Following the transmission of the assessment and the report, the Secretary of the Treasury will review the assessment and the report and, in consultation with the Secretary of State, the Attorney General, and the Secretary of Homeland Security, shall impose all appropriate sanctions against targeted foreign persons. Targeted foreign persons, according to section 2 (a) of E.O. 13848, are any foreign persons determined in the above described process: (i) to have directly or indirectly engaged in, sponsored, concealed, or otherwise been complicit in foreign interference in a United States election; (ii) to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any activity described in subsection (a)(i) of section 2 E.O. 13848 or any person whose property and interests in property are blocked pursuant to this order; or (iii) to 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 or interests in property are blocked pursuant to this order. Broad Sanctions against Targeted Foreign Persons The sanctions authorized by E.O. 13848 would block the U.S. property of targeted foreign persons[4] , place targeted foreign persons on the Specially Designated National and Blocked Person List and broadly prohibits dealings with or facilitating dealings of targeted foreign persons.[5]  Finally, section 6 of E.O. 13848 suspends entry into the United States of such targeted foreign persons.  Notably, E.O. 13848 does not purport to sanction the Russian banks that have been called out in almost every piece of sanctions legislation that is pending before Congress. Additional Sanctions to be Determined on a Case-by-Case Basis Also, in addition to the above sanctions, the Secretary of State and the Secretary of the Treasury, in consultation with the heads of other appropriate agencies, will jointly prepare a recommendation for the President as to whether further sanctions against foreign persons may be appropriate in response to the identified foreign interference.  The list of the possible additional sanctions is broad and includes most types of sanctions that we have seen in the past.[6] Parallel Legislative Process Several sanctions bills are currently pending in Congress, most notably the Defending Elections from Threats by Establishing Redlines (“DETER“) Act (S. 2313, H.R. 4884) Act and the Defending American Security from Kremlin Aggression Act of 2018 (S. 3336). DETER Act The DETER Act suggests several new sanctions, yet leaves a level of executive discretion on the full scope of sanctions to implement.  Furthermore, additional sanctions would only be triggered in case there is a finding that Russia interfered in a U.S. election.  The DETER Act seeks to prevent and penalize Russia’s interference in U.S. elections by, among other measures, blocking the assets of Russian oligarchs and major Russian companies if the U.S. Director of National Intelligence determines that the Russian government, or any person acting on its behalf, “knowingly engaged in interference in a United States election.“[7]  The DETER Act was introduced in the Senate in January 2018 by Senator Chris Van Hollen (D-MD), with Senator Marco Rubio (R-FL) as a co-sponsor, and was subsequently referred to the Committee on Banking, Housing, and Urban Affairs.  Since then it has picked up a dozen additional co-sponsors, including Senators Lindsey Graham (R-SC) and Susan Collins (R-ME).  In the House of Representatives, the bill was introduced in January 2018 by Rep. Ileana Ros-Lehtinen (R-FL) and presently has 25 co-sponsors from both parties. Notably, the proposed legislation seeks to block the U.S. assets of Rosneft, Gazprom, and Lukoil, Russian companies in the Russian defense and intelligence sectors, Russian state-owned entities, and senior Russian political figures or oligarchs upon a finding of election interference by the U.S. intelligence community.  The DETER Act would block the assets of those political figures and oligarchs previously identified by OFAC.  Section 241 of Countering America’s Adversaries Through Sanctions Act (“CAATSA“) required OFAC to publish a report on January 29, 2018 identifying “the most significant senior foreign political figures and oligarchs in the Russian Federation,“[8] (the “Section 241 List“).  The Treasury Department issued the report shortly before midnight on the due date, publicly naming 114 senior Russian political figures and 96 oligarchs.[9]  The report did not result in any sanctions or legal repercussions.  At the time, most observers were highly critical of the Section 241 List, claiming that it demonstrated that the Trump administration was failing to adequately address Congressional intent to punish Moscow.  Interestingly, almost all of the oligarchs designated by OFAC on April 6, 2018 originally appeared on the Section 241 List (but not all oligarchs on the Section 241 List were designated by OFAC on April 6).[10]  The bill would designate all persons on the Section 241 List.  In addition, the bill seeks to block the U.S. assets of six Russian state-owned financial institutions: (1) Sberbank, (2) VTB Bank, (3) Gazprombank, (4) Vnesheconombank, (5) Bank of Moscow, and (6) Rosselkhozbank. Defending American Security from Kremlin Aggression Act of 2018 Defending American Security from Kremlin Aggression Act of 2018 (S. 3336) was introduced on August 1, 2018 by a bipartisan group of senators including Senator Lindsey Graham (R-SC) and five bipartisan co-sponsors: Senators Robert Menendez (D-NJ), Cory Gardner (R-CO), Benjamin Cardin (D-MD), Jeanne Shaheen (D-NH) and the late John McCain (R-AZ).  Senator Graham dubbed it the “sanctions bill from hell,” and indeed it threatens to sanction wide swaths of the Russian economy.[11] Most notably, in a new Section 237 added to CAATSA, described in Section 601 of S. 3336, the President is directed to impose sanctions against any person that “sells, leases, or provides to the Russian Federation goods, services, technology, financing, or support” of a certain amount[12] that “could directly and significantly contribute to the Russian Federation’s (1) ability to develop crude oil resources located in the Russian Federation; or (2) production of crude oil resources in the Russian Federation, including any direct and significant assistance with respect to the construction, modernization, or repair of infrastructure that would facilitate the development of crude oil resources located in the Russian Federation.” These bills propose a range of sanctions measures, including, depending on the bill, broad sanctions against seven Russian financial institutions, restrictions on Russian sovereign debt, energy sector sanctions, and other measures. If passed, the sanctions could limit the president’s discretion on sanctions policy, much as CAATSA sought to do, as we had highlighted in a last year’s client alert. Effect of Executive Order on Pending Legislation It is a possibility that the Executive Order could dissuade Congress from taking further action on Russian sanctions.  With the Executive Order enacted, legislators might be of the opinion that less room and reason are left for the pending legislation.  That seems unlikely, however, as several Senators have already criticized the Executive Order for being too weak.  Senator Chris Van Hollen, who introduced the DETER Act, characterized the executive order as a version of the DETER Act but “without teeths“.[13]  “As I look at this, it seems aimed more at deterring congressional action on the Deter Act than deterring Putin’s interference in our elections,” Senator Van Hollen said.[14]  Likewise, Senator Lindsey Graham, who introduced the Defending American Security from Kremlin Aggression Act, said: “Something is better than nothing, but I doubt it will be a substitute for legislation.“[15] It therefore remains likely that Congress will push ahead with sanctions legislation that would, side by side with E.O. 13848, result in even broader and tougher sanctions, specifically targeting Russia. Conclusion The broad scope of sanctions announced in E.O. 13848 and the generic reference to foreign persons might lead to a substantial broadening of U.S. sanctions, in both substance and reach. Considering the time frame allotted to the various steps of the assessment, review and finally potential listing of targeted foreign persons, it is possible this process might last well into 2019 before any listings actually take place. However, if reports begin to surface regarding Russian- or other country interference in the upcoming, November midterm elections, businesses should closely assess whether any determinations under the new E.O., could impact their business relationships with companies with ties to countries where the interference originates. [1]   Executive Order 13694 of April 1, 2015, as amended by Executive Order 13757 of December 28, 2016, is executive order that targets, inter alia, attacks on the IT systems with the purpose or effect of interfering with or undermining election processes and institutions.  This executive order remains in effect and President Trump could opt to use it to issue sanctions alongside those described in E.O. 13848. [2]   Chris Riotta, Trump signs executive order imposing sanctions on foreign election meddlers, Independent, (Sept. 12, 2018), available  at https://www.independent.co.uk/news/world/americas/us-politics/trump-us-election-meddling-russia-executive-order-conspiracy-dan-coats-john-bolton-a8535051.html and http://www.foxnews.com/politics/2018/09/12/trump-signs-executive-order-to-impose-sanctions-against-any-election-interference.html. [3]   Section 1 (f) E.O. 13848 notes that not later than 30 days following the date of this order, the Secretary of State, the Secretary of the Treasury, the Attorney General, the Secretary of Homeland Security, and the Director of National Intelligence shall develop a framework for the process that will be used to carry out their respective responsibilities pursuant to this order.  The framework, which may be classified in whole or in part, shall focus on ensuring that agencies fulfill their responsibilities pursuant to this order in a manner that maintains methodological consistency; protects law enforcement or other sensitive information and intelligence sources and methods; maintains an appropriate separation between intelligence functions and policy and legal judgments; ensures that efforts to protect electoral processes and institutions are insulated from political bias; and respects the principles of free speech and open debate. [4]   Section 5 explains that to the blocking of targeted persons’ U.S. property also prohibits (i) the making of any contribution or provision of funds, good, or services by, to, or for the benefit of such foreign targeted person; and (ii) the receiving of any contribution or provision of funds, goods, or services from any such targeted foreign person. [5]   Furthermore, according to section 4 of E.O. 13848, U.S. persons are also prohibited from making donations of certain humanitarian articles such as food, clothing, and medicine to such targeted foreign persons. [6]   It includes (i) blocking and prohibiting all transactions in a person’s property and interests in property subject to United States jurisdiction; (ii) export license restrictions under any statute or regulation that requires the prior review and approval of the United States Government as a condition for the export or re-export of goods or services; (iii) prohibitions on United States financial institutions making loans or providing credit to a person; (iv) restrictions on transactions in foreign exchange in which a person has any interest; (v) prohibitions on transfers of credit or payments between financial institutions, or by, any financial institution, for the benefit of a person; (vi) prohibitions on United States persons investing in or purchasing equity or debt of a person; (vii) exclusion of a person’s alien corporate officers from the United States; (viii) imposition on a person’s alien principal executive officers of any of the sanctions described in this section; or (ix) any other measures authorized by law. [7]   H.R. 4884, Section 201 (a). [8]   CAATSA, Title II, § 241. [9]   See U.S. Dep’t of the Treasury, Report to Congress Pursuant to Section 241 of the Countering America’s Adversaries Through Sanctions Act of 2017 Regarding Senior Foreign Political Figures and Oligarchs in the Russian Federation and Russian Parastatal Entities (Unclassified) (Jan. 29, 2018), available at https://www.scribd.com/document/370313106/2018-01-29-Treasury-Caatsa-241-Final. [10]   The one exception is Igor Rotenberg.  Although Igor Rotenberg did not appear on the Section 241 List, his father and uncle were included.  According to the April 6 OFAC announcement, Igor Rotenberg acquired significant assets from his father, Arkady Rotenberg, after OFAC designated the latter in March 2014.  Specifically Arkady Rotenberg sold Igor Rotenberg 79 percent of the Russian oil and gas drilling company Gazprom Burenie.  Igor Rotenberg’s uncle, Boris Rotenberg, owns 16 percent of the company.  Like his brother Arkady Rotenberg, Boris Rotenberg was designated in March 2014. [11]   Patricia Zengerle, U.S. senators introduce Russia sanctions ‘bill from hell,’ Reuters (Aug. 2, 2018), available at https://www.reuters.com/article/us-usa-russia-sanctions/us-senators-introduce-russia-sanctions-bill-from-hell-idUSKBN1KN22Q. [12]   $1,000,000 per transaction or $5,000,000 over a 12-month period. [13]   Julian E. Barnes and Nicholas Fandos, Lawmakers Dismiss White House Push to Fight Election Interference as Too Weak, N.Y. Times, Sept. 12, 2018, available at https://www.nytimes.com/2018/09/12/us/politics/trump-executive-order-election-interference-senate.html. [14]   Id. [15]   Id. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, Richard W. Roeder, Christopher Timura, Stephanie Connor, Henry C. Phillips and R.L. Pratt. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade or Financial Institutions practice groups: International Trade Group – United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) International Trade Group – Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 13, 2018 |
Essar v. Norscot: Are The Costs Associated With Third Party Funding Recoverable?

London partner Jeffrey Sullivan is the author of “Essar v. Norscot: Are The Costs Associated With Third Party Funding Recoverable?” [PDF]  published in the September 2018 issue of Transnational Dispute Management.

