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June 20, 2018 |
Acting Associate AG Panuccio Highlights DOJ’s False Claims Act Enforcement Reform Efforts

Click for PDF On June 14, 2018, Acting Associate Attorney General Jesse Panuccio gave remarks highlighting recent enforcement activity and policy initiatives by the Department of Justice (“DOJ”).  The remarks, delivered at the American Bar Association’s 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement, included extensive commentary about DOJ’s ongoing efforts to introduce reforms to promote a more fair and consistent application of the False Claims Act (“FCA”).  While the impact of these policy initiatives remains to be seen, DOJ’s continued focus on these efforts, led by officials at the highest levels within DOJ, suggests that FCA enforcement reform is a priority for the Department. After giving an overview of several FCA settlements from the last eighteen months—apparently designed to demonstrate that this DOJ recognizes the importance of the FCA in a breadth of traditional enforcement areas—Mr. Panuccio discussed two particular priorities: the opioid epidemic and the nation’s elderly population.  He emphasized that DOJ would “actively employ” the FCA against any entity in the opioid distribution chain that engages in fraudulent conduct.  He then highlighted the crucial role of the FCA in protecting the nation’s elderly from fraud and abuse, citing examples of enforcement against a nursing home management company, hospices, and skilled rehabilitation facilities. The majority of Mr. Panuccio’s remarks focused, however, on policy initiatives DOJ is undertaking to ensure that enforcement “is fair and consistent with the rule of law.”  Mr. Panuccio alluded to general reform initiatives by the department, such as the ban on certain third-party payments in settlement agreements, before expanding on reforms specific to the FCA.  Mr. Panuccio highlighted that the recent FCA reform efforts have been spearheaded by Deputy Associate Attorney General Stephen Cox; Mr. Cox had delivered remarks at the Federal Bar Association Qui Tam Conference in February of this year that had provided insight into the positions articulated in the Brand and Granston memoranda.  In his speech, Mr. Panuccio described five policy initiatives being undertaken by DOJ to reform FCA enforcement: (i) qui tam dismissal criteria; (ii) the use of guidance in FCA cases; (iii) cooperation credit; (iv) compliance program credit; and (v) preventing “piling on.” Qui tam dismissals Mr. Panuccio acknowledged the tremendous increase in the number qui tam cases that are filed each year, which includes cases that are not in the public interest.  Recognizing that DOJ expends significant resources to monitor cases even when it declines to intervene, Mr. Panuccio noted that DOJ attorneys have been instructed to consider whether moving to dismiss the action would be an appropriate use of prosecutorial discretion under the FCA.  While DOJ previously exercised this authority only rarely, consistent with the Granston memo, Mr. Panuccio suggested that, going forward, DOJ may use that authority more frequently in order to free up DOJ’s resources for matters in the public interest. Although defendants generally may not yet be experiencing significant differences regarding the possibility of dismissal at the DOJ line level, the continued public discussion of the potential use of DOJ’s dismissal authority by high-level officials suggests that DOJ appreciates the problems caused by frivolous qui tams and may ultimately be more receptive to dismissal of actions lacking merit. Guidance As stated in the Brand Memorandum, DOJ will no longer use noncompliance with agency guidance that expands upon statutory or regulatory requirements as the basis for an FCA violation.  Mr. Panuccio explained that, in an FCA case, evidence that a party received a guidance document would be relevant in proving that the party had knowledge of the law explained in that guidance.  However, DOJ attorneys have been instructed “not to use [DOJ’s] enforcement authority to convert sub-regulatory guidance into rules that have the force or effect of law.” Cooperation With respect to cooperation credit, Mr. Panuccio indicated that DOJ is working on formalizing its practices and that modifications to prior practices should be expected.  That notwithstanding, Mr. Panuccio provided assurances that DOJ will continue to “expect and recognize genuine cooperation” in both civil and criminal matters.  He also noted that the extent of the discount provided when negotiating a settlement would depend on the nature of the cooperation, how helpful it was, and whether it helped identify individual wrongdoers. Though DOJ’s new policies on cooperation credit are still forthcoming, Mr. Panuccio’s remarks suggest that formal cooperation credit might be expanded to cover situations outside of those in which the defendant makes a self-disclosure. Compliance In recognition of the challenges of running large organizations, DOJ will “reward companies that invest in strong compliance measures.”  How this may differ, if at all, from current ad hoc considerations remains to be seen. Piling On Mr. Panuccio acknowledged that, when multiple regulatory bodies pursue a defendant for the same or substantially the same conduct, “unwarranted and disproportionate penalties” can result. In order to avoid this “piling on,” DOJ attorneys will promote coordination within the agency and other regulatory bodies to ensure that defendants are subject to fair punishment and receive the benefit of finality that should accompany a settlement.  Moreover, Mr. Panuccio remarked that DOJ attorneys should not “invoke the threat of criminal prosecution solely to persuade a company to pay a larger settlement in a civil case,” which really is simply a restatement of every attorney’s existing ethical duty.  Whether DOJ leadership’s interest here will result in significant practical developments is uncertain.  Such developments, though perhaps unlikely, could include eliminating the cross-designation of Assistant U.S. Attorneys as both Civil and Criminal; limiting the ability of Civil Division attorneys to invite Criminal Division lawyers to participate in meetings without the request or consent of defendants; or perhaps even somehow inhibiting the Civil Division from using the FCA, with its mandatory treble damages and per-claim penalties, following criminal fines and restitution. We will continue to monitor and report on these important developments. The following Gibson Dunn lawyers assisted in preparing this client update: Stephen Payne, Jonathan Phillips and Claudia Kraft. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@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.

June 14, 2018 |
Revisions to the FFIEC BSA/AML Manual to Include the New CDD Regulation

Click for PDF On May 11, 2018, the federal bank regulators and the Financial Crimes Enforcement Network (“FinCEN”) published two new chapters of the Federal Financial Institution Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual (“BSA/AML Manual”) to reflect changes made by FinCEN to the CDD regulation.[1]  One of the chapters replaces the current chapter “Customer Due Diligence – Overview and Examination Procedures” (“CDD Chapter”), and the other chapter is entirely new and contains an overview of and examination procedures for “Beneficial Ownership for Legal Entity Customers” to reflect the beneficial ownership requirements of the CDD regulation (“Beneficial Ownership Chapter”).[2] The new CDD Chapter builds upon the previous chapter, adds the requirements of the CDD regulation, and otherwise updates the chapter, which had not been revised since 2007.  The Beneficial Ownership Chapter largely repeats what is in the CDD Rule.  Both new chapters reference the regulatory guidance and clarifications from the Frequently Asked Questions issued by FinCEN on April 3, 2018 (the “FAQs”).[3]   Other Refinements to the CDD Regulation May Impact the BSA/AML Manual Implementation of the CDD regulation is a dynamic process and may require further refinement of these chapters as FinCEN issues further guidance.  For instance, in response to concerns of the banking industry, on May 16, 2018, FinCEN issued an administrative ruling imposing a 90-day moratorium on the requirement to recertify CDD information when certificates of deposit (“CDs”) are rolled over or loans renewed (if the CDs or loans were opened before May 11, 2018).  FinCEN will have further discussions with the banking industry and will make a decision whether to make this temporary exception permanent within this 90-day period (before August 9, 2018).[4] In his May 16, 2018, testimony at a House Financial Services Committee hearing on “Implementation of FinCEN’s Customer Due Diligence Rule,” FinCEN Director Kenneth Blanco suggested that FinCEN may be receptive to refinements as compliance experience is gained with the regulation.  Director Blanco also indicated that there will be a period of adjustment for compliance with the regulation and that FinCEN and the regulators will not engage in “gotcha” enforcement, but are seeking “good faith compliance.” Highlights from the New Chapters Periodic Reviews:  The BSA/AML Manual no longer expressly requires periodic CDD reviews, but suggests that regulators may still expect periodic reviews for higher risk customers.  The language in the previous CDD Chapter requiring periodic CDD refresh reviews has been eliminated.[5]Consistent with FAQ 14, the new CDD Chapter states that updating CDD information will be event driven and provides a list of possible event triggers, such as red flags identified through suspicious activity monitoring or receipt of a criminal subpoena.  Nevertheless, the CDD Chapter does not completely eliminate the expectation of periodic reviews for higher risk clients, stating:  “Information provided by higher profile customers and their transactions should be reviewed . . . more frequently throughout the term of the relationship with the bank.”Although this appears to be a relaxation of the expectation to conduct periodic reviews, we expect many banks will not change their current practices.  For a number of years, in addition to event driven reviews, many banks have conducted periodic CDD reviews at risk based intervals because they have understood periodic reviews to be a regulatory expectation. Lower Beneficial Ownership Thresholds:  Somewhat surprisingly, there is no expression in the new chapters that consideration should be given to obtaining beneficial ownership at a lower threshold than 25% for certain high risk business lines or customer types.  The new Beneficial Ownership Chapter simply repeats the regulatory requirement stating that:  “The beneficial ownership rule requires banks to collect beneficial ownership information at the 25 percent ownership threshold regardless of the customer’s risk profile.”  The FAQs (FAQ 6 and 7) refer to the fact that a financial institution may “choose” to apply a lower threshold and “there may be circumstances where a financial institution may determine a lower threshold may be warranted.”  We understand that specifying an expectation that there should be lower beneficial thresholds for certain higher risk customers was an issue that was debated among FinCEN and the bank regulators.For a number of years, many banks have obtained beneficial ownership at lower than 25% thresholds for high risk business lines and customers (e.g., private banking for non-resident aliens).  Banks that have previously applied a lower threshold, however, should carefully evaluate any decision to raise thresholds to the 25% level in the regulation.  If a bank currently applies a lower threshold, raising the threshold may attract regulatory scrutiny about whether the move was justified from a risk standpoint.  Moreover, a risk-based program should address not only regulatory risk, but also money laundering risk.  Therefore, banks should consider reviewing beneficial ownership at lower thresholds for certain customers and business lines and when a legal entity customer has an unusually complex or opaque ownership structure for the type of customer regardless of the business line or risk rating of the customer. New Accounts:  The new chapters do not discuss one of the most controversial and challenging requirements of the CDD rule, the requirement to verify CDD information when a customer previously subject to CDD opens a new account, including when CDs are rolled over or loans renewed.  This most likely may be because application of the requirement to CD rollovers and loan renewals is still under consideration by FinCEN, as discussed above. Enhanced Due Diligence:  The requirement to maintain enhanced due diligence (“EDD”) policies, procedures, and processes for higher risk customers remains with no new suggested categories of customers that should be subject to EDD. Risk Rating:  The new CDD Chapter seems to articulate an expectation to risk rate customers:  “The bank should have an understanding of the money laundering and terrorist financing risk of its customers, referred to in the rule as the customer risk profile.  This concept is also commonly referred to as the customer risk rating.”  The CDD Chapter, therefore, could be read as expressing for banks an expectation that goes beyond FinCEN’s expectation for all covered financial institutions in FAQ 35, which states that a customer profile “may, but need not, include a system of risk ratings or categories of customers.”  It appears that banks that do not currently risk rate customers should consider doing so.  Since the CDD section was first drafted in 2006 and amended in 2007, customer risk rating based on an established method with weighted risk factors has become a best and almost universal practice for banks to facilitate the AML risk assessment, CDD/EDD, and the identification of suspicious activity. Enterprise-Wide CDD:  The new CDD Chapter recognizes the CDD approach of many complex organizations that have CDD requirements and functions that cross financial institution legal entities and the general enterprise-wide approach to BSA/AML long referenced in the BSA/AML Manual.  See BSA/AML Manual, BSA/AML Compliance Program Structures Overview, at p. 155.  The CDD Chapter states that a bank “may choose to implement CDD policies, procedures and processes on an enterprise-wide basis to the extent permitted by law sharing across business lines, legal entities, and with affiliate support units.” Conclusion Despite the CDD regulation, at its core CDD compliance is still risk based and regulatory risk remains a concern.  Every bank must carefully and continually review its CDD program against the regulatory requirements and expectations articulated in the BSA/AML Manual, as well as recent regulatory enforcement actions, the institution’s past examination and independent and compliance testing issues, and best practices of peer institutions.  This review will help anticipate whether there are aspects of its CDD/EDD program that could be subject to criticism in the examination process.  As the U.S. Court of Appeals for the Ninth Circuit recently recognized, detailed manuals issued by agencies with enforcement authority like the BSA/AML Manual “can put regulated banks on notice of expected conduct.”  California Pacific Bank v. Federal Deposit Insurance Corporation, 885 F.3d 560, 572 (9th Cir. 2018).  The BSA/AML Manual is an important and welcome roadmap although not always as up to date, clear or detailed as banks would like it to be. These were the first revisions to the BSA/AML Manual since 2014.  We understand that additional revisions to other chapters are under consideration.    [1]   May 11, 2018 also was the compliance date for the CDD regulations.  The Notice of Final Rulemaking for the CDD regulation, which was published on May 11, 2016, provided a two-year implementation period.  81 Fed. Reg. 29,398 (May 11, 2016).  https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf. For banks, the new regulation is set forth in the BSA regulations at 31 C.F.R. § 1010.230 (beneficial ownership requirements) and 31 C.F.R. § 1020.210(a)(5).    [2]   The new chapters can be found at: https://www.ffiec.gov/press/pdf/Customer%20Due%20Diligence%20-%20Overview%20and%20Exam%20Procedures-FINAL.pdfw  (CDD Chapter) and https://www.ffiec.gov/press/pdf/Beneficial%20Ownership%20Requirements%20for %20Legal%20Entity%20CustomersOverview-FINAL.pdf (Beneficial Ownership Chapter).    [3]   Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, FIN-2018-G001.  https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-0.  On April 23, 2018, Gibson Dunn published a client alert on these FAQs.  FinCEN Issues FAQs on Customer Due Diligence Regulation.  https://www.gibsondunn.com/fincen-issues-faqs-on-customer-due-diligence-regulation/. FinCEN also issued FAQs on the regulation on September 29, 2017. https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf.    [4]   Beneficial Ownership Requirements for Legal Entity Customers of Certain Financial Products and Services with Automatic Rollovers or Renewals, FIN-2018-R002.  https://www.fincen.gov/sites/default/files/2018-05/FinCEN%20Ruling%20CD%20and%20Loan%20Rollover%20Relief_FINAL%20508-revised.pdf    [5]   The BSA/AML Manual previously stated at p. 57:  “CDD processes should include periodic risk-based monitoring of the customer relationship to determine if there are substantive changes to the original CDD information. . . .” 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 Financial Institutions practice group, or the authors: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Linda Noonan – Washington, D.C. (+1 202-887-3595, lnoonan@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.

May 31, 2018 |
President Trump Issues Additional Sanctions Further Targeting PdVSA and the Government of Venezuela

Click for PDF On May 21, 2018, in response to the reelection of Venezuelan President Nicolás Maduro, President Donald J. Trump imposed additional sanctions against the Government of Venezuela.[1]  The new sanctions prohibit U.S. persons from engaging in certain dealings in debt owed to the Government of Venezuela and equity of Venezuelan state-owned entities.  In this regard, these sanctions build upon prior Venezuela-related sanctions to further restrict financing available to the current Venezuelan government. In a statement released with the executive order, President Trump noted that the sanctions are designed 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.”[2]  In many senses this executive order represents a protective measure.  Furthermore, selling and collateralizing debt owed to and equity held by the Venezuelan government sidesteps other U.S. sanctions to provide alternative means of financing state-owned enterprises, such as Petroleos de Venezuela, S.A. (“PdVSA”), which fund support for the Maduro regime.[3]  The new sanctions are meant to close off this potential funding stream without incurring the collateral costs associated with adding PdVSA to the Specially Designated Nationals (“SDN”) list. Notably, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”)—which is also immersed in the tasks of issuing guidance related to new Russia and Iranian sanctions—has not provided any general licenses, interpretive guidance, or additional statements regarding this executive order or the sanctions it imposes. OVERVIEW OF NEW SANCTIONS The executive order specifically prohibits the following transactions in debt owed to and equity held by the Government of Venezuela.  As in earlier executive orders, the “Government of Venezuela” includes 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 (including, for example, PdVSA subsidiaries and majority-owned joint ventures).[4] (1) Transactions involving the purchase of any debt owed to the Government of Venezuela, including accounts receivable.[5] The executive order prohibits U.S. persons from engaging in transactions involving the purchase of debts owed to the Government of Venezuela.  For example, pursuant to this prohibition, a U.S. person may not purchase from PdVSA a debt it is owed by a non-sanctioned customer.  Importantly, this provision prohibits not only U.S. persons from buying debts owed to the Venezuelan government but also broadly prohibits U.S. persons from engaging in any transactions related to the purchase of such debts.  For example, a U.S. bank may not provide financing for one entity to purchase the debt that another entity owes the Government of Venezuela. As in other Venezuela-related sanctions, debt subject to this prohibition includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.[6]  Although accounts receivable are expressly included as debt in this provision, their inclusion here does not represent an expansion of OFAC’s interpretation of debt.  Rather, OFAC has generally considered trade debt, including accounts receivable, to be debt subject to prior Venezuela-related sanctions and other similar sanctions.[7]  The explicit inclusion of accounts receivable in these provisions highlights the type of transaction that the sanctions are primarily aimed at stopping and for which compliance professionals should screen. (2) Transactions involving any debt owed to the Government of Venezuela that is pledged as collateral after the effective date of this order, including accounts receivable.[8] The executive order also prohibits U.S. persons from dealing in debt owed to the Government of Venezuela that is pledged as collateral after May 21, 2018.  OFAC has not provided any interpretative guidance regarding what constitutes “collateral” for the purposes of this provision, but it likely refers to debt, as defined above, which is offered as security for a loan made to the Government of Venezuela.  This provision only covers debt pledged as collateral after May 21, 2018.  It does not prohibit U.S. persons from dealing in the transfer of debt owed to the Government of Venezuela that was pledged as collateral on or before May 21, 2018.  However, OFAC has also not provided additional information regarding when it will consider a debt to be “pledged” for the purposes of determining when such debt is covered by this provision.  It is likely that debt is pledged upon the execution of the agreement offering the debt as collateral. This provision directly curtails the ability of the Venezuelan Government to use accounts receivable financing to support its continued operation.  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 by PdVSA. While similar in some respects to prior sanctions targeting debt transactions, these new prohibitions include several notable differences.  First, the provisions restrict transactions involving debt owed to the Government of Venezuela, rather than debt owed by the Government of Venezuela to its creditors.[9]  Second, there is no exception for dealings in short-term debt.  Where prior Venezuela sanctions permitted transactions in debt with payment terms less than 30 or 90 days (depending upon the debtor), debts with payment terms of any length are covered by this executive order.[10]  Finally, these prohibitions are not limited to “new debt” issued after a specified date.[11]  Instead, all debts owing to the Government of Venezuela, regardless of when they were issued, are covered.  The novelty of these features poses additional compliance challenges for U.S. businesses and financial institutions. (3) Transactions involving 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.[12] Pursuant to this provision, U.S. persons are broadly prohibited from engaging in transactions in which the Government of Venezuela is selling, transferring, assigning, or collateralizing equity interests in Venezuelan state-owned entities.  As in prior sanctions, “equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.[13]  In that regard, this prohibition prevents the Maduro government from selling shares in state-owned entities to finance their continued operation. Unlike certain prior provisions restricting equity transactions involving the Venezuelan government, this provision is not limited based on the date the relevant equity was issued.[14]  Instead, all equity interests in any entity majority-owned by the Venezuelan government are subject to this prohibition, regardless of when the equity was issued.  Relatedly, where other prior sanctions prohibited U.S. persons from participating in the purchase of equity from the Venezuelan government, this provision now prohibits U.S. persons from participating in a broader range of transactions involving such equity.[15] Importantly, this prohibition covers transactions involving Venezuelan government sale, transfer, assignment, or collateralization of equity interests in CITGO.  When sanctions on Venezuelan government debt or equity were imposed in August 2017, OFAC issued a general license effectively carving out CITGO, PdVSA’s U.S. subsidiary, from those restrictions.[16]  OFAC has offered no such authorization here.  Consequently, in the absence of a license from OFAC, U.S. persons are prohibited from dealing in CITGO shares offered for sale, transfer, assignment, or collateral by the Government of Venezuela, including PdVSA. EUROPEAN UNION RESPONSE On May 29, 2018, the EU Foreign Ministers noted that the EU will “act swiftly, according to established procedures, with the aim of imposing additional targeted and reversible restrictive measures, that do not harm the Venezuelan population, whose plight the EU wishes to alleviate,” without yet detailing the exact scope of the additional EU sanctions.[17]  So far, the EU with Regulation (EU) 2017/2063 has already legislated an arms embargo and the prohibition on equipment, which might be used for internal repression, targeting also respective auxiliary services, as well as an asset freeze and prohibitions that no funds or economic resources shall be made available to or for the benefit of certain persons.[18]  From the EU statements, it can be inferred that as a minimum it is to be expected that the list of persons subject to the asset freeze will be expanded. IMPLICATIONS The new sanctions targeting the Government of Venezuela may have significant effects for U.S. and non-U.S. companies.  First, the novel features of the debt-related provisions, including restrictions on debt owed to rather than by PdVSA, may require firms to reconfigure their compliance strategies.  For example, the purpose of covered transactions or the parties’ relationship to the Government of Venezuela may not be readily apparent to financial institutions, who may, as a result, wish to supplement transaction screening with compliance certifications from their customers.  Foreign financial institutions must be wary as well.  If a foreign bank obscures the purpose of a transaction in order for a U.S. bank to accept the transaction, the foreign bank could be held liable for “causing” a violation of U.S. sanctions.[19] Furthermore, these additional sanctions, coupled with the prominence of state-owned enterprises in the Venezuelan economy, will further discourage U.S. companies from engaging in business in Venezuela.  Companies that do or have done business in Venezuela already face significant challenges securing payment from state-owned entities, such as PdVSA.  Not only does PdVSA lack the funding to pay outstanding debts but prior sanctions and OFAC-issued interpretative guidance have limited the ability of all parties to rely on debt financing.[20]  Cutting off PdVSA’s ability to use the sale of state-owned equities and accounts receivable financing to raise funds will make it more challenging to set acceptable payment terms for ongoing work in Venezuela.  When no viable payment options remain, U.S. businesses will likely stop doing business with companies like PdVSA.  In this way, the U.S. Venezuela-related sanctions may ultimately incur the same collateral costs that would have come from blacklisting PdVSA, even though these measures were intended to avoid this outcome. Despite having this potential unintended consequence, the escalating sanctions targeting Venezuela have not yet had their intended effect on the Maduro regime.  Although the Trump administration and the EU called for “free and fair” elections and the disbanding of the Venezuelan Constituent Assembly when announcing new sanctions last year, the Constituent Assembly certified the reelection of President Maduro in an election the Trump administration characterized as “neither free nor fair.”[21]  It is unclear whether the addition of these new prohibitions will be sufficient to achieve the desired outcome in Venezuela.    [1]   E.O. 13835 (May 21, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_eo_13835.pdf.    [2]   Statement from President Donald J. Trump on the Maduro Regime in Venezuela (May 21, 2018), available at https://www.whitehouse.gov/briefings-statements/statement-president-donald-j-trump-maduro-regime-venezuela/.    [3]   OFAC FAQs at Question 512, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.    [4]   E.O 13835 § 2(d).    [5]   E.O 13835 § 1(a)(i).    [6]   OFAC FAQs at Question 511, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.    [7]   Id. at Question 419, indicating that payment terms for goods provided and services rendered are debt subject to applicable sanctions.    [8]   E.O 13835 § 1(a)(ii).    [9]   Cf. Directive 2 (as amended on Sept. 29, 2017) under Executive Order 13662, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive2_20170929.pdf. [10]   E.O. 13808 (Aug. 24, 2017) (“EO”), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/13808.pdf. [11]   Cf. E.O. 13808 § 1(a)(i)-(ii). [12]   E.O 13835 § 1(a)(iii). [13]   OFAC FAQs at Question 511, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela. [14]   Cf. E.O. 13808 § 1(a)(ii). [15]   Cf. E.O. 13808 § 1(b). [16]   General License 2, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl2.pdf. [17]   Venezuela: Council adopts conclusions, available at http://www.consilium.europa.eu/en/press/press-releases/2018/05/28/venezuela-council-adopts-conclusions/. [18]   Regulation (EU) 2017/2063, available at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017R2063&from=EN. [19]   E.O 13835 § 2(a); see e.g., OFAC (July 20, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170727_transtel.pdf, [20]   Clifford Krauss, ConocoPhillips Wins $2 Billion Ruling over Venezuelan Seizure, (Apr. 25, 2018) NY Times, available at https://www.nytimes.com/2018/04/25/business/energy-environment/conocophillips-venezuela-ruling.html. [21]   Statement by the Press Secretary on New Financial Sanctions on Venezuela (Aug. 25, 2017), available at https://www.whitehouse.gov/briefings-statements/statement-press-secretary-new-financial-sanctions-venezuela/; Declaration by the High Representative on behalf of the EU on the presidential and regional elections in Venezuela available at http://www.consilium.europa.eu/en/press/press-releases/2018/05/22/declaration-by-the-high-representative-on-behalf-of-the-eu-on-the-presidential-and-regional-elections-in-venezuela/. The following Gibson Dunn lawyers assisted in preparing this client update: R.L. Pratt, Judith Alison Lee, Adam Smith, Stephanie Connor and Richard Roeder. 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) Mark Handley – London (+44 (0)207 071 4277, mhandley@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.

May 30, 2018 |
Update on Proposed Changes to the CFIUS Review Process

Click for PDF After six months of wrangling over the fate of a proposal to modernize the process by which the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) reviews foreign investment in the United States, the U.S. Congress appears primed to streamline and modernize the CFIUS review process.  Last week, committees in the Senate and the House of Representatives approved mark-ups of the proposed legislation, which will most likely be included in the National Defense Authorization Act of Fiscal Year 2019.  As it currently stands, the proposed legislation would alter the CFIUS review process in many critical respects. Background CFIUS is an inter-agency committee authorized to review the national security implications of transactions that could result in control of a U.S. business by a foreign person (“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 particular national security implications posed by an increasing number of Chinese investments targeting sensitive technologies in the United States. As we wrote in November 2017, the proposed Foreign Investment Risk Review Modernization Act (“FIRRMA”) sought to expand the scope of transactions subject to CFIUS review and reform the process by which that review takes place.[2]  Despite initial bipartisan congressional support and endorsement by the Trump administration, FIRRMA encountered a fair amount of criticism from U.S. industry groups.  As originally drafted, FIRRMA would have broadened the scope of transactions subject to CFIUS review to include—among other things—outbound investments in which a U.S. company would contribute intellectual property or other support, such as joint ventures or licensing agreements, which are not currently subject to CFIUS jurisdiction.  After months of intense lobbying, those provisions have been replaced by a proposal to update U.S. export controls to regulate “emerging” and “foundational” technologies.  The amended version of FIRRMA also provides for short-form “light” filings, tightens the timeframe for CFIUS reviews, exempts acquirers from U.S. allies, expands the definition of “passive” investments excluded from CFIUS review, and codifies the Committee’s review of real estate transactions involving sensitive government sites as well as those connected to air, land, and sea ports. Regulating Outbound Technology Transfers Through the Export Control Process One of the most controversial provisions of the original FIRRMA legislation was the inclusion of outbound investments—such as joint ventures or licensing agreements—in the list of covered transactions subject to CFIUS review.[3]  As originally drafted, FIRRMA 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.  Such structures are common vehicles for foreign investment, and do not trigger CFIUS jurisdiction under current regulations because they do not involve the acquisition of a U.S. business.  As detailed below, the Senate ultimately retreated from this approach, opting instead to deal with such transactions through a new and enhanced set of export controls. The Senate’s amended version of FIRRMA would 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 subject to CFIUS review.[4]  The Senate draft directs the Secretary of Commerce to establish controls on the export, re-export, or in-country transfer of such technology, such as requiring a license or other authorization.[5]  Notably, the legislation would require a license before any covered technology is transferred to a country subject to an arms embargo, which would include technology transfers to China.  If a license application is submitted on behalf of a joint venture, the Commerce Department may require the disclosure of any foreign person with significant ownership interests in the foreign entity participating in the transaction. The House version of the proposed CFIUS legislation also includes robust export control measures in lieu of an effort to regulate outbound investments through CFIUS.  As a result, the CFIUS reform legislation may provide an end-run around attempts to reform and modernize U.S. export controls, an effort that has languished on the legislative docket for decades. Mandatory “Light” Filings and a Streamlined Review Process  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.[6]  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. 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.[7]  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. The Senate’s amended version of FIRRMA would alter this process in several key respects: Mandatory “Light” Filings.  In lieu of the lengthy voluntary notice required in the current CFIUS review process, FIRRMA would authorize parties to submit short form “declarations”—not to exceed 5 pages in length—at least 45 days prior to the completion of a transaction.  Declarations would be mandatory in certain circumstances, such as when a foreign government holds a “substantial” interest in the foreign acquirer, or in other circumstances prescribed by the Committee.[8] Exemptions.  The proposed Senate bill would also allow the Committee to exempt transactions involving companies from U.S. allies, as well as those which have developed a parallel process to review the national security implications of foreign investment.  Notably, parallel measures to review foreign investment have been proposed in a number of other countries.  In August 2017, citing similar concerns with China’s technological investments, the European Union called for more rigorous screening of foreign acquisitions involving European companies, and Germany increased the authority of its Ministry for Economic Affairs and Energy (“BMWi”) to review foreign investments.  And in October 2017, the United Kingdom published several legislative proposals that would increase its ability to review and intervene in transactions that raise national security considerations or involve national infrastructure. Timeframe.  FIRRMA would also require the Committee to respond to a declaration within a tighter time period.  The Senate draft says that the Committee shall take action within 30 days of receiving a declaration,[9] whereas the House draft cuts that response time down to 15 days.[10]  FIRRMA would provide for a longer initial review period, extending it from 30 to 45 days and authorizing CFIUS to extend the 45-day investigation phase by 30 days “in extraordinary circumstances.”[11]  In the House draft, the extension period for extraordinary circumstances is only 15 days.[12] Filing Fees.  The original FIRRMA bill included a provision requiring filing fees not to exceed the lesser of 1% of the value of the transaction or $300,000.[13] The Senate draft still provides for filing fees, but it is less specific as to the amount, instructing the Committee to consider the value of the transaction, the effect of the fee on small business concerns, the effect on foreign investment, and the expenses of the Committee in setting the fee.[14]  The Senate draft also instructs the Committee to periodically reconsider the amount of the fee.  In contrast, the House draft eliminates the proposed filing fees entirely. Judicial Review.  The original November 2017 version of FIRRMA would have exempted the actions and findings of the Committee from judicial review, limiting parties’ ability to challenge CFIUS decisions.  The amended Senate version of the bill provides that parties may challenge CFIUS actions before the U.S. Court of Appeals for D.C. Circuit.[15]  The Senate draft also establishes procedures for the review of privileged or classified information via ex parte and in camera reviews.[16] The Space Between “Control” and “Passive” Investments The Senate draft would expand the definition of a covered transaction to include not only a transaction through which a foreign company could obtain “control” of a U.S. company, but also any “other investment (other than passive investment) by a foreign person in any United States critical technology company or United States critical infrastructure company that is unaffiliated with the foreign person.”[17]  Notably, current CFIUS regulations exclude transactions that result in a foreign person holding 10 percent or less of the outstanding voting interest in a U.S. business if the transaction is “solely for the purpose of a passive investment,” i.e., “if the person holding or acquiring such interests does not plan or intend to exercise control, does not possess or develop any purpose other than passive investment, and does not take any action inconsistent with holding or acquiring such interests solely for the purpose of passive investment.”[18]  FIRRMA sought to clarify this provision by codifying a stricter definition of the term passive investment, not dependent upon the percent of ownership interest.  If enacted, this change will significantly increase the types of transactions that are subject to CFIUS scrutiny. The amended version of the Senate bill effectively expands the definition in several key ways.  For example, the original FIRRMA stated that in order for an investment by a foreign person in a U.S. business to be considered passive, the foreign person could not have access to any non-public technical information or nontechnical information that was not available to all investors.[19]  The amended Senate draft adds a materiality requirement and eliminates the provision on nontechnical information entirely.  In the new version, the information afforded must be technical, material, and nonpublic in order for the investment to be deemed non-passive.[20] The draft Senate legislation also specifically indicates that financial information does not qualify as material nonpublic technical information.[21] The passivity definition is of critical importance for private equity funds, and the amended Senate version of the bill accommodates such funds by excluding them from regulations that would allow CFIUS to create a test for passivity based on the size of the investment.  The Senate draft also clarifies that an indirect investment by a foreign person through an investment fund that affords the foreign person membership as a limited partner on an advisory board or committee shall be considered a passive investment so long as the advisory board or committee does not have the power to approve, disapprove, or otherwise control investment decisions of the fund.[22] Real Estate Transactions As drafted late last year, FIRRMA sought to broaden the scope of transactions subject to CFIUS review to include the purchase or lease by a foreign person of real estate that is in close proximity to a U.S. military installation or other sensitive U.S. government facility or property.  This would effectively codify the Committee’s standard practice of examining the proximity of a physical property to any sensitive military or U.S. government facilities.  The amended version of the Senate draft retains this provision, and includes properties connected to air, land or sea ports.[23]  However, the Senate draft exempts the purchase of any ‘single housing unit’ as well as real estate in ‘urbanized areas’ as defined by the U.S. Census Bureau.[24] Amendments A to ZTE By the end of the Senate Banking mark-up on May 22, 2018, the Senate’s draft legislation had been subject to 50 different amendments, ranging from pedestrian changes in title to substantive alterations in the original language.  There was also a last-ditch attempt by Senator Van Hollen (D-MD) to push back on the Trump administration’s recent effort to weaken penalties imposed on the Chinese telecom giant ZTE Corporation (“ZTE”) for violations of U.S. sanctions and export controls.  Notably, the amended legislation was approved by the Senate Committee on Banking, Housing, and Urban Affairs with the ZTE amendment by a unanimous vote.  Some observers noted that the Senate’s attempt to push back on the President’s interference in the ZTE case could provide the administration with certain diplomatic cover in advance of further trade talks with the Chinese.    [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]   Press Release, U.S. Senator John Cornyn, Cornyn, Feinstein, Burr Introduce Bill to Strengthen the CFIUS Review Process, Safeguard National Security (Nov. 8, 2017), available at https://www.cornyn.senate.gov/content/news/cornyn-feinstein-burr-introduce-bill-strengthen-cfius-review-process-safeguard-national.    [3]   FIRRMA Section 3(a)(5)(B)(v).  The House draft includes only joint ventures that could result in the foreign control of a U.S. business in the list of covered transactions.  Amendment to H.R. 5841 Section 201(3)(B)(i).    [4]   Amendment to S. 2098 Section 25(a).    [5]   Amendment to S. 2098 Section 25(b).    [6]   31 C.F.R. §§ 800.401(a)-(b), 800.402(c).    [7]   31 C.F.R. § 800.506.    [8]   The requirements for what can trigger a mandatory declaration (the acquisition of a substantial interest in a U.S. business by a foreign person in which a foreign government has a substantial interest) are the same in both the House and Senate drafts.  The definition of substantial interest is also the same.  The original Senate version of FIRRMA mandated declarations for transactions involving the acquisition of a voting interest of at least 25% in a U.S. business by a foreign person in which a foreign government owns, directly or indirectly, at least a 25% voting interest.  See FIRRMA Section 5(v)(II)(aa).  Recent iterations of the bill replaced this 25% threshold with the phrase “substantial interest,” to be defined by subsequent regulation, with the caveat that an interest that is a passive investment or that is less than a 10% voting interest shall not be considered a substantial interest.  Amendment to S. 2098 Section 6(v)(IV)(bb)(AA)-(CC).  The House bill largely parallels the Senate bill on the use of voluntary and mandatory declarations.  One linguistic change is that the Senate bill directs that the Committee “shall” prescribe regulations establishing requirements for declarations whereas the House bill says that the Committee “may” prescribe regulations for voluntary and mandatory declarations.  Amendment to H.R. 5841 Section 302(a)(v)(II)(aa).    [9]   Amendment to S. 2098 Section 6(v)(III)(bb). [10]   Amendment to H.R. 5841 Section 302(a)(v)(IV)(bb). [11]   Amendment to S. 2098 Section 9. [12]   Amendment to H.R. 5841 Section 303. [13]   FIRRMA Section 19. [14]   Amendment to S. 2098 Section 22. [15]   Amendment to S. 2098 Section 15. [16]   These provisions clarify parties’ rights in the wake of the D.C. Circuit’s 2014 decision in Ralls Corp. v. Committee on Foreign Investment in the United States.  After CFIUS and President Obama ordered the Chinese-owned Ralls Corporation to divest a wind-farm project in close proximity to a Department of Defense facility, the D.C. Circuit held that the Committee had violated Ralls’ due process rights by failing, prior to the order to divest, to provide Ralls with access to the unclassified information that the government had relied on, and to give Ralls the opportunity to rebut that unclassified information. [17]   Amendment to S. 2098 Section 3(a)(5)(B)(iii). [18]   31 C.F.R. §§ 800.302(b), 800.223. [19]   FIRRMA Section 3(a)(5)(D)(i). [20]   Amendment to S. 2098 Section 3(a)(5)(D)(i). [21]   Amendment to S. 2098 Section 3(a)(5)(D)(ii). [22]   Amendment to S. 2098 Section 3(a)(5)(D)(iv). [23]   Amendment to S. 2098 Section 3(a)(5)(B)(ii). [24]   Amendment to S. 2098 Section 3(a)(5)(C)(i). The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Jose Fernandez 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 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 (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Handley – London (+44 (0)207 071 4277, mhandley@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.