August 21, 2018 |
The Trump Trade Tariffs: A Roadmap for Private Equity Executives

Click for PDF Navigating Uncertainty and Volatility for Your Portfolio Companies As the daily headlines attest, trade tariffs – both those recently implemented and those currently pending or contemplated – continue to create a dynamic and challenging business environment, including for portfolio companies of private equity sponsors. With that in mind, our International Trade and Private Equity Practice Groups have collaborated to prepare the following “roadmap” for private equity executives to help their portfolio companies identify their exposure to and mitigate the impact of tariffs on their imports and exports, and to otherwise successfully navigate these complicated conditions. We hope you find it useful. Our lawyers remain available to further assist you with respect to these matters and any related developments. The Trump Trade Tariffs: A Roadmap for Private Equity Executives (click on link) Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s International Trade or Private Equity practice groups, or any of the following: International Trade Group: Judith Alison Lee – Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Private Equity Group: George P. Stamas – Washington, D.C./New York (+1 202-955-8280/+1 212-351-5300, gstamas@gibsondunn.com) Mark D. Director – Washington, D.C./New York (+1 202-955-8508/+1 212-351-5308, mdirector@gibsondunn.com) Steven R. Shoemate – New York (+1 212-351-3879, sshoemate@gibsondunn.com) Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com) Alexander D. Fine – Washington, D.C./New York (+1 202-955-8209/+1 212-351-5333, afine@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 14, 2018 |
CFIUS Reform: Our Analysis

Click for PDF On August 13, 2018, President Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY 2019 NDAA”), an omnibus bill to authorize defense spending that includes—among other measures—legislation that will significantly expand the scope of inbound foreign investments subject to review by the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”).  Named for John McCain, the senior senator from Arizona who is battling brain cancer after six terms in the Senate, the FY 2019 NDAA incorporates the Foreign Investment Risk Review Modernization Act (“FIRRMA”), legislation that was proposed late last year to reform the CFIUS review process, as well as the new Export Control Reform Act of 2018 (“ECRA”). CFIUS is an inter-agency committee authorized to review the national security implications of investments made by foreign companies and persons in U.S. businesses (“covered transactions”), and to block transactions or impose measures to mitigate any threats to U.S. national security.[1]  Established in 1975 and last reformed in 2007, observers have pointed to an antiquated regulatory framework that hinders the Committee’s ability to review the national security implications posed by an increasing number of Chinese investments targeting sensitive technologies in the United States.  During its consideration, FIRRMA enjoyed bipartisan congressional support and was endorsed several times in the process by the Trump administration, but encountered a fair amount of criticism from U.S. industry groups.  After months of intense negotiation between the House, Senate, and the Trump administration, the final version of the bill includes several important changes from its earlier iterations, which we described here and here. Summary of Key Changes After months of intense lobbying and negotiations, the House and Senate have agreed upon language that will expand the scope of transactions subject to CFIUS review beyond those in which a foreign company gains control of a U.S. business.  The Committee will now have the authority to review certain real estate transactions, as well as investments that impact the critical infrastructure and critical technologies sector, even if the foreign acquirer does not have control over such businesses.  Provisions that would have included certain outbound investments in the scope of covered transactions have been abandoned in favor of language requiring updated U.S. export controls to regulate “emerging” and “foundational” technologies.  Furthermore, the CFIUS review process will be reformed in several significant ways, as FIRRMA provides for mandatory short-form “light” filings and tightens the timeframe for CFIUS reviews.  Taken together, these changes represent a significant departure from the Committee’s past practice. FIRRMA includes the following reforms: Expanded Scope of Review.  FIRRMA expands the scope of transactions subject to the Committee’s review by granting CFIUS the authority to examine the national security implications of a foreign acquirer’s non-controlling investments in U.S. businesses that deal with critical infrastructure, critical technology, or the personal data of U.S. citizens.  FIRRMA also provides CFIUS with authority to review real estate transactions—including leases, sales, and concessions—involving air or maritime ports or in close proximity to sensitive U.S. government facilities.  Critically, as we discuss below, a carve out for indirect investments through investment funds may exempt certain transactions involving private equity funds from the Committee’s expanded jurisdiction.  According to Frequently Asked Questions (“FAQs”) published by the U.S. Department of the Treasury, the FIRRMA provisions which expand the scope of transactions subject to review will take effect at a later date, most likely after the publication of implementing regulations.[2] Extended Formal Timeline.  Effective immediately, FIRRMA extends the Committee’s initial review period from 30 to 45 days, and authorizes CFIUS to extend the subsequent 45-day investigation phase by 15 days “in extraordinary circumstances” (the Senate draft had proposed a 30 day extension period).  Although these measures provide for longer formal review times, other changes to the review process will eliminate much of the uncertainty with regard to the timing of a CFIUS review, and could ultimately cut down on the duration of the Committee’s deliberations.  According to the Treasury Department FAQs, notices that were accepted on or before the effective date of FIRRMA will remain subject to a 30-day review period. “Light” Filings.  In lieu of the lengthy notice that is currently required in voluntary CFIUS filings, new  “light” filings may now be submitted for certain transactions instead of the lengthy voluntary notices that are currently required.  FIRRMA makes filing with the Committee mandatory in certain circumstances, but provides the Committee the authority to set the precise criteria.  The streamlined “light” filing review process will go live on the earlier of 18 months after FIRRMA’s enactment or 30 days after the publication of implementing regulations.  Notably, FIRRMA authorizes the Committee to conduct pilot programs to implement the new review procedure for 18 months after the enactment of the bill. Filing Fee.  FIRRMA also imposes a filing fee, but again authorizes the Committee to shape this requirement in its implementing regulations. Expanded Scope of Transactions Subject to CFIUS Review 1.      Real Estate Transactions The Committee has focused on the national security risks associated with foreign real estate transactions in close proximity to sensitive U.S. government installations or military bases, but until now it did not have the authority to address transactions that did not involve the acquisition of an existing U.S. business, including leases or concessions.  FIRRMA effectively codifies the Committee’s standard practice of examining the proximity of a physical property to any sensitive military or U.S. government facility, as well as key U.S. air or maritime ports, but it also provides the Committee with the authority to examine a wider array of real estate transactions.  However, FIRRMA also gives the Committee the authority to prescribe regulations that limit or clarify the scope of this expanded jurisdiction over real estate transactions.  For example, the Committee is empowered to narrow the types of “foreign persons” that are required to seek the Committee’s approval. Specifically, FIRRMA authorizes CFIUS to review the purchase or lease by, or concessions to, a foreign company of U.S. real estate that is: “located within or will function as part of, an air or maritime port;” “in close proximity to a U.S. military installation or another facility or property of the United States government that is sensitive for reasons relating to national security;” “could reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility or property;” “could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance;” and “meets such other criteria as the Committee prescribes by regulation, except that such criteria may not expand the categories of real estate to which this clause applies ….” At first glance, these provisions provide a drastic expansion of the Committee’s authority over a foreign person’s non-controlling investments in U.S. real estate.  However, FIRRMA gives the Committee significant leeway to propose regulations that would limit the scope of real estate transactions subject to review.  First, the bill exempts the purchase of any “single housing unit” as well as real estate in “urbanized areas” as defined by the U.S. Census Bureau, except as otherwise prescribed by the Committee in regulations in consultation with the Defense Department.  Second, FIRRMA specifies that the Committee shall prescribe regulations to ensure that the term “close proximity” “refers only to a distance or distances within which the purchase, lease or concession of real estate could pose a national security risk” in connection to a U.S. government facility.  Third, FIRRMA allows for the further narrowing of the scope of this provision by granting the Committee authority to prescribe regulations that further define the term “foreign person” for purposes of such transactions. This last limitation is perhaps the most important.  As written, the Committee would appear to have jurisdiction over any real estate transaction that falls within the categories specified above, even if the foreign person is only a passive, minority investor.  FIRRMA grants the Committee the authority to limit the transactions subject to its review by providing that it “shall specify criteria to limit the application of such clauses to the investments of certain categories of foreign persons,” and that such criteria shall take into consideration “how a foreign person is connected to a foreign country or foreign government, and whether the connection may affect the national security of the United States.”  We expect such guidance to consider the extent to which foreign persons from countries with a heightened security risk—in particular, China—would have control or physical access to such properties. 2.      Critical Infrastructure, Critical Technologies and Sensitive Data FIRRMA will also expand the scope of transactions subject to the Committee’s review to include—subject to further implementing regulations—“any other investment” by a foreign person in an unaffiliated U.S. business or “change in the rights that a foreign person has” with regard to any U.S. business that: owns, operates, manufactures, supplies or services critical infrastructure; produces, designs, tests, manufactures, fabricates or develops one or more critical technologies; or maintains or collects sensitive personal data of United States citizens that may be exploited in a manner that threatens national security. The type of non-controlling “other investments” that trigger the Committee’s review includes several types of non-passive investments.  Such investments subject to CFIUS jurisdiction include those which afford a foreign person “access to any material non-public technical information in the possession” of the U.S. business; “membership or observer rights” or “the right to nominate an individual” to the board of directors or equivalent governing body of the U.S. business; and “any involvement, other than through voting of shares, in substantive decision-making” of the U.S. business with regard to: the use, development, acquisition, safekeeping, or release of sensitive personal data of United States citizens maintained or collected” by the U.S. business; the use, development, acquisition or release of critical technologies, or the management, operation, manufacture or supply of critical infrastructure. Again, FIRRMA grants CFIUS the authority to limit this expanded scope in several important ways.  First, the definition of the term “material nonpublic technical information” is subject to further regulations prescribed by the Committee, and is limited to information not available in the public domain that “provides knowledge, know-how, or understanding … of the design, location, or operation of critical infrastructure” or “is necessary to design, fabricate, develop, test, produce or manufacture crucial technologies, including processes, techniques or methods.”  FIRRMA excludes financial information regarding the performance of a U.S. business from the definition of material nonpublic technical information.  Second, FIRRMA grants the Committee the authority to prescribe regulations providing guidance on the types of transactions that are considered to be “other investment” for purposes of this provision. Moreover, FIRRMA delegates authority to the Committee to prescribe regulations that limit the types of investments in critical infrastructure that are subject to review to include “the subset of critical infrastructure that is likely to be of importance to the national security of the United States,” including an enumeration of specific types and examples. As with real estate transactions, FIRRMA limits the scope of these provisions by granting the Committee the authority to prescribe regulations that further define the term “foreign person” for purposes of such transactions.  The extent to which this provision evolved in the negotiation process is also noteworthy.  The final language replaces provisions of the Senate draft that would have exempted transactions from certain U.S. allies or those with parallel procedures to review foreign investment.  The final version of the bill also eliminated heightened scrutiny for transactions involving countries of “special concern.”  Instead, the FIRRMA expresses the “sense of Congress” that the Committee may consider the involvement of such countries when assessing the national security risks of a proposed transaction. FIRRMA also subjects to CFIUS review any “other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent” the Committee’s review. 3.      A Private Equity Exception: Indirect Investments Through Investment Funds An express carve-out for indirect foreign investment through certain investment funds may prevent many transactions by private equity funds from falling into the Committee’s expanded jurisdiction.  Specifically, FIRRMA clarifies that an indirect investment by a foreign person in the types of U.S. businesses described above through an investment fund shall not trigger CFIUS review under certain circumstances, including where: the fund is managed exclusively by a U.S. general partner, managing member, or equivalent; the advisory board does not control the fund’s investment decisions or the investment decisions of the general partner, managing member, or equivalent; and the foreign person does not otherwise have the ability to control the fund or access to material nonpublic technical information as a result of its participation on the advisory board or committee. In this regard, if the foreign person is a limited partner and the fund is “managed exclusively” by U.S. persons, provided that the advisory board authority is limited accordingly, indirect investments by foreign persons through such funds will not be subject to CFIUS’ expanded jurisdiction over non-controlling “other investments,” as described above. 4.      Streamlined Review Process and Mandatory, “Light” Filings FIRRMA also seeks to streamline the CFIUS review process—a notoriously onerous procedure.  Under current practice, most CFIUS reviews commence when the parties to a transaction submit a joint voluntary notice, a lengthy filing that must include detailed information about the transaction, the acquiring and target entities, the nature of the target entity’s products, and the acquiring entity’s plans to alter or change the target’s business moving forward.[3] In practice, parties are expected to submit a “draft” notice to CFIUS prior to the commencement of the official 30-day review period, which provides the Committee and the parties with an opportunity to identify and resolve concerns before the official clock starts ticking.  In recent years, this informal review process has added a degree of unpredictability in terms of timing, as the “pre-filing” phase can consume several weeks.  FIRRMA requires that the Committee must respond to the draft pre-filing of a notice within 10 days, effectively closing a loophole CFIUS often used to manage its workflow and extend the transaction review period. The current CFIUS review process includes a 30-day initial review of a notified transaction, potentially followed by a 45-day investigation period, for a possible total of 75 days.  In certain circumstances, CFIUS may also refer a transaction to the President for decision, which must be made within 15 days.[4]  As the volume of transactions before the Committee has increased, it has become more common for CFIUS to ask parties to refile notices at the end of the official 75-day review period, thereby restarting the clock.  This has added a significant degree of uncertainty to the CFIUS review, compelling some parties to abandon deals or not to file at all. To address these timing issues, the bill extends the initial review period from 30 to 45 days, and authorizes CFIUS to extend the subsequent 45-day investigation phase by 15 days “in extraordinary circumstances” (the Senate draft had proposed a 30 day extension period).  The combination of these measures may allow longer official review times, but will eliminate much of the uncertainty associated with the timing of the process.  Critically, these new timeframes are effective immediately. In lieu of the lengthy voluntary notice required in the current CFIUS review process, FIRRMA authorizes parties to submit short form “declarations”—not to exceed 5 pages in length—at least 45 days prior to the completion of a transaction.  FIRRMA requires the Committee to respond to a declaration within 30 days of receipt by approving the transaction, requesting that the parties file a full written notice, or initiating a further review. FIRRMA generally authorizes CFIUS to prescribe regulations specifying the types of transactions for which such declarations will be required.  The bill also requires the submission of declarations for transactions by which a foreign entity in which a foreign government has a substantial interest acquires a substantial interest in U.S. critical infrastructure or critical technology companies.  This “mandatory filing” requirement is a significant departure from past practice, where all CFIUS filings were voluntary.  However, CFIUS is authorized not only to define “substantial interest,” thereby limiting the transactions that are subject to this requirement, but also to waive the declaration filing requirement if the investment is not directed by a foreign government or the foreign buyer has historically cooperated with CFIUS.  This provision could be used to ease the regulatory burden on a number of state-owned financial institutions, such as state-owned pension plans and investment funds, that are not controlled by a foreign government. In contrast to the updated procedures for the full review and investigation process, the declaration review process will not be effective immediately, but will go live on the earlier of 18 months after FIRRMA’s enactment or 30 days after the Secretary of the Treasury determines that the Committee has the regulations, organizational structure, personnel and other resources necessary to administer the new procedure.  FIRRMA authorizes the Committee to conduct pilot programs to implement the new review procedure for 18 months after the enactment of the bill. 5.      Filing Fees Prior to the passage of FIRRMA, there were no filing fees associated with submitting a transaction for CFIUS review.  The new legislation provides for the imposition of such fees.  The House version capped CFIUS fees at the lesser of one percent of the value of the transaction or $300,000 (adjusted for inflation).  The Senate version provided a list of criteria for CFIUS to consider when determining the fee, and would have allowed for the imposition of an additional fee when requested to prioritize the handling of filings.  The final version of FIRRMA retains the House caps and authorizes the Committee to set the fee based on certain enumerated criteria.  Fees will only be assessed for transactions requiring a written notice, not the shorter declarations. 6.      Regulation of Outbound Technology Transfers Through Export Controls The inclusion of the ECRA in the NDAA is a remarkable development in several ways.  First, the modernization of the United States’ primary authority for U.S. export controls on non-military items, the Export Administration Act of 1979 (“EAA”), has been an achievement just out of reach for Congress for decades.  Second, the ECRA grants the President authority to regulate and enforce export controls in several new ways, and specialists at the Department of Commerce will be busy for many months (and likely years) drafting regulations to implement these authorities.  Third, and most relevant to technology transfers, the inclusion of the ECRA in the NDAA is an acknowledgement by Congress that the export licensing process administered by the Department of Commerce Bureau of Industry and Security (“BIS”) is likely to be a better way to implement at least some of the policy objectives that motivated earlier iterations of FIRRMA. a.      Controls on Exports of Emerging and Foundational Technologies The ECRA replaces one of the most controversial provisions included in earlier versions of FIRRMA, which sought to include outbound investments—such as joint ventures or licensing agreements—in the list of covered transactions subject to CFIUS review.  As originally drafted, the CFIUS reform legislation would have subjected to CFIUS review any contribution (other than through an ordinary customer relationship) by a U.S. critical technology company of both intellectual property and associated support to a foreign person through any type of arrangement.  In its final form, the ECRA will require the President to establish, in coordination with the Secretaries of Commerce, Defense, Energy, and State, a “regular, ongoing interagency process to identify emerging and foundational technologies” that are essential to national security but not are not “critical technologies” subject to CFIUS review. In an effort to close gaps in the existing export controls regimes that do not restrict the transfer of such emerging or foundational technologies, the NDAA adopts the language of an earlier Senate draft requiring the Secretary of Commerce to establish controls on the export, re-export, or in-country transfer of such technology, including requirements for licenses or other authorizations. With several notable exceptions, Congress generally stops short of specifying how the Secretary of Commerce should establish such controls.  First, the bill requires exporters to obtain a license before exporting any emerging and foundational technologies to countries subject to an arms embargo, such as China. Second, the bill directs the Secretary of Commerce to not place additional licensing requirements on several types of transactions.  These include: The sale or license of a finished item and the provision of associated technology if the U.S. party to the transaction generally makes the finished item and associated technology available to its customers, distributors, and resellers; The sale or license to a customer of a product and the provision of integration services or similar services if the U.S. party generally makes such services available to its customers; The transfer of equipment and the provision of associated technology to operate the equipment if the transfer could not result in the foreign person using the equipment to produce critical technologies; The procurement by the U.S. party of goods or services, including manufacturing services, from a foreign person that is party to the transaction, if the foreign person has no rights to exploit any technology contributed by the U.S. person other than to supply the procured goods or services; and Any contribution and associated support by a U.S. person that is a party to the transaction to an industry organization related to a standard or specification, whether in development or declared, including any license or commitment to license intellectual property in compliance with the rules of any standards organization. Third, for several transaction types, the bill now shifts to the Department of Commerce the obligation to gather and consider the kinds of information on foreign ownership that would normally be included in CFIUS submissions.  If a proposed transaction involves joint venture, joint development agreement, or similar collaborative arrangement, the bill suggests that the Secretary of Commerce “require the applicant to identify, in addition to any foreign person participating in the arrangement, any foreign person with significant ownership interest in a foreign person participating in the arrangement.”[5] For those exporters operating in sectors that are identified as involving foundational or emerging technologies, such requirements could significantly increase the diligence they will need to conduct on counterparties, and at least some counterparties are likely to walk away from proposed transactions to avoid having to provide sensitive information regarding their ownership.  In addition, the new information gathered on foreign person participation and ownership is likely to lead Commerce to block transactions by denying license applications. b.         Addition of Defense Industrial Base Policy Considerations to Export Control Regulation and Licensing The ECRA also introduces two new policy considerations to the mix of policies the Department of Commerce is obligated to consider in its regulation of exports.  Historically, the EAA required the Department of Commerce to restrict the export of goods or technology that would significantly contribute to the military potential of other countries and to limit export controls to only those items that were militarily critical goods and technologies.[6]  Through these and other expressed policy objectives, Congress sought to promote export activity and to restrict it only when necessary.  In the ECRA, Congress introduces two new policy considerations that arguably shift U.S. export policy toward a more protectionist stance.  First, Congress directs the Secretary of Commerce to regulate exports so as to help preserve the qualitative military superiority of the United States.  Second, Congress directs the Secretary to regulate exports in ways that build and maintain the U.S. defense industrial base.[7] Congress provides the Secretary with specific direction on how to implement these new policy mandates.  In particular, the Secretary is to create a licensing procedure that will enable it to gather information to assess the impact of a proposed export on the U.S. defense industrial base.  To inform this assessment, the Secretary is to require applicants to provide information that would enable Commerce to determine whether the purpose or effect of the export would be to allow for the production of items relevant for the defense industrial base outside of the United States.[8]  ECRA further directs the Secretary to deny license applications when the proposed export would have a “significant negative impact” on the defense industrial base of the U.S. The Secretary can determine a proposed export would have a “significant negative impact” if it meets any one of three criteria: Whether the export would have the effect of reducing the availability or production of an item in the United States that is likely to be required by the Department of Defense (“DoD”) or other Federal department or agency for the advancement of national security; Whether the export would lead to a reduction in the production of an item in the United States that is the result of research and development carried out, or funded by the DoD or other Federal department or agency, or a federally funded research and development center; and Whether the export would lead to a reduction in the employment of U.S. persons whose knowledge and skills are necessary for the continued production in the U.S. of an item that is likely to be acquired by the DoD or other Federal department or agency for the advancement of national security.[9] These criteria are familiar ones to CFIUS and to CFIUS practitioners but are less so for many of those charged with administering the Department of Commerce’s export controls, and even lesser still for the many companies that rely on BIS export licensing to conduct business.  While it is unclear how BIS will specifically implement these new policy and licensing directives, we predict it will be difficult for many license applicants to gather and present the kind of information BIS will need to make its licensing determinations.  We also believe that the introduction of these defense industrial base considerations could make it more difficult for companies to obtain authorization to export their technologies generally. Final Thought Critically, most of the substantial changes mandated by FIRRMA will not take effect until the Committee has issued new regulations.  As a result, the true impact of the legislation will not be clear for some time.      [1]   CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA) (section 721) and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. Part 800.    [2]   U.S. Dep’t of the Treasury, FIRRMA FAQs, (Aug. 13, 2018) available at https://home.treasury.gov/sites/default/files/2018-08/FIRRMA-FAQs-8-13-18-v2-CLEAN.pdf.    [3]   31 C.F.R. §§ 800.401(a)-(b), 800.402(c).    [4]   31 C.F.R. § 800.506.    [5]   ECRA § 1758(a)(3)(C).    [6]   Export Administration Act of 1979, § §  3(2)(A) and 5(d).    [7]   ECRA, Section 1752(2)(B) and (C).    [8]   ECRA, Section 1756(d)(1) and (2).    [9]   ECRA, Section 1756(d)(3)(A)-(C). The following Gibson Dunn lawyers assisted in the preparation of this client update:  Judith Lee, Jose Fernandez, Christopher Timura, Stephanie L. Connor and R.L. Pratt. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade Group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 9, 2018 |
The “New” Iran E.O. and the “New” EU Blocking Statute – Navigating the Divide for International Business