May 21, 2018 |
The EU Responds to the U.S. Withdrawal from the Iran Deal

Click for PDF We recently assessed President Trump’s decision to abandon the 2015 Iran nuclear deal, known as the Joint Comprehensive Plan of Action (“JCPOA”), and to re-impose lifted sanctions on Iran, including secondary sanctions that threaten to limit non-U.S. entities’ access to the U.S. market if they transact with certain Iranian entities. On May 17, 2018, Jean-Claude Juncker, President of the European Commission, stated that the European Union (EU) would “stick to the [JCPOA]” and seek to protect “European businesses, especially small and medium-sized enterprises.”[1] The next day, the European Commission announced it would prohibit compliance with the re-imposed U.S. sanctions.[2] The Commission will accomplish this by revising an existing EU blocking statute,[3] so that EU nationals and other persons within the EU, as well as companies incorporated within the EU, such as subsidiaries of U.S. companies, will be prohibited from complying with the revived U.S. sanctions.[4] This decision thrusts companies that do business in both the United States and EU into significant legal uncertainty. The European Commission also announced a number of other measures designed to facilitate continued trade with Iran. For example, the Commission has “[l]aunched the formal process to remove obstacles for the European Investment Bank to decide under the EU budget guarantee to finance activities” in Iran.[5] As “confidence building measures,” the Commission will “continue and strengthen the ongoing sectoral cooperation with, and assistance to, Iran, including in the energy sector and with regard to small and medium-sized companies.”[6] The Commission has also said it would encourage member states “to explore the possibility of allowing one-off bank transfers to the Central Bank of Iran” to allow Iranian authorities to receive oil-related revenues.[7] Implementation Timeline The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced the re-imposed sanctions will be subject to 90- and 180-day wind-down periods that will expire on August 6 and November 4, 2018, respectively.[8] The European Commission aims to have the amended blocking statute take effect before the first expiration on August 6, 2018.[9] Once amended, the blocking statute will automatically take effect after two months, unless either the European Parliament or Council object, but it could take effect sooner if both institutions indicate approval before the objection periods ends.[10] Legal Risks A tangle of U.S. laws, including the Iran and Libya Sanctions Act of 1996 (“ISA”)[11] and Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”),[12] provide sanctions that apply extraterritorially to prohibit non-U.S. entities from transacting with various Iranian entities. Companies that engage in such transactions may face severe consequences, including large financial penalties and a complete ban from the U.S. banking system.[13] Needless to say, such a ban may pose an existential threat to non-U.S. entities with significant U.S. business. The practical effect of the EU blocking statute, however, remains uncertain. That regulation prohibits entities and persons from complying with U.S. sanctions and foreign court requests that stem from U.S. laws specified in the blocking statute’s annex.[14] The annex currently includes the following laws: a)      Cuban Liberty and Democratic Solidarity Act of 1996; b)      Iran and Libyan Sanctions Act of 1996; c)      Code of Federal Regulations, Ch. V, Part 515 (Cuban Assets Controls Regulations), subparts B, E, and G. The blocking statute’s impact remains uncertain for a variety of reasons. First, EU member states must give effect to the statute by passing domestic implementing laws. The United Kingdom passed such a law, which created a criminal offence for compliance with the stated U.S. laws. The U.K. law does not provide for a prison sentence as punishment,[15] but it does provide for a potentially unlimited fine.[16] Other member states also created criminal offences, including Ireland, the Netherlands, and Sweden. Other states, including Germany, Italy and Spain, created administrative penalties for non-compliance. Meanwhile some member states, including France, Belgium and Luxembourg, never implemented the blocking statute. It is unclear whether they would do so now, although they have a duty under EU law to implement the blocking statute. Second, the European Commission has not yet released the amended statute: its scope remains to be seen. Finally, the extent to which member states will prosecute violations of the blocking statute remains unclear. It has largely been viewed as a political symbol, rather than an effective legal tool. No company has ever been convicted of breaching the blocking statute,[17] and only Austria has ever pressed charges.[18] Indeed, European Commission Vice President Valdis Dombrovskis recognized the blocking statute “could be of limited effectiveness” given the centrality of the U.S. banking system.[19] Considering the current political situation, which substantially differs from the situation when the EU blocking statute was first introduced in 1996, the enforcement appetite, however, might increase. Possible Options for Affected Companies The U.S. sanctions and impending EU blocking statute confront companies with a multi-jurisdictional Scylla and Charybdis. Entities have three basic options. First, they could attempt to comply with both U.S. and EU law while maintaining business in Iran. Some companies, such as French oil conglomerate Total, have indicated they will seek special licenses from the United States to allow their business in Iran to continue.[20] Given that the purpose of the U.S. sanctions is to isolate Iran economically, such efforts seem unlikely to succeed. Second, companies could comply with U.S. sanctions while exiting Iranian business and thereby potentially violating the EU blocking statute. While special attention has to be paid to criminal prosecution in, inter alia, Ireland, and high fines in the United Kingdom,[21] most member states impose maximum fines well under $1 million.[22] The United States, meanwhile, may impose multi-billion dollar fines[23] and ban companies from the U.S. banking system. Given the profound threat of such penalties, a number of non-U.S. companies have already announced plans to end business in Iran.[24] Third, companies could comply with the blocking statute, maintain business with Iranian entities, and violate the U.S. sanctions. But given the existential threat that a ban from the U.S. financial system would pose to many large companies, this route appears least tenable. Whether this route merits pursuit will largely depend on the support the EU commits to providing to small and medium-sized enterprises that become a target of U.S. sanctions. Conclusion The European Commission’s announcement that it will amend the blocking statute further increases the uncertainty companies face in navigating U.S. sanctions on Iran, and may expose them to significant liability. Russia’s recently proposed law to impose fines and possibly imprisonment for complying with U.S. sanctions against Russia only adds to the uncertainty.[25] The scope and practical effect of the EU blocking statute remain to be seen, but Gibson Dunn will continue to closely monitor the situation. 1 Speech, European Commission, Press conference remarks by Jean-Claude Juncker (May 17, 2018), http://europa.eu/rapid/press-release_SPEECH-18-3851_en.htm. 2 Press Release, European Commission, European Commission acts to protect the interests of EU companies investing in Iran as part of the EU’s continued commitment to the Joint Comprehensive Plan of Action (May 18, 2018), http://europa.eu/rapid/press-release_IP-18-3861_en.htm. 3 Council Regulation (EC) No. 2271/1996 (OJ L 309, 29.11.1996, p. 1-6). 4 Id.; see also Press Release, supra note 2. 5 Press Release, supra note 2. 6 Id. 7 Id. 8 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), https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf, (hereinafter “OFAC FAQ”). 9 Press release, supra note 2. 10 Id. 11 Pub. L. No. 104-172 (codified as amended in scattered sections of 50 U.S.C.). 12 Pub. L. No. 111-195 (codified as amended in scattered sections of 22 and 50 U.S.C.). 13 CISADA § 102. 14 Council Regulation (EC) No. 2271/1996, art. 5. 15 Extraterritorial US Legislation (Sanctions against Cuba, Iran, Libya) (Protection of Trading Interests) Order, S.I. 1996/3171. The U.K. law’s omission of a custodial sentence makes it an outlier in U.K. financial crime laws. 16 Id. 17 See, e.g., In 1990s Redux, EU to Consider Blocking U.S. Sanctions Over Iran, N.Y. Times (May 9, 2018), https://www.nytimes.com/reuters/2018/05/09/business/09reuters-iran-nuclear-eu-business.html. 18 See Austria charges bank after Cuban accounts cancelled, Reuters (Apr. 27, 2007), http://www.reuters.com/article/2007/04/27/austria-bawag-idUSL2711446820070427. 19 Huw Jones, EU says block on U.S. sanctions on Iran of limited use for EU banks, Reuters (May 17, 2018), https://www.reuters.com/article/us-iran-nuclear-eu-banks/eu-says-block-on-u-s-sanctions-on-iran-of-limited-use-for-eu-banks-idUSKCN1II17K; 20 Steven Mufson, French oil giant Total seeks Iran sanctions waiver from Trump for $2 billion project, Washington Post (May 16, 2018), https://www.washingtonpost.com/business/economy/french-oil-giant-total-seeks-iran-sanctions-waiver-from-trump-for-2-billion-project/2018/05/16/dfc709cc-5926-11e8-b656-a5f8c2a9295d_story.html. 21 See Extraterritorial US Legislation (Sanctions against Cuba, Iran, Libya) (Protection of Trading Interests) Order, S.I. 1996/3171 (articulating no maximum penalty); Lag om EG:s förordning om skydd mot extraterritoriell lagstiftning som antas av ett tredje land (Svensk författningssamling [SFS] 1997:825) (Swed.) (same). 22 For example, the Netherlands imposes a maximum fine of one million guilders, which is about $560,000. See Uitvoering van verordening (EG) nr. 2271/96 van de Raad van de Europese Unie van 22 november 1996, https://www.parlementairemonitor.nl/9353000/1/j9vvij5epmj1ey0/vi3ah5gewv8e. 23 For example, it levied a $9 billion fine against BNP Paribas for violating sanctions against Iran, Cuba and Sudan. Maia De La Baume & Anca Gurzu, Europe not backing down on Iran, Politico (May 17, 2018), https://www.politico.com/story/2018/05/17/europe-iran-trump-595120. 24 EU moves to block US sanctions on Iran, Al Jazeera (May 17, 2018), https://www.aljazeera.com/news/2018/05/eu-moves-block-sanctions-iran-180517134848253.html. 25 Maya Lester, Draft Russian Bill criminalises compliance with Western sanctions, European Sanctions Blog (May 16, 2018), https://europeansanctions.com/2018/05/16/draft-russian-bill-criminalises-compliance-with-western-sanctions/. The proposed Russian law targets U.S. sanctions against Russia, not Iran, but if Russia chooses to maintain business with Iran, then it’s possible that compliance with the re-imposed U.S. sanctions against Iran could trigger the Russian law where that compliance implicates business in Russia. See id. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Patrick Doris, Mark Handley, Richard Roeder, Adam Smith, and Chris 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 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 (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Handley – London (+44 (0)207 071 4277, mhandley@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.

May 9, 2018 |
The Trump Administration Pulls the Plug on the Iran Nuclear Agreement

Click for PDF On May 8, 2018, 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]  Though it came as no surprise, the decision went further than many observers had anticipated.  Notably, under the terms of the JCPOA, U.S. sanctions were held in abeyance through a series of waivers that were periodically renewed by both the Obama and Trump administrations.  Many commentators expected the current administration to discontinue only waivers of sanctions on the Iranian financial sector that were set to expire on May 12, 2018, leaving other sanctions untouched.[2]  Instead, the Trump administration re-imposed all nuclear related sanctions on Iran, staggering the implementation over the course of the next six months.  As described in an initial volley of frequently asked questions (“FAQs”) set forth by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the re-imposition of nuclear sanctions will be subject to certain 90 and 180 day wind-down periods that expire on August 6, 2018 and November 4, 2018, respectively.[3] Background The JCPOA The JCPOA was a purposefully limited accord focusing only on Iran’s nuclear activities and the international community’s nuclear-related sanctions.  Prior to the JCPOA, the international community, including the United Nations, the European Union, and the United States imposed substantial sanctions on Iran of varying scope and severity.  The European Union had implemented an oil embargo and U.S. nuclear sanctions had included the “blacklisting” of more than 700 individuals and entities on OFAC’s list of Specially Designated Nationals and Blocked Persons (“SDN List”), as well as economic restrictions imposed on entities under U.S. jurisdiction (“Primary Sanctions”) and restrictions on entities outside U.S. jurisdiction (“Secondary Sanctions”).  Secondary Sanctions threatened non-U.S. entities with limitations on their access to the U.S. market if they transacted with various Iranian entities.  Broadly, Secondary Sanctions forced non-U.S. entities to decide whether they were going to deal with Iran or with the United States.  They could not do both. 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.[4]  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’ commitment 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.  This sanctions relief came into effect in January 2016 (on “Implementation Day”) when the IAEA determined that Iran was compliant with the initial nuclear components of the JCPOA. Criticism of the Deal Donald Trump made his opposition to the JCPOA a cornerstone of his presidential campaign.  On occasions too numerous to count, then candidate and now President Trump criticized the deal and indicated his intent to withdraw from the JCPOA unless it was “fixed” to address his concerns, including the deal’s silence on Iran’s ballistic missile development and the existence of certain “sunset provisions” (after which any remaining sanctions would be permanently lifted).[5] There were at least two challenges built into the JCPOA that critics—including President Trump—have seized upon.  First, in an effort to reach an agreement to limit Iran’s nuclear capabilities, the Obama administration and other JCPOA parties not only included “sunset” provisions in the accord after which certain restrictions on Iran would be lifted, but also drew a distinction between Iran’s compliance with the nuclear deal and its conduct in other areas (including its support for groups the United States deems terrorists, its repression of its citizens, its support for Syrian President Bashar al-Assad, and its conventional weapons development programs).  Supporters of the deal argued that addressing the immediate nuclear weapons risk was paramount—this necessitated both the sunset provisions and the absence of addressing other troubling activities.  Critics of the deal, however, including some powerful Congressional leaders and President Trump, derided these compromises and claimed not only that the sunset periods were too brief to be meaningful, but also that by ignoring non-nuclear issues Iran was given both a free pass to continue its bad behavior and indeed the ability to fund that bad behavior out of proceeds received from the nuclear-related sanctions relief. A second challenge to the deal came from the fact that while the other parties to the JCPOA agreed to remove almost all of their sanctions on Iran, U.S. relief was far more surgical and reversible.  This was recognized by all parties to the JCPOA but so long as President Obama (or a successor with similar political views) was in office, it was thought to be a manageable limitation.  One of the key limits to the U.S. relief was that U.S. persons—including financial institutions and companies—have remained broadly prohibited from engaging with Iran even after the JCPOA was implemented in 2016.  Instead, the principal relief the U.S. offered was on the sanctions risks posed to non-U.S. parties pursuant to Secondary Sanctions and related measures.  As a consequence, it has remained a challenge for non-U.S. persons to fully engage with Iran due to the continued inability to leverage U.S. banks, insurance and other institutions that remain central to the bulk of cross-border finance and trade. Changes to U.S. Sanctions Regarding Iran Wind-Down Periods In conjunction with the May 8, 2018 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 of the 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. According to FAQs published by OFAC, the 90-day wind-down period will apply to sanctions on:[6] The purchase and acquisition of U.S. dollar banknotes by the Government of Iran; Gold and precious metals; Graphite, raw or semi-finished metals such as aluminum and steel; Coal; Software for integrating industrial processes; Iranian rials; Iranian sovereign debt; and Iran’s automobile sector. At the end of the 90-day wind-down period, the U.S. government will also revoke authorizations to import into the United States Iranian carpets and foodstuffs and to sell to Iran commercial passenger aircraft and related parts and services.[7] The longer 180-day wind-down period will apply to sanctions on:[8] 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. At the end of the 180-day wind-down period, the U.S. government will also revoke General License H, which authorizes foreign entities of U.S. companies to do business with Iran, and the U.S. government will re-impose sanctions against individuals and entities removed from the SDN List on Implementation Day.[9] The nature and scope of the “wind-down” period resulted in immediate, and significant, concerns from companies seeking to comply with U.S. sanctions.  OFAC has clarified that, in the event a non-U.S. non-Iranian person is owed payment after the conclusion of the wind-down period for goods or services that were provided lawfully therein, the U.S. government would allow that person to receive payment according to the terms of the written contract or written agreement.[10]  Similarly, if a non-U.S., non-Iranian person is owed repayment after the expiration of the wind-down periods for loans or credits extended to an Iranian counterparty prior to the end of the 90-day or 180-day wind-down period, as applicable, provided that such loans or credits were extended pursuant to a written contract or written agreement entered into prior to May 8, 2018, and such activities were consistent with U.S. sanctions in effect at the time the loans or credits were extended, the U.S. government would allow the non-U.S., non-Iranian person to receive repayment of the related debt or obligation according to the terms of the written contract or written agreement.[11]  These allowances are designed for such parties to be made whole for debts and obligations owed or due to them for goods or services fully provided or delivered or loans or credit extended to an Iranian party prior to the end of the wind-down periods.  Notably, 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.[12] Changes to the SDN List In assessing the impact of the “re-designations” under the SDN List, it is useful to note the restrictions that remained in place after the JCPOA was implemented.  For example, although they were not classified as SDNs, the property and interests in property of persons of the Government of Iran and Iranian financial institutions remained blocked if they are in or come within the United States or if they are in or come within the possession or control of a U.S. person, wherever located.  As a result, U.S. persons were broadly prohibited from engaging in transactions or dealing with the Government of Iran and Iranian financial institutions, while non-U.S. persons could deal with them in non-dollar currencies.[13]  But under the new policy, such persons will be moved to the SDN List, which means that non-U.S. persons who continue to deal with them will be subject to Secondary Sanctions.[14]  OFAC indicated that it will not add such persons to the SDN List immediately, so as “to allow for the orderly wind down by non-U.S., non-Iranian persons of activities that had been undertaken” consistent with the prior regulations.  This change will happen no later than November 5, 2018.[15] Diplomatic Next Steps Yesterday’s announcement followed significant diplomatic efforts to save the deal.  Trump’s January 2018 announcement that he would extend existing waivers until May 2018 set off a feverish round of negotiations with European partners, culminating in recent visits by French President Emmanuel Macron and German Chancellor Angela Merkel to try to persuade the Trump administration to remain in the deal.  Many expect those negotiations to continue, as the global community is significantly more exposed to the Iranian market than U.S. persons, who continued to be subject to sanctions post-JCPOA.  Indeed, since sanctions were suspended in early 2016, Iran’s oil exports have increased dramatically, reaching approximately two million barrels per day in 2017.  European imports from Iran rose by nearly 800 percent between 2015 and 2017 (primarily imports of Iranian oil), while European exports to Iran rose by more than four billion euros ($5 billion) annually over the same period.[16]  Major European companies have also resumed investing in Iran—France’s Total has announced plans to invest $1 billion in one of Iran’s largest offshore gas fields.[17]  Early press reports following President Trump’s May 2018 announcement, if accurate, suggest that Iran and the other JCPOA parties remain committed to the underlying deal and plan to begin prompt negotiations to salvage the JCPOA.[18] Because full re-imposition of U.S. sanctions is not scheduled to take effect for another six months, it is entirely possible that the announcement by President Trump will serve as an impetus to negotiations that bring Iran and the rest of the P5+1 to the table.  Such an approach could mirror the Trump administration’s recent tactics with respect to steel and aluminum tariffs, where a splashy public announcement is followed by a series of repeated extensions as the administration seeks to extract further concessions.  One point of leverage the EU may have in these negotiations is the possibility of extending the existing “Blocking Regulation,”[19] which makes it unlawful for EU persons to comply with a specific list of U.S. sanctions laws against Cuba, Libya and Iran as of 1996.  That list could be extended to capture U.S. sanctions against Iran in respect of which the JCPOA offered relief.  This possibility has been mentioned by senior EU officials a number of times since late last year, including by the EU ambassador to the United States in September 2017,[20] and the head of the Iranian Taskforce in the EU’s External Action Service in February 2018.[21] For now, the EU remains committed to the deal.  On the same day that President Trump announced the change in Iran sanctions policy, European Union High Representative and Vice-President Federica Mogherini remarked that “[a]s long as Iran continues to implement its nuclear related commitments, as it is doing so far, the European Union will remain committed to the continued full and effective implementation of the nuclear deal. . . . The lifting of nuclear related sanctions is an essential part of the agreement.  The European Union has repeatedly stressed that the lifting of nuclear related sanctions has not only a positive impact on trade and economic relations with Iran, but also and mainly crucial benefits for the Iranian people.  The European Union is fully committed to ensuring that this continues to be delivered on.”[22] Notably, the Trump administration may be hard pressed to convince Iran’s most significant trading partners —many of whom are mired in disputes with the United States—to add pressure on Tehran.  China and India are Iran’s largest importers, and China appears particularly unlikely to reduce its reliance on Iranian oil given heightened tensions between Beijing and Washington over bilateral trade and investment issues.  Furthermore, the Trump administration would need to convince Russia to halt plans to invest potentially tens of billions of dollars in Iran’s oil and gas sector, and the Trump administration’s strained ties with Turkey make it far from clear that Turkey would cooperate with renewed U.S. pressure on Iran.[23]  Furthermore, the expected rise in oil prices as a result of the withdrawal is seen as a boon to Russia, whose economy is heavily dependent on petroleum and natural gas exports. Alternatively, U.S. allies in the Middle East, led by Israel and Saudi Arabia, support the Trump administration and have argued that Iran threatens their own national security.  Last week Israeli Prime Minister Benjamin Netanyahu unveiled documents regarding Iran’s covert nuclear weapons project from the 1990s as proof that Iran lied about the extent of its program, a move that was widely criticized as an effort to influence U.S. public opinion with information that was widely known and had provided the impetus for the negotiations in the first place.  The U.S. intelligence community had confirmed the weapons program ended in 2003. Furthermore, the Trump administration could have a difficult time persuading countries to cut commercial ties with Iran in the absence of any international legal basis for doing so.  Although U.S. sanctions on Iran have more force than United Nations sanctions, the latter created an important international framework that the United States and other countries could expand on.  Most of these sanctions were repealed with the passage of UN Security Council Resolution 2231 (2015), which endorsed the JCPOA.  The “snapback” mechanism in UNSCR 2231 would enable the United States to unilaterally require the restoration of UN sanctions on Iran under international law.  But as the UN’s nuclear watchdog has repeatedly confirmed Iran’s compliance with the JCPOA’s nuclear terms, the diplomatic costs of unilaterally requiring UN sanctions’ reactivation would likely outweigh any benefits.[24] Although the JCPOA contains no provisions for withdrawal, Iran has long threatened to resume its nuclear program if the United States reneges on its obligations by reinstituting sanctions.[25]  In the immediate aftermath of the Trump administration’s May 8 announcement, however, Iranian President Hassan Rouhani said that his government remains committed to maintaining the nuclear deal with other world powers.  The Iranian leader said he had directed his diplomats to negotiate with the deal’s remaining signatories—including European countries, Russia and China—and that the JCPOA could survive without the United States.  Rouhani, who had made the deal his signature achievement, faces stiff pressure from the hardline elements within Iran who objected to the deal.  If Iran resumes uranium enrichment activities, that could move European parties to walk away from the negotiating table, thereby dooming the JCPOA on which President Rouhani has staked so much political capital and empowering more hardline elements within the Iranian regime.[26] Conclusion Although many expect negotiations regarding the fate of the JCPOA to continue over the next six months, the outcome of such deliberations is highly uncertain.  Notably, it took the combined efforts of the Bush and Obama administrations to convince foreign governments and companies to join the United States in imposing sanctions on Iran, and such coordinated actions are unlikely to be replicated in the wake of leaving the JCPOA.  As the Trump administration negotiates with the rest of the parties to the JCPOA, it is possible that the U.S. administration may exercise discretion and decline to bring enforcement actions against non-U.S. persons that continue to do business with Iran.  That would mitigate the immediate impact of re-imposing sanctions. The precise nature of any EU response remains to be seen.  Although potential blocking regulations may serve as leverage in negotiations, the impact would be severe for European companies seeking to comply with both U.S. and European laws.  Whether the position of the United Kingdom will remain aligned with its European partners once it has left the EU is another imponderable,[27] although the U.K., French and German governments have projected a united front in re-affirming their commitment to the JCPOA,[28] and the U.K. is a signatory to the JCPOA separate from its status as an EU member state.  Further strains to the U.S.–EU relationship are likely if the U.S. were to bring enforcement actions against EU persons for alleged breaches of re-imposed sanctions.  The EU has stated that “it is determined to act in accordance with its security interests and to protect its economic investments.”[29]  However, what this might mean in practice remains unclear.    [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]   These sanctions were enacted on the last day of 2011, when President Obama signed into law the National Defense Authorization Act for Fiscal Year 2012 (“NDAA”).  Included within the NDAA is a measure that designated the entire Iranian financial sector as a primary money laundering concern, which effectively required the President to freeze the assets of Iranian financial institutions and prohibit all transactions with respect to Iranian financial institutions’ property and interests in property if the property or interest in property comes within the United States’ jurisdiction or the possession and control of a United States person.  In addition, the measure broadly authorized the President to impose sanctions on the Central Bank of Iran.    [3]   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.    [4]   U.S. Dep’t of State, Joint Comprehensive Plan of Action (July 14, 2015), available at https://www.state.gov/documents/organization/245317.pdf.    [5]   Press Release, White House, Statement by the President on the Iran Nuclear Deal (Jan. 12, 2018), available at https://www.whitehouse.gov/briefings-statements/statement-president-iran-nuclear-deal.    [6]   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. 1.2.    [7]   Id.    [8]   OFAC FAQ No. 1.3.    [9]   Id. [10]   OFAC FAQ No. 2.1. [11]   Id. [12]   Id. [13]   E.O. 13599, 77 Fed. Reg. 6659 (Feb. 5, 2012); U.S. Dep’t of Treasury, Resource Center, OFAC, JCPOA-related Designation Removals, JCPOA Designation Updates, Foreign Sanctions Evaders Removals, NS-ISA List Removals; 13599 List Changes (Jan. 16, 2016), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/updated_names.aspx. [14]   OFAC FAQ No. 3. [15]   Id. (“Beginning on November 5, 2018, activities with most persons moved from the E.O. 13599 List to the SDN List will be subject to secondary sanctions.  Such persons will have a notation of “Additional Sanctions Information – Subject to Secondary Sanctions” in their SDN List entry.”) [16]   Peter Harrell, The Challenge of Reinstating Sanctions Against Iran, Foreign Affairs (May 4, 2018), available at https://www.foreignaffairs.com/articles/iran/2018-05-04/challenge-reinstating-sanctions-against-iran?cid=int-fls&pgtype=hpg. [17]   Id. [18]   See, e.g., Erin Cunningham & Bijan Sabbagh, Iran to Negotiate with Europeans, Russia and China about Remaining in Nuclear Deal, Wash. Post (May 8, 2018), available at https://wapo.st/2HWaI9w?tid=ss_tw&utm_term=.ed12421ad6a6; James McAuley, After Trump Says U.S. Will Withdraw from Iran Deal, Allies Say They’ll Try to Save It, Wash. Post (May 8, 2018), available at https://wapo.st/2rokYfI?tid=ss_tw&utm_term=.291cd9490f2e. [19]   Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom. [20]   Jessica Schulberg, Europe Considering Blocking Iran Sanctions if U.S. Leaves Nuclear Deal, EU Ambassador Says, Huffington Post (Sept. 26, 2017), available at https://www.huffingtonpost.co.uk/entry/europe-iran-sanctions-nuclear-deal_us_59c9772ce4b0cdc77333e758. [21]   John Irish & Parisa Hafezi, EU could impose blocking regulations if U.S. pulls out of Iran deal, Reuters, (Feb. 8, 2018), available at https://uk.reuters.com/article/uk-iran-nuclear-eu/eu-could-impose-blocking-regulations-if-u-s-pulls-out-of-iran-deal-idUKKBN1FS2F0. [22]   Press Release, European Union External Action Service, Remarks by HR/VP Mogherini on the statement by US President Trump regarding the Iran nuclear deal (JCPOA) (May 8, 2018). [23]   Harrell, see supra n. 16. [24]   Id. [25]   The last sentence of the JCPOA expressly provides: “Iran has stated that if sanctions are reinstated in whole or in part, Iran will treat that as grounds to cease performing its commitments under this JCPOA in whole or in part.” [26]   See Erin Cunningham & Bijan Sabbagh, Iran to Negotiate with Europeans, Russia and China about Remaining in Nuclear Deal, Wash. Post (May 8, 2018), available at https://wapo.st/2HWaI9w?tid=ss_tw&utm_term=.ed12421ad6a6; James McAuley, After Trump Says U.S. Will Withdraw from Iran Deal, Allies Say They’ll Try to Save It, Wash. Post (May 8, 2018), available at https://wapo.st/2rokYfI?tid=ss_tw&utm_term=.291cd9490f2e. [27]   While the U.K. is currently in the EU, it will be leaving the EU shortly, at which time it may seek to negotiate trade deals with a variety of governments.  Particularly if negotiations over the U.K.’s exit from the EU were to become fractious, it is possible a post-Brexit U.K. could use its stance on the JCPOA as a bargaining counter in negotiations with the Trump administration over a new U.K.–U.S. trade deal. [28]   Press Release, U.K. Prime Minister’s Office, Joint statement from Prime Minister May, Chancellor Merkel and President Macron following President Trump’s statement on Iran (May 8, 2018), available at https://www.gov.uk/government/news/joint-statement-from-prime-minister-may-chancellor-merkel-and-president-macron-following-president-trumps-statement-on-iran. [29]   Press Release, EU External Action Serv., Remarks by HR/VP Mogherini on the statement by US President Trump regarding the Iran nuclear deal (JCPOA) (May 8, 2018. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Patrick Doris, Mark Handley, Stephanie Connor, 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 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) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@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) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, kkobildjanova@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) 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) Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@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.