Click for PDF On August 6, 2018, President Donald Trump issued a new executive order (the “New Iran E.O.”) authorizing the re-imposition of certain Iran-related sanctions.[1] As previously announced on May 8, 2018, and discussed in detail by Gibson Dunn here, the Trump administration opted to abandon the 2015 Iran nuclear deal—the Joint Comprehensive Plan of Action (the “JCPOA”)—and re-impose U.S. nuclear-related sanctions on the Iranian regime over the course of several months. The re-imposition of sanctions was subject to 90- and 180-day “wind-down” periods, the first of which expired on August 6, 2018. Accordingly, the New Iran E.O. authorizes the roll-back of certain types of sanctions relief provided under the JCPOA by terminating several Obama-era executive orders and formally effectuates the U.S. withdrawal from the JCPOA. In the words of President Trump, from here on out anyone doing business with Iran “will NOT be doing business with the United States.”[2] Simultaneous with the New Iran E.O., as foreshadowed in our May 21, 2018 client alert, the EU enacted Commission Delegated Regulation (EU) 2018/1100 (the “Re-imposed Iran Sanctions Blocking Regulation”), which supplements Council Regulation (EC) No 2271/96 (as amended, the “EU Blocking Statute”).  The combined effect of the EU Blocking Statute and the Re-imposed Iran Sanctions Blocking Regulation is to prohibit compliance by EU entities with U.S. sanctions on Iran which have been re-imposed following the U.S. withdrawal from the JCPOA.  The EU matched President Trump’s strident language with one senior EU official stating that “if EU companies abide by U.S. . . . sanctions they will, in turn, be sanctioned by the EU.”[3] These two actions appear to place multinational companies in an impossible bind between the inconsistent demands (and rhetoric) of powerful regulators. However, depending upon how Washington and EU Member States choose actually to implement their respective authorities this bind may prove navigable. As we have discussed in May and July of this year, the sanctions relief the United States offered under the JCPOA was limited. The “primary sanctions” that limit U.S. companies and persons from engaging with Iran have on the whole never been lifted. The principal sanctions relief provided by the United States have been of “secondary sanctions” that focus on non-U.S. companies’ transactions with Iran. These measures are designed to force non-U.S. firms to choose to either engage with Iran or the United States. In most cases, pursuant to the August 6 announcements these measures have or soon will return to the level they were prior to the implementation of JCPOA in January 2016. In some cases, the new regulations will broaden the scope of those sanctions to levels beyond those that existed prior to the JCPOA. In both the U.S. and European cases the language of the new regulations is broad and the statements from political leaders absolute. However, much as it was prior to the JCPOA the true impact of the U.S. sanctions and the EU counter-measures will be a function of the political and diplomatic appetite regulators on both sides of the Atlantic have for actually enforcing these measures. All of the sanctions and counter-sanctions are in large part discretionary. In pre-JCPOA times, the Obama Administration had similarly broad authorities to impose “secondary sanctions” on companies around the world for transactions with Iran – however, with the Administration’s clear goal of compelling Iran to the negotiating table and its concern about maintaining core diplomatic alliances, the Obama Administration actually imposed such sanctions only very sparingly. Similarly, the EU’s Blocking Statute has been in place in some form for nearly twenty years. In that time the EU and its member states – concerned about maintaining its relationships with Washington and not wanting to impose a lose-lose choice on its major corporations – have actually enforced these rules infrequently. The question going forward is whether the Trump Administration, the EU, and its various Member States will more forcefully and consistently enforce these discretionary and contradictory authorities. Early indications are that despite the language of the new regulations and the rhetoric of senior officials, there may be more flexibility on both sides of the Atlantic than it may seem. This does not remove the challenges from multinational companies eager to avoid angering either European or U.S. regulators, but it may provide a way forward. Background to the New Iran E.O. The publication of the New Iran E.O. is the latest in a series of steps the Trump administration has taken to fulfill President Trump’s campaign promise to withdraw from the JCPOA and re-impose sanctions on Iran. Following the administration’s announcement on May 8, 2018 that the U.S. would abandon the JCPOA, OFAC issued guidance indicating that the administration would allow certain activities authorized under the JCPOA to continue for specified “wind-down” periods, rather than immediately re-impose sanctions.[4] Further to this guidance, on June 27, 2018, OFAC announced that it was terminating authorizations issued pursuant to the JCPOA that had permitted limited engagement by U.S. persons and their foreign subsidiaries to undertake certain Iran-related activities.[5] As we noted in prior guidance, these authorizations were replaced with limited licenses permitting only the wind-down of previously permissible activities. The issuance of the New Iran E.O. marks the termination of the first wind-down period provided by these earlier actions. Pursuant to its provisions, OFAC is authorized to begin re-imposing the first tranche of secondary sanctions on or after August 7, 2018. In addition, as of August 7, 2018, the authorizations issued on June 28, 2018 permitting U.S. persons to wind-down their participation in contingent contracts for Iranian commercial passenger aviation and transactions involving Iranian-origin foodstuffs and carpets have been terminated.[6]U.S. persons are again prohibited from engaging in these activities. U.S. Sanctions Authorized for Re-imposition The New Iran E.O. authorizes the re-imposition of secondary sanctions previously rolled back under the JCPOA. This is a uniquely omnibus Executive Order and includes the framework for the reimposed sanctions that were reinstated as of August 7 as well as those that will be reinstated as of November 5. Applicable exceptions and conditions to these sanctions are also incorporated in the E.O. Sections of the New Iran E.O. implement provisions of various Iran-related legislation passed by Congress and revoke other executive orders from which the relevant sanctions-related provisions have been incorporated. In this regard, the New Iran E.O. attempts to consolidate the relevant secondary sanctions authorities into a single legal source, creating an unusually comprehensive executive order. The secondary sanctions available for imposition for these activities and for those sanctionable activities undertaken on or after November 5 include three general types of sanctions to be discretionarily imposed against entities for different activities and behaviors. First, the Order provides for blocking sanctions, such as those imposed against persons placed on the List of Specially Designated Nationals and Blocking Persons (the “SDN List”). Second, the Order provides for correspondent and payable-through account sanctions which prohibit or restrict U.S. banks from opening or maintaining U.S. accounts for designated foreign financial institutions, effectively cutting these foreign banks off from the U.S. financial system (and in some cases ostracizing them from U.S. dollar-based trade in general). Finally, the Order provides for menu-based sanctions permitting OFAC to select from several sanctions—from visa limitations to blocking sanctions—to impose against designated entities. Sanctions Applicable on or after August 7, 2018 The New Iran E.O. authorizes the imposition of secondary sanctions against foreign persons engaged in the activities described below on or after August 7, 2018: Blocking sanctions on non-U.S. persons who materially assist, sponsor, or provide support for or goods or services in support of the purchase or acquisition of U.S. dollars or precious metals by the Government of Iran;[7] Correspondent and payable-through account sanctions on foreign financial institutions that engage in significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;[8] Menu-based sanctions on non-U.S. persons who knowingly engage in: significant transactions to provide significant goods or services to Iran’s automotive sector;[9] the sale, supply, or transfer to or from Iran of certain materials, including graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;[10]or the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt;[11] Correspondent and payable-through account sanctions on foreign financial institutions that conduct or facilitate significant transactions related to the provision of significant goods or services to Iran’s automotive sector.[12]  Depending upon the seriousness of the conduct these sanctions could prohibit the opening of such accounts, strictly condition the maintenance of such accounts, or even require that such accounts be closed. Sanctions Applicable on or after November 5, 2018 The New Iran E.O. also authorizes the imposition of several types of secondary sanctions against foreign persons who engage in the activities described below on or after November 5, 2018: Blocking sanctions on non-U.S. persons who materially assist, sponsor, or provide support for or goods or services in support of: the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), or the Central Bank of Iran;[13] Iranian SDNs;[14]or any other person included on the SDN List pursuant to Section 1(a) of the New Iran E.O. or Executive Order 13599 (i.e., the Government of Iran and certain Iranian financial entities);[15] Blocking sanctions on non-U.S. persons who: are part of the Iranian energy, shipping, or shipbuilding sectors;[16] operate Iranian ports;[17]or provide significant support to or goods or service in support of persons that are part of Iran’s energy, shipping, or shipbuilding sectors; Iranian port operators; or Iranian SDNs (excluding certain Iranian financial institutions);[18] Menu-based sanctions on non-U.S. persons who: knowingly engage in significant transactions in Iranian petroleum, petroleum products, or petrochemical products;[19] are successors, subsidiaries, parents, or affiliates of persons who have knowingly engaged in significant transactions in Iranian petroleum, petroleum products, or petrochemical products or in Iran’s automotive sector;[20] provide underwriting services, insurance, or reinsurance for sanctionable activities with or involving Iran;[21]or provide specialized financial messaging services to the Central Bank of Iran;[22] Correspondent and payable-through account sanctions on foreign financial institutions that conduct or facilitate significant transactions on behalf of Iranian SDNs or other SDNs (as described above);[23] with NIOC or NICO;[24]or for transactions in Iranian petroleum, petroleum products, or petrochemical products.[25] As above, depending upon the seriousness of the conduct these correspondent and payable-through account sanctions could prohibit the opening of such accounts, strictly condition the maintenance of such accounts, or even require that such accounts be closed. On November 5, in addition to the imposition of these sanctions provided in the New Iran E.O., OFAC will again prohibit non-U.S. entities owned or controlled by U.S. persons (e.g., foreign subsidiaries of U.S. companies) from generally engaging in business operations in and with respect to Iran. As we have noted in prior guidance, on June 28, 2018, OFAC revoked General License H, which permitted such activity, and replaced it with narrower authorizations permitting only the wind-down of the previously authorized transactions.  This wind-down authority expires on November 5, 2018. Broader Scope of Sanctions Authorities with Continued Discretion and Exemptions Included among the provisions described above are new or expanded sanctions authorities. OFAC indicates that these changes are designed to provide “greater consistency in the administration of Iran-related sanctions.”[26] The broadened scope of these provisions is also consistent with the Trump administration’s promise to impose the “strongest sanctions in history” on Iran and indicates that the administration may go beyond the comparatively narrower application of these authorities by the Obama administration.[27] Specifically, new authorities, listed above, allow the imposition of blocking sanctions or correspondent and payable-through account sanctions on foreign persons engaging on or after November 5 in transactions with persons sanctioned under the New Iran E.O.[28] Other sections of the E.O. expand the menu of sanctions available for imposition against persons designated for engaging in transactions involving Iranian petroleum, petroleum products, or petrochemical products. Potential sanctions now include, among other restrictions, blocking sanctions and visa restrictions on the executive officers of entities sanctioned for engaging in such transactions.[29] The New Iran E.O. also expands the restrictions applicable to U.S.-owned or –controlled foreign entities. Among other applicable restrictions, such entities are also prohibited from engaging in transactions with persons blocked for providing material support to Iranian SDNs or for being part of Iran’s energy, shipping, or shipbuilding sectors or an Iranian port operator.[30]As noted above, U.S.-owned or –controlled foreign entities continue to be generally permitted to wind-down their business operations with or involving Iran, notwithstanding these new restrictions. Importantly, these expanded sanctions authorities and the broad re-authorization of secondary sanctions provided in the New Iran E.O. do not immediately result in the designation of additional persons or otherwise necessarily expand the sanctions imposed. As we have seen in the context of the secondary sanctions authorized in the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), expansive secondary sanctions authorities that are not imposed may have limited direct impact. Moreover, lost in the midst of the rhetoric and the regulations is that the Trump Administration appears willing to continue certain, arguably forgiving policies and exemptions that the Obama Administration supported. The Administration could have, but did not, revoke certain exemptions that shaped Obama-era policy. For instance, according to the terms of the New Iran E.O., the sanctions listed above targeting transactions in Iranian petroleum and petroleum products will not apply to entities in countries that the President determines have “significantly reduced their Iranian crude oil imports.”[31] The Trump Administration had initially stated that the Administration would only apply this exception if countries eliminated their Iranian oil imports.[32] However, officials later indicated that the U.S. government may work on a “case-by-case” basis with certain countries committed to reducing their imports from Iran and may consider whether to grant this exception.[33] Other exceptions, including for transactions related to the Shah Deniz gas field (which is partly owned by the Government of Iran) and for transactions involving the export of agricultural commodities, food, medicine, or medical devices to Iran, continue to apply.[34]  Additionally, General License D-1 – which allows for the export of certain telecommunications goods and services to Iran remains in force, as does General License J – which permits temporary visits to Iran by U.S.-origin aircraft (thus allowing international carriers to continue flying to Iran). The Trump Administration has even kept some of the even more explicitly lenient regulatory interpretations that the Obama team had. For instance, OFAC FAQ 613 notes that despite the secondary sanctions on Iran’s automotive sector, the shipment by non-U.S. parties of after-market parts for use in maintaining finished cars (rather than building new cars) would not generally be viewed as prohibited.[35] Moreover, OFAC FAQ 315 provides that rather than shutting down the entire Iranian port sector (and thus eliminating all shipments to the country) by imposing sanctions on any non-U.S. person who calls at an Iranian port, “to the extent that a shipping company transacts with port operators in Iran” that are not sanctioned, the payment of “routine fees” and the loading and unloading of cargo would not generally be prohibited.[36]  Neither of these allowances were required by legislation. Despite this flexibility – which will be very helpful to certain industries active in the implicated sectors (such as telecommunications, auto parts, airlines, and shipping) – it is important to remember that these exceptions are on the margin. In the main, the secondary sanctions in the New Iran E.O. were issued by an Administration eager to robustly and clearly fulfill a key campaign pledge in an election year and an Administration that appears comfortable engaging in unilateral action even at the cost of potentially weakening relationships with key allies. Administration officials have already signaled plans for strict enforcement[37] and the broadening of the sanctions authorities described above may be the first steps towards doing so. The European Response Almost immediately after President Trump announced his intention to withdraw from the JCPOA on May 8, 2018, the European Union and senior leaders in several major EU Member States announced their intention to remain compliant with the JCPOA and to reinvigorate the “EU Blocking Statute” so as to continue to promote the sanctions relief that the bloc views as central to the JCPOA. While some Member States moved to update their domestic legislation in this regard prior to the end of the first wind-down period, the EU had not formalized any changes until August 7. The EU Blocking Statute was designed as a counter-measure to what the EU considers to be the unlawful effects of third-country (primarily, but not exclusively, U.S.) extra-territorial sanctions on “EU operators.”  Its purpose is first and foremost to protect EU operators engaging in international trade, in a manner wholly compliant with EU law, but in breach of sanctions imposed by other countries.  At a political level, it is also designed to display the EU’s disapproval of sanctions regimes implemented by third countries which the EU considers to be abusive or unreasonable.  The EU Blocking Statute sets out a series of requirements relating to offending overseas sanctions (explained below), and then lists the overseas sanctions regimes to which it applies in an Annex. The Re-imposed Iran Sanctions Blocking Regulation is accompanied by an Implementing Regulation (EU) 2018/1101 (the “Implementing Regulation”), relating to the process for EU operators to apply for authorization from the European Commission to comply with Blocked U.S. Sanctions (as defined below).  The European Commission has also prepared a Guidance Note Questions and Answers: adoption of update of the Blocking Statute (the “Guidance”) to help EU operators understand these various instruments. The EU Blocking Statute applies to a wide range of actors including: any natural person being a resident in the EU and a national of an EU Member State; any legal person incorporated within the EU; any national of an EU Member State established outside the EU and any shipping company established outside the EU and controlled by nationals of an EU member state, if their vessels are registered in that EU member state in accordance with its legislation; any other natural person being a resident in the EU, unless that person is in the country of which he is a national; and any other natural person within the EU, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of an EU member state, acting in a professional capacity.[38] The EU’s guidance note emphasizes that when EU subsidiaries of U.S. companies are formed in accordance with the law of an EU Member State and have their registered office, central administration or principal place of business within the EU they are subject to the EU Blocking Statute. However, branches of U.S. companies in the EU are not subject to the EU Blocking Statute. From Rhetoric and Regulation… The EU Blocking Statute prohibits EU operators from complying with a set of specific extra-territorial laws or any decisions, rulings or awards based on those laws.[39]  The laws are explicitly listed and include six different U.S. sanctions laws and one set of U.S. regulations (OFAC’s Iranian Transactions and Sanctions Regulations). The EU Blocking Statute applies to all EU operators from August 7, 2018 and does not allow for any grandfathering of pre-existing contracts or agreements. Notably, the EU Guidance indicates that EU operators are prohibited from even requesting a license from the United States to maintain compliance with U.S. sanctions. Requesting such permission—without first gaining authorization from the EU or a competent authority in a Member State to do so— is tantamount to complying with U.S. sanctions.[40] In addition to prohibiting compliance with the various U.S. laws and regulations, the EU Blocking Statute requires EU operators to report to the European Commission within 30 days of any circumstances arising from the extraterritorial laws that affect their economic or financial interests. [40a] The EU Blocking Statute also holds that any decision rendered in the United States or elsewhere made due to the extraterritorial measures cannot be implemented in the European Union. [40b] This means, for instance, that any court decision made in light of the extraterritorial measures cannot be executed in the European Union, presumably even under existing mutual recognition agreements. Finally, the EU Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures. Though it is unclear how this would work in practice, it appears to allow an EU operator to exercise a private right of action and to be indemnified by companies that do comply with the U.S. laws if in so doing those companies injure the EU operator. For instance, if a European company has a contract to provide certain goods to Iran the European company is not allowed to break that contract due to their desire to comply with U.S. sanctions. However, if some of those goods are derived in part from other companies that have decided to comply with U.S. measures and to cease supplying any material destined for Iran the European company may be compelled to cease its transactions with Iran. In such case the Iranian company could sue the European company for breach of contract – the European operator could in turn sue its supplier for the damages caused due to the supplier’s compliance with the extra-territorial U.S. sanctions. Similarly, this provision allows Member States to sue companies who comply with the U.S. rules to the detriment of an EU operator (which has been done once before under the existing EU Blocking Statute). [40c] …To Reality As noted in our May 21, 2018 client alert , the competent authorities of the EU Member States are responsible for the implementation at national level of the EU Blocking Statute, including the adoption and implementation in national legal orders of penalties for possible breaches.  Such penalties are laid down in national legislation and vary by Member State. The United Kingdom has in place a law, the Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996, which broadly makes compliance with Blocked U.S. Sanctions a criminal offence. That Order does not provide for custodial sentences, but it does provide for a potentially unlimited fine. Certain other Member States have also opted for the creation of criminal offences, including Ireland, the Netherlands and Sweden. Other Member States, including Germany, Italy and Spain, have devised administrative penalties for non-compliance.  Meanwhile some Member States, including France, Belgium and Luxembourg, do not appear ever to have even implemented the EU Blocking Statute, notwithstanding the obligation on them as a matter of general EU law to prescribe penalties for breach of EU law which are effective, proportionate and dissuasive. Despite the breadth of the EU Blocking Statute language, the enforcement language and posture noted above, and the absolute nature of some of the rhetoric emanating from Brussels and certain Member State capitals as indicated by the lack of universal implementation of the existing EU Blocking Statute by Member States there has clearly been uneven application of existing rules.  We expect the same going forward with the updated EU Blocking Statute. Additionally, the EU Blocking Statute appears to include sufficient flexibility to provide multinational companies a potential path to navigate between Washington and Brussels.  (This is even before assessing the potentially low likelihood of enforcement.  We recognize that given the political and diplomatic environment in 2018 the past’s limited enforcement environment may not be prologue). In this regard, there are two key flexibilities written into the EU regulations. First, the Guidance allows EU operators to request authorization to comply with U.S. sanctions if not doing so would cause “serious harm to their interests or the interests of the European Union.” [40d] The European Commission has an existing template for making such a request which includes thirteen potential criteria that applicants can call upon when making their application.[41]These include whether there exists “a substantial connecting link” between the EU operator and the United States, whether not complying with U.S. measures could have “adverse effect on the conduct of [a company’s] economic activity,” or whether the “applicant’s activity would be rendered excessively difficult due to a loss of essential inputs or resources, which cannot be reasonably replaced.” Given the centrality of the U.S. financial system, and in some cases U.S. supply chains, many European companies could likely be able to make such claims. Under Article 3(2) and 3(3) of the Implementing Regulation, EU operators requesting an authorization must, at a minimum, explain with which provisions of the Blocked U.S. Sanctions they wish to be authorized to comply, and the acts they would be required to carry out.  EU operators seeking an authorization must also demonstrate how non-compliance with the Blocked U.S. Sanctions would cause serious damage to their interests or to the interests of the EU.  While potentially broad, it is uncertain what standard Brussels or the Member States will use in assessing whether to grant such authorizations. The second element of flexibility in the EU Blocking Statute is that EU operators will not be forced to continue business with Iran. Rather, the Guidance notes that EU operators are still free to conduct their business as they see fit – including “whether to engage or not in an economic sector on the basis of their assessment of the economic situation.”[42]  As such, we expect to see an increasing number of European firms to cease engaging in Iran, following in the wake of dozens of major European companies and financial institutions who have already announced their departure (and an even larger number who chose never to enter even under the JCPOA). This is a key flexibility as there are many reasons—apart from sanctions—that could cause a company in the prudent exercise of its fiduciary duties to decide to suspend Iranian operations and remain compliant with the EU Blocking Statute.  Indeed there is significant momentum behind European companies leaving Iran or otherwise indicating their plans to limit engagement.  Notably, this activity has included not just major private European companies leaving or announcing their intention to do so, but also actions by publicly-owned firms and even regulators.  For instance, the President of the European Investment Bank (an institution owned by the EU’s Member States) has publicly stated that the institution’s global operations would be put at risk if it continued its Iranian activities in light of U.S. sanctions.[43]  Though the EIB’s President has not indicated what this means for the EIB’s future Iran-related business it suggests a potential way out of engaging in Iran consistent with the EU regulations. Similarly – though not formally related to the new EU measures – the German Bundesbank recently quietly decided to revise its terms and conditions on cash withdrawals applicable to German financial institutions to include a provision that allowed the Bundesbank to reject a request from Tehran to withdraw EUR 300 million in cash from the German-regulated Europäisch-Iranische Handelsbank, an Iranian-owned bank based in Hamburg, Germany. The Bundesbank’s terms and conditions now inter alia state that such transactions could be refused in cases in which the transaction would threaten the Bundesbank’s relationships with other central banks or financial institutions in third countries. [44]  The principal “third country” in question is likely the United States. Next Steps and the Way Ahead We expect that the next steps in either enhancing sanctions on Iran (from the U.S. side) or protecting trade with Iran (from the EU side) will be regulatory. In line with past practices we think it possible that U.S. regulators will provide further guidance in the form of FAQs or even General Licenses to calibrate their policies. EU regulators, and Member States could do the same.  Actual enforcement on either side of the Atlantic is likely to be slow in coming. The Trump Administration has followed the Obama Administration’s playbook and sent senior officials to major foreign companies and countries thought to be the most likely source of non-compliance with U.S. measures. In the Obama era such outreach led to significant compliance enhancements in the companies and countries visited and thereby reduced the Obama Administration’s need to actually impose extra-territorial measures (secondary sanctions). In the current circumstance, the diplomatic situation for the United States is more uncertain. European governments, stung by the Administration’s withdrawal from the JCPOA and the continuing trade war, will clearly be unwilling to publicly go along with U.S. measures even if European companies choose to comply (either explicitly or implicitly in order to stay compliant with the EU Blocking Statute). The Turkish government, still smarting from recent U.S. sanctions unrelated to Iran imposed on their Ministers of Justice and Interior[45] (and the recent Iran sanctions-related conviction in U.S. federal court of a senior bank executive from Turkey’s Halk Bank[46]) may also prove less willing to assist. Moreover, while the UAE may be more able and willing to tamp down the traditional flows to Iran out of Dubai than was the case during the Bush and Obama Administrations, major Iranian oil importers such as India and China remain potential wildcards. Provided they receive substantial reduction exemptions to allow continued purchase of Iranian crude, we assess that other major Iranian oil importers such as South Korea, Japan, and Taiwan will likely on the whole opt to comply with U.S. measures.  Seoul, Tokyo, and Taipei would be unlikely to risk angering Washington given their broader needs for U.S. support in the region and their financial institutions will be similarly loathe to alienate their U.S. partners and risk their access to the American market and the U.S. dollar. There is much that remains unknown about the way ahead. The Trump Administration has not clearly articulated its goals with respect to the reimposed sanctions and in the lead up to the U.S. midterm elections in November could decide to become even more aggressive so as to gain support from its base. Similarly, as the Iranian government deals with the reimposed sanctions alongside mounting domestic protests it may also lash out aggressively, perhaps going as far as fulfilling its pledge to block the Straits of Hormuz or otherwise interfere with global trade or other core regional security interests. If either of these external factors come to bear, the situation would quickly become more challenging and the sanctions realities faced by global companies and governments could change radically. [1] Executive Order, “Reimposing Certain Sanctions with Respect to Iran,” (Aug. 6, 2017), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf. [2] Babak Dehghanpisheh and Peter Graff, “Trump Says Firms doing Business in Iran to be Barred from U.S as Sanctions Hit,” Reuters (Aug. 7, 2018), available at https://www.reuters.com/article/us-iran-nuclear/trump-says-firms-doing-business-in-iran-to-be-barred-from-us-as-sanctions-hit-idUSKBN1KS13I. [3] Nathalie Tocci, Aide to Federica Mogherini, quoted in Jacqueline Thomsen, “EU Issues Warning to European Companies that Comply with new U.S. Sanctions on Iran,” The Hill, (Aug. 7, 2018), available at http://thehill.com/policy/international/europe/400704-eu-threatens-to-sanction-european-companies-that-comply-with-new. [4] Press Release, White House, Remarks by President Trump on the Joint Comprehensive Plan of Action (May 8, 2018), available at https://www.whitehouse.gov/briefings-statements/remarkspresident-trump-joint-comprehensive-plan-action; U.S. Dep’t of Treasury, Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA) (May 8, 2018). [5] U.S. Dep’t of the Treasury, Revocation of JCPOA-Related General Licenses; Amendment of the Iranian Transactions and Sanctions Regulations; Publication of Updated FAQs (Jun. 27, 2018), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180627.aspx. [6] 31 C.F.R. §§ 560.534-356. [7] Section 1(a)(i). [8] Section 6. [9] Section 3(a)(i). [10] Section 5. [11] Id. [12] Section 2(a)(i). [13] Section 1(a)(ii). [14] Section 1(a)(iii). [15] Id. [16] Section 