May 3, 2018 |
Webcast: Anti-Money Laundering and Sanctions Enforcement and Compliance in 2018 and Beyond

Gibson Dunn partners provide an overview of significant trends and key issues in Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) and sanctions enforcement and compliance. Topics covered: BSA/AML Overview Recent trends in BSA/AML enforcement Recent trends in BSA/AML compliance BSA/AML Reform Efforts Sanctions Overview Key OFAC sanctions program developments Recent trends in sanctions enforcement The future of sanctions under the Trump Administration (and beyond) View Slides [PDF] PANELISTS M. Kendall Day was a white collar prosecutor for 15 years, serving most recently as an Acting Deputy Assistant Attorney General with the U.S. Department of Justice’s Criminal Division, where he supervised Bank Secrecy Act investigations, enforcement of anti-money laundering and sanctions laws, deferred prosecution agreements and non-prosecution agreements involving all types of financial institutions. He previously served in a variety of leadership and line attorney roles, including as Chief of the DOJ Money Laundering and Asset Recovery Section. Mr. Day will join Gibson Dunn’s Washington, D.C. office as a partner effective May 1, 2018. Stephanie L. Brooker is co-chair of Gibson Dunn’s Financial Institutions Practice Group. She is former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a trial attorney for several years. Stephanie represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving BSA/AML, sanctions, anti-corruption, securities, tax, wire fraud, and sensitive employee matters. Her practice also includes BSA/AML compliance counseling and due diligence and significant criminal and civil asset forfeiture matters. Adam M. Smith is an experienced international trade lawyer who previously served in the Obama Administration as the Senior Advisor to the Director of OFAC and as the Director for Multilateral Affairs on the National Security Council. Adam focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. F. Joseph Warin is co-chair of Gibson Dunn’s White Collar Defense and Investigations Practice Group, and chair of the Washington, D.C. office’s Litigation Department.  He is a former Assistant United States Attorney in Washington, D.C., one of only ten lawyers in the United States with Chambers rankings in five categories, was named by Best Lawyers® as 2016 Lawyer of the Year for White Collar Criminal Defense in the District of Columbia, and recognized by Benchmark Litigation as a U.S. White Collar Crime Litigator Star for seven consecutive years (2011–2017). In 2017, Chambers honored Mr. Warin with the Outstanding Contribution to the Legal Profession Award. 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. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

April 23, 2018 |
FinCEN Issues FAQs on Customer Due Diligence Regulation

Click for PDF On April 3, 2018, FinCEN issued its long-awaited Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, FIN-2018-G001. https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-0.[1]  The timing of this guidance is very controversial, issued five weeks before the new Customer Due Diligence (“CDD”) regulation goes into effect on May 11, 2018.[2]  Most covered financial institutions (banks, broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities) already have drafted policies, procedures, and internal controls and made IT systems changes to comply with the new regulation.  Covered financial institutions will need to review these FAQs carefully to ensure that their proposed CDD rule compliance measures are consistent with FinCEN’s guidance. The guidance is set forth in 37 questions.  As discussed below, some of the information is helpful, allaying financial institutions’ most significant concerns.  Other FAQs confirm what FinCEN has said in recent months informally to industry groups and at conferences.  A few FAQs raise additional questions, and others, particularly the FAQ on rollovers of certifications of deposit and loan renewals, are not responsive to industry concerns and may raise significant compliance burdens for covered financial institutions.  The guidance reflects FinCEN’s regulatory interpretations based on discussions within the government and with financial institutions and their trade associations.  The need for such extensive guidance on so many issues in the regulation illustrates the complexity of compliance and suggests that FinCEN should consider whether clarifications and technical corrections to the regulation should be made.  We provide below discussion of highlights from the FAQs, including areas of continued ambiguity and uncertainty in the regulation and FAQs. Highlights from the FAQs FAQ 1 and 2 discuss the threshold for obtaining and verifying beneficial ownership.  FinCEN states that financial institutions can “choose” to collect beneficial ownership information at a lower threshold than required under the regulation (25%), but does not acknowledge that financial institution regulators may expect a lower threshold for certain business lines or customer types or that there may be regulatory concerns if financial institutions adjust thresholds upward to meet the BSA regulatory threshold.  A covered financial institution may be in compliance with the regulatory threshold, but fall short of regulatory expectations. FAQ 7 states that a financial institution need not re-verify the identity of a beneficial owner of a legal entity customer if that beneficial owner is an existing customer of the financial institution on whom CIP has been conducted previously provided that the existing information is “up-to-date, accurate, and the legal entity’s customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.”  The example given suggests that no steps are expected to verify that the information is up-to-date and accurate beyond the representative’s confirmation or certification.  The beneficial ownership records must cross reference the individual’s CIP record. FAQs 9-12 address one of the most controversial aspects of the regulation, about which there has been much confusion: the requirement that, when an existing customer opens a new account, a financial institution must identify and verify beneficial ownership information.  FinCEN provides further clarity on what must be updated and how:Under FAQ 10, if a legal entity customer, for which the required beneficial ownership information has been obtained for an existing account, opens a new account, the financial institution can rely on the information obtained and verified previously “provided the customer certifies or confirms (verbally or in writing) that such information is up-to-date and accurate at the time each subsequent new account is opened,” and the financial institution has no knowledge that would “reasonably call into question” the reliability of the information.  The financial institution also would need to maintain a record of the certification or confirmation by the customer.There is no grace period.  If an account is opened on Tuesday, and a new account is opened on Thursday, the certification or confirmation is still required.  In advance planning for compliance, many financial institutions had included a grace period in their procedures. FAQ 11 provides that, when the financial institution opens a new account or subaccount for an existing legal entity customer whose beneficial ownership has been verified for the institution’s own recordkeeping and operational purposes and not at the customer’s request, there is no requirement to update the beneficial ownership information for the new account.  This is because the account would be considered opened by the financial institution and the requirement to update only applies to each new account opened by a customer.  This is consistent with what FinCEN representatives have said at recent conferences.The FAQ specifies that this would not apply to (1) accounts or subaccounts set up to accommodate a trading strategy of a different legal entity, e.g., a subsidiary of the customer, or (2) accounts of a customer of the existing legal entity customer, “i.e., accounts (or subaccounts) through which a customer of a financial institution’s existing legal entity carries out trading activity through the financial institution without intermediation from the existing legal entity customer.”  We believe the FAQ may fall far short of addressing all the concerns expressed to FinCEN on this issue by the securities industry. FAQ 12 addresses an issue which has been a major concern to the banking industry:  whether beneficial ownership information must be updated when a certificate of deposit (“CD”) is rolled over or a loan is renewed.  These actions are generally not considered opening of new accounts by banks.FinCEN continues to maintain that CD rollovers or loan renewals are openings of new accounts for purposes of the CDD regulation.  Therefore, the first time a CD or loan renewal for a legal entity customer occurs after May 11, 2018, the effective date of the CDD regulation, beneficial ownership information must be obtained and verified, and at each subsequent rollover or renewal, there must be confirmation that the information is current and accurate (consistent with FAQ 10) as for any other new account for an existing customer.  There is an exception or alternative approach authorized in FAQ 12 “because the risk of money laundering is very low”:  If, at the time of the rollover or renewal, the customer certifies its beneficial ownership information, and also agrees to notify the financial institution of any change in information in the future, no action will be required at subsequent renewals or rollovers.The response in FAQ 12 is not responsive to the concerns that have been expressed by the banking industry and will be burdensome for banks to administer.  Obtaining a certification in time, without disrupting the rollover or renewal, will be challenging, and it appears that if it the certification or promise to update is not obtained in time, the account may have to be closed. FAQs 13 through 17 address another aspect of the regulation that has generated extensive discussion: When (1) must beneficial ownership be obtained for an account opened before the effective date of the regulation, or (2) beneficial ownership information updated on existing accounts whose beneficial ownership has been obtained and verified.Following closely what was said in the preamble to the final rule, FAQ 13 states that the obligation is triggered when a financial institution “becomes aware of information about the customer during the course of normal monitoring relevant to assessing or reassessing the risk posed by the customer, and such information indicates a possible change in beneficial ownership.”FAQ 14 clarifies somewhat what is considered normal monitoring but is not perfectly clear what triggers obtaining and verifying beneficial ownership.  It is clear that there is no obligation to obtain or update beneficial ownership information in routine periodic CDD reviews (CDD refresh reviews) “absent specific risk-based concerns.” We would assume that means, following FAQ 13, concerns about the ownership of the customer.  Beyond that FAQ 14  is less clear.  It states that the obligation is triggered “when, in the course of normal monitoring a financial institution becomes aware of information about a customer or an account, including a possible change of beneficial ownership information, relevant to assessing or reassessing the customer’s overall risk profile.  Absent such a risk-related trigger or event, collecting or updating of beneficial ownership information is at the discretion of the covered financial institution.”The trigger or event may mean in the course of SAR monitoring or when conducting event-driven CDD reviews, e.g., when a subpoena is received or material negative news is identified – something that may change a risk profile.  Does the obligation then arise only if the risk profile change includes a concern about whether the financial institution has accurate ownership information?  That may be the intent, but is not clearly stated.  If the account is being considered for closure because of the change in risk profile, would the financial institution be released from the obligation to obtain beneficial ownership?   That would make sense, but is not stated.  This FAQ is in need of clarification and examples would be helpful.On another note, the language in FAQ 14 also is of interest because it may suggest, in FinCEN’s view, that periodic CDD reviews should be conducted on a risk basis, and CDD refresh reviews may not be expected for lower risk customers, as is the practice for some banks. FAQ 18 seems to address at least partially a technical issue with the regulation that arises because SEC-registered investment advisers are excluded from the definition of legal entity customer in the regulation, but U.S. pooled investment vehicles advised by them are not excluded.[3]  FAQ 18 states that, if the operator or adviser of a pooled investment vehicle is not excluded from the definition of legal entity customer, under the regulation, e.g., like a foreign bank, no beneficial ownership information is required to be obtained on the pooled investment vehicle under the ownership prong, but there must be compliance with beneficial ownership control party prong, i.e., verification of identity of a control party.  A control party could be a “portfolio manager” in these situations.FinCEN describes why no ownership information is required as follows:  “Because of the way the ownership of a pooled investment vehicle fluctuates, it would be impractical for covered financial institutions to collect and verify ownership identity for this type of entity.”  Thus, in the case where the operator or adviser of the pooled investment vehicle is excluded from the definition of legal entity, like an SEC-registered investment adviser, it would seem not to be an expectation to obtain beneficial ownership information under the ownership prong.  Nevertheless, the question of whether you need to obtain and verify the identity of a control party for a pooled investment vehicle advised by a SEC registered investment adviser is not squarely answered in the FAQ.  A technical correction to the regulation is still needed, but it is unlikely there would be regulatory or audit criticism for following the FAQ guidance at least with respect to the ownership prong. FAQ 19 clarifies that, when a beneficial owner is a trust (where the legal entity customer is owned more than 25% by a trust), the financial institution is only required to verify the identity of one trustee if there are multiple trustees. FAQ 20 deals with what to do if a trust holds more than a 25% beneficial interest in a legal entity customers and the trustee is not an individual, but a legal entity, like a bank or law firm.  Under the regulation, if a trust holds more than 25% beneficial ownership of a legal entity customer, the financial institution must verify the identity of the trustee to satisfy the ownership prong of the beneficial ownership requirement.  The ownership prong references identification of “individuals.”  Consequently, the language of the regulation does not seem to contemplate the situation where the trustee was a legal entity.FAQ 20 seems to suggest that, despite this issue with the regulation, CIP should be conducted on the legal entity trustee, but apparently, on a risk basis, not in every case:  “In circumstances where a natural person does not exist for purposes of the ownership/equity prong, a natural person would not be identified.  However, a covered financial institution should collect identification information on the legal entity trustee as part of its CIP, consistent with the covered institution’s risk assessment and customer risk profile.”  (Emphasis added.)More clarification is needed on this issue, and perhaps an amendment to the regulation to address this specific situation.  Pending additional guidance, the safest course appears to be to verify the identity of legal entity trustee consistent with CIP requirements, which may pose practical difficulties, e.g., will a law firm trustee easily provide its TIN?  Presumably, CIP would not be required on any legal entity trustee that is excepted from the definition of legal entity under 31 C.F.R. § 1010.230(e)(2). FAQ 21 addresses the question of how does a financial institution verify that a legal entity comes within one of the regulatory exceptions to the definition of legal entity customer in 31 C.F.R. § 1010.230(e)(2).  The answer is that the financial institution generally can rely on information provided by the customer if it has no knowledge of facts that would reasonably call into question the reliability of the information.  Nevertheless, that is not the end of the story.  The FAQ provides that the financial institution also must have risk-based policies and procedures that specify the type of information they will obtain and reasonably rely on to determine eligibility for exclusions. FAQ 24 may resolve another technical issue in the regulation.  The exceptions to the definition of legal entity in the regulation refer back to the BSA CIP exemption provisions, which in turn, cross reference the Currency Transaction Reporting (CTR) exemption for banks when granting so-called Tier One exemptions.  One category for the CTR exemption is “listed” entities, which includes NASDAQ listed entities, but excludes NASDAQ Capital Markets Companies, i.e., this category of NASDAQ listed entity is not subject to CIP or CTR Tier One exemptions.  31 C.F.R. § 1020.315(b)(4).  This carve out was not discussed in the preamble to the CDD final regulation or in FAQ 24.The FAQ simply states:  “[A]ny company (other than a bank) whose common stock or analogous equity interests are listed on the New York Stock Exchange, the American Stock Exchange (currently known as the NYSE American), or NASDAQ stock exchange” is excepted from the definition of legal entity.  In any event, as with the FAQ 18 issue, it would appear that a technical correction is needed on this point, but, given the FAQ, it is unlikely that a financial institution would be criticized if it treated NASDAQ Capital Markets Companies as excepted legal entities. FAQs 32 and 33 end the speculation that the CDD regulation impacts CTR compliance.  Consistent with FinCEN CTR guidance, under FAQ 32, the rule remains that, for purposes of CTR aggregation, the fact that two businesses share a common owner does not mean that a financial institution must aggregate the currency transactions of the two businesses for CTR reporting, except in the narrow situation where there is a reason to believe businesses are not being operated separately. Conclusion Financial institutions and their industry groups will likely continue to seek further guidance on the most problematic issues in the CDD regulation.  It is our understanding that FinCEN and the bank regulators also will address compliance with the CDD regulation in the upcoming update to the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual. Covered financial institutions already have spent, and will continue to spend, significant time and resources to meet the complex regulatory requirements and anticipated regulatory expectations.  In this flurry of activity to address regulatory risk, it is essential for financial institutions to continue to consider any money laundering risk of legal entity clients and that CDD not become simply mechanical.  It is not only a matter of documenting and updating all of the right information about beneficial ownership and control, but financial institutions should continue to assess whether the ownership structure makes sense for the business or whether it is overly complex for the business type and purposely opaque.  Also, it is important to consider whether it makes sense for a particular legal entity to be seeking a relationship with your financial institution and whether the legal entity is changing financial institutions voluntarily.  CDD measures to address regulatory risk and money laundering risk overlap but are not equivalent.    [1]   FinCEN also issued FAQs on the regulation on July 19, 2016. https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf.   FINRA issued guidance on the CDD regulation in FINRA Notice to Members 17-40 (Nov. 21, 2017). http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-40.pdf.    [2]   The Notice of Final Rulemaking was published on May 11, 2016 and provided a two-year implementation period.  81 Fed. Reg. 29,398 (May 11, 2016). https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf.  FinCEN made some slight amendments to the rule on September 29, 2017.  https://www.fincen.gov/sites/default/files/federal_register_notices/2017-09-29/CDD_Technical_Amendement_17-20777.pdf The new regulations are set forth in the BSA regulations at 31 C.F.R. § 1010.230 (beneficial ownership requirements); 31 C.F.R. § 1020.210(a)(5) (banks); 31 C.F.R. § 1023.210(b)(5) (broker-dealers); 31 C.F.R. § 1024.210(b)(4) (mutual funds); and 31 C.F.R. § 1026.210(b)(5) (future commission merchants and introducing brokers in commodities).    [3]   The regulation does not clearly address the beneficial ownership requirements for a U.S. pooled investment vehicle operated or controlled by a registered SEC investment adviser.  Pooled investment vehicles operated or advised by a “financial institution” regulated by a Federal functional regulator are not considered legal entities under the regulation.  31 C.F.R. § 1010.230(e)(2)(xi).  An SEC registered investment adviser, however, is not yet a financial institution under the BSA.  Under 31 C.F.R. § 1010.230(e)(3), a pooled investment vehicle that is operated or advised by a “financial institution” not excluded from the definition of legal entity is subject to the beneficial ownership control party prong. 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 Financial Institutions practice group, or the authors: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Linda Noonan – Washington, D.C. (+1 202-887-3595, lnoonan@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.

April 12, 2018 |
Trump Administration Imposes Unprecedented Russia Sanctions

Click for PDF On April 6, 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) significantly enhanced the impact of sanctions against Russia by blacklisting almost 40 Russian oligarchs, officials, and their affiliated companies pursuant to Obama-era sanctions, as modified by the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) of 2017.  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 Bashal al-Assad regime in Syria, attempts to subvert Western democracies, and malicious cyber activities.[1]  Russian stocks fell sharply in response to the new measures, and the ruble depreciated almost 5 percent against the dollar.[2] Although this is not the first time that the Trump administration imposed sanctions against Russia, it is the most significant action taken to date.  In June 2017, OFAC added 38 individuals and entities involved in the Ukraine conflict to OFAC’s list of Specially Designated Nationals (“SDNs”).[3]  The April 6 sanctions added seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, the primary state-owned Russian weapons trading company and its subsidiary, a Russian bank, to the SDN List.[4]  These designations include major, publicly-traded companies that have been listed on the London and Hong Kong exchanges and that have thousands of customers and tens of thousands of investors throughout the world. OFAC has never designated similar companies, and the potential challenges for global companies seeking to comply with OFAC measures are substantial.  An SDN designation prohibits U.S. persons—including U.S. companies, U.S. financial institutions, and their foreign branches—from engaging in any transactions with the designees or with entities in which they hold an aggregate ownership of 50 percent or more.  The designation of a small company in a regional market can be devastating for the company, but rarely would it impose meaningful collateral consequences on global markets or investors.  In this case, sanctions on companies such as EN+ and RUSAL (amongst others) have already impacted a substantial portion of a core global commodity (the aluminum market) while also preventing further trades in their shares, a move that could harm pension funds, mutual funds, and other investors that have long held stakes worth billions of dollars. To minimize the immediate disruptions, OFAC issued two time-limited general licenses (regulatory exemptions) permitting companies and individuals to undertake certain transactions to “wind down” business dealings related to the designated parties.[5]  However, our assessment is that disruptions are inevitable and the size of the sanctions targets in this case means that the general licenses will have potentially limited effect in reducing dislocations. Background OFAC’s April 6 designations mark a clear change in tone from the Trump administration, which had initially resisted imposing the full force of CAATSA’s sanctions.  For example, as we wrote in our 2017 Year-End Sanctions Update, CAATSA required the imposition of secondary sanctions on any person the President determined to have been engaging in “a significant transaction with a person that is part, or operates for or on behalf of, the defense or intelligence sectors of the Government Russia.”[6]  On the day such sanctions were to be imposed, State Department representatives provided classified briefings to Congressional leaders to explain their decision not to impose any such sanctions under CAATSA, namely because the Trump administration felt that CAATSA was already having an deterrent effect which removed any immediate need to impose sanctions.[7] Section 241 of CAATSA also 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]  Although the report did not result in any sanctions or legal repercussions, the public naming of such persons did cause confusion for those who sought to engage with them in compliance with U.S. law.[10]  However, most observers were highly critical of the 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 on April 6 originally appeared on the Section 241 List.[11] Designations Included among the list of sanctioned parties were seven Russian oligarchs designated for being a Russian government official or operating in the energy sector of the Russian Federation economy, and 12 companies they own or control.  In its press release, OFAC warned that the 12 companies identified as owned or controlled by the designated Russian oligarchs “should not be viewed as exhaustive, and the regulated community remains responsible for compliance with OFAC’s 50 percent rule.”  This rule extends U.S. sanctions prohibitions to entities owned 50 percent or more, even if those companies are not themselves listed by OFAC.  The opacity of ownership in the Russian economy makes the 50 percent rule very difficult to operationalize. In addition, OFAC designated 17 senior Russian government officials, a state-owned company and its subsidiary.  The sanctioned individuals and entities, as described by OFAC, are provided in the following table. SDN Description Designated Russian Oligarchs 1. Vladimir Bogdanov Bogdanov is the Director General and Vice Chairman of the Board of Directors of Surgutneftegaz, a vertically integrated oil company operating in Russia. OFAC imposed sectoral sanctions on Surgutneftegaz pursuant to Directive 4 issued under E.O. 13662 in September 2014. 2. Oleg Deripaska Deripaska has said that he does not separate himself from the Russian state.  He has also acknowledged possessing a Russian diplomatic passport, and claims to have represented the Russian government in other countries.  Deripaska has been investigated for money laundering, and has been accused of threatening the lives of business rivals, illegally wiretapping a government official, and taking part in extortion and racketeering.  There are also allegations that Deripaska bribed a government official, ordered the murder of a businessman, and had links to a Russian organized crime group. 3. Suleiman Kerimov Kerimov is a member of the Russian Federation Council.  On November 20, 2017, Kerimov was detained in France and held for two days. He is alleged to have brought hundreds of millions of euros into France – transporting as much as 20 million euros at a time in suitcases, in addition to conducting more conventional funds transfers – without reporting the money to French tax authorities.  Kerimov allegedly launders the funds through the purchase of villas.  Kerimov was also accused of failing to pay 400 million euros in taxes. 4. Kirill Shamalov Shamalov married Putin’s daughter Katerina Tikhonova in February 2013 and his fortunes drastically improved following the marriage; within 18 months, he acquired a large portion of shares of Sibur, a Russia-based company involved in oil and gas exploration, production, processing, and refining.  A year later, he was able to borrow more than one $1 billion through a loan from Gazprombank, a state-owned entity subject to sectoral sanctions pursuant to E.O. 13662.  That same year, long-time Putin associate Gennady Timchenko, who is himself designated pursuant to E.O. 13661, sold an additional 17 percent of Sibur’s shares to Shamalov.  Shortly thereafter, Kirill Shamalov joined the ranks of the billionaire elite around Putin. 5. Andrei Skoch Skoch is a deputy of the Russian Federation’s State Duma.  Skoch has longstanding ties to Russian organized criminal groups, including time spent leading one such enterprise. 6. Viktor Vekselberg Vekselberg is the founder and Chairman of the Board of Directors of the Renova Group.  The Renova Group is comprised of asset management companies and investment funds that own and manage assets in several sectors of the Russian economy, including energy.  In 2016, Russian prosecutors raided Renova’s offices and arrested two associates of Vekselberg, including the company’s chief managing director and another top executive, for bribing officials connected to a power generation project in Russia. Designated Oligarch-Owned Companies 7. B-Finance Ltd. British Virgin Islands company owned or controlled by, directly or indirectly, Oleg Deripaska. 8. Basic Element Limited Basic Element Limited is based in Jersey and is the private investment and management company for Deripaska’s various business interests. 9. EN+ Group Owned or controlled by, directly or indirectly, Oleg Deripaska, B-Finance Ltd., and Basic Element Limited.  EN+ Group is located in Jersey and is a leading international vertically integrated aluminum and power producer.  This is a publicly traded company that has been listed, inter alia, on the London Stock Exchange. 10. EuroSibEnergo Owned or controlled by, directly or indirectly, Oleg Deripaska and EN+ Group. EuroSibEnergo is one of the largest independent power companies in Russia, operating power plants across Russia and producing around nine percent of Russia’s total electricity. 11. United Company RUSAL PLC Owned or controlled by, directly or indirectly, EN+ Group.  United Company RUSAL PLC is based in Jersey and is one of the world’s largest aluminum producers, responsible for seven percent of global aluminum production.  This is a publicly traded company that has been listed, inter alia¸ on the Hong Kong Stock Exchange. 12. Russian Machines Owned or controlled by, directly or indirectly, Oleg Deripaska and Basic Element Limited.  Russian Machines was established to manage the machinery assets of Basic Element Limited. 13. GAZ Group Owned or controlled by, directly or indirectly, Oleg Deripaska and Russian Machines.  GAZ Group is Russia’s leading manufacturer of commercial vehicles. 14. Agroholding Kuban Owned or controlled by, directly or indirectly, Oleg Deripaska and Basic Element Limited. 15. Gazprom Burenie, OOO Owned or controlled by Igor Rotenberg.  Gazprom Burenie, OOO provides oil and gas exploration services in Russia. 16. NPV Engineering Open Joint Stock Company Owned or controlled by Igor Rotenberg.  NPV Engineering Open Joint Stock Company provides management and consulting services in Russia. 17. Ladoga Menedzhment, OOO Owned or controlled by Kirill Shamalov.  Ladoga Menedzhment, OOO is located in Russia and engaged in deposit banking. 18. Renova Group Owned or controlled by Viktor Vekselberg.  Renova Group, based in Russia, is comprised of investment funds and management companies operating in the energy sector, among others, in Russia’s economy. Designated Russian State-Owned Firms 19. Rosoboroneksport State-owned Russian weapons trading company with longstanding and ongoing ties to the Government of Syria, with billions of dollars’ worth of weapons sales over more than a decade.  Rosoboroneksport is being designated under E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the Government of Syria. 20. Russian Financial Corporation Bank (RFC Bank) Owned by Rosoboroneksport.  RFC Bank incorporated is in Moscow, Russia and its operations include deposit banking activities. Designated Russian Government Officials 21. Andrey Akimov Chairman of the Management Board of state-owned Gazprombank 22. Mikhail Fradkov President of the Russian Institute for Strategic Studies (RISS), a major research and analytical center established by the President of the Russian Federation, which provides information support to the Presidential Administration, Federation Council, State Duma, and Security Council. 23. Sergey Fursenko Member of the board of directors of Gazprom Neft, a subsidiary of state-owned Gazprom 24. Oleg Govorun Head of the Presidential Directorate for Social and Economic Cooperation with the Commonwealth of Independent States Member Countries.  Govorun is being designated pursuant to E.O. 13661 for being an official of the Government of the Russian Federation. 25. Alexey Dyumin Governor of the Tula region of Russia.  He previously headed the Special Operations Forces, which played a key role in Russia’s purported annexation of Crimea. 26. Vladimir Kolokoltsev Minister of Internal Affairs and General Police of the Russian Federation 27. Konstantin Kosachev Chairperson of the Council of the Federation Committee on Foreign Affairs 28. Andrey Kostin President, Chairman of the Management Board, and Member of the Supervisory Council of state-owned VTB Bank 29. Alexey Miller Chairman of the Management Committee and Deputy Chairman of the Board of Directors of state-owned company Gazprom 30. Nikolai Patrushev Secretary of the Russian Federation Security Council 31. Vladislav Reznik Member of the Russian State Duma 32. Evgeniy Shkolov Aide to the President of the Russian Federation 33. Alexander Torshin State Secretary – Deputy Governor of the Central Bank of the Russian Federation 34. Vladimir Ustinov Plenipotentiary Envoy to Russia’s Southern Federal District 35. Timur Valiulin Head of the General Administration for Combatting Extremism within Russia’s Ministry of Interior 36. Alexander Zharov Head of Roskomnadzor (the Federal Service for the Supervision of Communications, Information Technology, and Mass Media) 37. Viktor Zolotov Director of the Federal Service of National Guard Troops and Commander of the National Guard Troops of the Russian Federation All assets subject to U.S. jurisdiction of the designated individuals and entities, and of any other entities blocked by operation of law as a result of their ownership by a sanctioned party, are frozen, and U.S. persons are generally prohibited from dealings with them.  OFAC’s Frequently Asked Questions (“FAQs”) make clear that if a blocked person owns less than 50 percent of a U.S. company, the U.S. company will not be blocked.  However, the U.S. company (1) must block all property and interests in property in which the blocked person has an interest and (2) cannot make any payments, dividends, or disbursement of profits to the blocked person and must place them in a blocked account at a U.S. financial institution.[12] Non-U.S. persons could face secondary sanctions for knowingly facilitating significant transactions for or on behalf of the designated individuals or entities.  CAATSA strengthened the secondary sanctions measures that could be used to target such persons, although such measures typically carry less risk because as a matter of implementation OFAC traditionally warns those who may be transacting with parties that could subject them to secondary sanctions and provides them with an opportunity to cure.  While this outreach and deterrence model of imposing secondary sanctions was developed under the Obama administration (and resulted in very few impositions of secondary sanctions), the Trump administration could theoretically change it and impose secondary sanctions without the traditional warning.  However, that appears unlikely and the Trump administration has indicated that it will continue to provide warnings before imposing secondary sanctions. Two CAATSA provisions bear particular note as they are implicated by Friday’s actions:  section 226, which authorizes sanctions on foreign financial institutions for facilitating a transaction on behalf of a Russian person on the SDN List, and section 228, which seeks to impose sanction on a person who “facilitates a significant transaction…for or on behalf of any person subject to sanctions imposed by the United States with respect to the Russian Federation.”[13]  OFAC has clarified that the section 228 provision extends to persons listed on either the SDN or the Sectoral Sanctions Identifications (“SSI”) List, as well as persons they may own or control pursuant to OFAC’s 50 percent rule.[14]  As we noted when CAATSA was passed, despite the mandatory nature of these sections, the President appears to retain the discretion to impose restrictions based upon whether he finds certain transaction significant or for other reasons.  With the increase in the SDN list to include major players in global commodities such as EN+ or RUSAL, more companies around the world that rely on these companies could find themselves at least theoretically at risk of being sanctioned themselves.  Companies should also consider this risk where there is reliance on material produced by any company in the Russian military establishment and sold by the Russian state arms company such as Rosoboronexport, which was also sanctioned. General Licenses In an effort to minimize the immediate disruptions to U.S. persons and global markets (especially given the sanctioning of major publicly traded corporations that have thousands of clients and investors throughout the world), OFAC issued General Licenses 12 and 13, permitting companies to undertake certain transactions and activities to “wind down” certain business dealings related to certain, listed designated parties.  These General Licenses only cover U.S. persons, which has led some non-U.S. companies to inquire whether their ability to wind down operations with respect to the SDN companies would place them at risk for secondary sanctions (as they would be engaging with sanctioned parties and perhaps trigger the CAATSA provisions above).  OFAC has noted in its FAQs that the U.S. Government would not find a transaction “significant” if a U.S. person would not need a specific license to undertake it.[15]  That is, it would seem that at least for the duration of the General Licenses a non-U.S. party can engage in similar wind down operations without risking secondary sanctions. General License 12, which expires June 5, 2018, authorizes U.S. persons to engage in transactions and activities with the 12 oligarch-owned designated entities that are “ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements” related to these 12 entities (as well as those entities impacted by operation of OFAC’s 50 percent rule).  This is a broader wind down provision than OFAC has issued in the past in that it allows not just “wind down” activities but also non-defined “maintenance” activities.  Despite this breadth it is already uncertain how this General License will actually work in practice.  Permissible transactions and activities include importation from blocked entities and broader dealings with them.  However, no payments are allowed to be made to blocked entities–rather such payments can only be made to the blocked entities listed in General License 12 into blocked, interest-bearing accounts and reported to OFAC by June 18, 2018 (10 business days after the expiration of the license).[16]  It is not clear why a sanctioned party would wish to deliver goods and services to parties if the sanctioned party cannot be paid.  In line with the FAQ noted above, for non-U.S. companies it would seem that in order to avoid secondary sanctions implications the same restrictions would apply–that is, continued transactions are permitted on a wind down basis, but transfer of funds to the SDN companies could be viewed as “significant” or otherwise sanctionable. Recognizing how broad the sanctions are and how far they may implicate subsidiaries of SDN companies inside the United States, OFAC’s FAQs clarify that General License 12 generally permits the blocked entities listed to pay U.S. persons their salaries, pension payments, or other benefits due during the wind down period.  U.S. persons employed by entities that are not explicitly listed in General License 12—principally the designated Russian state-owned entities—do not have the benefit of this wind down period.  OFAC FAQs note that such U.S. persons may seek authorization from OFAC to maintain or wind down their relationships with any such blocked entity, but make clear that continued employment or board membership related to these entities is prohibited.[17]  The implications of these restrictions are significant where, as is the case with the blocked entities listed in General License 12, U.S. subsidiaries exist and U.S. persons are involved throughout company operations. General License 13, which expires May 7, 2018, similarly allows transactions and activities otherwise prohibited under the April 6 sanctions.  This license allows transactions and activities necessary to “divest or transfer debt, equity, or other holdings” in three designated Russia entities:  EN+ Group PLC, GAZ Group, and United Company RUSAL PLC.  Permitted transactions include facilitating, clearing, and settling transactions.  General License 13, however, does not permit any divestment or transfer to a blocked person, including the three entities listed in General License 13.[18]  As with General License 12, transactions permitted under General License 13 must be reported to OFAC within 10 business days after the expiration of the license. Once again, it is uncertain how the General License will work in practice.  Given the designations which have depressed the share prices of the sanctions parties it is unknown who might be willing to purchase the shares even if U.S. holders are permitted to sell them. Other Ramifications for Investors, Supply Chains, and Customers The April 6 sanctions raise other significant questions and practical challenges for U.S. and non-U.S. companies, with particular risks for investors as well as the manufacturers, suppliers, and customers of the SDN companies. Investors and fund managers will need to conduct significant diligence into the participants and ownership structures of their funds, including fund limited partners, to determine whether sanctioned persons or entities are involved.  Moreover, for those who have seen the value of any assets tied to these companies decline significantly, they are allowed to continue to try sell their assets to non-U.S. persons.  However, given the challenge in finding buyers and evidence that certain financial institutions and brokers are already refusing to engage in any trades (even during the wind down period), the investment community needs to potentially prepare for long-term holding of blocked assets (by setting up sequestered accounts). For those within the supply chains of sanctioned companies, from suppliers of commodities to finished goods, as well as customers of sanctioned companies, the concern will be to potentially replace key commercial relationships which will become increasingly difficult (if not prohibited) to maintain.  For companies that have relied on RUSAL, for example, as a source of aluminum or as a customer for their goods they will potentially need to find replacements.  While aluminum is not in short supply globally, in certain jurisdictions RUSAL has a commanding position and even a monopoly.  It is unclear how companies that seek to be compliant with OFAC regulations will navigate a world in which RUSAL has been a primary or secondary supplier (and there is no clear way to avoid such engagement so long as the company seeks to be active in that jurisdiction and in need of aluminum).  Moreover, it is not just U.S. person counterparties that are likely to be affected by prohibitions on dealing with sanctioned parties.  In line with the FAQ noted above, if non-U.S. companies were to make payments to the sanctioned companies for deliveries, these could be deemed “significant transactions” and could make the non-U.S. companies, themselves, the target of OFAC designations and/or secondary sanctions.  One option—reportedly pursued by one major trading company—is to declare force majeure on contracts with Rusal. As noted above, relief contemplated by General Licenses 12 and 13 may be operationally difficult to implement.  The sanctions apply to companies 50 percent owned or controlled by blocked parties.  Companies will need to undertake, under a short time line, significant due diligence to determine whether any such companies are involved in its operations.  The wind down process may be further complicated by any Russian response to the U.S. sanctions. What Happens Next? The April 6 sanctions are likely not the end of the story.  The next steps to watch include: 1.)    Potential Russian Retaliation:  During an address to the State Duma on April 11, Prime Minister Dmitry Medvedev said, for example, that Russia should consider targeting U.S. goods or goods produced in Russia by U.S. companies when considering a possible response.[19]  Any such measures could implicate further U.S. business dealings with Russian entities, including the blocked entities. 2.)    Changing Ownership and Structure of Sanctioned Parties:  Given that the sanctioned companies were listed due to their ownership/control by sanctioned persons (pursuant to the 50 percent rule) there have already been moves to dilute their ownership and thus potentially have the companies de-listed.  While possible, it is important to note that because the companies were explicitly listed by OFAC (and now appear on the SDN list), any reduction in ownership or control will not result in an automatic de-listing.  Rather, OFAC will need to process these changes and formally de-list the entities before they can be treated as non-sanctioned.  OFAC could opt not to de-list, or could decide to list the companies on other bases.  Regardless the process will undoubtedly take some time.  We note that at least one engineering firm whose stock was held by a designated entity has already obtained a license to complete the transfer of these shares; this is helpful precedent for any company impacted but only tangentially related to the designated entities.  Sanctioned entities have also changed their board membership in response to the U.S. sanctions.  On Monday, April 11, for example, the entire board at Renova Management AG, the Swiss subsidiary of the Renova Group, was dismissed after Renova Group’s designation.[20] 3.)    European Follow On Restrictions:  The shock of many of Europe’s major powers following the poisoning of Sergei and Yulia Skripal in Salisbury in early March and the resulting mass expulsion of Russian diplomats from European capitals suggests that sanctions may be next.  Core European U.S. allies were likely notified in advance of the April 6 measures.  In the run up to sanctions in 2014, Washington and Brussels worked very closely to institute parallel measures against Moscow.  While that unity has broken down under the Trump administration, especially since CAATSA was passed in August, it would appear as though some European sanctions are liking in the offing. 4.)    OFAC FAQs/Licenses and Potentially New Measures:  Due to the complexity of the April 6 measures, we expect that OFAC will issue additional FAQs and potentially revisions to General Licenses 12 and 13 (or new General Licenses) in the near term to clear up questions and further calibrate response.  Depending upon next steps from Russia and Europe we may see additional sanctions as well.  Secretary of State-designate Mike Pompeo’s statement that the United States “soft” policy toward Russia is over suggests as much.[21] Unfortunately, there is no clear path towards a de-escalation in Washington-Moscow tensions.  When the U.S. first issued sanctions against Russia in response to the Crimea incursion in 2014 the sanctions “off-ramp” was very clearly defined: if Russia altered its behavior in Crimea/Ukraine there was a way that sanctions could be removed.  Since 2014, as Secretary Mnuchin noted, Russia’s activities have exacerbated in scope and territory to include support for the Bashar regime in Syria, election meddling, cyber-attacks, and the nerve agent attack in the United Kingdom.  The breadth and boldness of this activity makes it even more unlikely that Russia will comply with the West’s wishes and thus even less likely that the sanctions would be removed or even reduced at any point in the near term.  For its part, bipartisan Congressional leadership expressed broad support for the Trump administration’s actions—however, Congress will likely demand more from the President in the near term.  Perhaps eager to placate Congress and dispel any notion that he is “soft” on Russia and buffeted by external circumstances ranging from any potential attack in Syria to the investigation by Robert Mueller, the President may impose still harsher measures on Moscow. [1]      Press Release, U.S. Department of the Treasury, Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity (Apr. 6, 2018), available at https://home.treasury.gov/news/featured-stories/treasury-designates-russian-oligarchs-officials-and-entities-in-response-to. [2]      Natasha Turak, US sanctions are finally proving a ‘major game changer’ for Russia, CNBC, (Apr. 10, 2018) available at https://www.cnbc.com/2018/04/10/us-moscow-sanctions-finally-proving-a-major-game-changer-for-russia.html. [3]      Press Release, U.S. Dep’t of the Treasury, Treasury Designates Individuals and Entities Involved in the Ongoing Conflict in Ukraine (June 20, 2017), available at https://www.treasury.gov/press-center/press-releases/Pages/sm0114.aspx.  Designated persons and entities included separatists and their supporters; entities operating in and connected to the Russian annexation of Crimea; entities owned or controlled by, or which have provided support to, persons operating in the Russian arms or materiel sector; and Russian government officials. [4]      U.S. Department of the Treasury, supra, n. 1. [5]      Id. [6]      CAATSA, Title II, § 231 (a). Specifically, CAATSA Section 231(a) specified that the President shall impose five or more of the secondary sanctions described in Section 235 with respect to a person the President determines knowingly “engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.”  The measures that could be imposed under Section 231 are discretionary in nature.  The language of the legislation is somewhat misleading in this regard.  Section 231 is written as a mandatory requirement—providing that the President “shall impose” various restrictions.  However, the legislation itself—and the October 27, 2017 guidance provided by the State Department—makes clear that secondary sanctions are only imposed after the President makes a determination that a party “knowingly” engaged in “significant” transactions with a listed party.  The terms “knowingly” and “significant” have imprecise meanings, even under the State Department guidance.  OFAC Ukraine-/Russia-related Sanctions FAQs (“OFAC FAQs”), OFAQ No. 545, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#567. [7]      Press Release, U.S. Dep’t of State, Background Briefing on the Countering America’s Adversaries Through Sanctions Act (CAATSA) Section 231 (Jan. 30, 2018), available at https://www.state.gov/r/pa/prs/ps/2018/01/277775.htm. [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]     See, e.g., Press Release, U.S. Dep’t of the Treasury, Treasury Releases CAATSA Reports, Including on Senior Foreign Political Figures and Oligarchs in the Russian Federation (Jan. 29, 2018), available at https://home.treasury.gov/news/press-releases/sm0271. [11]     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. [12]     OFAC FAQ No. 573. [13]     CAATSA, Title II, §228. [14]     OFAC FAQ No. 546.  In its implementing guidance, OFAC confirmed that Section 228 extends to SDNs and SSI entities but clarified that it would not deem a transaction “significant” if U.S. persons could engage in the transaction without the need for a specific license from OFAC.  In other words, only transactions prohibited by OFAC—specifically, transactions with SDNs and/or transactions with SSI entities that are prohibited by the sectoral sanctions—will “count” as significant for purposes of Section 228.  OFAC also noted that even a transaction with an SSI that involves prohibited debt or equity would not automatically be deemed “significant”—it would need to also involve “deceptive practices” and OFAC would assess this criteria on a “totality of the circumstances” basis. [15]     OFAC FAQ No. 574. [16]     General License 12; OFAC FAQ No. 569. [17]     See also OFAC FAQ Nos. 567-568. [18]     See also OFAC FAQ Nos. 570-571. [19]     Russia’s Renova says board at its Swiss subsidiary dismissed due to sanctions, Reuters (Apr. 11, 2018), available at https://uk.reuters.com/article/usa-russia-sanctions-renova/russias-renova-says-board-at-its-swiss-subsidiary-dismissed-due-to-sanctions-idUKR4N1NE02P. [20]     Russia ready to prop Up Deripaska’s Rusal as US sanctions bite, Financial Times (Apr. 11, 2018), available at https://www.ft.com/content/4904f6d4-3d97-11e8-b7e0-52972418fec4. [21]     Patricia Zengerle, Lesley Wroughton, As Pompeo signals hard Russia line, lawmakers want him to stand on his own, Reuters (Apr. 12, 2018), available at https://www.reuters.com/article/us-usa-trump-pompeo/as-pompeo-signals-hard-russia-line-lawmakers-want-him-to-stand-on-his-own-idUSKBN1HJ0HO. The following Gibson Dunn lawyers assisted in preparing this client update: Adam Smith, Judith Alison Lee, Christopher Timura, Stephanie Connor, and Courtney Brown. 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) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@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) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, kkobildjanova@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) 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) Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Richard 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.

March 23, 2018 |
United States Implements Increased Tariffs on Steel and Aluminum Imports: Exclusion Relief Possible

Click for PDF Effective this morning, the United States implemented the increased tariffs on steel and aluminum imports that President Trump announced on March 8, 2018 in Presidential Proclamations implementing findings issued by the Commerce Department under Section 232 of the Trade Expansion Act of 1962, which allows the President to order a national security – focused investigation on the impacts of specified imports and, based upon the findings of the investigation, to impose tariffs without Congressional approval.  The Commerce Department investigations into imports of steel and of aluminum were initiated in April 2017, and in January 2018, the Commerce Department issued its reports.  The presidential proclamations issued on March 8, 2018 provided for increased duties of twenty-five percent on a range of steel articles (generally referenced in Chapters 72 and 73 of the Harmonized Tariff Schedule of the United States or “HTSUS”) and ten percent on various aluminum articles (generally referenced in Chapter 76 of the HTSUS). The March 8, 2018 Presidential Proclamations provided that the additional duties would not apply to imports of steel or aluminum articles from Canada and Mexico, although the preambles to the Proclamations indicated that the exemptions for products from Canada and Mexico were only effective “at least at this time,” and that these exemptions would be affected by “ongoing discussions with these countries.”  The preambles to these Proclamations also stated that “[a]ny country with which we have a security relationship is welcome to discuss with the United States alternative ways to address the threatened impairment of the national security caused by imports from that country,” and that based on these discussions the President “may remove or modify” the tariffs from that country.  The Presidential Proclamations also expressly provided for the possibility of “exclusions” from the increased tariffs pursuant to procedures to be issued by the Commerce Department, as discussed below. Yesterday evening, President Trump issued new Presidential Proclamations with respect to the Section 232 increased steel and aluminum tariffs.  These Proclamations modified the March 8, 2018 Presidential Proclamations in the following principal respects: The Proclamations provided for a temporary exemption from the increased tariffs until May 1, 2018 for Australia, Argentina, South Korea, Brazil, and the member countries of the European union. The Proclamations expressly stated that these exemptions as well as those for Canada and Mexico would apply only to steel articles imported through April 30, 2018. The Proclamations further clarified that the “exclusion” relief provided for and discussed below would be “retroactive to the date the request for exclusion was posted for public comment.” Needless to say, these latest Presidential Proclamations will not be the end of the processes involved in these Section 232 increased tariffs.  For example, other countries such as Japan will certainly be pressing for exemption from the increased tariffs, and the April 30, 2018 termination of the existing exemptions for imports from Canada, Mexico, Austria, Argentina, South Korea, Brazil and the member countries of the European union will certainly be the focus of efforts to extend these exemptions beyond this date. As noted above, the March 8, 2018 Presidential Proclamations provided for the possibility of “exclusions” for certain steel articles.  Earlier this week on March 19, 2018, the Commerce Department issued an “interim final rule” relating to the exclusion process, and also provided formats for the exclusion applications.  These materials generally provided the following concerning the exclusion process: All exclusion requests (as well as all objections to such requests) must be filed electronically using the specified form. The forms require very extensive information concerning the products for which an exclusion is requested, providing that a “separate Exclusion Request must be submitted for each steel product by physical dimension,” and requiring detailed information on “product availability” from United States steel manufacturers.  Requests are limited to twenty five pages, inclusive of all exhibits and attachments, but not including the forms themselves. Only individuals and organizations using the steel articles that are engaged in “business activities (e.g., construction, manufacturing or supplying steel to users) in the United States” may request an exclusion. There is no time limit on when the exclusion request can be submitted. Exclusion requests will be considered on a “rolling basis,” that is, based upon when the request was filed in complete form, with the Commerce regulations providing that the Department’s review process “normally will not exceed 90 days.” The regulations state that approved exclusions will be effective “five business days after publication of the response,” although this effective date appears to have been overwritten by yesterday’s Presidential Proclamations, as noted above. Approved exclusions will be limited to the individuals or organizations making the request, although other individuals or organizations may submit “follow-on” applications to take advantage of exclusions granted to others. The regulations provide that an exclusion “will only be granted  if an article is not produced in the United States in a sufficient and reasonably available amount, is not produced in the United States in a satisfactory quantity, or for a specific national security consideration.” Exclusions will “generally be approved for one year,” so that presumably some additional application process would be necessary thereafter. The regulations also provide that the Commerce Department will provide to U.S. Customs and Border Protection “information that will identify each approved exclusion request,” and that CBP may require additional reporting by importers relating to the exclusions. The exclusions process outlined above is comparable to, but in many ways more detailed and burdensome than, the exclusion process that the United States government applied following President Bush’s 2001 Proclamation of increased tariffs pursuant to Section 201 on various steel products.  Our substantial involvement in those exclusion proceedings indicated that it was very important to follow-up the exclusion request in a number of ways, including contacts with domestic producers and those involved in the other federal agencies with input into the process.  We would expect the exclusion proceedings involving these Section 232 Presidential Proclamations to involve a similar process. Gibson Dunn’s lawyers would be pleased to advise concerning any specific concerns or issues relating to the increased Section 232 tariffs on steel and aluminum products.  Please contact the Gibson Dunn lawyer with whom you usually work, or the author: Donald Harrison – Washington, D.C. (+1 202-955-8560, dharrison@gibsondunn.com) Please also feel free to contact the following leaders of the firm’s International Trade Group: Judith Alison Lee – Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Dallas (+1 214-698-3295, rkirk@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.

March 13, 2018 |
Webcast: U.S. Economic and Trade Sanctions Against Venezuela – the Outlook for 2018

This 90-minute complimentary webinar will provide a deep dive into the U.S. economic and trade sanctions against Venezuela, including a review of the most recent developments and a forecast of what may be in store for 2018. View Slides [PDF] This program covers: Status of Current Sanctions on Venezuela – Prohibited Parties and Sectors Commerce and State Department Export Controls Impact of Growing Use of Cryptocurrencies in Venezuela On the Horizon – Possibilities for U.S to “Ratchet Up” Sanctions PANELISTS: 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. 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, FCPA, economic sanctions and embargoes, and export controls. She also advises on issues relating to virtual and digital currencies, blockchain technologies and distributed cryptoledgers. Adam M. Smith, a partner in our Washington, D.C. office, is an experienced international trade lawyer who previously served in the Obama Administration as the Senior Advisor to the Director of OFAC and as the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. Christopher T. Timura, of counsel in our Washington D.C. office, is a member of the firm’s International Trade Practice Group. He counsels clients on export controls (ITAR and EAR), economic sanctions, and anticorruption, and represents them before the departments of State (DDTC), Treasury (OFAC and CFIUS), Commerce (BIS), Homeland Security (CBP), and Justice in investment reviews and in voluntary and directed disclosures involving both civil and criminal enforcement actions. 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. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

March 12, 2018 |
Brexit – converting the political deal into a legal deal and the end state

Click for PDF In our client alert of 8 December 2017 we summarised the political deal relating to the terms of withdrawal of the UK from the EU with a two year transition.  It is important to remember that this “Phase 1” deal only relates to the separation terms and not to the future relationship between the UK and the EU post Brexit. In her Mansion House speech on 2 March 2018 UK Prime Minister Theresa May set out Britain’s vision for a future relationship.  The full text of her speech can be found here.  It continues to make it clear that the UK will remain outside the Single Market and Customs Union. On the critical issue of the Irish border, the UK Government’s position remains that a technological solution is available to ensure that there is neither a hard border within Ireland nor a border in the Irish Sea which would divide the UK.  Neither the EU nor Ireland itself accept that a technological solution is workable, and there remain doubts whether such a solution is possible if the UK is outside the EU Customs Union (or something equivalent to a customs union).  The terms of the political deal in December make it clear that, in the absence of an agreed solution on this issue, the UK will maintain full alignment with the rules of the Single Market and Customs Union. The UK’s main opposition party, The Labour Party, has now shifted its position to support the UK remaining in a customs union. The Government is proposing a “customs partnership” which would mirror the EU’s requirements for imports and rules of origin. Theresa May has acknowledged both that access to the markets of the UK and EU will be less than it is today and that the decisions of the CJEU will continue to affect the UK after Brexit. On a future trade agreement, the UK’s position is that it will not accept the rights of Canada and the obligations of Norway and that a “bespoke model” is not the only solution. There is, however, an acknowledgement that, if the UK wants access to the EU’s market, it will need to commit to some areas of regulation such as state aid and anti-trust. Prime Minister May has confirmed that the UK will not engage in a “race to the bottom” in its standards in areas such as worker’s rights and environmental protections, and that there should be a comprehensive system of mutual recognition of regulatory standards. She has also said that there will need to be an independent arbitration mechanism to deal with any disagreements in relation to any future trade agreement. Theresa May has also said that financial services should be part of a deep and comprehensive partnership. The UK will also pay to remain in the European Medicines Agency, the European Chemicals Agency and the European Aviation Safety Agency but will not remain part of the EU’s Digital Single Market. Donald Tusk, the European Council President, has rejected much of the substance of the UK’s position, stating that the only possible arrangement is a free trade agreement excluding the mutual recognition model at the heart of the UK’s proposals.  Crucially, however, he has said that there would be more room for negotiation should the UK’s red lines on the Customs Union and Single Market “evolve”. It is clear that this is an opening position for the two sides in the negotiations and that there is a long history of EU negotiations being settled at the very last minute.  The current timetable envisages clarity on the final terms of the transition and the “end state” by the European Council meeting on 18/19 October 2018. 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) that has been considering these issues for many months.  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.

March 7, 2018 |
Intra-EU Investment Treaties: Is It Time to Restructure Your Investment?

Click for PDF Yesterday, the Court of Justice of the European Union (CJEU) issued its much awaited ruling on the compatibility of intra-EU bilateral investment treaties (BITs) with EU law, in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia.[1] The CJEU determined that arbitration provisions found in BITs concluded between EU Member States are incompatible with EU law.  Adopting the policy views expressed by the European Commission in recent years, the CJEU’s decision goes against the Advisory Opinion of the Attorney General Wathelet issued in September 2017[2], who had advised that there is no incompatibility with EU law.  The decision also goes against a long line of decisions from international arbitration tribunals rejecting the suggestion that EU law precludes the jurisdiction of such arbitral tribunals. The decision itself is surprisingly light in terms of its reasoning and leaves many questions unanswered.  For example, it is not clear how the CJEU ruling will impact pending disputes against EU Member States under intra-EU BITs.  It also appears to suggest that arbitration under the Energy Charter Treaty may be unaffected. However, the ruling no doubt will have consequences for the protection of foreign investments within the EU going forward.  Investors will not be able to commence arbitration proceedings under BITs between EU Member States.  Thus, in order to maximize protection from potential adverse government actions, investors from EU Member States with investments in other EU Member States should seriously consider restructuring their investments in order to ensure that they can take advantage of investment treaty protections. Background to the Dispute The question of compatibility of intra-EU BITs with EU law was brought before the CJEU following a request for preliminary ruling by the German Federal Court of Justice (Bundesgerichtshof) (BGH) in 2016.[3]  The BGH referred the issue to the CJEU in the context of a challenge to an arbitral award rendered under the Netherlands and Slovakia BIT of 1991 in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia in December 2012.  The Slovak Republic was seeking to set aside the UNCITRAL award before the Frankfurt courts (Frankfurt was the seat of arbitration).  The arbitral tribunal had awarded the claimant, Achmea, EUR 22.1 million plus interest and costs. The Slovakia argued inter alia that the BIT was incompatible with EU law based on certain provisions of the Treaty of the Functioning of the European Union (TFEU) and that the EU courts had exclusive jurisdiction over Achmea’s claims.  The first instance court in Frankfurt initially dismissed Slovakia’s application to have the award set aside.  Slovakia subsequently appealed to the BGH, following which BGH referred the questions on incompatibility to the CJEU, while enunciating its view that the BIT was in fact compatible with EU law. Although not binding on the CJEU, the EU Advocate General (AG) also weighed in the discussion with an Advisory Opinion in September 2017 in which he opined that intra-EU BITs are indeed compatible with EU law.  The AG expressly disagreed with the European Commission’s position (which had intervened and filed written submissions in a number of intra-EU BIT arbitrations[4]) that intra-EU BITs are incompatible with EU law.[5] CJEU’s Decision The BGH’s opinion and the AG’s Advisory Opinion, however, did not sway the CJEU.  In fact, the CJEU ruled that the arbitration clause featured in the Netherlands and Slovakia BIT of 1991 has an adverse effect on the autonomy of EU law and was therefore incompatible.  The Court opined that the BIT established a mechanism for settling disputes between an investor and a Member State by an arbitral tribunal which falls outside the judicial system of the EU and thus did not ensure the full effectiveness of EU law should the dispute in question require the interpretation or application of EU law. Implications of the CJEU Decision Currently, there are more than 190 BITs between EU Member States still in force and the CJEU’s ruling today will therefore have ramifications for the future of investment protection within the EU.  Although it remains to be seen how future investment treaty tribunals will interpret the CJEU’s ruling, they may consider that they lack jurisdiction when asked to hear disputes brought by European investors against EU Member States under intra-EU BITs in light of this ruling.  At the very least, any EU national court that is asked to assist in arbitration proceedings seated in EU Member States or hear recognition/enforcement applications for investment treaty awards under intra-EU BITs would need to consider the CJEU’s ruling.  What this decision means for arbitrations taking place outside the EU or under the self-contained regime of the ICSID Convention rules, however, is unclear. From the face of the decision, it appears that the CJEU left open the question as to whether its findings would apply to the provisions of multilateral treaties, such as the Energy Charter Treaty (ECT), to which the EU itself is a Party.   In particular, the CJEU appeared to distinguish between agreements only signed between two EU Member States and those signed by the EU itself (such as the ECT).  To date, all ECT tribunals that have considered jurisdictional objections based on EU law have rejected such arguments.[6] What Should Investors Consider Doing in Light of the Decision? In light of today’s ruling, it would be wise for EU based investors with investments in other EU Member States to consider restructuring their investments to ensure that their corporate structure includes at least one entity outside the EU in a country that has a BIT with the relevant EU Member State.  As has been consistently confirmed by investment treaty tribunals, re-structuring of investments before a dispute arises with a view to maximizing investment treaty protections is a legitimate business goal.  By undertaking such a restructuring, investors will ensure that they have additional remedies should they face adverse government actions against their investments.    [1]   The ruling can be accessed at curia.europa.eu.    [2]   Opinion of Advocate General Wathelet, Case C-284/16, Slowakische Republik v Achmea BV, 19 September 2017, available at: <http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62016CC0284&from=EN>.    [3]   See the press release No. 81/2016 dated 10 May 2016, in which the BGH announced that it requested a preliminary ruling from the CJEU, available at <http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=pm&Datum=2016&Sort=3&nr=74606&pos=2&anz=83>.    [4]   For example, in Eastern Sugar v. Czech Republic, SCC Case No. 088/2004; AES v. Hungary, ICSID Case No. ARB/07/22; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19; Charanne v. Spain, SCC Case No. V062/2012; Isolux v. Spain, SCC Case V2013/153; Blusun v. Italy, ICSID Case No. ARB/14/3; Novenergia v Spain, SCC Case No. 2015/063; in enforcement proceedings in Micula v Romania No. 15-3109-cv (2d Cir.).    [5]   In the recent years, the Commission has been increasing pressure on arbitral tribunals hearing disputes under intra-EU BITs to decline jurisdiction and also on EU Member States.  In 2015, for example, it initiated infringement proceedings against five EU Member States (Austria, the Netherlands, Romania, Slovakia and Sweden) and requested them to terminate their intra-EU BITs, see press release dated 18 June 2015 available at: <http://europa.eu/rapid/press-release_IP-15-5198_en.htm>.  In late November 2017, the European Commission’s Competition Office has indicated that any compensation to be paid by EU Member States to foreign investors following successful investment treaty claims would constitute state aid requiring approval from the Commission: see report dated 10 November 2017 available at: <http://ec.europa.eu/competition/state_aid/cases/258770/258770_1945237_333_2.pdf>.    [6]   See for example Charanne B.V. and Construction Investments S.A.R.L. v. Spain, SCC No. 062/2012; RREEF v. Spain, ICSID Case No. ARB/13/30; Eiser Infrastructure v. Spain, ICSID Case No. ARB/13/36; Blusun v. Italy, ICSID Case No. ARB/14/3; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration practice group, or the following: Cyrus Benson – London (+44 (0) 20 7071 4239, cbenson@gibsondunn.com) Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com) Jeffrey Sullivan – London (+44 (0) 20 7071 4231, jeffrey.sullivan@gibsondunn.com) Rahim Moloo – New York (+1 212-351-2413, rmoloo@gibsondunn.com) Ceyda Knoebel – London (+44 (0)20 7071 4243, cknoebel@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.