1(a)(iv). [17] Id. [18] Id. [19] Section 3(a)(ii)-(iii). [20] Section 3(a)(iv)-(vi). [21] Section 5. [22] Id. This provision refers to the electronic messaging provided principally by the SWIFT inter-bank messaging system. [23] Section 2(a)(ii). [24] Section 2(a)(iii). [25] Section 2(a)(iv)-(v). [26] OFAC FAQ No. 601. [27] See, e.g., Press Release, U.S. Dep’t. of State, After the Iran Deal: A New Iran Strategy (May 21, 2018), available at https://www.state.gov/secretary/remarks/2018/05/282301.htm. [28] Including, inter alia, persons sanctioned for engaging in transactions involving U.S. bank notes or precious metals, NIOC, NICO, the Central Bank of Iran, Iran’s energy, shipping, or shipbuilding sectors, Iranian port operators, or Iranian SDNs. See OFAC FAQ 601 for a complete list. [29] Sections 4(e) and 5(a)(vii). [30] Section 8(a). [31] Sections 2(c)(i) and 3(b)(i) [32] Special Briefing, U.S. Dep’t. of State, Senior State Department Official on U.S. Efforts to Discuss the Re-Imposition of Sanctions on Iran With Partners Around The World (Jun. 26, 2018), available at https://www.state.gov/r/pa/prs/ps/2018/06/283512.htm. [33] Brian Hook, Director of Policy Planning, U.S. State Department, Press Briefing, July 2, 2018. [34] See, e.g., Section 2(d)-(e) [35] OFAC FAQ No. 613. [36] OFAC FAQ No. 315. [37] See, e.g., Press Release, U.S. Dep’t. of State, After the Iran Deal: A New Iran Strategy (May 21, 2018), available at https://www.state.gov/secretary/remarks/2018/05/282301.htm. [38] We note that the scope of the EU Blocking Statute slightly differs from EU financial and economic sanctions, specifically as in that “business done in part or in whole in the EU” is not automatically covered. [39] The listed extra-territorial legislation are the: National Defense Authorization Act for Fiscal Year 1993, Title XVII “Cuban Democracy Act 1992”, sections 1704 and 1706; Cuban Liberty and Democratic Solidarity Act of 1996; Iran Sanctions Act of 1996; Iran Freedom and Counter-Proliferation Act of 2012; National Defense Authorization Act for Fiscal Year 2012; Iran Threat Reduction and Syria Human Rights Act of 2012; and the Iran Transactions and Sanctions Regulations (31 CFR Part 560). [40] Guidance Note – Questions and Answers: Adoption of Update of the EU Blocking Statute (2018/C 277I/03) (hereinafter “Guidance Note”), Question 23. [40a] Article 2, paragraph 1 of the EU Blocking Statute [40b] Article 4 of the EU Blocking Statute [40c] In 2007, Austria brought charges for breach of Regulation (EC) 2271/96 against an Austrian bank, at the time the fifth-largest Austrian bank. The charges were based on the Austrian Federal Law on the Punishment of Offences against the Provisions of EC Regulation (EC) No 2271/96. The bank had closed the accounts of 100 Cuban nationals. Having Cuban clients would have prevented the acquisition of the bank by a U.S. investor at a time when U.S. Cuban sanctions made it illegal for U.S. companies to deal with Cuba. Following a public uproar, and after U.S. authorities agreed to grant the bank an exemption, the bank reinstated the accounts held by Cuban nationals. The acquisition of the bank went ahead as planned and the investigation against the bank for breach of Regulation (EC) 2271/96 was discontinued, available online at https://www.bmeia.gv.at/en/the-ministry/press/announcements/2007/foreign-ministry-ceases-investigations-against-bawag-bank/, last checked August 9, 2018. [40d] Article 5, paragraph 2 of the EU Blocking Statute [41] Template for Applications for Authorisations under Article 5 paragraph 2 of Council Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting thereon (‘Regulation’). [42] Guidance Note, Question 5. [43] Robin Emmott and Alissa de Carbonnel, “European Investment Bank Casts Doubt on EU Plan to Salvage Nuclear Deal,” Reuters, (July 18, 2018), available at https://www.reuters.com/article/us-iran-nuclear-eu/european-investment-bank-casts-doubt-on-eu-plan-to-salvage-nuclear-deal-idUSKBN1K81BD. [44] Claire Jones and Guy Chazan, “Bundesbank Rule Change hits €300m Iran Bank Transfer,” Financial Times, (August 6, 2018). [45] Adam Goldman and Gardiner Harris, “U.S. Imposes Sanctions on Turkish Officials over Detained American Pastor,” N.Y. Times (Aug. 1, 2018). [46] Benjamin Weiser, “Turkish Banker in Iran Sanctions-Busting Case Sentenced to 21 Months,” N.Y. Times (May 16, 2018). The following Gibson Dunn lawyers assisted in the preparation of this client update: Adam Smith, Judith Lee, R.L. Pratt, Richard Roeder, Patrick Doris, Christopher Timura, Stephanie Connor, and Peter Alexiadis. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade Group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
Developments in the Defense of Financial Institutions

To Disclose or Not to Disclose: Analyzing the Consequences of Voluntary Self-Disclosure for Financial Institutions Click for PDF One of the most frequently discussed white collar issues of late has been the benefits of voluntarily self-disclosing to the U.S. Department of Justice (“DOJ”) allegations of misconduct involving a corporation.  This is the beginning of periodic analyses of white collar issues unique to financial institutions, and in this issue we examine whether and to what extent a financial institution can expect a benefit from DOJ for a voluntary self-disclosure (“VSD”), especially with regard to money laundering or Bank Secrecy Act violations.  Although the public discourse regarding VSDs tends to suggest that there are benefits to be gained, a close examination of the issue specifically with respect to financial institutions shows that the benefits that will confer in this area, if any, are neither easy to anticipate nor to quantify.  A full consideration of whether to make a VSD to DOJ should include a host of factors beyond the quantifiable benefit, ranging from the likelihood of independent enforcer discovery; to the severity, duration, and evidentiary support for a potential violation; and to the expectations of prudential regulators and any associated licensing or regulatory consequences, as well as other factors. VSD decisions arise in many contexts, including in matters involving the Foreign Corrupt Practices Act (“FCPA”), sanctions enforcement, and the Bank Secrecy Act (“BSA”).  In certain situations, the benefits of voluntary self-disclosure prior to a criminal enforcement action can be substantial.  Prosecutors have at times responded to a VSD by reducing charges and penalties, offering deferred prosecution and non-prosecution agreements, and entering into more favorable consent decrees and settlements.[1]  However, as Deputy Attorney General Rod Rosenstein stated in recent remarks, enforcement policies meant to encourage corporate disclosures “do[] not provide a guarantee” that disclosures will yield a favorable result in all cases.[2]  The outcome of a prosecution following a VSD is situation-specific, and, as such, the process should not be entered into without careful consideration of the costs and benefits. In the context of Bank Secrecy Act and anti-money laundering regulation (“BSA/AML”), VSDs present an uncertain set of tradeoffs.  The BSA and its implementing  regulations already require most U.S. financial institutions subject to the requirements of the BSA[3] to file suspicious activity reports (“SARs”) with the U.S. government when the institution knows, suspects or has reason to suspect that a transaction by, through or to it involves money laundering, BSA violations or other illegal activity.[4]  Guidance from DOJ encourages voluntary self-disclosure, and at least one recent non-prosecution agreement entered with the Department has listed self-disclosure as a consideration in setting the terms of a settlement agreement.[5]  Over the past three years, however, no BSA/AML criminal resolution has explicitly given an institution credit for voluntarily disclosing potential misconduct.  During this same period, DOJ began messaging an expanded focus on VSDs in the context of FCPA violations, announced the FCPA Pilot Project, and ultimately made permanent in the U.S. Attorney’s Manual the potential benefits of a VSD for FCPA violations. This alert addresses some of the considerations that financial institutions weigh when deciding whether to voluntarily self-disclose potential BSA/AML violations to criminal enforcement authorities.  In discussing these considerations, we review guidance provided by DOJ and the regulatory enforcement agencies, and analyze recent BSA/AML criminal resolutions, as well as FCPA violations involving similar defendants. Guidance from the Department of Justice – Conflicting Signals DOJ guidance documents describe the Department’s general approach to VSDs, but, until recently, they left unanswered many questions dealing specifically with self-disclosure by financial institutions.  The Department’s high-level approach to general voluntary self-disclosure is outlined in the United States Attorney Manual (“USAM”).  Starting from the principle that “[c]ooperation is a mitigating factor” that can allow a corporation to avoid particularly harsh penalties, the USAM instructs prosecutors that they “may consider a corporation’s timely and voluntary disclosure” when deciding whether and how to pursue corporate liability.[6] In the FCPA context, a self-disclosure is deemed to be voluntary—and thus potentially qualifying a company for mitigation credit—if (1) the company discloses the relevant evidence of misconduct prior to an imminent threat of disclosure or government investigation; (2) the company reports the conduct to DOJ and relevant regulatory agencies “within a reasonably prompt time after becoming aware of the offense”; and (3) the company discloses all relevant facts known to it, including all relevant facts about the individual wrongdoers involved.[7] DOJ has not yet offered specific instruction, however, on how prosecutors should treat voluntary self-disclosure in the BSA/AML context and, unlike other areas of enforcement, no formal self-disclosure program currently exists for financial institutions seeking to obtain mitigation credit in the money laundering context.  Indeed, the only guidance document to mention VSDs and financial institutions—issued by DOJ’s National Security Division in 2016[8]—specifically exempted financial institutions from the VSD benefits offered to other corporate actors in the export control and sanctions context, citing the “unique reporting obligations” imposed on financial institutions “under their applicable statutory and regulatory regimes.”[9] Despite this lack of guidance, the recent adoption of DOJ’s FCPA Corporate Enforcement Policy may provide insight on how prosecutors could treat voluntary disclosures by financial institutions moving forward.  Enacted in the fall of 2017, the Corporate Enforcement Policy arose from DOJ’s 2016 FCPA Pilot Program, which was created to provide improved guidance and certainty to companies facing DOJ enforcement actions, while incentivizing self-disclosure, cooperation, and remediation.[10]  One year later, based on the success of the program, many of its aspects were codified in the USAM.[11]  Specifically, the new policy creates a presumption that entities that voluntarily disclose potential misconduct and fully cooperate with any subsequent government investigation will receive a declination, absent aggravating circumstances.[12]  In early 2018, Acting Assistant Attorney General John Cronan announced that the Corporate Enforcement Policy would serve as non-binding guidance for corporate investigations beyond the FCPA context.[13] This expanded consideration of VSDs beyond the FCPA space was on display in March 2018, when, after an investigation by DOJ’s Securities and Financial Fraud Unit, the Department publicly announced that it had opted not to prosecute a financial institution in connection with the bank’s alleged front-running of certain foreign exchange transactions.[14]  DOJ’s Securities and Financial Fraud Unit specifically noted that DOJ’s decision to close its investigation without filing charges resulted, in part, from “timely, voluntary self-disclosure” of the alleged misconduct,[15] a sentiment echoed by Cronan in subsequent remarks at an American Bar Association white collar conference regarding the reasons for the declination.[16]  Cronan further commented that “[w]hen a company discovers misconduct, quickly raises its hand and tells us about it, that says something. . . . It shows the company is taking misconduct seriously . . . and we are rewarding those good decisions.”[17] Other Agency Guidance Guidance issued by other enforcement agencies similarly may offer clues as to how financial institutions can utilize VSDs to more successfully navigate a criminal enforcement action. In the context of export and import control, companies that self-disclose to the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”) can benefit in two primary ways.  First, OFAC may be less likely to initiate an enforcement proceeding following a VSD, as OFAC considers a party’s decision to cooperate when determining whether to initiate a civil enforcement proceeding.[18]  Second, if OFAC decides it is appropriate to bring an enforcement action, companies that self-disclose receive a fifty-percent reduction in the base penalty they face, as detailed in the below-base-penalty matrix published in OFAC guidance:[19] As depicted by the chart, in the absence of a VSD, the base penalty for egregious violations[20] is the applicable statutory maximum penalty for the violation.[21]  In non-egregious cases, the base penalty is calculated based on the revenue derived from the violative transaction, capped at $295,141.[22]  When the apparent violation is voluntarily disclosed, however, OFAC has made clear that in non-egregious cases, the penalty will be one-half of the transaction value, capped at $147,571 per violation.[23]  This is applicable except in circumstances where the maximum penalty for the apparent violation is less than $295,141, in which case the base amount of the penalty shall be capped at one-half the statutory maximum penalty applicable to the violation.[24]  In an egregious case, if the apparent violation is self-disclosed, the base amount of the penalty will be one-half of the applicable statutory maximum penalty.[25] Other agencies tasked with overseeing the enforcement of financial regulations also have issued guidance encouraging voluntary disclosures.  Although the Financial Crimes Enforcement Network (“FinCEN”) has not provided guidance on how it credits voluntary disclosures,[26] guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), consisting of the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”), the Office of Thrift Supervision (“OTS”), and the National Credit Union Administration (“NCUA”), has made clear that, in determining the amount and appropriateness of a penalty to be assessed against a financial institution in connection with various types of violations, the agencies will consider “voluntary disclosure of the violation.”[27] In 2016, the OCC published a revised Policies and Procedures Manual to ensure this and other factors are considered and to “enhance the consistency” of its enforcement decisions.[28]  That guidance includes a matrix with several factors, one of which is “concealment.”[29]  In the event that a financial institution self-discloses, they are not penalized for concealment.  Thus, while not directly reducing potential financial exposure, a VSD ensures that a financial institution is not further penalized for the potential violation. It is also worth noting that, unlike DOJ, these regulators do not appear to draw distinctions regarding the type of offense at issue (i.e., FCPA versus BSA versus sanctions violations).  Moreover, financial institutions contemplating not disclosing potential misconduct need to consider whether the nature of the potential misconduct at issue goes to the financial institution’s safety and soundness, adequacy of capital, or other issues of interest to prudential regulators such as the Federal Reserve, OCC, and FDIC.  To the extent such prudential concerns are implicated, a financial institution may be required to disclose the underlying evidence of misconduct and may face penalties for failing to do so. The Securities and Exchange Commission (“SEC”) also has indicated that it will consider VSDs as a factor in its enforcement actions under the federal securities laws.  