February 5, 2018 |
2017 Year-End Sanctions Update

Click for PDF A year ago this week, we assessed that the newly-minted Trump administration could follow through on the President’s campaign promises and alter several sanctions programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). The U.S. Congress, we surmised, could respond by codifying and expanding existing regulations.  After a year of historic growth in the use of sanctions—and one in which sanctions played a greater role in both foreign and domestic policy in the United States—we stand by that assessment.  The Trump administration continued a nearly two-decade bipartisan trend of increasing reliance on sanctions.  Across the full range of sanctions programs, nearly 1,000 entities and individuals were added to the Specially Designated Nationals and Blocked Persons (the “SDN” or “black”) list.  (see below).  This represented a nearly 30 percent increase over the number added during President Obama’s last year in office, and a nearly three-fold increase over the number added during President Obama’s first year in office. Source: Graph compiled from OFAC data. The Trump administration’s Secretary of the Treasury, Steven Mnuchin, has had an unprecedented level of involvement in OFAC’s recent actions.  In prior administrations, the Treasury Secretary’s involvement in sanctions policy was intermittent and rare, leaving the day-to-day work and announcements of new sanctions to the director of OFAC or the Under Secretary for Terrorism and Financial Intelligence.  To the best of our knowledge, there has never been a Treasury Secretary so clearly enamored with the sanctions tool—an assessment supported by Mnuchin’s own September 2017 claim that he spends half of his time on national security and sanctions issues.[1] While the increasing use of sanctions is noteworthy and brings to mind concerns raised by observers about an “overuse” of sanctions, neither the administration nor Congress appears likely to cease their reliance on the tool as a “go to” instrument of coercion.  The past year saw increased sanctions pressure on Iran, Syria, Russia, and North Korea as well as a roll back of the Cuban sanctions relief provided under President Obama.  Congress responded, codifying and strengthening existing sanctions measures against Russia, Iran and North Korea by passing the unprecedented “Countering America’s Adversaries through Sanctions Act” (“CAATSA”).[2]  New sanctions on Venezuela were imposed and old sanctions on Sudan were removed. Even as the Trump administration sought to separate itself from the Obama team, many of the new sanctions imposed—such as those against Venezuela—appear to borrow explicitly from the Obama administration’s playbook.  Moreover, several core features of Obama’s sanctions policy remain broadly untouched—at least for now.  Key among them is the Joint Comprehensive Plan of Action (“JCPOA”), which President Trump described during the presidential campaign as “the worst deal ever negotiated.[3]  Despite uncertainty over its future, the JCPOA remains intact.[4] There were also some surprises.  On December 20, 2017, President Trump issued an unusually broad executive order to implement the Global Magnitsky Human Rights Accountability Act, a 2016 law that authorized sanctions for those responsible for human rights abuses and significant government corruption.[5]  The order was celebrated by the human rights and anti-corruption non-government communities,[6] and added more than four dozen individuals and entities from various countries—including Burma, China, the Democratic Republic of the Congo, the Gambia, Guatemala, Russia, and South Sudan, and even from core U.S. allies like Israel—to OFAC’s SDN List.[7] We would be remiss to omit reference to the pivotal role that sanctions played in the deteriorating diplomatic relationship between the United States and Russia, as well as many of the political controversies that dominated the headlines in 2017.  In 2012, the United States Congress passed an aggressive law intended to punish Russian officials responsible for the death of Sergei Magnitsky, a Russian accountant who was imprisoned after exposing a tax fraud scheme allegedly involving Russian government officials and who died under suspicious circumstances while in custody.[8]  Specifically, the Sergei Magnitsky Rule of Law Accountability Act (“2012 Magnitsky Act”)—passed unanimously by the U.S. Congress in December 2012—sought to block certain Russian government officials and businessmen from entering the United States, froze their assets held by U.S. banks, and banned future use of the U.S. banking system.[9]  Subsequent efforts to remove the 2012 Magnitsky Act sanctions serve as critical background for many of the allegations surrounding Russia’s purported efforts to interfere in the 2016 U.S. election.[10]  There are presently 49 individuals sanctioned under authority granted by the 2012 Magnitsky Act.[11] While events of the past year will give historians much fodder to assess the long-term geopolitical and even domestic political impact of economic sanctions, our purpose here is more limited: a recap of the continuing evolution of sanctions in 2017. I.     Major U.S. Program Developments A.     Russia Title II of CAATSA, the “Countering Russian Influence in Europe and Eurasia Act of 2017” (“CRIEEA”), strengthened OFAC’s sectoral and secondary sanctions targeting the Russian Federation in several significant and unprecedented ways.  CAATSA codified and amended the Russia sectoral sanctions that had been implemented during the Obama administration.[12]  By adopting the Obama-era executive orders as statutory law, Congress sought to ensure that only congressional action can weaken or eliminate these sanctions.[13]  CAATSA also authorized or mandated secondary sanctions with respect to certain activities, such as conducting malicious cyber-attacks or providing support to Russian energy export projects.  Moreover, the statute, for the first time in any sanctions law, explicitly limited the President’s ability to license (exempt) transactions from sanctions prohibitions if the licensing “significantly alters United States’ foreign policy with regard to the Russian Federation.”[14] In brief, CAATSA expanded the Obama administration’s sanctions targeting certain sectors of the Russian economy by reducing the maximum maturity period for new debt that U.S. persons can provide to designated Russian financial institutions from 30 to 14 days, and to designated Russian energy companies from 90 to 60 days.[15]  CAATSA also expanded the Obama administration’s prohibition on the provision of goods, support, or technology to designated Russian entities relating to the exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation.[16]  CAATSA removed the limitation that such projects be located in Russia, instead targeting “new” oil projects worldwide in which a designated Russian person has a “controlling interest or a substantial non-controlling” ownership interest.[17] OFAC’s Russia Sanctions 101Whenever there is a change or expansion of U.S. sanctions policy, we find it useful to revisit some of the basic tenets of U.S. sanctions.  As a matter of first principles, U.S. sanctions have two principal means of targeting an activity: (1) sanctioning persons for engaging in those activities ; and/or (2) designating the activity as per se sanctionable. Primary vs. Secondary Sanctions:  When OFAC sanctions certain activities, it does so through primary or secondary sanctions.  Under “primary” sanctions, U.S. persons who engage in prohibited activities (including dealing with an SDN or a sanctioned country) could face civil and criminal penalties, as could any person (U.S. or non-U.S.) who causes a violation to occur in U.S. territory, such as by causing a U.S. financial institution to process a prohibited transaction.  Whereas U.S. persons often face civil and criminal penalties for engaging in prohibited transactions, secondary sanctions subject non-U.S. persons to indirect sanctions with different kinds of limitations that can vary from the relatively innocuous (e.g., blocking use of the U.S.’s export-import bank), to the severe (e.g., blocking use of the U.S. financial system or blocking all property interests). SDN vs. SSI Designations:  There are several types of ‘designations’ for purposes of OFAC’s Russia sanctions: most importantly, SDNs and Sectoral Sanctions Identifications (“SSIs”).  U.S. persons are generally prohibited from dealing with any person or entity on the “SDN List” and all assets under U.S. jurisdiction that are owned or controlled by an SDN are frozen.   Under the SSI or sectoral designations, U.S. persons are prohibited from engaging in certain types of activities with SSI entities.  A sectoral designation does not result in a complete prohibition on all interactions as with SDNs and SSI assets are not frozen.  The precise restrictions on SSI entities are set forth in a series of “directives.” CAATSA also sought to strengthen secondary sanctions targeting those non-U.S. persons who engage in activities ranging from undermining cybersecurity,[18] to investing in Russian crude oil projects,[19] evading sanctions and abusing human rights.[20]  In expanding these measures, Congress dramatically increased OFAC’s workload for the final quarter of 2017, as CAATSA created numerous interpretative issues, reporting and designation requirements that consumed the remainder of the year.  We analyze these measures in greater detail, as well as OFAC’s guidance and implementing regulations in Trump Administration Implements Congressionally Mandated Russia Sanctions – Significant Presidential Discretion Remains (November 21, 2017). Most recently, CAATSA required the imposition of secondary sanctions on any person the President determines to be engaging in “a significant transaction with a person that is part, or operates for or on behalf of, the defense or intelligence sectors of the Government Russia.”[21]  Those sanctions were due to be imposed within 180 days of the passage of CAATSA—by January 29, 2018.  On January 29, State Department representatives provided classified briefings to Congressional leaders to explain their decision not to impose any such sanctions under CAATSA.[22]  Though the briefings were classified, the State Department revealed that the Trump administration felt that CAATSA was already having a deterrent effect which removed any immediate need to impose sanctions.[23]  Some Members of Congress expressed disapproval of the administration’s lack of action and accused the White House of failing to implement the law.[24]  But the statutory language is nuanced, and the administration’s FAQs released in October 2017 indicated that—in line with similar language passed in 2010 with respect to sanctions on Iran—it would be taking a flexible approach to assessing violations under this provision.[25]  While it is unknown what was said in the classified briefings, we are aware of numerous outreach missions that administration representatives have undertaken in order to deter foreign governments and corporations from engaging in such transactions.  The publicized plans of certain governments to purchase substantial Russian munitions in 2018—such as Turkey’s proposal to procure S-400 surface-to-air missiles from Russia[26]—will test both the power of the law’s deterrence and potentially Congress’s patience. CAATSA also required the Treasury Department to publish—also by January 29—a report identifying “the most significant senior foreign political figures and oligarchs in the Russian Federation.”[27]  Just before midnight on January 29, the Treasury Department issued its report, publicly naming 114 senior Russian political figures and 96 oligarchs.[28]  The inter-agency team charged with drafting the report used objective standards in drafting these lists—senior political figures included members of the Russian Presidential administration, members of the Russian Cabinet and senior executives at Russian state-owned enterprises.  For the oligarch list, OFAC included Russians with a net worth of U.S. $1 billion or more.  All of these classifications appear to be based on information that is generally available in the public sphere.  Although the report apparently includes a lengthy classified annex, it was not immediately clear what kind of information was included in that material. Notably, there is no legal impact of appearing in this report.  The Treasury Department noted in numerous places that this report “is not a sanctions list,” and “the inclusion of individuals or entities in any portion of the report does not impose sanctions on those individuals or entities.”[29]  That there are no sanctions implications to such a listing was also a unique CAATSA innovation—never before has OFAC been charged with compiling and publishing a “name and shame” list with no concomitant sanctions.  As a consequence, many financial institutions and private corporations on the outside of government have been uncertain how to handle transactions with counterparties who now appear on this list.  To date, it appears that the breadth and objective nature of the list has substantially dulled the impact—a fact that many critics of the administration have noted.  Even in Russia the impact has been surprisingly muted.  It is noteworthy that even as President Putin’s senior representatives claimed that the list was the United States’ attempt to influence Russia’s upcoming presidential contest, Putin quickly announced that he would not be authorizing any retaliatory measures. Aside from the considerable efforts required to implement CAATSA, OFAC added 38 more individuals and entities involved in the Ukraine conflict to the SDN List in June 2017.[30]  The sanctioned parties included Ukrainian separatists and their supporters; entities operating in and connected to the Russian annexation of Crimea; entities owned or controlled by, or which have provided support to, persons operating in the Russian arms or materiel sector; and Russian Government officials.[31] B.     Iran As expected, the Trump administration has taken a harsh posture toward Iran, using existing sanctions programs to designate numerous individuals and entities—including the head of Iran’s judiciary[32]—and threatening to abandon the JCPOA.  Though specific licensing requests are confidential, our experience and understanding is that OFAC licensing of Iran-related transactions —even those in line with the JCPOA—has slowed considerably. On October 13, 2017, President Trump refused to certify, under the authority granted to him by the Iran Nuclear Agreement Review Act (“INARA”) of 2015, that the sanctions relief under the JCPOA is “appropriate and proportionate” to the measures taken by Iran with respect to its nuclear program.[33]  As we wrote this past October, President Trump’s refusal to make the certification kicked off a sixty-day period during which Congress could have enacted Iran-related sanctions legislation on an expedited basis.  Congress allowed the sixty-days to pass without taking action. But Congress was not inactive on the Iran sanctions front.  Although CAATSA’s Russia-related portions captured most of the headlines, Title I of CAATSA, the “Countering Iran’s Destabilizing Activities Act of 2017” (“CIDA”), imposed significant sanctions against Iran.  CIDA targeted Iran’s ballistic missile program, the Iranian Revolutionary Guard Corps (“IRGC”), Iranian human rights abuses, and weapons transfers benefitting Iran.  CAATSA also codified the designations of persons pursuant to two executive orders and purports to limit the President’s ability to remove those persons from the SDN list.[34]  We described the measures targeting Iran at length in our alerts, Congress Seeks to Force (and Tie) President’s Hand on Sanctions Through Passage of Significant New Law Codifying and Expanding U.S. Sanctions on Russia, North Korea, and Iran (July 28, 2017), and A Blockbuster Week in U.S. Sanctions (June 19, 2017). On January 12, 2018, President Trump announced that he was giving the deal another 120 days to be “fixed.”  Although the administration has not made clear the full nature of its concerns with the JCPOA, it has noted that the deal’s silence on Iran’s ballistic missile development and the existence of certain “sunset provisions” (after which any remaining sanctions would be permanently lifted) are high on the list of shortcomings.  The announcement of this deadline (which expires in May 2018) set off a feverish set of negotiations with core European partners (the UK, Germany and France) and with Congress to develop new measures that will satisfy the President.  As we have noted, the JCPOA is not a Senate-ratified treaty but rather an Executive Agreement.  As such the President has significant flexibility to remain in or to exit the Agreement.  Given the President’s apparent willingness to unilaterally remove the United States from agreements that the Obama team negotiated (such as the Paris Climate Accord) we assess that even though it remains unclear how the situation will evolve, the President’s threat is unlikely to be perceived as a mere a negotiating strategy. C.     North Korea The relationship between the United States and the Democratic People’s Republic of Korea (“DPRK” or “North Korea”) deteriorated rapidly in 2017, resulting in new sanctions that target non-U.S. persons and foreign financial institutions for doing business with the Pyongyang regime.  Unlike many other aspects of the Trump administration’s foreign policy, the DPRK efforts have been decidedly multilateral—several United Nations Security Council resolutions against DPRK have been passed since Trump took office.  These resolutions are described in greater detail in the European Union section of this Update. Although successive U.S. administrations had tightened sanctions on North Korea—declaring a “national emergency” under the IEEPA in 2008, blocking hundreds of North Korean individuals and entities, banning imports in 2011 and exports in 2016[35]—the perception of the threat and the potential for a U.S. military response escalated rapidly under the Trump administration.  In the early days of 2018, tensions between the United States and Pyongyang seem to have reached a fever pitch—with leaders on both sides claiming to have their finger on the nuclear launch button.[36] North Korea’s characteristic bellicosity was apparent in its efforts to ramp up its domestic missile program in 2017.  The DPRK fired more than 20 missiles from at least 16 different tests between February and December.[37]  In July 2017—as the U.S. Congress was drafting expansive legislation to impose sanctions on Iran and Russia—North Korea tested two intercontinental ballistic missiles, claiming they could reach “anywhere in the world.”[38]  In response, Congress added a new section targeting North Korea to the draft CAATSA, titled “Korean Interdiction and Modernization of Sanctions Act” (“KIMSA”).[39]  CAATSA expanded sanctions that had previously been set forth by Congress in the North Korea Sanctions and Policy Enhancement Act of 2016, enabling the President to impose sanctions on foreign individuals and entities that historically provided an economic lifeline to the Pyonyang regime.  CAATSA strengthened sanctions aimed at North Korean economic activities and required the Secretary of State to submit a determination as to whether North Korea meets the criteria for designation as a state sponsor of terrorism.  The Trump administration ultimately added North Korea to the state sponsors of terrorism list on November 20, 2017.[40] On September 20, 2017, the Trump administration issued Executive Order 13810, imposing additional sanctions on North Korea.[41]  This order borrowed from the Obama administration’s sanctions playbook by imposing sanctions on specific sectors and threatening to cut off access to the U.S. banking system for non-U.S. persons involved in North Korean trade.  In the words of Treasury Secretary Steven Mnuchin, the order effectively put foreign banks “on notice that, going forward, they can choose to do business with the United States, or with North Korea, but not both.”[42] This was not the first attempt to restrict North Korea’s access to the global banking community.  In 2016, OFAC’s ban on the export of goods, technology, and services to North Korea included a prohibition on financial services.[43]  Also in 2016, the Treasury Department classified North Korea as a “jurisdiction of primary money laundering concern” under Section 311 of the USA Patriot Act, 31 U.S.C. § 5318A, effectively prohibiting the use of correspondent accounts on behalf of North Korean financial institutions and requiring that U.S. financial institutions implement additional due diligence with regard to entities linked to North Korea.[44]  However, the threat of the potential application of correspondent and payable-through banking restrictions on non-North Korean financial institutions in Executive Order 13810 was expected to have a more significant impact on North Korea than these other measures. Executive Order 13810 also laid the groundwork for the imposition of sectoral sanctions by granting OFAC the authority to designate those involved in a long list of North Korean economic sectors: construction, energy, financial services, fishing, information technology, manufacturing, medical, mining, textiles, or transportation industries, as well as those who own, control, or operate any port in North Korea, and North Korean persons, including those engaged in commercial activity that generates revenue for the Government of North Korea or the Workers’ Party of Korea.  Unlike with the Russian sectoral sanctions, however, a designation under Executive Order 13810 results in the blocking of all property and interests in property.  Executive Order 13810 is described at length in our alert, In Latest Salvo, the Trump Administration Pressures Non-U.S. Companies and Persons to Cut Financial and Business Ties with North Korea. Given that several members of the Trump administration have noted that the North Korea threat—and the effort to denuclearize the Korean peninsula—is the President’s “number one” foreign policy priority, we assess that more sanctions are likely in the near term.  The Department of Justice (“DOJ”) has also been active in this arena—launching investigations, issuing grand jury subpoenas and acting against assets believed to be linked to North Korea.  In August 2017, the DOJ resolved an $11 million money laundering and asset forfeiture matter for actions alleged associated with North Korean financial facilitators.[45] Notably, in the last few weeks we have seen a warming relationship between North and South Korea.  Whether this signifies a permanent improvement in diplomatic relations on the Korean peninsula, or a brief respite ahead of the Winter Olympics, remains to be seen.  Either way, multinational corporations would be wise to observe any daylight that develops between Seoul and Washington sanctions policies with respect to the North Korea.  A divergence in the approach to North Korean sanctions between these major players could lead to significant challenges. D.     Cuba As we noted last year, the final year of the Obama administration brought about a series of important changes to the Cuba sanctions regime.  This summer, President Trump announced that he was “canceling” President Obama’s “one-side deal”[46] with Havana. In November, the Departments of the Treasury, Commerce, and State began to implement significant changes to the United States’ Cuba sanctions regime.  Though the previous administration’s actions were not entirely removed—and have not been as of this writing—the Trump administration did rollback several of the Obama administration’s changes to United States sanctions policy with respect to Cuba. As noted, on June 16, 2017, President Trump announced that his administration would reimpose some of the sanctions on Cuba that were relaxed under President Obama.  According to a fact sheet that the White House issued at the time, the new Cuba policy aims to keep the Grupo de Administración Empresarial (“GAESA”), a conglomerate run by the Cuban military, from benefiting from the opening in U.S.-Cuba relations.[47]  The fact sheet further elaborated that the new policy purports to enhance existing travel restrictions to “better enforce the statutory ban” on U.S. tourism to Cuba, including limiting travel for non-academic educational purposes to group travel and prohibiting individual travel permitted by the Obama administration.[48]  At the time, President Trump directed the Departments of the Treasury and Commerce to begin the process of issuing new regulations within 30 days of the announcement.[49]  We described the policy change in our alert, A Blockbuster Week in U.S. Sanctions (June 19, 2017). On November 8, 2017, OFAC, the Commerce Department’s Bureau of Industry and Security (“BIS”), and the State Department released amendments to the Cuban Assets Control Regulations (“CACR”) and Export Administration regulations (“EAR”), implementing the changes.[50]  Additionally, while certain transactions with Cuban parties by U.S. persons remain permitted, the CACR now prohibit transacting with entities listed on the State Department’s new “Cuba Restricted List” (or the “List”), which was released simultaneously and consists of Cuban entities that the administration considers to be “under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services personnel.”[51] Notably, these provisions, when viewed together with the increased restrictions, muddy the already difficult-to-navigate regulatory waters.  The new OFAC and BIS amendments cover three main areas: The OFAC amendments now prohibit U.S. persons and entities from engaging in direct financial transactions with entities listed on the Cuba Restricted List, while the BIS amendments state that BIS will generally deny license applications for the export of items for use by entities on the list.[52]  The List includes over 175 entities and sub-entities that operate in a variety of economic sectors, notably, over 80 of which are hotels.[53]  The focus on hotels directly impacts the Obama-era sanctions relief that had led to an increase in U.S. visits to the island, as even permitted visitors will now have a difficult time finding appropriate accommodation.  These changes have already seen a retrenchment and reduction in U.S. visitors. The OFAC amendments restrict people-to-people travel that had previously been authorized, requiring, among other things, that nonacademic educational travel be conducted under “the auspices of an organization that is a person subject to U.S. jurisdiction and that sponsors such exchanges to promote people-to-people contact” and that such travelers are accompanied by a representative of that organization and participate in full-time schedule of activities.[54] BIS has simplified the Support for the Cuban People License Exception to the Cuba Embargo, now allowing for the export of all EAR99 items (and those controlled only for anti-terrorism reasons on the Commerce Control List ) to Cuba, provided the intended end user is in the Cuban private sector.[55] Three months after the issuance of these amendments, it is still unclear whether a complete pivot with respect to U.S. policy towards Cuba is in the making.  Undoubtedly, there are signals that a full reversal is possible:  in addition to President Trump’s rhetoric and the recent amendments, 2017 witnessed stories concerning attacks on U.S. (and other) diplomats in Havana and the expulsion of various Cuban diplomats from the United States.  At the very least, the Trump administration’s policy has served to chill the considerable interest that had developed in investments in Cuba. E.     Venezuela Throughout 2017, Venezuela’s President Nicolás Maduro and his supporters moved to consolidate their power.  In March 2017, Venezuela’s Tribunal Supremo de Justicia ruled that it was taking over all powers of the Asemblea Nacional.[56]  Although the court later revised its ruling, months of protests ensued, and Maduro supporters elected a purported replacement legislature, the Asemblea Constituyente, in an election that was widely boycotted by Maduro’s opposition.[57]  Amidst this political upheaval, Venezuela’s economy—which is largely dependent on the state-owned oil company, Petróleos de Venezuela, S.A. (“PdVSA”)—has been in sharp decline.  In response to the Maduro governments efforts to undermine their political opposition, the United States slowly increased and expanded its economic sanctions against Venezuela, focusing on blocking the property and interests of key figures in the Maduro government and on financial sanctions that make it more difficult for the Maduro government and PdVSA to raise new money. OFAC’s first steps against individual persons associated with the Maduro government took place in March 2015 blocking designations, and OFAC followed these with additional designations in May and November 2017.  OFAC’s initial March 2015 designations were made pursuant to EO 13692[58] and targeted a short list of seven officials in response to their role in the erosion of human rights guarantees, persecution of political opponents, curtailment of press freedoms, use of violence and human rights violations and abuses in response to antigovernment protests, and arbitrary arrest and detention of antigovernment protestors, and significant public corruption.  These officials occupied positions in Venezuela’s intelligence, security, prosecutorial, and defense services. The May and November 2017 designations targeted both former and current officials.  They included President Maduro (for engineering the election of the Asemblea Constituyente), eight members of Tribunal Supremo de Justicia (for efforts to obstruct Asemblea Nacional)[59] and members of the Consejo Nacional Electoral who interfered in regional elections in October 2015.  Others designated include the second VP of the Asemblea Constituyente, its former second VP and now Ambassador to Italy, the current Cultural Minister, and Minister of Urban Agriculture.[60]  Two government officials were also designated under authority of the Foreign Narcotics Kingpin Designation Act (Kingpin Act) for playing significant roles in narcotics trafficking. On August 24, 2017, President Trump issued an executive order imposing sanctions targeting transactions involving debt and equity of the Venezuelan government, including PdVSA.  These restrictions borrowed from the Russian sanctions from 2014 and were based on a similar set of policy constraints—namely, even though it might be possible for U.S. sanctions to enact devastating harm on economic targets in Venezuela, the collateral consequences of doing so (to the United States and its allies) would be potentially too serious.  Consequently a lesser set of sanctions—a “grey list”—was required. As such, the following activities are now prohibited without OFAC authorization.  As under other sanctions programs, the prohibitions apply not only to the entities specifically targeted in the executive order (i.e., the Government of Venezuela and PdVSA), but also to any entity that is at least 50% owned or controlled by the targeted entities (for example, subsidiaries of PdVSA or entities owned or controlled by the Government of Venezuela).[61] In brief, the executive order prohibits U.S. persons from transactions involving new debt of PdVSA with a maturity of greater than 90 days, or new debt of the Government of Venezuela (other than PdVSA) with a maturity of greater than 30 days.  U.S. persons are also prohibited from transacting in new equity of the Government of Venezuela, including PdVSA.  The term “equity,” as described in OFAC’s FAQs, “includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.”  This prohibition covers only equity “directly or indirectly” issued by the Government of Venezuela—including PdVSA—after the effective date of the sanctions, but, as described below, transactions involving equity issued by third parties may also be prohibited, if the Government of Venezuela is the seller.  This limitation on purely secondary market sales of debt is new and was not implemented in the Russia program. The executive order also prohibits U.S. persons from engaging in any transactions relating to Venezuelan government (or PdVSA) bonds, even if issued prior to the effective date of the sanctions, with the exception of those covered by the general license described below.  OFAC explains this provision (and others in the executive order) as an effort to “prevent U.S. persons from contributing to the Government of Venezuela’s corrupt and shortsighted financing schemes,” including the sale of bonds and other securities “for much less than they are worth at the expense of the Venezuelan people and using proceeds from these sales to enrich supporters of the regime.” The executive order also prohibits the involvement of U.S. persons in transactions relating to dividend payments to the Government of Venezuela from entities owned or controlled by the Government of Venezuela.  This provision restricts the flow of dividends from subsidiaries—including CITGO—up to PdVSA and the Venezuelan government.  This has proven a challenge for many companies active in Venezuela: the nationalization efforts under the prior Chavez regime converted the operations of many foreign firms into joint ventures majority held by PdVSA or the Government of Venezuela (the “empresa mixtas”).  Finally, U.S. persons are prohibited from purchasing any securities, including those issued by non-sanctioned third parties, directly or indirectly from the Government of Venezuela, except for new debt with maturities of less than 90 days (for PdVSA) or 30 days (for all other portions of the Venezuelan government). In connection with its financial sanctions, OFAC has issued four general licenses.  General License 1 provided for a wind down period of 30 days—until September 24, 2017—to carry out transactions that are “ordinarily incident and necessary to wind down contracts or other agreements that were in effect prior to August 25, 2017.”  The wind-down period did not apply to the prohibitions relating to dividends and distributions of profits, and persons engaging in such wind-down transactions were required to file a detailed report with OFAC.  General License 2 authorizes transactions involving the new debt or new equity issued by, or securities sold by, CITGO Holding, Inc. or its subsidiaries, provided that no other Government of Venezuela entity is involved in the transaction.  This very significant general license effectively carves CITGO out of the new sanctions, provided that U.S. persons are careful not to permit any other involvement by PdVSA or the Government of Venezuela in the transaction.  General License 3 exempts certain bonds, listed in an annex, from the prohibition on transactions involving Venezuelan bonds.  Several bonds issued by PdVSA are listed in the annex. General License 3 also exempts bonds issued by U.S. persons (e.g., CITGO) prior to the issuance of the executive order.  General License 4 authorizes certain transactions relating to new debt involving agricultural commodities (including food), medicine, or medical devices. In late 2017 Venezuela bonds fell into technical default as some of its payments were delayed.  Though the Government has appeared to continue juggling accounts to remain out of a more formalized default situation—which could have serious consequences as bonds could become due automatically and immediately—the sanctions have made traditional renegotiation of debt challenging.  Maduro has appointed two individuals, Vice President Tareck El Aissami and Economy Minister Simon Zerpa, to lead his government’s efforts in any renegotiation; both of those men are on the SDN List making it uncomfortable for any financial institution to enter into any negotiations with them.[62] An additional complexity in the Venezuelan situation came about with Maduro’s announcement that his government was issuing a new “cyber currency” to thwart any impact of restrictions on the U.S. dollar that came about due to sanctions.  In response OFAC issued its first FAQ 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 sanctions consequences if they undertook dealings in the new currency.[63] F.     Sudan In January 2017, the Obama administration revoked most of the Sudanese Sanctions Regulations (“SSR”) by general license, subject to a six-month review period.[64]  After a brief extension of the review period, the Trump administration finalized the revocation of the SSR effective October 12, 2017.  Historically, the SSR 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.  Under the separate Darfur Sanctions Regulations (“DSR”), the United States blocked property belonging to those connected to the conflict in Darfur.  The DSR remain in place, as do the designations of numerous Sudanese persons. II.    U.S. Enforcement A.     Selected OFAC Enforcement Actions 2017 was a busy year for OFAC enforcement actions.  OFAC assessed over $119 million in collective civil penalties in 16 enforcement actions; however, four cases represent roughly 96% of the issued penalties.  Notably, one enforcement action against a Chinese entity, Zhongxing Telecommunications Equipment Corporation, which resulted in the highest penalty for the year and OFAC’s largest penalty ever imposed on a non-financial institution (over $100 million), may have foreshadowed a growing enforcement trend for 2018—cracking down on Chinese companies working with jurisdictions under comprehensive U.S. sanctions (such as Iran, North Korea, Cuba, Syria and the Crimea Region of Ukraine). Zhongxing Telecommunications Equipment Corporation[65] On March 7, 2017, Zhongxing Telecommunications Equipment Corporation and its subsidiaries and affiliates, (collectively, “ZTE”), agreed to settle its potential civil liability for 251 apparent violations of the Iranian Transactions and Sanctions Regulations (“ITSR”) for $100,871,266.  ZTE is a telecommunications corporation established in the People’s Republic of China. According to the settlement documents, from January 2010 to March 2016, ZTE developed and implemented a company-wide plan that used third-party companies to conceal ZTE’s illegal business activities with Iran.  ZTE’s highest-level management had specific knowledge of the legal risks of engaging in such activities prior to signing contracts with Iranian customers and supplying U.S.-origin goods to Iran.  Under these contracts, ZTE committed to the procurement and delivery of U.S.-origin goods to Iran.  Some of these delivered goods included those controlled for anti-terrorism, national security, regional stability, and encryption item purposes.  ZTE was also contractually obligated to and, did in fact, enhance the law enforcement surveillance capabilities and features of Iran’s telecommunications facilities and infrastructure. OFAC determined that ZTE willfully and recklessly demonstrated a disregard for U.S. sanctions requirements and that the 251 apparent violations constituted an egregious case.  In making its determination, OFAC considered the following facts and circumstances: (1) various executives and senior executives knew or had reason to know of the conduct that led to the apparent violations and engaged in a long-term pattern of conduct designed to hide and purposefully obfuscate its conduct; (2) the conduct was undertaken pursuant to directives and business processes that were illegitimate in nature and specifically designed and implemented to facilitate the violative behavior; (3) ZTE caused significant harm to the integrity of the ITSR and its associated policy objectives; and (4) ZTE is a sophisticated and experienced telecommunications company that has global operations and routinely deals in goods, services, and technology subject to U.S. laws. ExxonMobil Corp.[66] On July 20, 2017, ExxonMobil Corp. and its U.S. subsidiaries (collectively, “ExxonMobil”) were penalized in the amount of $2,000,000 for violating the Ukraine-Related Sanctions Regulations by engaging in business with Igor Sechin, the President of Rosneft OAO who has been identified on the SDN List. ExxonMobil and Mr. Sechin signed legal documents related to oil and gas projects in Russia when OFAC had already designated Mr. Sechin as an SDN approximately one month prior.  ExxonMobil explained that it interpreted the related White House press statements to be establishing a distinction between Mr. Sechin’s “professional” versus “personal” capacity, citing a news article that quoted a Treasury Department representative that a U.S. person would not be prohibited from participating in a meeting of Rosneft’s board of directors.  OFAC considered ExxonMobil’s arguments and determined that the penalty accurately reflects OFAC’s consideration of the underlying facts and circumstances.  Specifically, OFAC considered the following: (1) ExxonMobil failed to consider warning signs associated with Mr. Sechin; (2) ExxonMobil’s senior executives knew of Mr. Sechin’s status as an SDN; and ExxonMobil is a sophisticated and experienced oil and gas company that routinely deals in business activities subject to U.S. economic sanctions. This penalty—and in particular the seeming removal of any distinction between personal and professional capacities—was met with surprise and concern in the OFAC bar.  ExxonMobil is currently challenging OFAC’s decision in federal court. CSE Global Limited and CSE TransTel Pte. Ltd.[67] On July 27, 2017, CSE TransTel Pte. Ltd. (“TransTel”), a wholly owned subsidiary of CSE Global Limited (“CSE Global”), agreed to pay $12,027,066 to settle its potential civil liability for 104 apparent violations of the International Emergency Economic Powers Act (“IEEPA”) and the ITSR.  Both TransTel and CSE Global are located in Singapore and offer telecommunications and technological services around the world.  CSE Global appeared to expand OFAC jurisdiction—at least explicitly—to cases in which non-U.S. parties “cause” U.S. entities to violate their sanctions obligations. From August 25, 2010 through November 5, 2011, TransTel entered into contracts with multiple Iranian companies to deliver and install telecommunications equipment for several energy projects in Iran or its territorial waters.  To fulfill its contracts, TransTel hired and engaged a number of third-party vendors, including several Iranian companies, to provide goods and services on its behalf.  In April 2012, the Singaporean bank that maintains TransTel and CSE Global’s accounts sent them a letter regarding sanctions warnings, to which TransTel and CSE Global responded that they would not route any transactions related to Iran through the bank.  From June 2012 to March 2013, TransTel then used the bank’s services for its Iranian business activities by initiating wire transfers destined to multiple third-party vendors that supplied goods and services for its energy projects in Iran. OFAC determined these apparent violations to be an egregious case, and considered the following facts and circumstances in its decision: (1) TransTel willfully and recklessly caused apparent violations of U.S. economic sanctions by engaging in, and systematically obfuscating, conduct it knew to be prohibited; (2) TransTel’s senior management played an active role in the wrongful conduct; (3) TransTel’s actions conveyed significant economic benefit to Iran and persons on OFAC’s SDN List by processing dozens of transactions through the U.S. financial system that totaled $11,111,812 and benefited Iran’s oil, gas, and power industries; and (4) TransTel is a commercially sophisticated company that engages in business in multiple countries.  OFAC considered the following to be mitigating factors: (1) TransTel has not received a penalty notice or cautionary letter from OFAC in the five years preceding the violations; (2) TransTel and CSE Global have undertaken remedial steps to ensure compliance with U.S. sanctions programs; and (3) TransTel and CSE Global provided substantial cooperation during the course of OFAC’s investigation. DENTSPLY SIRONA Inc.[68] On December 6, 2017, DENTSPLY SIRONA INC. (“DSI”), a Delaware corporation, agreed to pay $1,220,400 to settle its potential civil liability for 37 apparent violations of the ITSR.  Specifically, two of DSI’s subsidiaries exported 37 shipments of dental equipment and supplies from the United States to distributors in third countries, with actual or constructive knowledge that the goods were destined for Iran. OFAC determined that the apparent violations constituted a non-egregious case and considered the following facts and circumstances: (1) DSI’s two subsidiaries acted willfully by exporting U.S.-origin dental products to third country distributors with knowledge or reason to know that the exports were ultimately destined for Iran; (2) personnel from these subsidiaries concealed the fact that the goods were destined for Iran, and in multiple cases continued to conduct business with these distributors after receiving confirmation that the distributors had re-exported DII products to Iran; (3) several supervisory personnel had actual knowledge of the conduct and appear to have deliberately concealed their awareness from DSI; (4) DSI has not received a penalty notice in the five years preceding the violations; (5) the harm to ITSR objectives was limited because the exports were likely eligible for specific license; and (6) DSI took remedial steps, including a voluntary expansion of the review to include a company-wide inquiry. Habib Bank Limited[69] In 2017, the New York Department of Financial Services (“DFS”) continued in its pursuit to enforce sanctions compliance for major banks.  In furtherance of this goal, DFS’s new regulation, Part 504, took effect on January 1, 2017, which sets forth the requirements for all DFS-licensed institutions and their use of sanctions screening programs.  On September 7, 2017, DFS issued a consent order against Habib Bank Limited (“Habib”) and its New York branch, imposing a $225 million penalty for persistent BSA/AML and sanctions compliance failures.  Habib is currently Pakistan’s largest bank.  Pursuant to the order, Habib agreed that it failed to maintain an effective AML and OFAC compliance program; failed to maintain true and accurate books and records; failed to operate in an unsafe and unsound manner; and violated provisions of a prior written agreement and consent order.  Prior to issuing the consent order, DFS had issued a “Notice of Hearing and Statement of Charges,” seeking to impose a nearly $630 million civil penalty against the Pakistani bank.  Habib will surrender its license to operate its New York Branch until it fulfills the conditions outlined in DFS’s separate Surrender Order.  As part of the conditions it must fulfill, Habib must complete an expanded transactional “lookback” to be conducted by an independent consultant.  As of this writing Habib has decided to cease operations in New York. III.     European Union In 2017, the European Union (the “EU”) stayed the course from 2016.  The key sanctions programs on Russia/Ukraine/Crimea and Iran were prolonged while further sanctions regulations were adopted, namely with respect to Mali and Venezuela.  Additional actions were also seen in the fast-moving DPRK sanctions and, in a noticeable development, an enhancement in sanctions enforcement actions across Europe. A.     Legislative developments 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. As yet no one has been designated under the Mali sanctions. Venezuela Finally following the U.S. lead on Venezuela sanctions, on November 13, 2017 the EU Council 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.[70] Subsequently on, January 22, 2018 an initial list of seven individuals was published who were subject to these sanctions. Though these measures are not yet as severe as U.S. measures on Venezuela—and  the Council stated that the sanctions can be reversed if Venezuela makes progress on these issues— the Council was also explicit in its warning that the sanctions may be expanded if the situation exacerbates.[71] North Korea As noted above with respect to U.S. measures, the events on the Korean Peninsula in 2017 also gave rise to significant new EU measures against DPRK.  The UN has been very active on DPRK issues and the EU has both been supporting such measures and expending significant efforts to implement these measures across the bloc’s 28 members.  On June 2, the UN Security Council designated a further four entities and 14 officials subject to travel bans and asset freezes, including Cho Il U, believed to be the Director of North Korea’s overseas espionage operations and foreign intelligence collection. In early August, the UN Security Council unanimously passed Resolution 2371 (2017), which introduced fresh sanctions against North Korea, including: (i) a full ban on coal, iron and iron ore (which, at $1 billion, is estimated to represent about a third of North Korea’s export economy); (ii) the addition of lead and lead ore to the banned commodities subject to sectoral sanctions; (iii) a ban on seafood exports from North Korea; and (iv) the expansion of financial sanctions by prohibiting new or expanded joint ventures and cooperative commercial entities with the DPRK. Demonstrating the significant developments seen to North Korean sanctions in 2017, in August the EU consolidated its existing North Korean sanctions into Council Regulation 2017/1509, a move deemed necessary in view of the numerous amendments that had been made to the previous Council Regulation 329/2007. It also issued an updated decision, Council Decision (CFSP) 2017/1512, amending Council Decision (CFSP) 2016/849, to reflect these changes. The UN Security Council duly imposed Resolution 2375 (2017) on September 11, 2017, which includes: (i) a ban on textile exports (North Korea’s second-biggest export at over $700m per year); (ii) limits on imports of crude oil and oil products to the amount imported by the exporting country in the preceding year; (iii) a prohibition against all joint ventures or cooperative entities or the expansion of existing joint ventures with North Korean entities or individuals; and (iv) a ban on new visas for North Korean overseas workers. These measures were watered down from the original restrictions called for by the United States, so as to ensure that Russia and China would not veto the proposals. The United States had initially sought a total prohibition on exports of oil into North Korea, stricter restrictions on North Koreans working in foreign countries, enforced inspections of ships suspected of carrying UN sanctioned cargo, and a complete asset freeze against Kim Jong-Un. In November, the EU further imposed additional restrictions via Council Regulation (EU) 2017/2062, which: (i) broadened the ban on investment of EU funds in or with North Korea to all economic sectors; (ii) reduced the permissible amount of personnel remittances to North Korea from €15,000 to €5,000; and (iii) at the Council’s invitation to review the existing list of luxury goods subject to import/export bans, published a new list, which covers everything from caviar, cigars and horses to artwork, musical instruments and vehicles. Finally, rounding off the year, the UN imposed Resolution 2397 (2017) on December 22, which inter alia: (i) strengthens the measures regarding the supply, sale or transfer to North Korea of all refined petroleum products, including diesel and kerosene, and reduced to 500 million barrels per 12-month period the permitted maximum aggregate of refined petroleum product exports to North Korea; (ii) limits the supply, sale or transfer of crude oil by Member States to the DPRK to 4 million barrels or 525,000 tons per 12-month period; (iii) expands sectoral sanctions by introducing a ban on North Korean exports of food and agricultural products, machinery, electrical equipment, earth and stone, wood and vessels, as well as a prohibition against the sale of North Korean fishing rights; (iv) introduces a ban on the supply, sale or transfer to North Korea of all industrial machinery, transportation vehicles, iron, steel and other metals; (v) strengthens the ban on providing work authorizations for North Korean nationals by requiring Member States to repatriate all income-earning North Koreans and all North Korean government safety oversight attachés monitoring North Korean workers abroad by 22 December 2019; and (vi) strengthens maritime measures by requiring Member States to seize, inspect and freeze any vessel in their ports and territorial waters for involvement in banned activities. As North Korea’s missile and nuclear programs show no signs of being halted, we expect that the international community will continue to expand the restrictive measures imposed against North Korea in the coming year. Indeed already in 2018, the EU has designated a further 17 North Korean individuals through Regulation 2018/87.  Though it is unlikely that the EU will get ahead of the U.S. or the UN the bloc has been cohesive among the 28 in the necessity of applying pressure on the Pyongyang regime. Russian Federation On December 21, 2017, the EU once again extended the economic sanctions adopted in 2014 in response to Moscow’s annexation of the Crimea and Sevastopol and the continued and deliberate destabilization of Ukraine. The economic sanctions are currently extended until July 31, 2018. Also, the listing of numerous Russian entities and individuals as targets of financial sanctions including measures such as asset freezes and the prohibition to provide funds or economic resources remained in place and was further extended. These measures also continue to include a number of trade restrictions and limitations on the access to the EU capital markets for major Russian majority state-owned financial institutions and major Russian energy companies. In particular, in accord with U.S. measures, EU Sanctions Regulations prohibits 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 to 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, whilst authorization must be sought for the provision technical assistance, brokering services and financing relating to the above. The trade of dual-use goods and technology is also restricted to the extent that it is prohibited to sell dual-use goods and technology for the Russian military users and prior authorization must be sought for the sale of such good and technology for all non-military users in Russia. The provision of goods and technology listed in the Common Military List is prohibited, while the supply of certain fuels used for rockets and space technology is subject to prior authorization. Note that there are exceptions for certain contracts concluded before 2014, ancillary contracts necessary for the execution of contracts concluded before 2014, and when the provision of services is necessary to prevent an event likely to significantly impact human health. In addition, assets for certain natural and legal persons have been frozen, and member states may only 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. Statements made by the EU and the responsible German authority clearly indicated the importance of EU sanctions and their implementation. Unlike with the DPRK sanctions, the continuation of Russian sanctions continues to threaten dissent among some of the EU’s members.  Time will tell if this dissenting bloc will eventually coalesce around a shared position and formally prevent the EU from continuing any measures against Moscow. Crimea and Sevastopol As the EU still does not recognize the annexation of Crimea and Sevastopol by Russia, it imposes sanctions against these territories as Ukrainian territory.[72] The measures, which include an import ban on goods from Crimea and Sevastopol, restrictions on trade and investment relating to a wide variety of economic sectors and infrastructure projects, as well as an export ban for certain goods and technologies relating to the transport, telecommunication, energy and mineral resources sectors have been extended until June 23, 2018.[73]  These restrictions are nearly identical to those in place in the United States. Iran Divergence between U.S. and EU Sanctions:  A Hypothetical Any divergence between U.S. and EU sanctions has the potential to cause significant compliance hurdles for multinational companies.  To take a hypothetical example: a German company is selling a product to Iran, and the product and the Iranian counterparty are not subject to any EU sanctions, yet they are subject to U.S. sanctions. The contract is signed, the product is ready for shipping and the Iranian counterparty has set aside the necessary funds. To now conclude the transaction, the German company cannot rely on a U.S. dollar transaction, as the U.S. clearing bank is likely to reject the transaction or freeze the funds. The U.S. dollar transaction or any other U.S. related business dealings could create a U.S. nexus leaving the transaction and eventually the German company in breach of U.S. sanctions. Even if the German company had decided to finance the transaction in EURO, business practice since Implementation Day has shown that (because as most banks rely on the access to the U.S. financial system) only a very limited number of international banks are willing to take the risk of accommodating such a transaction, fearing retaliation from U.S. regulators. As set out in our 2016 Year-End Sanctions Update, the European Council lifted all nuclear related economic and financial EU sanctions against Iran on January 16, 2016 pursuant to Iran’s compliance with the JCPOA.  Nonetheless, some restrictions remain in force. The remaining measures in force include those related to violations of human rights adopted in 2011, and comprise an asset freeze and visa bans for individuals and entities responsible for grave human rights violations and a ban on exports to Iran of equipment which might be used for internal repression and of equipment for monitoring telecommunications, as well as nuclear and ballistic missile technology.  These measures where recently extended until April 13, 2018. EU Rosneft Judgement One European judicial outcome in 2017 is especially noteworthy.  In March 2017, the Court of Justice of the EU (CJEU) established its jurisdiction to rule on matters of the EU’s common foreign and security policy, which is an area of fierce contention between Brussels and national governments seeking to maintain sovereignty.[74] The case, which was referred by the UK High Court concerned Russian oil company Rosneft’s questioning of the validity of EU sanctions against Russia regarding a restricted access to the EU’s capital markets and on the provision of financial assistance related to the supply of key equipment for the Russian oil sector. While the CJEU in a first step confirmed the validity of the EU Russia sanctions, it also addressed important questions regarding the scope of the imposed sanctions.[75] In interpreting “financial assistance” under article 4(3)(b) of EU Regulation 833/2014 relating to the need for prior authorization if related to the sale, supply, transfer or export of specified equipment for the Russian oil sector, the UK government and the European Commission both interpreted the term broadly to include payment services.[76] However, the CJEU rejected this view and stated that financial assistance in this case “does not include the processing of a payment, as such, by a bank or other financial institution.”[77] This was in line with arguments made by Rosneft and the intervening German government that the mere processing of a third-party payment is different from providing active and substantive support and must be comparable to loans, credits or export credit insurance.[78] This interpretation threatens to further distance U.S. and EU sanctions.  This more limited approach is in opposition to U.S. views in which prohibitions on dealings with certain actors almost always include the use of financial institutions under U.S. jurisdiction to provide services to sanctioned parties.  It remains to be seen how European banks—eager to both engage in legal business but remain compliant with U.S. regulations so as to maintain their own U.S. correspondent banks—will adjust to this more flexible approach. IV.     United Kingdom Legislative developments Policing and Crime Act 2017 and accompanying guidance Part 8 of the Policing and Crime Act 2017, which came into force on April 1, 2017, strengthened the UK’s sanctions enforcement by increasing the maximum custodial sentence for violating sanctions rules from two to seven years.  Additionally, it expanded the list of offences amenable to a deferred prosecution agreement (“DPA”), giving the National Crime Agency and Office of Financial Sanctions Implementation (“OFSI”) more scope to offer DPAs—which can still only be entered into by the Serious Fraud Office and the Crown Prosecution Service—and impose Serious Organized Crime Prevention Orders. Importantly, it also gives OFSI new powers—this still new agency is slowly building up its authorities and has established a strong track record in its brief stint.  The Policing and Crime Act gives the agency the power to impose, as an alternative to criminal prosecution and by reference to the civil standard of proof, monetary penalties for infringements of EU/UK sanctions. OFSI can impose penalties of either £1 million or 50% of the value of the breach, whichever is greater. The lower evidential burden to impose the new civil penalties means that OFSI need only be satisfied on the balance of probabilities that a person (legal or natural) acted in breach of sanctions and knew or had reasonable cause to suspect they were in breach. The Act also addresses the delay between the United Nations Security Council adopting a financial sanctions resolution and the EU adopting an implementing regulation, which can take over a month. OFSI can adopt temporary regulations to give immediate effect to the UN’s resolutions, as if the designated person were included in the EU’s consolidated list. OFSI put this power into practice in June of this year by adding a militia leader, Hissene Abdoulaye, to its consolidated list of Central African Republican sanctions targets, before the EU had done so. Businesses relying on a version of the EU’s consolidated list prepared by the European Union, or by a member state other than the United Kingdom, may miss fast-track listings done by the UK in this manner. The UK has also enacted the Policing and Crime Act (Financial Sanctions) (Overseas Territories) Order 2017 to extend these short-term fast-track listings to its offshore financial centers of Cayman, British Virgin Islands and Turks and Caicos. In a number of interviews this year, OFSI head Rena Lalgie has given further indications of how the body will enforce sanctions compliance. According to Ms. Lalgie, “voluntary disclosure will be an important part of determining the level of any penalties that might be imposed.”  OFSI has already said that in its Guidance hat companies that voluntarily come forward will see reductions in fines of up to 50% in “serious” cases and 30% in the “most serious” cases.  This is a very similar process to the mitigation provided by OFAC to entities engaging in voluntary disclosure. Ms. Lalgie also made the following noteworthy comments: “preventing and stopping non-compliance and ensuring compliance improves in the future.” The agency has used its information powers numerous times to “require companies which haven’t complied to tell [OFSI] how they intend to improve their systems and controls in future.”  Any continuing sanctions non-compliance could lead to criminal prosecution, with fines “fill[ing] the gap between prevention and criminal prosecution“. The most important actions a company can take to avoid violating sanctions rules are to “know [its] customers and promote active awareness among relevant staff of high-risk areas“. Ms. Lalgie believes that a company also ought to know what sanctions are in place in the countries in which it does business and have appropriate, up-to-date procedures that are regularly monitored and understood by staff. In April 2017, and after a public consultation, OFSI published its final Guidance on the new financial sanctions framework providing detailed guidelines relating to the imposition of the new civil monetary penalties. For further information about the consultation, please see our 2016 Year-End United Kingdom White Collar Crime Alert. The final OFSI Guidance on monetary penalties was also published in April 2017. It provides a detailed overview of OFSI’s approach to investigating potential breaches, as well as the penalty process and procedures for review and appeal. Of note are the following key points from the guidance: Penalties can be imposed on natural or legal persons, meaning that separate penalties could be imposed on a legal entity and the officers who run it, if the officer consented to or connived in the breach, or the breach was attributable to the officer’s negligence; OFSI will regularly publish details of all monetary penalties imposed, including by reference to the name of the person or company in breach, and a summary of the case; and Under sections 147(3)-(6) of the Policing and Crime Act 2017, decisions to impose a penalty can be reviewed by a government minister and then by appeal to the Upper Tribunal. In OFSI’s “penalty matrix,” factors which may escalate the level of penalty imposed include the direct provision of funds or resources to a designated person, the circumvention of sanctions, and the actual or expected knowledge of sanctions and compliance systems of the person or business in breach. Voluntary and materially complete disclosure to OFSI is a mitigating factor that may reduce the level of penalty imposed by up to 50%. The European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 On August 8 2017, the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 (the “IPR 2017”) came into force. Before the IPR 2017, financial services firms had a positive reporting obligation to notify HM Treasury of any known or suspected breach of financial sanctions, and to notify any known assets of those subject to financial sanctions. Failure to notify constituted a criminal offence. The IPR 2017 extends this reporting regime to: auditors; casinos; dealers in precious metals or stones; estate agents; external accountants; independent legal professionals; tax advisers; and trust or company service providers. OFSI has claimed in its Guidance (at 5.1.1) that all companies and individuals have a positive reporting obligation, but this is based on wording in the relevant EU regulations not implemented into English law. As such, the IPR 2017 represents a significant expansion of the scope of the financial sanctions reporting obligations in the UK. Moreover, this extension of the reporting obligation regime is specific to the UK—there is no EU equivalent. It should be noted that trade sanctions are on the whole excluded from this reporting regime, with the focus mostly on those included in the Consolidated List or the separate Ukraine List. As set out in the Explanatory Memorandum to the Regulations, this development occurred without a public consultation, impact assessment, or parliamentary scrutiny. The failings of the system as currently enacted are best seen by way of a comparison with the money laundering reporting obligations. In the field of AML: the maker of a bona fide suspicious activity report is protected by statute from liability for any loss or damage flowing from the SAR; there is a defense to any breach if the party has followed its regulator’s guidance; there is a defense of “reasonable excuse” for failing to make a SAR; there is an architecture for reporting, first within an organization and then for an MLRO who has personal criminal liability if they fail to report; and there is an exception to the obligation to make a SAR for lawyers and accountants, auditors or tax advisers, if the information came from the client—the so-called “privileged circumstances” exception. None of the certainty that comes with a clear reporting hierarchy is found in the IPR 2017, and none of these protections are present either. Most notably this may have an unintended chilling effect on companies seeking legal assistance in the conduct of an internal investigation. As they stand the IPR 2017 would require a company’s lawyers to report to OFSI any suspected breach of sanctions, thus robbing the client of the possibility of gaining any credit by self-reporting. Given that OFSI’s own guidance stresses the benefits of self-reporting, the IPR 2017 only serve to undermine this policy objective. It remains to be seen whether the government will revise the IPR 2017 to take account of these failings. Sanctions and Anti-Money Laundering Bill 2017 On October 18, 2017 a new Sanctions and Anti-Money Laundering Bill was introduced in the House of Lords, which aims to provide a legislative framework for the imposition and enforcement of sanctions after Brexit. Currently much of the UK Government’s authority to impose and enforce sanctions flow from the European Communities Act 1972. The proposed bill would give the Government authority to impose and implement sanctions by way of secondary legislation to comply with its obligations under the United Nations Charter and to support its foreign policy and national security goals. The European Union (Withdrawal) Bill 2017-19 (the “Bill”) which will give effect to Brexit, will freeze the current sanctions regimes and underlying designations on the date of the UK’s exit from the EU. The sanctions regime in place would quickly become out of date, and absent new legislation the UK would be unable to amend or lift the existing sanctions. The Sanctions and Money Laundering Bill seeks to provide the mechanism to resolve this issue. The proposed legislation has been through two readings before the House of Lords and is currently at the Committee Stage with the Report Stage scheduled for 15 and 17 January. Part I of the Bill as originally introduced provided the power to impose sanctions, giving an appropriate Minister, defined as the Secretary of State or the Treasury, the power to make “sanctions regulations” for a variety of purposes including: compliance with a UN obligation; compliance with another international obligation; to further the prevention of terrorism in the UK or elsewhere; in the interests of national security; in the interests of international peace and security; or to further a foreign policy objective of the UK government. In the process of going through the House of Lords further bases for imposing sanctions have been added to the current draft of the Bill. These are: promote the resolution of armed conflicts or the protection of civilians in conflict zones; promote compliance with international humanitarian and human rights law; contribute to multilateral efforts to prevents the spread and use of weapons and materials of mass destruction; and promote respect for human rights, democracy, the rule of law and good governance. The absence of “misappropriation” as a basis for sanctions is notable, when that is the basis for the current EU sanctions against Egypt and Tunisia and some of those against Ukraine. Another absence is an express reference to cyber-related sanctions. As discussed in our 2017 Mid-Year United Kingdom White Collar Crime Update earlier in 2017 the EU proposed sanctions as one of a panoply of responses to organized cyber-attacks.  In the case of human trafficking, as mentioned further below, there have been a number of recent proposals to impose such sanctions. It is possible that some of the broad rubrics such as “protection of civilians in conflict zones” or “human rights law” or “international peace and security” will be extended to cover such sanctions. “Sanctions regulations” are defined as regulations which impose financial, immigration, trade, aircraft, or shipping sanctions, and expanded upon in clauses 2 to 6 of the Bill. In its comments on the Bill the House of Lords’ Constitution Committee has raised concerns in relation to the breadth of powers afforded to Ministers under the sanctions provisions, including in particular the power to create new forms of sanctions. The Bill is currently the subject of significant debate and it is not yet clear what final form it will take. The sanctions authorized by the Bill take a variety of forms. Financial sanctions can be imposed by way of asset freezes, and by the placement of restrictions on the provision of financial services, funds, or economic resources in relation to designated persons, persons connected with a prescribed country, or persons meeting a particular description. A person who is the subject of a travel ban may be refused leave to enter or to remain in the UK. Trade sanctions can prevent activities relating to target countries or to target specific sectors within those countries. Aircraft and shipping sanctions can have a variety of impacts, including preventing particular craft from entering the UK’s airspace or waters. Designated persons can include individuals, corporations, and organizations and can be identified by name or by description. The Bill enables Ministers to set out in regulations how designation powers are to be exercised. The Bill also includes provision for Ministers to create exceptions to any prohibition or requirement imposed by the regulations, or to issue licenses for prohibitions imposed by the regulations not to apply. Clause 16 is worthy of mention for, as explained in the accompanying Explanatory Notes, it provides a mechanism for a yet-further expansion of the obligatory reporting regime to all individuals and companies. Whether this provision survives parliamentary scrutiny, and the requirement to protect the right to a fair trial, will remain to be seen. Chapter 2 sets out the Bill’s provisions on revocation, variation and review of designations of persons under the Bill. The Bill provides that a designation may be varied or revoked by the Minister who made it at any time, and that at any time a designated person may request that the Minister vary or revoke the designation. However, after such a request, no further request may be made unless it relies on new grounds or raises a significant matter which has not previously been considered by the Minister.  The Bill also requires periodic review of designations by the appropriate Minister every three years. Where a designated person has been identified by a UN Security Council Resolution, they may ask the Secretary of State to use his or her best endeavors to have their name removed from the UN list. These provisions have attracted criticism, as they would appear to detract from the existing procedural safeguards available in relation to EU sanctions, which include an entitlement to challenge before the Courts. Similarly, the existing EU regime allows for review of designations every six to twelve months. Although the Bill adopts certain definitions from EU Sanctions measures, it also provides that new sanctions regulations may make provision as to the meaning of other concepts.  This may give rise to a divergence in the interpretation of sanctions legislation between the UK and the EU, which could increase uncertainty and the burden of those charged with compliance with multiple sanctions regimes. Criminal Finances Act 2017—”Magnitsky Sanctions” The CFA amended POCA to include a “Magnitsky amendment.”  This expands the definition of “unlawful conduct” for the purposes of civil recovery orders under Part 5 of POCA to include human rights abuses and applies to those who profited from or materially assisted in the abuses. The amendment is modelled on the US Magnitsky Act. By regulations made on January 20, 2018, this portion of the CFA will come into force on January 31, 2018. V.     United Kingdom and European Union Enforcement The year 2017 was a remarkable one for sanctions enforcement across the EU. Whether the level of enforcement seen in 2017 will become the new normal, or will soon be revealed as an aberration remains to be seen.  What we know is that it would be difficult to point to any other year in recent history that had as many enforcement actions from as wide a diversity of countries as we saw in 2017.  Last year saw successful enforcement in at least nine different member states including Denmark, France, Belgium, Germany, the Netherlands and Latvia.  Both companies and individuals faced censure and even penalties. Moreover, there was significant diversity in the sanctions regimes enforced: enforcement actions were made in light of violations against Russia, Crimea, Syria, Iran, Ukraine, DPRK, Al Qaida and Anti-Terrorism sanctions.  The enforcement theories were also varied and included cases in which broad systems and controls failings were noted, and others in which the focus was more limited trade sanctions and export controls violations. France In France the highest-profile enforcement action has been that against LafargeHolcim in relation to alleged breaches of Syrian sanctions. The allegation is that LafargeHolcim paid some $5.6 million between 2012 and 2014 to designated persons in order to secure protection for its factories in Syria. A formal judicial inquiry was commenced on June 13, 2017.[79] The French authorities have conducted raids at LafargeHolcim sites during November 2017, and interviewed a number of employees. On December 8, 2017 the former CEO Eric Olsen was formally charged in relation to the payments.[80] Belgium The Belgian authorities have also been investigating LafargeHolcim in relation to alleged breaches of Syrian sanctions, and in November 2017 the Belgian’s raised premises of a Lafarge-Holcim subsidiary in Belgium.[81] Netherlands The Dutch authorities have been particularly active during 2017 with a significant number of enforcement actions. Although the largest of the fines runs to €500,000, the Dutch have fined five different companies, obtained a number of custodial sentences, and commenced a number of new investigations. On February 17, 2017 the Dutch Central Bank obtained an administrative sanction against an unnamed Dutch trust office for failings in its transaction monitoring and client due diligence in breach of the Dutch Sanctiewet 1977 (“Sanctions Law 1977”).[82] On March 10, 2017, a man was sentenced to 3 years’ jail for breaches of the EU’s Al Qaida and Terrorism sanctions under the Sanctions Law 1977.[83] On April 21, 2017 a sentence of 19 years’ jail was upheld by the Court of Appeal for the supply of arms and munitions to the sanctioned government of Charles Taylor in Liberia.[84] On April 24, 2017, a fine of €50,000 was handed down to another Dutch logistics provider for the unlicensed shipping of unmanned aircraft on the EU Common Military List from the United States to Saudi Arabia. The goods were valued at $14 million.[85] On the same day, an unnamed Dutch airline was fined €40,000 (half suspended for two years), relating to the shipment of goods on the EU Common Military List from South Africa to Ecuador.[86] In May 2017, it was reported that the Dutch authorities were investigating trust companies within the BK Group for possible breaches of the Ukraine misappropriation sanctions.[87] On August 3, 2017 the Dutch Central Bank obtained a fine of €100,000 against an unnamed payment services provider company. The fine was reduced from €125,000 on appeal.[88] The fine relates to the failure to conduct any sanctions or PEP screening on a sample of files reviewed by the Bank. On September 4, 2017, a fine of €500,000 and a custodial sentence of 1 year and 8 months was obtained in relation to a prosecution for trade with an entity that was designated on the EU’s anti-nuclear sanctions against Iran.[89] On September 4, 2017 the Dutch International Development Ministry commenced an inquiry into the activities of the companies Dematec Equipment and Biljard Hydrauliek in providing equipment for the building of the Kerch Strait Bridge designed to join Russia and Crimea.[90] On November 9, 2017 the Dutch Public Prosecution Service obtained a criminal fine of €50,000 against an unnamed Dutch freight solutions company.[91] The Dutch authorities also sought a two-month suspended sentence for the company’s managing director.[92] The company had sought to ship radar equipment for Sukhoi jet fighters from Malaysia to Russia, but the consignment was intercepted at Schiphol Airport. The sale was in breach of both European export controls, as the products were military equipment listed in the Dutch Besluit Strategische Goederen (“Dutch Strategic Goods Order”), and in breach of Russian sanctions which would have prohibited the granting of an export licence even if one had been applied for. Lithuania On August 18, 2017, the Lithuanian Prosecutor General’s Office announced that the Lithuanian Financial Crime Investigation Service had opened an investigation into alleged breaches of the EU’s Crimean sanctions by three different enterprises: Pluosto Linija LLC, BT Invest, and Hanner Group OÜ.[93] Based on press reports the allegation are of investments and business dealings by Lithuanian nationals in Crimean companies and property developments.[94] Latvia On June 27, 2017, the Latvian Financial and Capital Market Commission entered into administrative agreements with three different Latvian Banks for failings related to breaches of North Korean sanctions. Each of the banks cooperated with the investigation and admitted the identified failings.[95] The press release highlights cooperation both with the FBI and with FINCEN, and that related investigations are ongoing. JSC Baltikums Bank and JSC PrivatBank were each fined €35,575 for “weaknesses in customer due diligence and transaction monitoring that led to the situation that bank had been used to circumvent international sanctions requirements imposed against North Korea”. Each of those banks also had imposed upon it an obligation to draw up an action plan “to enable the bank to further identify transactions that are aimed at circumventing or breaching of the international sanctions”. JSC Reģionālā investiciju Banka, by contrast, was fined €570,364, for the same failings, but also for “failure to ensure effective functioning of internal control system.”  To remedy this, the bank was undertaken to invest €2.8 million on “the improvement of its internal control system in 2017/2018”.  In addition official warnings were issued to those at the bank responsible for anti-money laundering and counter-terrorist financing controls.  The bank also undertook to “assess its AML/CTF internal control system and take the necessary measures to improve its functioning and effectiveness in line with the action plan, to perform external testing on the categorization of customer base and IT solutions, as well as assess the risks associated with cross-border enforcement of sanctions.” Germany As reported in our 2014 year-End Sanctions Update, the German authorities arrested three individuals in 2014 for alleged shipment of valves and other equipment for use in Iran’s nuclear program. It has now been reported that the trial in Berlin was stopped after 15 days when the Berlin Criminal Court ruled that the penalties sought against the indicted individuals were unconstitutional. The case has now been referred to the Federal Court which is expected to rule during the course of 2018.[96] Denmark The Danish Public Prosecutor for Serious Economic and International Crime has commenced an investigation into Nordea Bank and Danske Bank, and has conducted raids on both companies. The allegations relate to failings in AML systems and controls and a lack of sanctions screening.[97] Italy The only known enforcement in Italy during 2017 relates to the seizure in Italy of goods of Crimean origin what had been shipped to Italy in breach of Crimean sanctions.[98] United Kingdom As noted in our 2017 Mid-Year United Kingdom White Collar Crime Alert, the one publicly known instance of a company which had self-reported to the UK’s OFSI, Computer Sciences Corporation (“CSC”). According to an SEC filing in February 2017 CSC submitted an initial notification of voluntary disclosure to OFAC and OFSI.[99] The disclosure concerned possible breaches of sanctions law relating to insurance premiums and claims data by Xchanging, a company that CSC had recently acquired. There continues to be little information in the public domain regarding enforcement activity by OFSI, although in responding to a Freedom of Information request, OFSI has confirmed that it has opened 125 investigations since it commenced operations in early 2016, and that 60 of these involved financial services firms regulated by the Financial Conduct Authority or the Prudential Regulation Authority.[100] This should not be mistaken for a likely torrent of upcoming enforcement actions. At a recent event hosted by the English Law Society, a representative from OFSI confirmed that the vast majority of the breaches OFSI was investigating were very minor, and that 97% of the known breaches would not be pursued through any sort of enforcement action.  Such statistics are in line with those reported by OFAC where well over 90% of opened matters do not result in any formal enforcement action. It may, therefore, be some time before we are able to report on significant enforcement activity by OFSI. VI.     Conclusion From our vantage point at the beginning of the new year, all signs suggest that there will be an increasing reliance on sanctions globally in 2018.  In the first month of 2018, the United States sanctioned 120 individuals and entities; at this pace the Trump administration is on track to beat its record year last year and potentially add more than 1400 entities to the sanctions list.  Notably, the expansive grounds for sanctions provided in legislation such as CAATSA and the 2016 Global Magnitsky Act translates into a dramatic expansion of OFAC’s traditional authority which will test the resources of the Treasury Department.[101]  OFAC has limited means to meet the broad authorities it has been given under the Act, and many commentators have suggested—with no small degree of concern—that it will have to rely on the efforts of lobbyists and non-government organizations to assist in developing potential new targets.[102] The increased use of sanctions could also magnify differences between the United States and its allies.  EU leaders, accustomed to a more collaborative approach on sanctions policymaking during the Obama administration, are increasingly concerned that new measures imposed by the Trump White House will harm European companies.  Over the past few months, EU officials and European national leaders have openly stated their frustration regarding U.S. recalcitrance on the JCPOA, the substance of the new U.S. sanctions on Russia and the perceived lack of consultation during the process by which they were imposed.  As noted above, if the U.S. withdraws from the JCPOA and/or reimposes nuclear sanctions against Iran, the EU could “block” such measures.[103]  Such a blocking could be imposed using the expansion of a little-used EU power dating from the mid-1990s to prohibit compliance with certain U.S. sanctions then in force against Cuba, Libya and Iran.[104]  Expanding the application of this so-called “blocking statute” to include any renewed secondary sanctions against Iran has the potential to cause significant difficulties for many multinational companies. Other states and jurisdictions have also continued to expand the use of sanctions.  For example, actions taken by Saudi Arabia and the United Arab Emirates against the State of Qatar appear to borrow directly from the strategies employed by U.S. sanctions; Russian retaliatory measures against Western sanctions continue apace; the African Union continues to seek capacity assistance so that it can better leverage sanctions on its own, and the United Nations Security Council continues to resort to the measures when faced with threats to international peace and security. The result is an increasingly flexible use of sanctions by a growing diversity of actors which makes understanding the rules of the road, let alone complying with them, a constant and increasing challenge for the world’s companies. [1]      Secretary Steven Mnuchin, POLITICO Pro Policy Summit (Sept. 14, 2017). [2]      Pub. L. No. 115-44 (2017), H.R. 3364.  Though President Trump noted that he saw the bill as “seriously flawed,” he signed it into law on August 2, 2017.  See Statement by President Donald J. Trump on Signing the “Countering America’s Adversaries Through Sanctions Act” (Aug. 2, 2017), available at https://www.whitehouse.gov/the-press-office/2017/08/02/statement-president-donald-j-trump-signing-countering-americas. [3]      “Trump election puts Iran nuclear deal on shaky ground,” Reuters (Nov. 9, 2016), available at https://www.reuters.com/article/us-usa-election-trump-iran/trump-election-puts-iran-nuclear-deal-on-shaky-ground-idUSKBN13427E. [4]      The JCPOA was described in detail in our 2016 Year-End Sanctions Update. [5]      P.L. 114-328, Subtitle F.  The 2016 Global Magnitsky Human Rights Accountability Act—co-authored by Senators John McCain (R-AZ) and Ben Cardin (D-MD)—passed with bipartisan support and was signed into law by President Obama on December 23, 2016. [6]      The Trump White House has more power to constrain bad buys, The Economist (Feb. 1, 2018). [7]      U.S. Dep’t of Treasury, Issuance of Global Magnitsky Executive Order; Global Magnitsky Designations (Dec. 21, 2017), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20171221.aspx.  Also on December 20, 2017, Treasury issued the Magnitsky Act Sanctions Regulations (31 C.F.R. pt. 584). U.S. Dep’t of Treasury, Publication of Magnitsky Act Sanctions Regulations; Magnitsky-Act Related Designations (Dec. 20, 2017), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20171220_33.aspx.  Designations included Gulnara Karimova, the daughter of the former Uzbekistan president who has been accused by U.S. and Dutch authorities of taking bribes from telecoms companies; Israeli businessman Dan Gertler, and Ángel Rondón Rijo, a businessman in the Dominican Republic who has been tied to a corruption scheme involving the Brazilian company Odebrecht. [8]      Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012, Pub. L. 112-208, 126 Stat. 1496 (2012). [9]      Id., see also Alex Horton, The Magnitsky Act, explained, (July 14, 2017), available at https://www.washingtonpost.com/news/the-fix/wp/2017/07/14/the-magnitsky-act-explained/?utm_term=.eba181a5e6a0. [10]     Natalia Veselnitskaya, the Russian lawyer who met with officials from President Trump’s campaign in June 2016, had been working to overturn the Magnitsky Act.  See Horton, The Magnitsky Act, explained, supra n.9. [11]     OFAC, SDN List, available at https://sanctionssearch.ofac.treas.gov/ (last visited Feb. 5, 2018). [12]     The six executive orders modified by CAATSA include E.O. No. 13660 (79 Fed. Reg. 13493), Blocking Property of Certain Persons Contributing to the Situation in Ukraine (Mar. 10, 2014); E.O. No. 13661 (79 Fed. Reg. 15535), Blocking Property of Additional Persons Contributing to the Situation in Ukraine (Mar. 19, 2014); E.O. No. 13662 (79 Fed. Reg. 16169) Blocking Property of Additional Persons Contributing to the Situation in Ukraine (Mar. 24, 2014); E.O. No. 13685 (79 Fed. Reg. 77357) Blocking Property of Certain Persons and Prohibiting Certain Transactions With Respect to the Crimea Region of Ukraine (Dec. 19, 2014); E.O. No. 13694 (80 Fed. Reg. 18077) Blocking the Property of Certain Persons Engaging in Significant Malicious Cyber-Enabled Activities (Apr. 1, 2015); E.O. No. 13757 (82 Fed. Reg. 1), Taking Additional Steps to Address the National Emergency With Respect to Significant Malicious Cyber-Enabled Activities (Dec. 28, 2016). [13]     Detailed analysis of the CAATSA sanctions—as well as OFAC’s implementing regulations and guidance—are described in our alerts, Trump Administration Implements Congressionally Mandated Russia Sanctions – Significant Presidential Discretion Remains (Nov. 21, 2017), Congress Seeks to Force (and Tie) President’s Hand on Sanctions Through Passage of Significant New Law Codifying and Expanding U.S. Sanctions on Russia, North Korea, and Iran (July 28, 2017), and A Blockbuster Week in U.S. Sanctions (June 19, 2017). [14]     See CAATSA Title II, § 216(a)(2)(A)(iii). [15]     CAATSA Title II, Section 223 (b) and (c); OFAC, Directive 1 (as amended on Sept. 29, 2017) under Executive Order 13662, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive1_20170929.pdf; OFAC, Directive 2 (as amended on Sept. 29, 2017) under Executive Order 13662, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive2_20170929.pdf.  OFAC maintains an updated list of the entities designated pursuant to each Directive in PDF, text, or a searchable list format at https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/ssi_list.aspx. [16]     OFAC, Directive 4 (as issued on Sept. 12, 2014) under Executive Order 13662, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive4.pdf. [17]     CAATSA, Title II, § 223(d) (defined as not less than a 33 percent interest).  The requirement that targeted projects be new ensures that the sanctions will not require U.S. energy businesses already engaged in projects that could be covered under the expanded sanctions to divest from such projects. [18]     CAATSA, Title II, § 224 directs the President to freeze the assets and block entry to the United States for persons he deems to have “knowingly engage[d] in significant activities undermining cybersecurity [defined in Section 224(d)] against any person, including a democratic institution, or government” on behalf of the Russian government; or “is owned or controlled by, or acts or purports to act for or on behalf of, directly or indirectly” such a person.  See also E.O. No. 13757 (82 Fed. Reg. 1), Taking Additional Steps to Address the National Emergency With Respect to Significant Malicious Cyber-Enabled Activities (Dec. 28, 2016).  Notably, on February 2, 2017, OFAC issued a general license to allow U.S. companies to enter into limited transactions with the FSB, fixing a technical—and unintended—issue with the prior sanctions.  Because the FSB acts as a licensing agency for encryption technology, which includes most electronic devices, the general license was required to remove obstacles for U.S. companies selling devices like cellphones and tablets to Russia. [19]     CAATSA directed that the President “shall impose” sanctions on foreign persons that knowingly make a “significant investment” in a “special Russian crude oil project,” and on FFIs for certain specified activities.  Specifically, CAATSA Section 225’s primary change to the UFSA was to strike “may impose” and replace it with “shall impose, unless the President determines that it is not in the national interest of the United States to do so.”  See 22 U.S.C. §§ 8921 (9), 8924 (a).  President Obama had declined to implement the sanctions set forth in UFSA. [20]     CAATSA, Title II, § 228 (a). [21]     CAATSA, Title II, § 231 (a). Specifically, CAATSA Section 231(a) specified that the President shall impose five or more of the secondary sanctions described in Section 235 with respect to a person the President determines knowingly “engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.”  The measures that could be imposed under Section 231 are discretionary in nature.  The language of the legislation is somewhat misleading in this regard.  Section 231 is written as a mandatory requirement—providing that the President “shall impose” various restrictions.  However, the legislation itself—and the October 27, 2017 guidance provided by the State Department—makes clear that secondary sanctions are only imposed after the President makes a determination that a party “knowingly” engaged in “significant” transactions with a listed party.  The terms “knowingly” and “significant” have imprecise meanings, even under the State Department guidance.  OFAC FAQ, No. 545, https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#ukraine (last updated Oct. 31, 2017). [22]     Press Release, U.S. Dep’t of State, Background Briefing on the Countering America’s Adversaries Through Sanctions Act (CAATSA) Section 231 (Jan. 30, 2018), available at https://www.state.gov/r/pa/prs/ps/2018/01/277775.htm. [23]     Id. [24]     Representative Maxine Waters called it “preposterous that it is the State Department’s position that the legislation has served as such a deterrent that not one person or entity is engaged in a significant transaction with the Russian defense or intelligence sectors”  Josh Delk, Maxine Waters Demands Answers from Mnuchin, Tillerson for Inactivity on Russia Sanctions, The Hill (Feb. 3, 2018 4:58 PM), available at http://thehill.com/homenews/house/372178-maxine-waters-demands-answers-from-mnuchin-tillerson-for-inactivity-on-russia.  Representative Eliot Engel accused the Trump administration of failing to “follow the law” and “cho[osing] instead to let Russia off the hook yet again.”  Press Release, Congressman Eliot L. Engel, Engel Statement on Trump Administration’s Failure To Impose New Sanctions On Russia (Jan. 29, 2018) available at https://engel.house.gov/latest-news1/engel-statement-on-trump-administrationss-failure-to-impose-new-sanctions-on-russia/. [25]     For instance, the FAQs defined “significant” very broadly and noted that truly civilian-related transactions with these counterparties would be unlikely to be found significant.  See Public Guidance on Sanctions with Respect to Russia’s Defense and Intelligence Sectors Under Section 231 of the Countering America’s Adversaries Through Sanctions Act of 2017, available at https://www.state.gov/t/isn/caatsa/275118.htm. [26]     Tuvan Gumrukcu, Ece Toksabay, Turkey, Russia sign deal on supply of S-400 missiles (Dec. 29, 2017), Reuters, available at https://www.reuters.com/article/us-russia-turkey-missiles/turkey-russia-sign-deal-on-supply-of-s-400-missiles-idUSKBN1EN0T5. [27]     CAATSA, Title II, Section 241. [28]     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. [29]     See, e.g., Press Release, U.S. Dep’t of the Treasury, Treasury Releases CAATSA Reports, Including on Senior Foreign Political Figures and Oligarchs in the Russian Federation (Jan. 29, 2018), available at https://home.treasury.gov/news/press-releases/sm0271. [30]     Press Release, U.S. Dep’t of the Treasury, Treasury Designates Individuals and Entities Involved in the Ongoing Conflict in Ukraine (June 20, 2017), available at https://www.treasury.gov/press-center/press-releases/Pages/sm0114.aspx. [31]     Id. [32]     Press Release, U.S. Dep’t of the Treasury, Treasury Sanctions Individuals and Entities for Human Rights Abuses and Censorship in Iran, and Support to Sanctioned Weapons Proliferators (Jan. 12, 2018), available at https://home.treasury.gov/news/press-releases/sm0250. [33]     INARA § 2(d)(6); Press Release, White House, Remarks by President Trump on Iran Strategy (Oct. 13, 2017), available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-iran-strategy/. [34]     CAATSA §§ 104-107. [35]     Exec. Order 13466, 73 Fed. Reg. 36787 (2008) (declaring state of emergency); Exec. Order No. 13570, 76 Fed. Reg. 22291 (2011) (banning imports); Exec. Order No. 13687, 80 Fed. Reg. 819 (2015) (designating DPRK officials); Exec. Order No. 13722, 81 Fed. Reg. 14,943 (2016) (banning exports). [36]     Stephen Collinson, The nuclear war tweet heard ’round the world,’ (January 3, 2018), CNN, available at http://www.cnn.com/2018/01/03/politics/donald-trump-nuclear-button-north-korea/index.html. [37]     Joshua Berlinger, North Korea’s missile tests:  What you need to know (Dec. 3, 2017), CNN, available at http://www.cnn.com/2017/05/29/asia/north-korea-missile-tests/index.html. [38]     Id.; Exec. Order No. 13810, 82 Fed. Reg. 44705 (September 20, 2017) (citing July 3 and July 28, 2017 intercontinental ballistic missile launches). [39]     Pub. L. No. 115-44 (2017), H.R. 3364, Title III. [40]     State Sponsors of Terrorism, U.S. Dep’t of State, available at https://www.state.gov/j/ct/list/c14151.htm (last visited January 5, 2018).  We wrote at length about the CAATSA North Korea sanctions in our alert, Congress Seeks to Force (and Tie) President’s Hand on Sanctions Through Passage of Significant New Law Codifying and Expanding U.S. Sanctions on Russia, North Korea, and Iran (July 28, 2017). [41]     Exec. Order No. 13810, 82 Fed. Reg. 44705 (Sept. 20, 2017). [42]     Banks won’t be allowed to do business with both U.S. and North Korea: Mnuchin, Reuters (Sept. 21, 2017), available at https://www.reuters.com/article/us-northkorea-missiles-usa-mnuchin/banks-wont-be-allowed-to-do-business-with-both-u-s-and-north-korea-mnuchin-idUSKCN1BW2RT?il=0. [43]     Exec. Order No. 13722, 81 Fed. Reg. 14,943 (2016). [44]     Press Release, U.S. Dep’t of the Treasury, “Treasury Takes Actions To Further Restrict North Korea’s Access to The U.S. Financial System” (June 1, 2016) available at https://www.treasury.gov/press-center/press-releases/Pages/jl0471.aspx; Imposition of Special Measure Against North Korea as a Jurisdiction of Primary Money Laundering Concern, 81 Fed. Reg. 78715 (Nov. 9, 2016) available at https://www.federalregister.gov/documents/2016/11/09/2016-27049/imposition-of-special-measure-against-north-korea-as-a-jurisdiction-of-primary-money-laundering. [45]     Press Release, U.S. Department of Justice, United States Files Complaints to Forfeit More Than $11 Million From Companies That Allegedly Laundered Funds To Benefit Sanctioned North Korean Entities(Aug. 22, 2017), available at https://www.justice.gov/usao-dc/pr/united-states-files-complaints-forfeit-more-11-million-companies-allegedly-laundered. [46]     Dan Merica, Trump Unveils New Restrictions on Travel, Business with Cuba, CNN (June 17, 2017), available at http://www.cnn.com/2017/06/16/politics/trump-cuba-policy/index.html. [47]     On June 16, 2017, President Trump issued a National Security Presidential Memorandum (NSPM) on Strengthening the Policy of the United States Toward Cuba.  See Fact Sheet on Cuba Policy, Whitehouse.gov (June 16, 2017), available at https://www.whitehouse.gov/blog/2017/06/16/fact-sheet-cuba-policy. [48]     Id. [49]     See id. [50]     See U.S. Dep’t of the Treasury, Fact Sheet, Treasury, Commerce, and State Department Implement Changes to the Cuba Sanctions Rules (Nov. 8, 2017), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_fact_sheet_11082017.pdf. [51]     See id. [52]     See id. [53]     See 82 Fed. Reg. 52089 (Nov. 9, 2017), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24449.pdf. [54]     31 C.F.R. § 515.565(b), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24447.pdf?utm_campaign=pi%20subscription%20mailing%20list&utm_source=federalregister.gov&utm_medium=email. [55]     15 C.F.R. § 740.21, https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24448.pdf. [56]     Rafael Romo, Venezuela’s High Court Dissolved National Assembly, CNN (Mar. 30, 2017) available at http://www.cnn.com/2017/03/30/americas/venezuela-dissolves-national-assembly/index.html. [57]     Jennifer L. McCoy, Venezuela’s Controversial New Constituent Assembly Explained, Wash. Post (Aug. 1, 2017) available at https://www.washingtonpost.com/news/monkey-cage/wp/2017/08/01/venezuelas-dubious-new-constituent-assembly-explained/?utm_term=.27786fbb07fd. [58]     Executive Order 13692, 80 Fed. Reg. 12747, Blocking Property and Suspending Entry of Certain Persons Contributing to the Situation in Venezuela, (Mar. 8, 2015) available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/13692.pdf. [59]     Nicholas Casey, U.S. Blacklists Maduro Loyalists on Venezuela Supreme Court, (May 18, 2017) NY Times, available at https://www.nytimes.com/2017/05/18/world/americas/venezuela-sanctions-supreme-court-president-nicolas-maduro.html?action=click&contentCollection=Americas&module=RelatedCoverage&region=EndOfArticle&pgtype=article. [60]     Press Release, U.S. Dep’t of the Treasury, Treasury Sanctions Ten Venezuela Government Officials, (Nov. 9, 2017) available at https://www.treasury.gov/press-center/press-releases/Pages/sm0214.aspxAnd; Kirk Semple, U.S. Imposes Sanctions on 10 More Venezuelan Government Officials, NY Times (Nov. 9, 2017) available at https://www.nytimes.com/2017/11/09/world/americas/venezuela-maduro-us-sanctions.html. [61]     For more information regarding these measures, please see our September 1, 2017 alert, President Trump Issues New Sanctions Targeting Certain Activities of PdVSA and the Government of Venezuela. [62]     Voice of America, Flirting With Default, Venezuela Vows Debt Payment (Nov. 14, 2017) available at https://www.voanews.com/a/flirting-with-default-venezuela-vows-debt-payment/4115621.html (last visited Feb. 4, 2018). [63]     See OFAC, FAQ No. 552, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#551. [64]     OFAC, Sudan and Darfur Sanctions, available at https://www.treasury.gov/resource-center/sanctions/Programs/pages/sudan.aspx (last visited Jan. 29, 2018). [65]     OFAC, Enforcement Information for March 7, 2017 (Mar. 7, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170307_zte.pdf. [66]     OFAC, Enforcement Information for July 20, 2017 (Jul. 20, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170720_exxonmobil.pdf. [67]     OFAC, Enforcement Information for July 27, 2017 (Jul. 27, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170727_transtel.pdf. [68]     OFAC, Enforcement Information for December 6, 2017 (Dec. 6, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20171206_Dentsply.pdf. [69]     DFS Enforcement Information (Aug. 24, 2017; Sept. 7, 2017), available at http://www.dfs.ny.gov/about/ea/ea170824a.pdf and http://www.dfs.ny.gov/about/ea/ea170824c.pdf. [70]     COUNCIL DECISION (CFSP) 2017/2074, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1516281850151&uri=CELEX:32017D2074. [71]    https://europeansanctions.com/category/venezuela/. [72]     Council Decision 2014/386/CFSP (OJ L 183/70, 24.6.2014). [73]     Council Decision (CFSP) 2017/1087, http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1516281366876&uri=CELEX:32017D1087. [74]     http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d2dc30d5788798fc77f149978503 f32526311ee6.e34KaxiLc3qMb40Rch0SaxyLaxb0?text=&docid=189262&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=274812; https://uk.reuters.com/article/uk-eu-russia-rosneft-court/eu-top-court-upholds-sanctions-against-russias-rosneft-idUKKBN16Z0RD. [75]     http://verfassungsblog.de/judicial-review-of-the-eus-common-foreign-and-security-policy-lessons-from-the-rosneft-case/. [76]     https://europeansanctions.com/2017/03/28/ecj-upholds-and-clarifies-eus-russia-sanctions-in-rosneft-judgment/. [77]     https://curia.europa.eu/jcms/upload/docs/application/pdf/2017-03/cp170034en.pdf. [78]     https://curia.europa.eu/jcms/upload/docs/application/pdf/2017-03/cp170034en.pdf. [79]     See https://uk.reuters.com/article/uk-lafargeholcim-syria/france-starts-inquiry-into-lafargeholcims-syria-activities-source-idUKKBN1940Q5. [80]     See http://www.france24.com/en/20171208-former-lafarge-ceo-charged-terror-financing-allegations. [81]     See http://www.france24.com/en/20171114-investigators-search-france-lafarge-offices-paris-alleged-links-syrian-jihadists. [82]     See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBROT:2017:1219. [83]     See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:GHDHA:2017:642. [84]     See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:GHSHE:2017:1760. [85]     See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBNHO:2017:3298. [86]     See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBNHO:2017:3300. [87]     See https://fd.nl/ondernemen/1201271/om-onderzoekt-verdachte-transacties-bij-trustkantoor-bk-group. [88]     See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBROT:2017:7264. [89]     See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBOBR:2017:4666. [90]     See http://www.dutchnews.nl/news/archives/2017/09/dutch-companies-investigated-for-supplying-equipment-for-crimean-bridge/. [91]     See https://fullcirclecompliance.eu/dutch-freight-forwarder-fined-80000-euros/, with http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBAMS:2017:8591, which gives the figure as €50,000. [92]     He may have been acquitted, as it was reported on November 23, 2017 that a director of a transport company was acquitted of charges of shipping military goods to Russia.  See http://deeplink.rechtspraak.nl/uitspraak?id=ECLI:NL:RBAMS:2017:8592. [93]     See http://www.baltic-course.com/eng/legislation/?doc=132389. [94]     See http://munscanner.com/2017/07/lithuanians-criemea/. [95]     See http://www.fktk.lv/en/media-room/press-releases/6429-fcmc-in-collaboration-with-u-s-law-enforcement-authorities-identifies-weaknesses-and-imposes-monetary-fines-on-three-banks.html. [96] See http://www.businessinsider.com/iranian-nuclear-smuggling-ring-nuclear-weapons-deal-north-korea-2017-9?IR=T. [97]     See http://www.bankingtech.com/2017/08/nordea-and-danske-bank-being-investigated-for-money-laundering/. [98]     See http://www.telegraph.co.uk/news/2017/04/13/crimean-wine-confiscated-italian-drinks-fair-violates-sanctions/. [99]     See https://www.sec.gov/Archives/edgar/data/23082/000002308217000058/cscfy1710-k.htm. [100]   See https://www.law360.com/articles/974613/uk-financial-sanctions-enforcer-probing-60-cases. [101]   See Adam Dobrik, Broad sanctions programme for corrupt officials vulnerable to external influence (January 10, 2018), Global Investigations Review. [102]   Id. [103]   As stated by the EU ambassador to the United States, available at https://www.huffingtonpost.com/entry/europe-iran-sanctions-nuclear-deal_us_59c9772ce4b0cdc77333e758 [104]   See EU Council Regulations 2271/1996, as discussed in our alert Clash of the Sanctions. The following Gibson Dunn lawyers assisted in preparing this client update: Adam Smith, Judith Alison Lee, Benno Schwarz, Stephanie Connor, Attila Borsos, Laura Cole, Helen Galloway, Mark Handley, Yannick Hefti-Rossier, Meghan Higgins, Jesse Melman, Henry Phillips, Nathan Powell, Richard Roeder 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 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) Caroline Krass – Chair, National Security Practice, Washington, D.C. (+1 202-887-3784, ckrass@gibsondunn.com) Jose W. 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December 8, 2017 |
Brexit – Initial deal agreed