In a 2001 report (the “Seaboard Report”), the SEC confirmed that, as part of its evaluation of proper enforcement actions, it would consider whether “the company voluntarily disclose[d] information [its] staff did not directly request and otherwise might not have uncovered.”[30]  The SEC noted that self-policing could result in reduced penalties based on how much the SEC credited self-reporting—from “the extraordinary step of taking no enforcement action to bringing reduced charges, seeking lighter sanctions, or including mitigating language in documents . . . use[d] to announce and resolve enforcement actions.”[31]  In 2010, the SEC formalized its cooperation program, identifying self-policing, self-reporting, and remediation and cooperation as the primary factors it would consider in determining the appropriate disposition of an enforcement action.[32]  In 2015, the former Director of the SEC’s Division of Enforcement, reaffirmed the importance of self-reporting to the SEC’s enforcement decisions, stating that previous cases “should send the message loud and clear that the SEC will reward self-reporting and cooperation with significant benefits.”[33]  As of mid-2016, the SEC had signed over 103 cooperation agreements, six non-prosecution agreements, and deferred nine prosecutions since the inception of the cooperation program.[34] Finally, like its federal counterparts, the New York Department of Financial Services (“NYDFS”) has previously signaled, at least in the context of export and import sanctions, that “[i]t is vital that companies continue to self-report violations,”[35] and warned that “those that do not [self-report] run the risk of even more severe consequences.”[36]  The NYDFS has not directly spoken to money laundering enforcement, but financial institutions considering disclosures to New York state authorities should keep this statement in mind.  Similar to the considerations an institution might face when dealing with federal regulators, to the extent DFS prudential concerns are implicated, a financial institution may be required to disclose the underlying evidence of misconduct and face penalties for failing to do so. Recent BSA/AML and FCPA Resolutions Even against this backdrop, over the last few years, voluntary self-disclosure has not appeared to play a significant role in the resolution of criminal enforcement proceedings arising from alleged BSA/AML violations.  Since 2015, DOJ, in conjunction with other enforcement agencies, has resolved BSA/AML charges against twelve financial institutions.[37]  In eleven of those cases, the final documentation of the resolution—the settlement agreements and press releases accompanying the settlement documents—make no mention of voluntary self-disclosure.  Even in the FCPA context, where DOJ has sought to provide greater certainty and transparency concerning the benefits of voluntary disclosure, there is a scant track record of financial institutions making voluntary disclosures in connection with FCPA resolutions.  Since 2015, DOJ has announced FCPA enforcement actions with six financial institutions.  The Justice Department did not credit any of them with voluntarily self-disclosing the conduct.[38] Although recent resolutions have not granted credit for VSDs, financial entities facing enforcement actions should consider how such a disclosure might affect the nature of a potential investigation and the ultimate disposition of an enforcement action.  It is worth noting that in the one recent BSA/AML resolution with a financial institution in which voluntary self-disclosure was referenced—DOJ’s 2017 resolution with Banamex USA—it was in the course of explaining why the financial institution did not receive disclosure credit.  In other words, there is no example of a criminal enforcement action commending a financial institution for a VSD, or of an agency softening the enforcement measures as a result of a VSD.[39]  The fact that the Banamex USA resolution affirmatively explains why the defendant did not receive VSD credit may imply that this type of credit may be available to financial institution defendants when they do make adequate VSDs. Furthermore, over the same time period, prosecutors have credited financial institutions for other forms of cooperation.  For example, in 2015, the Department of Justice deferred prosecution of CommerceWest Bank officials for a BSA charge arising from their willful failure to file a SAR, in part because of the bank’s “willingness to acknowledge and accept responsibility for its actions” and “extensive cooperation with [DOJ’s] investigation.”[40]  Similarly, a 2015 non-prosecution agreement with Ripple Labs Inc. credited the financial institution with, among other factors, “extensive cooperation with the Government.”[41]  These favorable dispositions signal that the government is willing to grant mitigation credit for cooperation, even when financial institutions are not credited with making VSDs. Other Relevant Considerations Relating to VSDs As discussed above, the government’s position regarding the value of VSDs and their effect on the ultimate resolution of a case vary based on the agency and the legal and regulatory regime(s) involved.  Given the lack of clear guidance from FinCEN about how it credits VSDs and the fact that BSA/AML resolutions tend not to explicitly reference a company’s decision to disclose as a relevant consideration, navigating the decision of whether to self-report to DOJ is itself a fraught one.  Beyond the threshold question of whether or not to self-disclose to DOJ, financial institutions faced with potential BSA/AML liability should be mindful of a number of other considerations, always with an eye on avoiding the specter of a full-blown criminal investigation and trying to minimize institutional liability to the extent possible. Likelihood of Discovery:  A financial institution deciding whether to self-disclose to DOJ must contemplate the possibility that the government will be tipped off by other means, including by the prudential regulators, and will investigate the potential misconduct anyway, without the financial institution gaining the benefits available for bringing a case to the government’s attention and potentially before the financial institution has had the opportunity to develop a remediation plan.  Financial institutions that plan to forego self-disclosure of possible misconduct will have to guard against both whistleblower disclosures and the possibility that other institutions aware of the potential misconduct will file a Suspicious Activity Report implicating the financial institution. Timing of Disclosure:  Even after a financial institution has decided to self-report to DOJ, it will have to think through the implications of when a disclosure is made.  A financial institution could decide to promptly disclose to maximize cooperation credit, but risks reporting without developing the understanding of the underlying facts that an internal investigation would provide.  Additionally, a prompt disclosure to DOJ may be met with a deconfliction request, in which the government asks that the company refrain from interviewing its employees until the government has had a chance to do so.  This may slow down the company’s investigation and impede its ability to take prompt and decisive remedial actions, including those related to personnel decisions.  On the other hand, waiting until after the internal investigation has concluded (or at least reached an advanced stage) presents the risk of the government finding out first in the interim.  The financial institution also will have to decide whether to wait longer to report to the government having already designed and begun to implement a remediation plan or to disclose while the remediation plan is still being developed. Selective or Sequential Disclosures:  Given the number of agencies with jurisdiction over the financial industry and the overlaps between their respective spheres of authority, financial institutions contemplating self-disclosure will often have to decide how much to disclose, whether to both prudential regulators and DOJ, and in what order.  In some cases, a financial institution potentially facing both regulatory and criminal liability may be well-advised to engage civil regulators first in the hope that, if DOJ does get involved, they will stand down and piggy-back on a global resolution with other regulators rather than seeking more serious penalties.  Indeed, DOJ prosecutors are required to consider the adequacy of non-criminal alternatives – such as civil or regulatory enforcement actions – in determining whether to initiate a criminal enforcement action.[42]  For example, the non-prosecution agreement DOJ entered in May 2017 with Banamex recognized that Citigroup, Banamex’s parent, was already in the process of winding down Banamex USA’s banking operations pursuant to a 2015 resolution with the California Department of Business Oversight and FDIC and was operating under ongoing consent orders with the Federal Reserve and OCC relating to BSA/AML compliance; consequently, DOJ sought only forfeiture rather than an additional monetary penalty.[43]  Of course, any decision to selectively disclose must be balanced carefully against the practical reality that banking regulators will, in certain instances, notify DOJ of potential criminal violations whether self-disclosed or identified in the examination process.  Whether that communication will occur often is influenced by factors such as the history of cooperation between the institutions or the relationships of those involved.  Nevertheless, the timing and nature of any referral by a regulator to DOJ might nullify any benefit from a selective or sequential disclosure. Conclusion In this inaugural Developments in the Defense of Financial Institutions Client Alert, we addressed whether and to what extent a financial institution should anticipate receiving a benefit when approaching the pivotal decision of whether to voluntarily self-disclose potential BSA/AML violations to DOJ.  We hope this publication serves as a helpful primer on this issue, and look forward to addressing other topics that raise unique issues for financial institutions in this rapidly-evolving area in future editions.    [1]   U.S. Dep’t of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download.    [2]   Rod Rosenstein, Deputy Att’y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign.    [3]   Throughout this alert, we use the term “financial institution” as it is defined in the Bank Secrecy Act.  “Financial institution” refers to banks, credit unions, registered stock brokers or dealers, currency exchanges, insurance companies, casinos, and other financial and banking-related entities.  See 31 U.S.C. § 5312(a)(2) (2012).  These institutions should be particularly attuned to the role that voluntary disclosures can play in the disposition of a criminal enforcement action.    [4]   See, e.g., 31 CFR § 1020.320 (FinCEN SAR requirements for banks); 12 C.F.R. § 21.11 (SAR requirements  for national banks).    [5]   See Non-Prosecution Agreement with Banamex USA, U.S. Dep’t of Justice (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download (noting that “the Company did not receive voluntary self-disclosure credit because neither it nor Citigroup voluntarily and timely disclosed to the Office the conduct described in the Statement of Facts”).    [6]   U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-28.700 (2017).    [7]   For a definition of self-disclosure in the sanctions space, see U.S. Dep’t of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download.  For a definition in the FCPA context, see U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-47.120 (2017).    [8]   U.S. Dep’t of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations, at 4 n.7 (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download.  Gibson Dunn’s 2016 Year-End Sanctions Update contains a more in-depth discussion of this DOJ guidance.    [9]   Id. at 2 n.3 [10]   Press Release, U.S. Dep’t of Justice, Criminal Division Launches New FCPA Pilot Program (Apr. 5, 2016), https://www.justice.gov/archives/opa/blog/criminal-division-launches-new-fcpa-pilot-program.  For a more in-depth discussion of the original Pilot Program, see Gibson Dunn’s 2016 Mid-Year FCPA Update, and for a detailed description of the FCPA Corporate Enforcement Policy, see our 2017 Year-End FCPA Update.  For discussion regarding specific declinations under the Pilot Program, in which self-disclosure played a significant role, see our 2016 Year-End FCPA Update and 2017 Mid-Year FCPA Update. [11]   Rod Rosenstein, Deputy Att’y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign (announcing that the FCPA Corporate Enforcement Policy would be incorporated into the USAM); U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-47.120 (2017). [12]   Id. [13]   Jody Godoy, DOJ Expands Leniency Beyond FCPA, Lets Barclays Off, Law360 (Mar. 1, 2018), https://www.law360.com/articles/1017798/doj-expands-leniency-beyond-fcpa-lets-barclays-off. [14]   U.S. Dep’t of Justice, Letter to Alexander Willscher and Joel Green Regarding Investigation of Barclays PLC (Feb. 28, 2018), https://www.justice.gov/criminal-fraud/file/1039791/download. [15]   Id. [16]   Tom Schoenberg, Barclays Won’t Face Criminal Case for Hewlett-Packard Trades, Bloomberg (Mar. 1, 2018), https://www.bloomberg.com/news/articles/2018-03-01/barclays-won-t-face-criminal-case-over-hewlett-packard-trades. [17]   Id. [18]   31 C.F.R. Pt. 501, app. A, § III.G.1 (2018). [19]   Id. § V.B.1.a.iv (2018). [20]   OFAC has established a two-track approach to penalty assessment, based on whether violations are “egregious” or “non-egregious.”  Egregious violations are identified based on analysis of several factors set forth in OFAC guidelines, including, among others: whether a violation was willful; whether the entity had actual knowledge of the violation, or should have had reason to know of it; harm caused to sanctions program objectives; and the individual characteristics of the entity involved. [21]   31 C.F.R. Pt. 501, app. A, § V.B.2.a.iv (2018). [22]   Id. § V.B.2.a.ii (2018). [23]   Id. § V.B.2.a.i (2018). [24]   Id. [25]   Id. § V.B.2.a.iii (2018). [26]   Robert B. Serino, FinCEN’s Lack of Policies and Procedures for Assessing Civil Money Penalties in Need of Reform, Am. Bar Ass’n (July 2016), https://www.americanbar.org/publications/blt/2016/07/07_serino.html.  It is worth noting, however, that there are certain circumstances in which FinCEN imposes a continuing duty to disclose, such as when there has been a failure to timely file a SAR (31 C.F.R. § 1020.320(b)(3)); failure to timely file a Currency Transaction Report (31 C.F.R. § 1010.306); and failure to timely register as a money-services business (31 C.F.R. § 1022.380(b)(3)).  In circumstances in which a financial institution identifies that it has not complied with these regulatory requirements and files belatedly, the decision whether to self-disclose to DOJ is impacted by the fact that the late filing will often be evident to FinCEN. [27]   Federal Financial Institutions Examination Council: Assessment of Civil Money Penalties, 63 FR 30226-02, 1998 WL 280287 (June 3, 1998). [28]   Office of the Comptroller of the Currency, Policies and Procedures Manual, PPM 5000-7 (Rev.) (Feb. 26, 2016), https://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-5a.pdf. [29]   Id. at 15-17. [30]   U.S. Secs. & Exch. Comm’n, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Release No. 44969 (Oct. 23, 2001), https://www.sec.gov/litigation/investreport/34-44969.htm. [31]   Id. [32]   U.S. Secs. & Exch. Comm’n, Enforcement Cooperation Program, https://www.sec.gov/spotlight/enforcement-cooperation-initiative.shtml (last modified Sept. 20, 2016). [33]   Andrew Ceresney, Director, SEC Division of Enforcement, ACI’s 32nd FCPA Conference Keynote Address (Nov. 17, 2015), https://www.sec.gov/news/speech/ceresney-fcpa-keynote-11-17-15.html. [34]   Juniad A. Zubairi & Brooke E. Conner, Is SEC Cooperation Credit Worthwhile?, Law360 (Aug. 30, 2016), https://www.law360.com/articles/833392. [35]   Press Release, N.Y. Dep’t Fin. Servs., Governor Cuomo Announced Bank of Tokyo-Mitsubishi UFJ to Pay $250 Million to State for Violations of New York Banking Law Involving Transactions with Iran and Other Regimes (June 20, 2013), https://www.dfs.ny.gov/about/press/pr1306201.htm. [36]   Id. [37]   Press Release, U.S. Dep’t of Justice, U.S. Gold Refinery Pleads Guilty to Charge of Failure to Maintain Adequate Anti-Money Laundering Program (Mar. 16, 2018), https://www.justice.gov/usao-sdfl/pr/us-gold-refinery-pleads-guilty-charge-failure-maintain-adequate-anti-money-laundering; Deferred Prosecution Agreement with U.S. Bancorp, U.S. Dep’t of Justice (Feb. 12, 2018), https://www.justice.gov/usao-sdny/press-release/file/1035081/download; Plea Agreement with Rabobank, National Association, U.S. Dep’t of Justice (Feb. 7, 2018), https://www.justice.gov/opa/press-release/file/1032101/download; Non-Prosecution Agreement with Banamex USA, U.S. Dep’t of Justice (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download; Press Release, U.S. Dep’t of Justice, Western Union Admits Anti-Money Laundering and Consumer Fraud Violations, Forfeits $586 Million in Settlement with Justice Department and Federal Trade Commission (Jan. 19, 2017), https://www.justice.gov/opa/pr/western-union-admits-anti-money-laundering-and-consumer-fraud-violations-forfeits-586-million; Non-Prosecution Agreement Between CG Technology, LP and the United States Attorneys’ Offices for the Eastern District of New York and the District of Nevada, U.S. Dep’t of Justice (Oct. 3, 2016), https://www.gibsondunn.com/wp-content/uploads/documents/publications/CG-Technology-dba-Cantor-Gaming-NPA.PDF; Press Release, U.S. Dep’t of Justice, Normandie Casino Operator Agrees to Plead Guilty to Federal Felony Charges of Violating Anti-Money Laundering Statutes (Jan. 22, 2016), https://www.justice.gov/usao-cdca/pr/normandie-casino-operator-agrees-plead-guilty-federal-felony-charges-violating-anti; Press Release, U.S. Dep’t of Justice, Hong Kong Entertainment (Overseas) Investments, Ltd, D/B/A Tinian Dynasty Hotel & Casino Enters into Agreement with the United States to Resolve Bank Secrecy Act Liability (July 23, 2015), https://www.justice.gov/usao-gu/pr/hong-kong-entertainment-overseas-investments-ltd-dba-tinian-dynasty-hotel-casino-enters; Deferred Prosecution Agreement with Bank of Mingo, U.S. Dep’t of Justice (May 20, 2015), https://www.gibsondunn.com/wp-content/uploads/documents/publications/Bank-of-Mingo-NPA.pdf; Settlement Agreement with Ripple Labs Inc., U.S. Dep’t of Justice (May 5, 2015), https://www.justice.gov/file/421626/download; Deferred Prosecution Agreement with Commerzbank AG, U.S. Dep’t of Justice (Mar. 12, 2015), https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/03/12/commerzbank_deferred_prosecution_agreement_1.pdf; Deferred Prosecution Agreement with CommerceWest Bank, U.S. Dep’t of Justice (Mar. 10, 2015) https://www.justice.gov/file/348996/download. [38]   Deferred Prosecution Agreement with Société Générale S.A., U.S. Dep’t of Justice (June 5, 2018), https://www.justice.gov/opa/press-release/file/1068521/download; Non-Prosecution Agreement with Legg Mason, Inc., U.S. Dep’t of Justice (June 4, 2018), https://www.justice.gov/opa/press-release/file/1068036/download; Non-Prosecution Agreement with Credit Suisse (Hong Kong) Limited, U.S. Dep’t of Justice (May 24, 2018), https://www.justice.gov/opa/press-release/file/1077881/download; Deferred Prosecution Agreement with Och-Ziff Capital Management Group, LLC, U.S. Dep’t of Justice (Sept. 29, 2016), https://www.justice.gov/opa/file/899306/download; Non-Prosecution Agreement with JPMorgan Securities (Asia Pacific) Ltd, U.S. Dep’t of Justice (Nov. 17, 2016), https://www.justice.gov/opa/press-release/file/911206/download; Non-Prosecution Agreement with Las Vegas Sands Corp., U.S. Dep’t of Justice (Jan. 17, 2017), https://www.justice.gov/opa/press-release/file/929836/download. [39]   See Non-Prosecution Agreement with Banamex USA, U.S. Dep’t of Justice, at 2 (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download (explaining that Banamex “did not receive voluntary disclosure credit because neither it nor [its parent company] Citigroup voluntarily and timely disclosed to [DOJ’s Money Laundering and Asset Recover Section] the conduct described in the Statement of Facts”) (emphasis added). [40]   Deferred Prosecution Agreement Between United States and CommerceWest Bank, U.S. Dep’t of Justice, at 2-3 (Mar. 9, 2015), https://www.justice.gov/file/348996/download. [41]   Settlement Agreement Between United States and Ripple Labs Inc., U.S. Dep’t of Justice (May 5, 2015), https://www.justice.gov/file/421626/download; see also Press Release, U.S. Dep’t of Justice, Ripple Labs Inc. Resolves Criminal Investigation (May 5, 2015), https://www.justice.gov/opa/pr/ripple-labs-inc-resolves-criminal-investigation. [42]   See U.S. Attorney’s Manual 9-28.1200 (recommending the analysis of civil or regulatory alternatives). [43]   Non-Prosecution Agreement Between U.S. Dep’t of Justice, Money Laundering and Asset Recovery Section and Banamex USA at 2 (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download. The following Gibson Dunn attorneys assisted in preparing this client update:  F. Joseph Warin, M. Kendall Day, Stephanie L. Brooker, Adam M. Smith, Linda Noonan, Elissa N. Baur, Stephanie L. Connor, Alexander R. Moss, and Jaclyn M. Neely. Gibson Dunn has deep experience with issues relating to the defense of financial institutions, and we have recently increased our financial institutions defense and anti-money laundering capabilities with the addition to our partnership of M. Kendall Day.  Kendall joined Gibson Dunn in May 2018, having spent 15 years as a white collar prosecutor, most recently as an Acting Deputy Assistant Attorney General, the highest level of career official in the U.S. Department of Justice’s Criminal Division.  For his last three years at DOJ, Kendall exercised nationwide supervisory authority over every Bank Secrecy Act and money-laundering charge, deferred prosecution agreement and non-prosecution agreement involving every type of financial institution. Kendall joined Stephanie Brooker, a former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and a former federal prosecutor and Chief of the Asset Forfeiture and Money Laundering Section for the U.S. Attorney’s Office for the District of Columbia, who serves as Co-Chair of the Financial Institutions Practice Group and a member of White Collar Defense and Investigations Practice Group.  Kendall and Stephanie practice with a Gibson Dunn network of more than 50 former federal prosecutors in domestic and international offices around the globe. For assistance navigating white collar or regulatory enforcement issues involving financial institutions, please contact any Gibson Dunn attorney with whom you usually work, or any of the following leaders and members of the firm’s White Collar Defense and Investigations or Financial Institutions practice groups: Washington, D.C. F. Joseph Warin – (+1 202-887-3609, fwarin@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com) Stephanie Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) Linda Noonan (+1 202-887-3595, lnoonan@gibsondunn.com) Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com) Christopher W.H. Sullivan (+1 202-887-3625, csullivan@gibsondunn.com) Courtney M. Brown (+1 202-955-8685, cmbrown@gibsondunn.com) Jason H. Smith (+1 202-887-3576, jsmith@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Pedro G. Soto (+1 202-955-8661, psoto@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Mark A. Kirsch (+1 212-351-2662, mkirsch@gibsondunn.com) Arthur S. Long (+1 212-351-2426, along@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Daniel P. Harris (+1 212-351-2632, dpharris@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Laura M. Sturges (+1 303-298-5929, lsturges@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Marc J. Fagel (+1 415-393-8332, mfagel@gibsondunn.com) Charles J. Stevens – Co-Chair (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8333, mwong@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charlie Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Paris Benoît Fleury (+33 1 56 43 13 00, bfleury@gibsondunn.com) Bernard Grinspan (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Jean-Philippe Robé (+33 1 56 43 13 00, jrobe@gibsondunn.com) Audrey Obadia-Zerbib (+33 1 56 43 13 00, aobadia-zerbib@gibsondunn.com) Munich Benno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Oliver D. Welch (+852 2214 3716, owelch@gibsondunn.com) São Paulo Lisa A. Alfaro (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, falmeida@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
The Politics of Brexit for those Outside the UK

Click for PDF Following the widely reported Cabinet meeting at Chequers, the Prime Minister’s country residence, on Friday 6 June 2018, the UK Government has now published its “White Paper” setting out its negotiating position with the EU.  A copy of the White Paper can be found here. The long-delayed White Paper centres around a free trade area for goods, based on a common rulebook.  The ancillary customs arrangement plan, in which the UK would collects tariffs on behalf of the EU, would then “enable the UK to control its own tariffs for trade with the rest of the world”.  However, the Government’s previous “mutual recognition plan” for financial services has been abandoned; instead the White Paper proposes a looser partnership under the framework of the EU’s existing equivalence regime. The responses to the White Paper encapsulate the difficulties of this process.  Eurosceptics remain unhappy that the Government’s position is far too close to a “Soft Brexit” and have threatened to rebel against the proposed customs scheme; Remainers are upset that services (which represent 79% of the UK’s GDP) are excluded. The full detail of the 98-page White Paper is less important at this stage than the negotiating dynamics.  Assuming both the UK and the EU want a deal, which is likely to be the case, M&A practitioners will be familiar with the concept that the stronger party, here the EU, will want to push the weaker party, the UK, as close to the edge as possible without tipping them over.  In that sense the UK has, perhaps inadvertently, somewhat strengthened its negotiating position – albeit in a fragile way. The rules of the UK political game In the UK the principle of separation of powers is strong as far as the independence of the judiciary is concerned.  In January 2017 the UK Supreme Court decided that the Prime Minister could not trigger the Brexit process without the authority of an express Act of Parliament. However, unlike the United States and other presidential systems, there is virtually no separation of powers between legislature and executive.  Government ministers are always also members of Parliament (both upper and lower houses).  The government of the day is dependent on maintaining the confidence of the House of Commons – and will normally be drawn from the political party with the largest number of seats in the House of Commons.  The Prime Minister will be the person who is the leader of that party. The governing Conservative Party today holds the largest number of seats in the House of Commons, but does not have an overall majority.  The Conservative Government is reliant on a “confidence and supply” agreement with the Northern Ireland Democratic Unionist Party (“DUP”) to give it a working majority. Maintaining an open land border between Northern Ireland and the Republic of Ireland is crucial to maintaining the Good Friday Agreement – which underpins the Irish peace process.  Maintaining an open border between Northern Ireland and the rest of the UK is of fundamental importance to the unionist parties in Northern Ireland – not least the DUP.  Thus, the management of the flow of goods and people across the Irish land border, and between Northern Ireland and the UK, have become critical issues in the Brexit debate and negotiations.  The White Paper’s proposed free trade area for goods would avoid friction at the border. Parliament will have a vote on the final Brexit deal, but if the Government loses that vote then it will almost certainly fall and a General Election will follow – more on this below. In addition, if the Prime Minister does not continue to have the support of her party, she would cease to be leader and be replaced.  Providing the Conservative Party continued to maintain its effective majority in the House of Commons, there would not necessarily be a general election on a change in prime minister (as happened when Margaret Thatcher was replaced by John Major in 1990) The position of the UK Government The UK Cabinet had four prominent campaigners for Brexit: David Davis (Secretary for Exiting the EU), Boris Johnson (Foreign Secretary), Michael Gove (Environment and Agriculture Secretary) and Liam Fox (Secretary for International Trade).  David Davis and Boris Johnson have both resigned in protest after the Chequers meeting but, so far, Michael Gove and Liam Fox have stayed in the Cabinet.  To that extent, at least for the moment, the Brexit camp has been split and although the Leave activists are unhappy, they are now weaker and more divided for the reasons described below. The Prime Minister can face a personal vote of confidence if 48 Conservative MPs demand such a vote.  However, she can only be removed if at least 159 of the 316 Conservative MPs then vote against her.  It is currently unlikely that this will happen (although the balance may well change once Brexit has happened – and in the lead up to a general election).  Although more than 48 Conservative MPs would in principle be willing to call a vote of confidence, it is believed that they would not win the subsequent vote to remove her.  If by chance that did happen, then Conservative MPs would select two of their members, who would be put to a vote of Conservative activists.  It is likely that at least one of them would be a strong Leaver, and would win the activists’ vote. The position in Parliament The current view on the maths is as follows: The Conservatives and DUP have 326 MPs out of a total of 650.  It is thought that somewhere between 60 and 80 Conservative MPs might vote against a “Soft Brexit” as currently proposed – and one has to assume it will become softer as negotiations with the EU continue.  The opposition Labour party is equally split.  The Labour leadership of Jeremy Corbyn and John McDonnell are likely to vote against any Brexit deal in order to bring the Government down, irrespective of whether that would lead to the UK crashing out of the EU with no deal.  However it is thought that sufficient opposition MPs would side with the Government in order to vote a “Soft Brexit” through the House of Commons. Once the final position is resolved, whether a “Soft Brexit” or no deal, it is likely that there will be a leadership challenge against Mrs May from within the Conservative Party. The position of the EU So far the EU have been relatively restrained in their public comments, on the basis that they have been waiting to see the detail of the White Paper. The EU has stated on many occasions that the UK cannot “pick and choose” between those parts of the EU Single Market that it likes, and those it does not.  For this reason, the proposals in the White Paper (which do not embrace all of the requirements of the Single Market), are unlikely to be welcomed by the EU.  It is highly likely that the EU will push back on the UK position to some degree, but it is a dangerous game for all sides to risk a “no deal” outcome.  Absent agreement on an extension the UK will leave the EU at 11 pm on 29 March 2019, but any deal will need to be agreed by late autumn 2018 so national parliaments in the EU and UK have time to vote on it. Finally Whatever happens with the EU the further political risk is the possibility that the Conservatives will be punished in any future General Election – allowing the left wing Jeremy Corbyn into power. It is very hard to quantify this risk.  In a recent poll Jeremy Corbyn edged slightly ahead of Theresa May as a preferred Prime Minister, although “Don’t Knows” had a clear majority. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.