The UK Government and the European Commission have issued a joint report setting out the progress of the phase 1 negotiations for the Brexit divorce terms. This report is being put forward with a view to the European Council recommending the commencement of phase 2 negotiations on the future trading relationship between the UK and the EU.  It is issued with the caveat that “nothing is agreed until everything is agreed”. A copy of the text of the UK-EU report is here. The key provisions are: Citizens’ rights: All EU citizens resident in the UK and all UK citizens resident in the EU at the date of Brexit will have ongoing rights to remain together with their immediate families (and future children) subject to various restrictions. After Brexit there will be a simple registration system for EU citizens coming to live and work in the UK. Ireland and Northern Ireland: In the absence of alternative agreed solutions (i.e. a satisfactory free trade deal between the UK and the EU), the UK will maintain full alignment with the rules of the single market and the customs union which support North-South cooperation in Ireland; the UK will also ensure that no new regulatory barriers develop between Northern Ireland and the rest of the UK. Financial settlement: There is no specific figure but the broad principles of the financial settlement have been agreed.  The UK government currently estimates the bill at around £35-£40 billion. Other high-level provisions relate to ongoing EU judicial procedures, the functioning of the EU institutions, agencies and bodies and police and judicial cooperation in criminal matters. The EU has dropped its demand for the divorce settlement to come under the direct jurisdiction of the Court of Justice of the European Union (CJEU).  However, the UK will pay “due regard” to European court rulings on citizens’ rights.  For at least eight years, British courts may also refer questions on EU law to the CJEU. The European Council is expected to approve the joint report on 14/15 December 2017.  This will mean negotiations can move on to details of a transitional period and the final post-Brexit EU-UK relationship. There are reports that the UK is expected to remain within the single market and customs union for a two year transitionary period.  Whilst there is no certainty on what will follow, there is a possibility that the EU and UK concessions on Ireland and Northern Ireland may help the UK to strike a long-term deal on staying in the customs union and single market (the so-called “soft Brexit”). There is still much to be discussed.  “We all know breaking up is hard, but breaking up and building a new relationship is harder,” commented Donald Tusk, European Council president.  “The most difficult challenge is still ahead.” This client alert was prepared by London partners Stephen Gillespie, Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Stephen Gillespie, Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) that has been considering these issues for many months.  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 Stephen Gillespie – Finance SGillespie@gibsondunn.com Tel: 020 7071 4230 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 © 2017 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 30, 2017 |
U.S. and International Policy Convergence Brings Supply Chain Diligence on Labor Trafficking to the Fore

During the Obama Administration, a number of legal and regulatory developments placed a new premium on the importance of ensuring that supply chains did not include items produced with forced labor or otherwise involve human trafficking.  Among these the Administration introduced new requirements for government contractors and their sub tiers to monitor for the use of prohibited types of labor and to report non-compliance.  Changes were also made to U.S. customs law to make it easier for U.S. customs officers to enforce existing prohibitions on the import of goods into the United States made with forced or child labor.  The growing private sector use of supply chain diligence and monitoring services also created new benchmarks in this area. The final months of the Obama Administration saw increased enforcement of an unusual U.S. customs provision, Section 307, which allows U.S. Customs and Border Protection (“CBP”) to detain shipments of goods at U.S. ports if those goods were likely produced with forced, child, or prison labor (“labor trafficking”).  Observers wondered whether enforcement and policy support would decline under the Trump Administration.  Eleven months in, however, converging interests in the Trump Administration suggest Section 307 enforcement will continue and that trafficking in other countries’ labor supplies is becoming the target of other initiatives in trade enforcement actions, trade negotiations, and even U.S. sanctions enforcement.  Outside of the United States, reporting laws modeled in part on one pioneered in California, as well as many voluntary, private sector initiatives, suggest a new, globalizing interest in eliminating the use of these forms of labor. In this client alert we provide background on several policy interests, legal developments, and private sector initiatives that we see converging in the United States and elsewhere in efforts to combat the use of labor trafficking in international trade.  In the United States, converging  policy interests cut across both the political spectrum and the public and private sectors, with Trump Administration officials, lawmakers, advocates, and private sector leaders all looking for ways to ensure that products entering the U.S. marketplace are not the fruit of these kinds of labor.  Convergence is also taking place abroad, with several major U.S. trade partners implementing new disclosure and reporting standards.  These many related policy developments are making diligence for labor trafficking in supply chains a new standard, and multi-national companies and others with international supply chains should look for ways to incorporate this kind of diligence into supplier vetting and supply chain management systems. I.     A Convergence of Policy Interests Focused on Labor Trafficking At least three sets of policy developments are converging in ways that are likely to increase the enforcement of laws that focus on the import of goods produced in part through forced labor trafficking: (1) the early 2016 closure of a loophole in U.S. Customs law and subsequent enforcement actions involving China and other country suppliers; (2) the focus of key players on the Trump Administration’s trade policy team on unfair trade competition in key markets, including China; and (3) Congressional and Executive Branch interest in cutting off financial flows to North Korea from its domestic use and export of North Korean labor. A.     The Trade Facilitation and Trade Enforcement Act of 2015, and Associated Regulations The Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) was signed by President Obama in February 2016.[1]  Among other changes, Section 910 of the TFTEA amended the Tariff Act of 1930, Section 307.  This amendment expands a potentially powerful enforcement tool. Section 307 originally banned the importation of merchandise “mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor or/and indentured labor,”[2] but the prohibition applied only if the merchandise at issue was available “in such quantities in the United States as to meet the consumptive demands of the United States.”[3] The TFTEA strengthened the ban by removing the “consumptive demands” exception. Before the TFTEA, this “consumptive demands” exception left Section 307 seldom enforced against imports. CBP and its predecessor agency did not issue a single Withhold Release Order (also known as a Detention Order) or Finding[4] between November 2000 and February 2016.[5]  After the amendment to Section 307, however, CBP issued four such orders—all against Chinese companies—within six months.  These orders are listed in the table below. The economic consequences of a potential CBP Detention Order or Finding are substantial. They include a disrupted supply chain, the cost (time and money) of mounting an administrative challenge to a Finding, possible forfeiture of the goods at issue, and potential contract claims for breach brought by interested buyers.  Additionally, financial costs can pale in comparison to the reputational harm an importer could suffer by association with labor trafficking.  Given these costs and the strong public policy interests in play, companies should consider how to enact due diligence to avoid being a party to a Section 307 action, and whether their supply chains might already include items produced through labor trafficking. Once CBP issues a Withhold Release Order, the importer bears the burden to show documentation certifying a range of facts about the production and shipping of the merchandise.[6]  Beyond providing these basic facts, an importer must also “submit a statement . . . showing in detail that he had made every reasonable effort to determine the source of the merchandise . . . and to ascertain the character of the labor used in the production of the merchandise.”[7] Creating such a detailed statement can be a difficult task without scrupulous knowledge of the supply chain. The CBP has not issued any public Withhold Release Orders or Findings since September 2016.  However, the CBP amended the Section 307 regulations in June 2017—allowing “any person . . . who has reason to believe that merchandise” has been produced through forced labor to file a communication to CBP.[8] Coupled with easily accessible governmental reports on problematic goods, these developments will allow and encourage interested parties to pressure the CBP to undertake import investigations.[9] Moreover, in a development discussed further below, Congress recently amended a provision of the Tariff Act to create a rebuttable presumption that items sourced wholly or in part using North Korean labor are produced with forced and slave labor and should therefore be prohibited from entering the United States under Section 307. B.     Trump Administration Focus On Unfair Trade Practices in China The policy interest in combatting labor trafficking in supply chains that reach into China dovetails with the aggressive policy posture, both in tone and substance, that the Trump Administration has taken against China in other areas of trade. Candidate Trump frequently assailed China for its trade practices, calling its trade policy the “greatest theft in the history of the world”[10] and stating China was “rap[ing] our country” through its massive trade surplus with the United States.[11]  President Trump’s rhetoric on China has tempered somewhat—he executed a limited trade deal with China in May concerning beef, poultry, natural gas, and electronic payment services.[12],[13] However, the President also initiated a Section 232 national security investigation on steel[14] and aluminum[15] imports and has signed several executive orders relating to perceived trade abuses and violations.[16]  Trade discussions with China this July ended without any formal agreement, plan, or indication whether discussions would resume.[17] Several high-ranking members of the Trump Administration share skepticism of—or hostility toward—China’s trade practices. For years, current U.S. Trade Representative Robert Lighthizer has been concerned with “government-organized unfair trade” or “rig[ged] trade” by China.[18]  On June 22, 2017, at a hearing in front of the U.S. House Ways and Means Committee, Ambassador Lighthizer suggested that the United States should “aggressively go after people that are engaging in unfair trade and hope that that leads to market efficiency, more economic freedom, and, globally, more wealth.”[19]  Similarly, in January, March, and June 2017, Secretary of Commerce Wilbur Ross labeled China “one of the most protectionist” countries in the world.[20] National Trade Council Director Peter Navarro has expressed negative views concerning China’s trade policies for years.  Before his role in the White House, Navarro wrote, produced, and directed a 2002 movie called Death by China, in which “a bread knife with the words ‘Made in China’ is plunged into a map of the United States and animated blood runs out.”[21]  More recently, in July 2016, Navarro spoke of the “damage and carnage that China’s trade policies have wrought on the American economic heartland.”[22]  Individually and collectively, the Trump Administration’s leaders made clear they will monitor Chinese imports hawkishly. The Trump Administration’s criticism of Chinese economic policy on familiar matters such as currency manipulation and protectionism is now expanding to the unfair trade that results from labor trafficking.  Executive agencies increasingly criticize China for state-sponsored forced and child labor.  The State Department’s 2017 Trafficking in Persons Report downgraded China to tier three, the lowest tier, reserved for countries with the most egregious records on human trafficking.  Amidst sometimes scathing language, the report noted “government complicity in forced labor,” and stated “[w]omen and children from neighboring Asian countries, Africa, and the Americas are subjected to forced labor and sex trafficking in China.”[23] Secretary of State Rex Tillerson defended this characterization at the formal presentation of the report, stating China “has not taken serious steps in its own complicity in trafficking, including forced labor. . . .”[24]  In a press briefing on the report, then-U.S. Ambassador-at-Large to Monitor and Combat Trafficking in Persons Susan Coppedge noted a range of abuses by China, including forced labor of North Koreans, Uighurs, and people in drug treatment facilities, stating “forced labor in China is not one-dimensional.”[25] In addition, the Department of Labor’s 2016 report on the List of Goods Produced by Child Labor or Forced Labor discussed “state-imposed forced labor” in China, and listed a wide range of goods sometimes produced by forced labor, child labor, or both in China.[26] Though produced and disseminated before President Trump took office, this report represented another public rebuke of China’s forced and child labor policies. C.     Targeting Forced Labor Through U.S. Economic Sanctions In another significant development, Congress and the Trump Administration are drawing connections between U.S. national security and the exploitation of labor trafficking by rogue regimes such as North Korea.  The August 2017 law, the Countering America’s Adversaries Through Sanctions Act (CAATSA), included a chapter giving new tools to the President to prevent the North Korean regime from raising currency through labor trafficking.[27] Section 321 of CAATSA amended the North Korea Sanctions and Policy Enhancement Act of 2016 (NKSPEA)[28] to require human trafficking determinations and reports and instituted a rebuttable presumption that goods made in connection with North Korean labor are prohibited under the Tariff Act of 1930 and are to be denied entry into U.S. ports.[29]  On November 7, the U.S. Customs and Border Protection (“CBP”) announced its commitment to implement CAATSA’s provisions on imports with a nexus to North Korean nationals or citizens.[30]  In its announcement, the CBP explained that it will deny entry, an action that could include the seizure of merchandise, of any significant merchandise that has been mined, produced, or manufactured wholly or in part by North Korean nationals or citizens unless the CBP finds through clear and convincing evidence that the merchandise was not produced with a form of prohibited labor.  CBP also noted that it would refer any import of merchandise found to have been produced with such labor to Immigration and Customs Enforcement Homeland Security Investigations with a request to initiate a criminal investigation. In another amendment, CAATSA directs the President to impose blocking sanctions on any non-U.S. person that knowingly employs North Korean laborers.  The identification of those that knowingly employ North Korean laborers is delegated under the NKSPEA to the State Department, which is required to issue a report on this topic, among others, every 180 days, to several Congressional committees.[31]  On October 26, 2017,[32] the State Department issued the first of its required reports and identified several individuals, a DPRK government agency, and a construction company – Chol Hyun Construction – as entities that export workers from the DPRK to other countries, primarily in the Gulf States and Africa.  As of the date of this alert, only the DPRK government agency, the External Construction Bureau, has been designated by OFAC as a specially designated national (SDN), but under CAATSA SDN designations could be applied to Chol Hyun Construction and to any person that make use of its laborers. II.     Broad International Support for Greater Disclosure of Efforts to Detect and Prevent the Use of Forced Labor Increased scrutiny on labor trafficking in supply chains is not unique to the United States.  The United Kingdom continues to raise its compliance standards.  In October 2017, the United Kingdom Home Office (interior ministry) issued updated guidance on compliance with the supply chain transparency obligation for commercial organizations contained in the Modern Slavery Act 2015.[33]  Under the 2015 Act, a commercial organization carrying on a business, or part of a business, in the UK and having a minimum £36 million annual global turnover was already required to publish on its website an annual statement explaining the steps taken to ensure that slavery and human trafficking is not taking place in any of its supply chains or in any part of its business.  Now, even smaller organizations are encouraged to produce the statements voluntarily.[34]  October’s guidance recommends that those statements should cover the organization’s internal anti-trafficking policy, due diligence measures in monitoring supply chains, and anti-trafficking training for staff, among other items.  The guidance also requests organizations to keep public archives of their annual statements,[35] which would “allow the public to compare statements between years and monitor the progress of the organization over time.”[36] Several other countries are following suit.  In February 2017, Australia announced an inquiry into whether it should enact its own labor trafficking reporting requirement.  On October 20, 2017 the Australian Minister of Justice closed a Public Consultation on a reporting regime modelled on the UK act.[37]  Similar diligence and disclosure bills have been enacted in France,[38] and have been proposed in other jurisdictions.[39] III.     Private Sector Leaders and Non-Governmental Organization Initiatives Are Setting New Benchmarks in Diligence, Monitoring and Compliance In the private sector, civil society groups across the political spectrum support greater scrutiny of forced and child labor.  Trade associations, domestic producers, and labor unions strive to limit competition from foreign producers of the same goods, while human rights organizations and religious groups concerned primarily with the plight of foreign laborers emphasize corporate social responsibility.[40]  For example, the AFL-CIO—the largest federation of unions in the United States—consistently highlights labor trafficking through the Solidarity Center,[41] and has lobbied governmental agencies for stronger enforcement.[42]  In addition, an array of large retailers and manufacturers have joined with The Consumer Goods Forum and pledged to take action against forced labor,[43] including “awareness training, cooperative action, traceability tools and grievance mechanisms.”[44] In September 2017, the Walmart Foundation announced the results of a Thai fishing industry study it paid to have commissioned by International Justice Mission (IJM), the world’s largest international anti-slavery organization.[45] The 2011 to 2016 survey of migrant fishermen working Thai fishing boats revealed that 37.9 percent of laborers were trafficking victims, 14.1 percent were physically abused, and 31.5 percent witnessed abuse of fellow crew members at sea. To further this effort, the U.S. State Department has also partnered with IJM in Thailand, providing funding to open IJM’s Bangkok office.[46] Whether opponents to labor trafficking are animated by humanitarian, financial, public image, or foreign policy concerns, support for greater enforcement is increasing and pervading the political spectrum. IV.     Going Forward: A Necessary Tailored Approach to Diligence, Risk Mitigation and Reporting As the White House, the United Kingdom, and even big box retailers demonstrate, heightened labor trafficking monitoring is here to stay.  Transparency on efforts taken to diligence supply chains for labor trafficking is required in California, the United Kingdom, and France, with other jurisdictions soon to adopt the same standards.  Moreover, first movers in the private sector and other stakeholders are setting benchmarks in multiple sectors for supply chain social responsibility. Diligence and compliance best practices for U.S. importers vary substantially and, for many sectors, are still under development.  For example, companies in consumer-facing sectors such as consumer electronics or fashion and apparel may have well-developed diligence and compliance systems because consumer and investor pressures have already driven the costs of non-compliance into their bottom lines.  In contrast, many types of federal government contractors, who were only recently introduced to new regulation on combatting labor trafficking, are only now beginning to develop diligence mechanisms for their supply chains that will enable compliance with required certifications and disclosures.[47] The convergence of policy interests and regulatory prompting have led many large, multinational companies to invest in systems designed to identify and mitigate the use of labor trafficking in the supply chains.  However, for most, integrating this type of compliance in existing business processes, and pushing it into sub-tiers that are often many times removed from their direct contracts with immediate suppliers will be both new and a challenge.  Looking across sectors, first movers in this area have developed a range of tools to leverage visibility and compliance in their supply chains, including contract provisions, supplier codes of conduct, supplier outreach, monitoring and reporting, and investigation, among others.  However, any company looking to amend their disclosures relating to labor trafficking or other areas of corporate social responsibility should proceed with some caution, as plaintiffs lawyers have attempted to use those disclosures as evidence of company awareness of these problems and, therefore, as a basis for liability.[48]  Gibson Dunn lawyers can help benchmark and evaluate the risks and opportunities associated with the adoption of these tools, can assist with the integration of these tools with other areas of compliance, and can advise on how to document, verify and report on efforts to keep supply chains free of labor trafficking.    [1]   The Trade Facilitation and Trade Enforcement Act of 2015, Pub. L. 114-125, 130 Stat. 122, Feb. 24, 2016.    [2]   Tariff Act of 1930, 19 U.S.C. § 1307 (2012).    [3]   Id.    [4]   U.S. Customs and Border Protection, Forced Labor (2017), available at https://www.cbp.gov/trade/trade-community/programs-outreach/convict-importations (accessed Nov. 8, 2017). The CBP commissioner can issue a Withhold Release Order when he or she has “information available [that] reasonably but not conclusively indicates that merchandise within the purview of section 307 is being, or is likely to be, imported . . . .” The CBP commissioner can issue a Finding when information conclusively demonstrates that merchandise at issue was produced by child labor. See Findings of Commissioner of CBP, 12 C.F.R. § 12.42 (2017).    [5]   U.S. Customs and Border Protection, Forced Labor (2017).    [6]   Proof of admissibility, 12 C.F.R. § 12.43 (2017).    [7]   Id.    [8]   Findings of Commissioner of CBP, 12 C.F.R. § 12.42 (2017).    [9]   See, e.g., United States Department of State, Trafficking in Persons Report (2017); United States Department of Labor, List of Goods Produced by Child Labor or Forced Labor (2016). [10]   Binyamin Appelbaum, Trump Taps Peter Navarro, Vocal Critic of China, for New Trade Post, N.Y. Times (Dec. 21, 2016), https://www.nytimes.com/2016/12/21/us/politics/peter-navarro-carl-icahn-trump-china-trade.html. [11]   Christopher Ruddy, Don’t Like Trump’s Bluster? Sometimes It Works, N.Y. Times (May 4, 2017), https://www.nytimes.com/2017/05/04/opinion/donald-trump-foreign-policy.html. [12]   H.R. 3364, Countering America’s Adversaries Through Sanctions Act, § 321. [13]   Keith Bradsher, U.S. Strikes China Trade Deals but Leaves Major Issues Untouched, N.Y. Times (May 11, 2017), https://www.nytimes.com/2017/05/11/business/us-china-trade-deals.html. [14]   Judith Alison Lee & Christopher Timura, Competing Interests Weigh Against Broad Import Controls on Steel Imports After Section 232 Public Hearing, Gibson, Dunn & Crutcher (June 9, 2017), http://www.gibsondunn.com/publications/Pages/Competing-Interests-Weigh-Against-Broad-Import-Controls–Steel-Imports-After-Section-232-Hearing.aspx. [15]   DEPARTMENT OF COMMERCE, Section 232 Investigation on the Effects of Imports of Aluminum on U.S. National Security, available at https://www.commerce.gov/page/section-232-investigation-effect-imports-aluminum-us-national-security. [16]   See, e.g., Exec. Order No. 13,796, 82 Fed. Reg. 20,819 (Apr. 29, 2017). [17]   David Lawder & Lesley Wroughton, U.S., China Fail to Agree On Trade Issues, Casting Doubt On Other Issues, Reuters (July 19, 2017), http://www.reuters.com/article/us-usa-china-trade-idUSKBN1A40BN. [18]   Robert E. Lighthizer, Donald Trump is no liberal on trade, Wash. Times (May 9, 2011), http:// www.washingtontimes.com/news/2011/may/9/donald-trump-is-no-liberal-on-trade. [19]   Andrew Soergel, China Trade, NAFTA Tweaks Loom over Lighthizer Hearing, U.S. News and World Rep. (June 22, 2017, 4:00 PM),  https://www.usnews.com/news/articles/2017-06-22/china-trade-nafta-tweaks-loom-over-robert-lighthizer-hearing. [20]   Commerce Secretary Wilbur Ross Talks Trade, Wall St. J. (June 18, 2017, 10:13 PM), https://www.wsj.com/articles/commerce-secretary-wilbur-ross-talks-trade-1497838380. Toluse Olorunnipa, Ross Backs Trump’s China Criticism With ‘Most Protectionist’ Dig, Bloomberg (Mar. 31, 2017, 1:41 PM), https://www.bloomberg.com/news/articles/2017-03-31/ross-backs-trump-s-china-criticism-with-most-protectionist-dig; David Lawder, U.S. Commerce nominee Ross calls China ‘most protectionist’ country, Reuters (Jan. 18, 2017, 11:10 AM), http://www.reuters.com/article/us-usa-congress-ross-idUSKBN1522BH. [21]   Steven Mufson, Meet Mr. ‘Death by China,’ Trump’s inside man on trade, Wash. Post (Feb. 17, 2017), https://www.washingtonpost.com/business/economy/meet-mr-death-by-china-trumps-inside-man-on-trade/2017/02/17/164d7458-ea25-11e6-80c2-30e57e57e05d_story.html. [22]   Tom Phillips, ‘Brutal, Amoral, Ruthless, Cheating’: How Trump’s New Trade Tsar Sees China, The Guardian (Dec. 22, 2016), https://www.theguardian.com/world/2016/dec/22/brutal-amoral-ruthless-cheating-trumps-trade-industrial-peter-navarro-views-on-china. [23]   United States Department of State, Trafficking in Persons Report (2017). [24]   Carol Morello, State Department Reprimands China Over Sex Trafficking and Forced Labor, Wash. Post (June 27, 2017), https://www.washingtonpost.com/world/national-security/state-department-reprimands-china-over-sex-trafficking-and-forced-labor/2017/06/27/c55cc80b-3b3d-49f7-827a-52416946c394_story.html. [25]   Press Release, United States Department of State, Briefing on the 2017 Trafficking in Persons Report (June 27, 2017), https://www.state.gov/r/pa/prs/ps/2017/06/272212.htm. [26]   United States Department of Labor, List of Goods Produced by Child Labor or Forced Labor (2016). [27]   The Countering America’s Adversaries Through Sanctions Act, H.R. 3364, Pub. L. 115-44, Aug. 3, 2017. [28]   22 U.S.C. § 9241(b). [29]   The Countering America’s Adversaries Through Sanctions Act, § 321 (b). [30]   Press Release, United States Customs & Border Protection, CBP Combats Modern-Day Slavery with the Passage of Countering America’s Adversaries through Sanctions Act (November 7, 2017), https://www.cbp.gov/newsroom/national-media-release/cbp-combats-modern-day-slavery-passage-countering-america-s. [31]   North Korea Sanctions and Policy Enhancement Act of 2016, Pub L. 114-122, Feb. 18, 2016; 22 U.S.C. § 9241(a). [32]   U.S. STATE DEPARTMENT, Report on Serious Human Rights Abuses and Censorship in North Korea, https://www.state.gov/j/drl/rls/275095.htm. [33]   United Kingdom Home Office, Transparency in Supply Chains etc. A practical guide  (2017), available at https://www.gov.uk/government/publications/transparency-in-supply-chains-a-practical-guide. [34]   Id. at 9. [35]   Id. at 14. [36]   Id. [37]   AUSTRALIAN GOVERNMENT ATTORNEY GENERAL’S Department, Modern Slavery in Supply Chains Reporting Requirement – Public Consultation, available at https://www.ag.gov.au/consultations/pages/modern-slavery-in-supply-chains-reporting-requirement-public-consultation.aspx. [38]   ASSEMBLEÉ NATIONALE, Proposition de Loi relative au devoir de vigilance des sociétiés mères et des entreprises donneuses d’ordre, Feb. 21, 2017. [39]   In March 2017, the Dutch Parliament introduced a new human rights diligence requirement on child labor in the supply chain for companies doing business in The Netherlands that will come into effect in 2020 if adopted by the Dutch Senate. available at https://www.hrw.org/news/2017/03/03/netherlandss-plan-cut-child-labor-out-products. [40]   For example, see the twenty-four groups—including labor unions, labor rights groups, consumer groups, religious groups, and businesses—that submitted a joint comment to the Department of Labor concerning expanding the Department of Labor’s global efforts against forced and child labor. Comments to the Department of Labor Regarding Notice of Initial Determination Revising the List of Products Requiring Federal Contractor Certification as to Forced/Indentured Child Labor Pursuant to Executive Order 13126 (Dec. 3, 2011), available at http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=2140&context =globaldocs. [41]   See, e.g., Tula Connell, ILO Labor Protocol in Effect Today, Solidarity Center (Nov. 9, 2016), https://www.solidaritycenter.org/ilo-forced-labor-protocol-in-effect-today. [42]   See, e.g., AFL-CIO and Solidarity Center, Joint Submission in Response to the Request for Comment on Guidelines for Eliminating Child and Forced Labor in Agricultural Supply Chains (2011), available at https://www.dol.gov/ilab/issues/child-labor/consultativegroup/comment3.pdf; AFL-CIO, Submission to the US Department of Labor on Child Labor, Forced Labor, and Forced or Indentured Child Labor in the Production of Goods in Foreign Countries and Efforts by Certain Countries to Eliminate the Worst Forms of Child Labor (2014), available at https://www.dol.gov/ilab/submissions/pdf/AFL-CIO20140115.pdf. [43]   Success Stories: Our Members’ Business Actions Against Force Labor, The Consumer Goods Forum (June 21, 2017), http://www.theconsumergoodsforum.com/strategic-focus/social-sustainability/forced-labour-case-studies. [44]   Consumer Goods Forum Shares Best Practices to Eradicate Forced Labor from Global Supply Chains, Sustainable Brands (June 22, 2017), http://www.sustainablebrands.com/news_and_views/supply_chain /sustainable_brands/consumer_goods_forum_shares_best_practices_eradicate_. [45]  Anti-Slavery Organization International Justice Mission Announces Grant from Walmart Foundation to Address Human Trafficking in Thai Fishing Industry, Business Wire, (Sept. 21, 2017, 8:15 AM) http://www.businesswire.com/news/home/20170921005137/en/. [46]   Id. [47]   Exec. Order No. 13,627, 77 Fed. Reg. 60,029 (Sept. 25, 2012); Federal Acquisition Regulation; Ending Trafficking in Persons, 48 C.F.R. §§ 1, 2, 9, 12, 22, 42, 52 (2015). [48]   See Perlette Michele Jura, William E. Thomson, Abbey Hudson & Christopher B. Leach, Courts Make Doing Good Abroad Bad For Business At Home, Law360 (Jan. 14, 2016), http://www.gibsondunn.com/publications/Documents/Jura-Thomson-Hudson-Leach-Courts-Make-Doing-Good-Abroad-Bad-For-Business-At-Home-Law360-1-14-2016.pdf. The following Gibson Dunn lawyers assisted in preparing this client update: Christopher Timura, Judith Alison Lee, Adam Smith, Patrick Doris, Chris Loudon, and Mark Handley. 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 A. 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) Caroline Krass – Chair, National Security Practice, Washington, D.C. (+1 202-887-3784, ckrass@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) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@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) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, kkobildjanova@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@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) Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) © 2017 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, 2017 |
Trump Administration Implements Congressionally Mandated Russia Sanctions – Significant Presidential Discretion Remains

Over the past few weeks the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) and the U.S. State Department have issued their first round of guidance documents concerning how the Trump Administration will implement the “Countering America’s Adversaries Through Sanctions Act” (H.R. 3364) (“CAATSA” or “the Act”).[1]  This law, which we analyzed in our August alert, Congress Seeks to Force (and Tie) President’s Hand on Sanctions Through Passage of Significant New Law Codifying and Expanding U.S. Sanctions on Russia, North Korea, and Iran, is the most significant sanctions legislation in several years. Despite President Trump’s opposition to CAATSA, the law passed with veto-proof majorities in both the House of Representatives and the Senate.  As a result, though the President noted that he still saw the bill as “seriously flawed,” he signed it into law on August 2, 2017.[2]  The Act requires OFAC and the State Department to publish guidance to notify the public how the Administration plans to enforce the new law.  This client alert provides an overview and analysis of the first tranche of required guidance.  The alert focuses on the broadest section of the law—Title II of the Act, titled the “Countering Russian Influence in Europe and Eurasia Act of 2017” (“CRIEEA”)—which significantly expands sanctions targeting the Russian Federation. Though the law is complex, Title II operates principally by codifying and expanding upon existing sectoral and secondary sanctions against Russia, attempting to reanimate a number of regulations that date back to the Obama Administration but that had never been fully utilized.  First, the Act codifies and expands upon the “sectoral” sanctions programs created by President Obama in July 2014 to target Russia’s financial services, energy, metals and mining, engineering, and “defense and related materiel” sectors.[3]  Second, the Act sets forth a series of “secondary“ sanctions that can be imposed on persons not otherwise subject to U.S. jurisdiction who engage in certain transactions with Russia’s energy, defense and intelligence sectors.[4] CAATSA is the latest and boldest example of the U.S. legislative branch’s increasing willingness to engage in the sanctions arena, an area which has traditionally been the responsibility of the Executive.  The Trump Administration’s admonishment to Congress cautioning against these new sanctions followed in the footsteps of prior administrations that had also warned Congress against legislatively-imposed sanctions due to a concern that they reduce a President’s flexibility in (and control over) foreign policy.  However, in nearly all other prior cases the Executive and Legislative branches eventually came to an agreement on sanctions legislation such that once the sanctions laws had passed, the Executive immediately set about implementing them. The same is not true here. Consequently, the passage of CAATSA left much uncertainty over how the sanctions provisions would be implemented, if at all.  As we noted in August prior to the issuance of any guidance by the Executive branch, even though parts of CAATSA are written as mandatory provisions, the legislation appeared to leave open the possibility for the Executive to either refrain from implementing significant portions of CAATSA or to implement sections of the law less robustly than the Congress may have wished.  Though some of the recent agency guidance indicates a strong enforcement posture, taken as a whole the guidance confirms this initial analysis: the President retains substantial discretion to not implement—or to weakly implement—large portions of the new law.  Early indications are that he will use this discretion frequently and broadly. As an early marker of this conclusion, in a departure from historic practice and as discussed below, both the OFAC and the State Department guidance devote significant attention not just to how they will implement the law but also what they are not going to do and why. I.  Sectoral Sanctions CAATSA codifies and expands upon the sectoral sanctions programs created by President Obama in March 2014 to target Russia’s financial services, energy, metals and mining, engineering, and “defense and related materiel” sectors.[5]  These sectoral sanctions were implemented through a series of OFAC “Directives” restricting only certain types of activities with specified entities.  All other transactions with SSI entities remain permitted.  OFAC identifies the entities facing these restrictions on the SSI List.[6]  In accordance with OFAC’s “Fifty Percent Rule,” prohibitions described in the Directives extend to entities owned 50 percent or more or identified as controlled by a listed SSI entity.[7] OFAC’s Russia Sanctions 101 Whenever there is a change or expansion of U.S. sanctions policy, we find it useful to revisit some of the basic tenets of U.S. sanctions. As a matter of first principles, U.S. sanctions have two principal means of targeting an activity: (1) designating the activity as per se sanctionable; and/or (2) sanctioning persons for engaging in those activities. SDN vs. SSI Designations: There are several types of ‘designations’ for purposes of OFAC’s Russia sanctions: most importantly, Specially Designated Nationals (“SDNs”) and Sectoral Sanctions Identifications (“SSIs”). U.S. persons are generally prohibited from dealing with any person or entity on the “SDN List” and all assets under U.S. jurisdiction that are owned or controlled by the SDN are frozen. Under the SSI or sectoral designations, U.S. persons are prohibited from engaging in certain types of activities with SSI entities. A sectoral designation does not result in a complete prohibition on all interactions as with SDNs and SSI assets are not frozen. The precise restrictions on SSI entities are set forth in a series of “directives” that we describe below. Primary vs. Secondary Sanctions: OFAC may also prohibit certain activities. Under its “primary” sanctions, U.S. persons who engage in prohibited activities (including dealing with an SDN or a sanctioned country) could face civil and criminal penalties, as could any person (U.S. or non-U.S.) who causes a violation to occur in U.S. territory, such as by causing a U.S. financial institution to process a prohibited transaction. Whereas U.S. persons often face civil and criminal penalties for engaging in prohibited transactions, secondary sanctions subject non-U.S. persons to indirect sanctions with different kinds of limitations that can vary from the relatively innocuous (e.g., blocking use of the U.S.’s export-import bank), to the severe (e.g., blocking use of the U.S. financial system or blocking all property interests). In OFAC’s new regulations and guidance—provided in the form of Frequently Asked Questions (“FAQs”)—the agency notes that it refrained from implementing some portions of the CAATSA sectoral measures.  For example, although CAATSA Section 223(a) authorized the Secretary of Treasury to add “state-owned entit[ies] operating in the railway or metals and mining sector of the economy of the Russian Federation” to the SSI target list, OFAC has not issued such designations to date.[8]  In declining to do so, OFAC noted that CAATSA did not require the imposition of sanctions under Section 223(a), and “maintaining unity” with allies is of critical importance.[9]  Given that it is unlikely that U.S. allies will impose such sanctions we view it as doubtful that this measure will be implemented in the near future. Directive 1:  Financial Services Sector Sanctions OFAC did, however, issue an amended Directive 1 on September 29, 2017.[10]  Under the prior version of Directive 1, U.S. persons were prohibited from dealing in new debt of SSI entities in Russia’s financial services sector if the debt had a maturity longer than 30 days.  CAATSA altered Directive 1 by reducing the maximum permitted maturity on new debt from 30 days to 14 days.  This measure significantly tightens the availability of debt financing for SSI-designated Russian financial institutions, but its most significant impact may actually be on how financial institutions interact with SSI entities—even with regard to transactions that do not violate the OFAC prohibitions.  U.S. financial institutions (and the many foreign institutions that regularly choose to comply with OFAC measures) are more likely than ever to closely scrutinize proposed transactions involving SSI entities to make sure that they are in compliance with Directive 1. Table 1.  Directive 1 Sanctions Effective Dates[11] Period when the debt was issued Applicable tenor of prohibited debt July 16, 2014 to September 12, 2014 Longer than 90 days maturity September 12, 2014 to November 28, 2017 Longer than 30 days maturity On or after November 28, 2017 Longer than 14 days maturity   Directive 2:  Energy Sector Sanctions OFAC also issued an amended Directive 2 on September 29, 2017.[12]  Under the prior version of Directive 2, U.S. persons were prohibited from dealing in new debt issued to SSI entities in Russia’s energy sector if that debt had a maturity longer than 90 days.  CAATSA altered Directive 2 by reducing the maximum permitted maturity on new debt from 90 days to 60 days.  This measure further tightens the availability of long-term debt financing for designated entities in Russia’s energy sector.  Here too, we expect U.S. financial institutions (and the many foreign institutions that regularly choose to comply with OFAC measures) to more closely scrutinize proposed transactions involving such entities to make sure that they are in compliance with Directive 2. Directives 1 and 2 apply to new debt or equity.[13]  OFAC has clarified that “debt” includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.  Debt also includes payment terms—meaning that U.S. persons selling a good or service to an SSI entity need to receive payments within the new debt maturity timeline (an extension of payment of terms is viewed as an extension of credit to the SSI [a “dealing in the new debt” of that entity]).  “Equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.[14]  The prohibitions extend to rollover of existing debt, if such rollover results in the creation of new debt with the specified maturity periods.[15]  Notably, under section 501.604 of the Reporting, Procedures and Penalties Regulations (31 C.F.R. part 501), U.S. financial institutions must report to OFAC any rejected transactions within 10 business days.[16]  U.S. banks will reject such transactions that exceed the debt maturity limit or consist of new equity. Table 2.  Directive 2 Sanctions Effective Dates[17] Period when the debt was issued Applicable tenor of prohibited debt July 16, 2014 to November 28, 2017 Longer than 90 days maturity On or after November 28, 2017 Longer than 60 days maturity   Directive 3:  Defense Sector Sanctions CAATSA made no changes to Directive 3, a provision that was implemented in 2014 to restrict U.S. persons from transacting or dealing in new debt of entities operating in the Russian defense and related materiel sector.  Notably, rather than expanding the scope and impact of sectoral sanctions under Directive 3, in Section 231 (discussed below) CAATSA set forth a series of secondary sanctions that could be imposed against parties that transact with elements of the Russian defense and intelligence sectors. Table 3.  OFAC Guidance Type of Activity OFAC Guidance[18] Derivative Transactions Permitted.  General License 1A authorizes certain transactions involving derivative products that would otherwise be prohibited pursuant to Directives 1, 2, or 3.[19]  Notably, CAATSA requires the Department of the Treasury to produce a report describing the effects of expanding the Russia sectoral sanctions to “include sovereign debt and the full range of derivative products” by February 2018.[20] Existing Long-Term Credit Facilities or Loan Agreements Permitted.  If entered into prior to the sanctions effective date, drawdowns and disbursements with repayment terms of 30 days or less (for persons subject to Directives 1 and 3) or 90 days or less (for persons subject to Directive 2) are permitted.[21] Permitted.  Drawdowns and disbursements whose repayment terms exceed the applicable authorized tenor are not prohibited if the terms of such drawdowns and disbursements (including the length of the repayment period, the interest rate applied to the drawdown, and the maximum drawdown amount) were contractually agreed to prior to the sanctions effective date and are not modified on or after the sanctions effective date. Prohibited.  U.S. persons may not deal in a drawdown or disbursement initiated after the sanctions effective date with a repayment term of longer than the authorized tenor, if the terms of the drawdown or disbursement were negotiated on or after the sanctions effective date.  Such a newly negotiated drawdown or disbursement would constitute a prohibited extension of credit.[22] Letters of Credit Permitted.  U.S. persons may deal in (including act as the advising or confirming bank or as the applicant (i.e., the purchaser of the underlying goods or services)) or process transactions under a letter of credit in which an entity subject to Directive 1, 2, or 3 is the beneficiary (i.e., the exporter or seller of the underlying goods or services) because the subject letter of credit does not represent an extension of credit to the SSI entity.[23] Permitted.  U.S. persons may deal in (including act as the advising or confirming bank or as the applicant or beneficiary) or process transactions under a letter of credit where the issuing bank is an SSI entity provided that the terms of all payment obligations under the letter of credit conform with the debt prohibitions under the applicable Directives.[24] Prohibited.  U.S. persons may not deal in (including act as the advising or confirming bank or as the beneficiary) or process transactions under a letter of credit if all of the following three conditions are met: (1) the letter of credit was issued on or after the sanctions effective date, (2) the letter of credit carries a term of longer than the authorized tenor, and (3) an SSI entity is the applicant of the letter of credit.  This would constitute prohibited activity because the subject letter of credit would represent an extension of credit to the SSI entity.[25] Debt Involving Non-SSI Entities Permitted.  Directives 1, 2, and 3 do not prohibit U.S. persons from dealing with an SSI entity as counterparty to transactions involving debt issued on or after the sanctions effective date by a non-sanctioned party.  For example, U.S. persons are not prohibited from dealing in a loan exceeding the applicable authorized tenor that is issued after the sanctions effective date of sanctions provided by an SSI entity to a non-sanctioned third-party, dealing with an SSI entity who is the underwriter on new debt of a non-sanctioned third party exceeding the applicable authorized tenor, or accepting payment under a letter of credit with terms exceeding the applicable authorized tenor that is issued, advised, or confirmed by an SSI entity, so long as the SSI entity is not the borrower.[26] Purchasing Goods or Services from an SSI Entity Permitted.  Directives 1, 2, and 3 do not prohibit U.S. persons from extending credit for longer than the specified tenor to non-sanctioned parties for the purpose of purchasing goods or services from an SSI entity, so long as the SSI entity is not the indirect borrower.[27] Short-Term Facilities Permitted.  Short-term facilities created after the sanctions effective date are permissible if two conditions are met:  first, as long as each individual disbursement has a maturity within the authorized tenor and the disbursement is paid back in full before the next disbursement and, second, the lender is not contractually required to roll over the balance for a cumulative period of longer than the authorized tenor at the borrower’s request (i.e., it has the option to refuse the request for a new short-term loan and terminate the facility), the loan is not prohibited, even though the same borrower may obtain a series of short-term loans from the same lender over a cumulative period exceeding the authorized tenor. Prohibited.  U.S. persons may not deal in a drawdown or disbursement initiated after the sanctions effective date with a repayment term of longer than the applicable authorized tenor if the terms of the drawdown or disbursement are negotiated or re-negotiated on or after the sanctions effective date, which would be considered a prohibited extension of credit.[28] Deferred Purchase Payments Prohibited.  Directives 1 and 3 prohibit new extensions of credit to SSI entities of greater than the periods of authorized tenor, and these prohibitions include deferred purchase agreements extending payment terms to an SSI entity.  Such agreements would constitute a prohibited extension of credit to an SSI entity if the terms were longer than the permissible number of days and the agreement was entered into on or after the sanctions effective date.  OFAC does not consider the inclusion of an interest rate to be a necessary condition for establishing whether a transaction represents new debt.[29]   Directive 4:  Energy Sector Sanctions The more significant changes to the Russian sectoral sanctions program are found in CAATSA’s expansion of Directive 4, which was amended by OFAC on October 31, 2017.[30]  The pre-CAATSA Directive 4 prohibited the provision of goods, support, or technology to designated Russian entities relating to the exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation.  Under CAATSA, the expanded Directive 4 removes this geographic limitation and instead targets the new, specified types of projects worldwide in which a designated Russian person has a “controlling interest or a substantial non-controlling ownership interest in such a project defined as not less than a 33 percent interest.”[31] In issuing the new Directive 4, OFAC staggered the implementation of its broader geographical application.  Effective October 31, 2017, Directive 4 targets projects involving designated persons “that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory.”  Starting in early 2018, Directive 4 will target new projects anywhere in the world.  Specifically, Directive 4 will extend to projects initiated on or after January 29, 2018, “that have the potential to produce oil in any location, and in which any person determined to be subject to this Directive or any earlier version thereof, their property, or their interests in property have (a) a 33 percent or greater ownership interest, or (b) ownership of a majority of the voting interests.”  This means that the new Directive 4 will not require U.S. energy businesses already engaged in projects that could be covered to divest from such projects. This grandfathering of certain energy projects is in line with prior U.S. sanctions in the Iran context.  For example, OFAC exempted the Caspian Sea Shah Deniz oil project despite the involvement of Iranian parties.[32]  In this case, the specific projects are unnamed but we believe that projects critical to the energy security of our European and Asian allies—in which Russian firms play important roles—are the intended beneficiaries of this exception. Note that the prohibition of subsection 2 of Directive 4 applies to projects owned 33 percent or more in the aggregate by one or more Directive 4 SSI entities, their property, and their interests in property, including entities owned 50 percent or more by one or more persons determined to be subject to Directive 4.  The prohibition also applies to projects in which one or more Directive 4 SSI entities, their property, or their interests in property own an aggregated majority of the voting interests.  Accordingly, if two SSI entities listed under Directive 4 each hold a 20 percent ownership interest in Project X, or together own a majority of the voting interests in the project, then the prohibition of subsection 2 of Directive 4 applies to Project X.[33] OFAC offered the following three examples to clarify how Directive 4 applies to projects in which a designated person owns a 33 percent or more interest: Example 1: An SSI entity listed under Directive 4 (“Entity A”) has a 33 percent ownership interest in a deepwater, Arctic offshore, or shale project initiated on or after January 29, 2018 that has the potential to produce oil (“Project X”). The prohibition of subsection 2 of Directive 4 applies to Project X. Consequently, U.S. persons are prohibited from providing goods, services (except for financial services), or technology in support of exploration or production for Project X. Example 2: Instead of holding a direct interest in Project X, Entity A now owns 50 percent of Entity B, and Entity B holds a 33 percent interest in Project X. As a result of OFAC’s 50 percent rule, Entity B is subject to Directive 4. Because Entity B is subject to Directive 4 and owns a 33 percent or greater interest in Project X, the prohibition of subsection 2 of Directive 4 applies to Project X. Consequently, U.S. persons are prohibited from providing goods, services (except for financial services), or technology in support of exploration or production for Project X. Example 3: Entity A now owns only 33 percent of Entity B, and Entity A is the only SSI entity that owns any interest in Entity B. Entity B holds a 100 percent ownership interest in Project X. Entity A owns less than 50 percent of Entity B, and so, in accordance with the 50 percent rule, Entity B is not subject to Directive 4. The prohibition of subsection 2 of Directive 4 would therefore not apply to Project X, even though Entity B owns an interest in the project that is 33 percent or greater. Several FAQs clarify key points in the changes: Types of Prohibited Services:  As set forth in the new FAQs, the prohibitions on the exportation of services under Directive 4 include, for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies.  The prohibitions do not apply to the provision of financial services, e.g., clearing transactions or providing insurance related to such activities.[34] Application to Oil and Gas Projects:  OFAC also clarified that if a deepwater, Arctic offshore, or shale project has the potential to produce oil, and the other requirements for either of the Directive 4 prohibitions are fully satisfied, then the relevant Directive 4 prohibition applies irrespective of whether the project also has the potential to produce gas.  If the project has the potential to produce gas only, then the Directive 4 prohibitions do not apply.[35]  Shale Projects, Defined:  OFAC interprets the term “shale projects” to include projects that have the potential to produce oil from resources located in shale formations.  Therefore, as long as the projects in question are neither deepwater nor Arctic offshore projects, the prohibitions in Directive 4 do not apply to exploration or production through shale to locate or extract crude oil (or gas) in reservoirs.[36]  Arctic Offshore Projects, Defined:  The term “Arctic offshore projects” applies to projects that have the potential to produce oil in areas that (1) involve drilling operations originating offshore, and (2) are located above the Arctic Circle.  The prohibitions do not apply to horizontal drilling operations originating onshore where such drilling operations extend under the seabed to areas above the Arctic Circle.[37] When Is A Project “Initiated”?:  For purposes of the global prohibitions effective January 29, 2018, a project is “initiated” when a government or any of its political subdivisions, agencies, or instrumentalities (including any entity owned or controlled directly or indirectly by any of the foregoing) formally grants exploration, development, or production rights to any party.[38] As discussed above, this grandfathering of existing projects—even those that have only just been launched and are perhaps years away from producing oil—is a significant exception. Subsidiaries:  OFAC clarified that prohibitions imposed pursuant to the new Directives extend to “entities owned 50 percent or more by one or more persons identified as subject to the Directives.”  Notably, this means that Directive 4 extends to projects in which 50 percent-owned subsidiaries have a 33 percent ownership interest.[39] II.  Secondary Sanctions Amendments to the Ukraine Freedom Support Act of 2014 CAATSA Sections 225 and 226 amend portions of the Ukraine Freedom Support Act of 2014 by making many of the sanctions in that law, which were previously discretionary and which President Obama chose not to implement, mandatory.[40]  However, as with other parts of CAATSA, there are several ways that the President can comply with Sections 225 and 226 and still opt not to impose these mandatory measures. Section 226 focuses on global financial institutions and makes mandatory 22 U.S.C. § 8924 (a), which had previously provided that the President “may impose” sanctions against foreign financial institutions (“FFIs”) that “knowingly engage[] . . . in significant transaction[s] involving” a person sanctioned under section 8923 for either (a) the transfer into Syria of defense articles, (b) the development of Russian Special Crude Oil Projects, or (c) Gazprom’s “withholding significant natural gas supplies” from NATO, Ukraine, Georgia, or Moldova.[41]  The law now requires the President to impose such measures (the President “shall impose”).  Section 226 also amended section 8924 (b), which authorized the President to impose sanctions on FFIs that “knowingly facilitate a significant financial transaction on behalf of any Russian person” on the SDN List pursuant to the Ukraine Freedom Support Act or the Ukraine-specific executive orders.[42]  The sanction authorized under section 8924 is a prohibition on the use of a correspondent account in the United States.[43]  Here too, the law now provides that the President “shall impose” such sanctions. However, as in so much of CAATSA, the President can opt not to impose these “mandatory” measures if he “determines that it is not in the national interest of the United States to do so.” Adding to this option for flexibility, on October 31, 2017, OFAC issued an FAQ to further clarify the scope of sanctions that FFIs could face under Section 226.[44]  OFAC confirmed that FFIs will not be subject to sanctions “solely on the basis of knowingly facilitating significant financial transactions” on behalf of SSI entities.[45]  The FAQ also notes that, “[u]nless the Secretary of State makes a determination that it is not in the national interest of the United States to do so, the Secretary of the Treasury shall prohibit the opening and prohibit or impose strict conditions on the maintaining in the United States of correspondent accounts or payable-through accounts for any FFI that the Secretary of the Treasury, in consultation with the Secretary of State, determines has engaged in sanctionable activity.”[46]  If Treasury decides to impose such measures, it will add the name of the FFI to a list similar to the List of Foreign Financial Institutions Subject to Part 561 (the “Part 561 List”).[47]  Treasury will establish and publicize that list before adding any FFIs to it.[48] For purposes of implementing Section 226 of CAATSA, OFAC will consider the “totality of the facts and circumstances” when determining whether transactions or financial transactions are “significant.”  Importing its definition from the Iran sanctions context,[49] OFAC notes that it will consider the following list of seven broad factors in determining whether a transaction is “significant”: 1) the size, number, and frequency of the transaction(s); 2) the nature of the transaction(s); 3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; 4) the nexus between the transaction(s) and a blocked person; 5) the impact of the transaction(s) on statutory objectives; 6) whether the transaction(s) involve deceptive practices; and 7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis.[50] OFAC provides itself even greater discretion through the substantial breadth of multi-factor inquiries. In line with other sanctions programs, OFAC will generally interpret the term “financial transaction” broadly to encompass any transfer of value involving a financial institution.  For example, the following is a non-exhaustive list of activities that OFAC would consider to be a “financial transaction”: receipt or origination of wire transfers; acceptance of commercial paper (both retail and wholesale), and the clearance of such paper (including checks and similar drafts); receipt or origination of ACH or ATM transactions; holding of nostro, vostro, or loro accounts; provision of trade finance or letter of credit services; provision of guarantees or similar instruments; provision of investment products or instruments or participation in investments; and any other transactions for or on behalf of, directly or indirectly, a person serving as a correspondent, respondent, or beneficiary.[51] Also in accord with other programs, OFAC noted that it will generally interpret the term “facilitated” broadly to refer to the “provision of assistance for certain efforts, activities, or transactions, including the provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.”[52] Section 228: “Foreign Sanctions Evaders” and “Serious Human Rights Abusers” Section 228, which became effective upon CAATSA’s enactment in August 2017, seeks to impose sanctions on transactions with persons that “evade sanctions imposed with respect to the Russian Federation,” and “persons responsible for human rights abuses.”  Congress drafted Section 228 very broadly, however, and in its plain text appeared to potentially make sanctionable almost any transaction with any entity—SDN or SSI—listed under Russia sanctions.  The OFAC guidance provides some important limitations on this impact. Specifically, section 228 requires the President to impose sanctions on a foreign person who knowingly “materially violates, attempts to violate, conspires to violate, or causes a violation of” applicable sanctions against Russia, or that “facilitates a significant transaction, including deceptive or structured transactions, for or on behalf of any person subject to sanctions imposed by the United States with respect to the Russian Federation,” or any child, spouse, parent, or sibling of the same.[53] (emphases added).  The language did not specify whether the “person subject to sanctions” must be an SDN or could be an SSI.  In October, OFAC clarified that this provision extends to persons listed on either the SDN or SSI List, as well as persons subject to sanctions pursuant to OFAC’s 50 percent rule.[54] However, if Section 228 were implemented as drafted, the difference between SDN and SSI designations could have disappeared—secondary sanctions could have been imposed in response to identical dealings with an SDN or an SSI, including even those transactions with SSIs that are permitted (namely all transactions other than the specific debt and equity prohibitions noted in the Directives). In its implementing guidance, OFAC confirmed that Section 228 extends to SDNs and SSI entities but clarified that it would not deem a transaction “significant” if U.S. persons could engage in the transaction without the need for a specific license from OFAC.  In other words, only transactions prohibited by OFAC—specifically, transactions with SDNs and/or transactions with SSI entities that are prohibited by the sectoral sanctions—will “count” as significant for purposes of Section 228.  OFAC also noted that even a transaction with an SSI that involves prohibited debt or equity would not automatically be deemed “significant”—it would need to also involve “deceptive practices” and OFAC would assess this criteria on a “totality of the circumstances” basis. The conclusion from Section 228’s guidance is that despite the provision’s seeming breadth, the status quo under which most international financial institutions have been operating ever since the advent of SSIs in 2014 remains: transactions with SDNs are risky; transactions with SSIs are much less so. OFAC noted that it anticipates that “regulations to be promulgated will generally reflect the following” key definitions: Key Term OFAC Definition or Guidance Facilitation For purposes of section 10(a)(2) of the Support for the Sovereignty, Integrity, Democracy, and Economic Security of Ukraine Act of 2014, (“SSIDES”), facilitating a significant transaction for or on behalf of a person will be interpreted to mean providing assistance for a transaction from which the person in question derives a particular benefit of any kind (as opposed to a generalized benefit conferred upon undifferentiated persons in aggregate). Assistance may include the provision or transmission of currency, financial instruments, securities, or any other value; purchasing, selling, transporting, swapping, brokering, financing, approving, or guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.[55] Significant Transaction For purposes of section 10(a)(2) of SSIDES, OFAC will consider the “totality of the facts and circumstances” when determining whether transactions are “significant.” Furthermore, for purposes of section 10(a)(2) of SSIDES, a transaction is not significant if U.S. persons would not require specific licenses from OFAC to participate in it. A transaction in which the person(s) subject to sanctions is only identified on the SSI List must also involve deceptive practices (i.e., attempts to obscure or conceal the actual parties or true nature of the transaction(s), or to evade sanctions) to potentially be considered significant. A transaction involving an SSI entity is not, however, automatically significant simply because a U.S. person would require a specific license from OFAC to participate in it and it involves deceptive practices.  In all cases, OFAC explains that the totality of the circumstances, including the other factors listed above, will shape the final determination of significance.[56] Deceptive or Structured Transaction As indicated in section 10(f)(3) of SSIDES as added by CAATSA, the term “structured” is defined in 31 C.F.R. § 1010.100(xx). Structured transactions are a type of deceptive transaction. A “deceptive transaction” is one that involves deceptive practices. As described in 31 C.F.R. § 561.404(f), “deceptive practices” are attempts to obscure or conceal the actual parties or true nature of a transaction, or to evade sanctions.[57] Materially Violate For purposes of section 10(a)(1) of SSIDES, OFAC will interpret the term “materially violate” to refer to an “egregious” violation.  A determination about whether a violation is egregious will be based on an analysis of the applicable General Factors as described in OFAC’s Economic Sanctions Enforcement Guidelines, located in subsection (B)(1), section V of Appendix A to 31 C.F.R. part 501.[58] Section 231:  Intelligence and Defense Sectors Section 231(a) provides that the President shall impose secondary sanctions with respect to a person the President determines knowingly “engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.”  On October 27, 2017, the State Department issued a list of almost 40 entities subject to the law.[59] There are several unique components to Section 231.  First, it is a secondary sanctions provision that covers both U.S. and non-U.S. persons.  Historically, secondary sanctions have only addressed non-U.S. persons and were consciously structured to bring transactions otherwise outside U.S. jurisdiction into compliance with U.S. policy.  The reason this expansion of secondary sanctions was necessary in this case is due to another unique feature of secondary sanctions under Section 231: in all other implementations of secondary sanctions the risk of such measures being imposed came from a non-U.S. person transacting with an SDN or an entity identified as owned or controlled by an SDN, or specific entities under the jurisdiction of sanctioned governments. That is not the situation here—the State Department explicitly noted that an entity’s inclusion on the list of Section 231 entities does not mean that an entity is sanctioned.  Though some entities on the list are SDNs or SSIs, the vast majority are neither.  Because of this, if the secondary sanctions had not been expanded to include U.S. persons a counterintuitive outcome could have resulted in which a U.S. person could engage in transactions with Section 231 parties (because they were neither SDNs nor SSIs) and non-U.S. persons could not. As discussed above, the secondary sanctions imposed under this section do not impact subsidiaries owned 50 percent or more by a designated entity, and the CAATSA designations list contains numerous subsidiaries and affiliates of entities that had previously been listed under other provisions of the Russia sanctions, like Directive 3.  That means that unless they are listed elsewhere (such as on the SSI list), U.S. and non-U.S. persons may continue to deal with the unlisted subsidiaries of entities on the Section 231 list. Furthermore, the measures that could be imposed under Section 231 are discretionary in nature.  The language of the legislation is somewhat misleading in this regard.  Section 231 is written as a mandatory requirement—providing that the President “shall impose” various restrictions. However, the legislation itself—and the October 27, 2017 guidance provided by the State Department—makes it clear that there are several tripwires that the President must determine have been crossed by an offending party before any secondary sanctions are even considered.  Under Section 231, secondary sanctions are only imposed after the President makes a determination that a party “knowingly” engaged in “significant” transactions with a listed party.  These terms (“knowingly” and “significant”) have imprecise meanings (even under the guidance).  Of note, the State Department provides that if a transaction for goods or services has purely civilian end-uses and/or civilian end-users, and does not involve entities in the intelligence sector, these factors will generally weigh heavily against a determination that such a transaction is significant for purposes of Section 231.[60]  This is critical because many U.S. allies rely on several of the entities on the Section 231 list for civilian products and services (such as commercial aircraft).  In short, if the President wants to avoid finding against an entity under Section 231 he has substantial ability to do so. Another component of the President’s built-in discretion—which is hinted at in the State Department guidance—is that because secondary sanctions are not usually “blocking” (or freezing) sanctions, as a matter of practice the U.S. government will only impose them after providing a party the opportunity to cure any problem. Parties, before being sanctioned under secondary measures, are almost always warned to change their behavior—and only if their behavior does not change are secondary sanctions imposed. Secondary sanctions, even more than primary sanctions, are designed to change behavior rather than punish for past wrongdoing. What is a “significant” transaction for purposes of Section 231? Totality of the Facts and Circumstances. The State Department guidance indicates that it “will consider the totality of the facts and circumstances surrounding the transaction and weigh various factors on a case-by-case basis.” Factors to be considered in the determination may include, but are not limited to, the significance of the transaction to U.S. national security and foreign policy interests, in particular whether it has a significant adverse impact on such interests; the nature and magnitude of the transaction; and the relation and significance of the transaction to the defense or intelligence sector of the Russian government. Civilian End-Uses or Users. The State Department indicated that, in this initial implementation stage, the U.S. government focus is expected to be on “significant transactions of a defense or intelligence nature with persons named in the Guidance,” and if a transaction for goods or services has “purely civilian end-uses and/or civilian end-users, and does not involve entities in the intelligence sector, these factors will generally weigh heavily against a determination that such a transaction is significant for purposes of Section 231.” Federal Security Service (“FSS”). Similarly, if a transaction is necessary to comply with rules and regulations administered by the FSS, or law enforcement or administrative actions or investigations involving the FSS, then “these factors will weigh heavily against a determination that such transaction is significant.” Section 232: Russian Energy Export Pipelines  CAATSA section 232 gives the President the authority to impose certain sanctions targeting Russian energy export pipelines.  Notably, the President is not required to impose the sanctions described in section 232.  Indeed, his doing so may be unlikely due to the qualifier that such sanctions are to be imposed “in coordination with allies of the United States.”  Given their reliance on Russian energy, European allies, in particular, have been very public in their objection to this section of CAATSA in particular.[62]  It is highly unlikely that any would follow (let alone lead) sanctions efforts on Russian energy pipelines. Section 233:  Privatization of State-Owned Assets Section 233 requires the President to impose sanctions on any person (U.S. or non-U.S.) that, with actual knowledge, makes an investment of $10,000,000 or more, or facilitates such an investment, if the investment directly contributes to the ability of Russia to privatize state-owned assets in a manner that unjustly benefits Russian government officials or their families.  As with section 232, if the President determined that a person violated section 233’s provisions, he would be required to impose at least five of 12 possible sanctions described in section 235. This mandatory sanctions provision takes effect from the date of enactment of CRIEEA (i.e., August 2, 2017).  As in Section 231 above, by using “person” rather than “foreign person” or “U.S. person,” Congress signaled that it intended for the sanctions to be applied to both U.S. and non-U.S. persons engaged in the prohibited investments.  The likelihood of imposing sanctions in this regard is also reduced given the requirement that OFAC will need to determine that such an investment “unjustly” benefits Russian government officials or their families.  We assess that “unjust” likely is meant to imply “corrupt” and corruption is a very challenging basis on which to impose sanctions.  OFAC has historically been very reticent to do so.  Indeed, very few sanctions programs have included a corruption basis and there are only a handful of actual designations OFAC has promulgated on this basis.  That there is no definition of “unjustly” underscores the unlikeliness of the Administration imposing sanctions under this measure. Key Term OFAC Definition or Guidance Investment OFAC will interpret the term “investment” broadly as a transaction that constitutes a commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise. For purposes of this interpretation, a loan or extension of credit is any transfer or extension of funds or credit on the basis of an obligation to repay, or any assumption or guarantee of the obligation of another to repay an extension of funds or credit, including: overdrafts, currency swaps, purchases of debt securities issued by the Government of Russia, purchases of a loan made by another person, sales of financial assets subject to an agreement to repurchase, renewals or refinancings whereby funds or credits are transferred or extended to a borrower or recipient described in the provision, the issuance of standby letters of credit, and drawdowns on existing lines of credit.[63] Facilitates For purposes of implementing section 233 of CAATSA, OFAC will interpret “facilitates” to mean the provision of assistance for certain efforts, activities, or transactions, including the provision of currency, financial instruments, securities, or any other transmission of value; purchasing, selling, transporting, swapping, brokering, financing, approving, or guaranteeing; the provision of other services of any kind; the provision of personnel; or the provision of software, technology, or goods of any kind.[64]  Unjustly Benefits OFAC will interpret the term “unjustly benefits” broadly to refer to activities such as public corruption that result in any direct or indirect advantage, value, or gain, whether the benefit is tangible or intangible, by officials of the Government of the Russian Federation, or their close associates or family members. Such public corruption could include, among other things, the misuse of Russian public assets or the misuse of public authority.[65] Close Associates or Family Members OFAC will interpret the term “close associate” of an official of the Government of the Russian Federation as a person who is widely or publicly known, or is actually known by the relevant person engaging in the conduct in question, to maintain a close relationship with that official. OFAC will interpret the term “family member” of an official of the Government of the Russian Federation to include parents, spouses (current and former), extramarital partners, children, siblings, uncles, aunts, grandparents, grandchildren, first cousins, stepchildren, stepsiblings, parents-in-law, and spouses of any of the foregoing.[66]      [1]   Pub. L. No. 115-44 (2017).    [2]   See Statement by President Donald J. Trump on Signing the “Countering America’s Adversaries Through Sanctions Act” (August 2, 2017), available at https://www.whitehouse.gov/the-press-office/2017/08/02/statement-president-donald-j-trump-signing-countering-americas.    [3]   E.O. No. 13662 (79 Fed. Reg. 16169) Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 24, 2014); CAATSA Section 222 (codification), 223 (expansion).    [4]   See Sections 223, 231.  A list of the secondary sanctions that could be imposed pursuant to CAATSA is provided in Section 235.  This list borrows from prior sanctions programs and includes a menu of prohibitions ranging from denying assistance from the U.S. Export-Import Bank and limiting export authorizations, to freezing assets and imposing sanctions on principal executive officers of an offending organization.    [5]   E.O. No. 13662 (79 Fed. Reg. 16169) Blocking Property of Additional Persons Contributing to the Situation in Ukraine (March 24, 2014); CAATSA Section 222 (codification), 223 (expansion).    [6]   OFAC maintains an updated list of the entities designated pursuant to each Directive in PDF, text, or a searchable list format at https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/ssi_list.aspx.    [7]   OFAC Ukraine-/Russia-related Sanctions FAQs (“OFAC FAQs”), FAQ No. 373, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#ukraine.    [8]   OFAC FAQ No. 539.    [9]   Id.  (“Section 223(a) of CAATSA does not require the imposition of sanctions. While sanctions may be imposed on potential targets in any sector of the economy of the Russian Federation in the future, maintaining unity with partners on sanctions implemented with respect to the Russian Federation is important to the U.S. government. The point of the sectoral sanctions is to impose costs on the Russian Federation for its aggression in Ukraine. The United States will continue to work closely with our allies to address unintended consequences arising as a result of such sanctions.”) [10]   OFAC, Directive 1 (as amended on September 29, 2017) under Executive Order 13662, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive1_20170929.pdf. [11]   OFAC FAQ No. 370. [12]   OFAC, Directive 2 (as amended on September 29, 2017) under Executive Order 13662, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive2_20170929.pdf. [13]   OFAC FAQ No. 371. [14]   Id. [15]   Id. [16]   OFAC FAQ No. 370.  31 C.F.R. §501.604(a) provides that “any financial institution that rejects a funds transfer where the funds are not blocked under the provisions of this chapter, but where processing the transfer would nonetheless violate, or facilitate an underlying transaction that is prohibited under, other provisions contained in this chapter, must report.” [17]   Id. [18]   OFAC FAQ No. 394.  On September 29, 2017, OFAC amended and reissued Directives 1 and 2 in accordance with Sections 223(b) and (c) of CRIEEA.  While the Directives are effective immediately, both Directives contain certain new prohibitions that will not come into effect until November 28, 2017, pursuant to CRIEEA.  In addition to these new prohibitions, the Directives continue to prohibit conduct that was prohibited by prior versions of the Directives.  OFAC plans to issue further guidance regarding the implementation of the new prohibitions in the Directives at a later date, including updating relevant FAQs to account for the new prohibitions that will come into effect on November 28, 2017. [19]   OFAC, General License 1A (September 12, 2014), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/ukraine_gl1a.pdf; OFAC FAQ No. 372. [20]   CAATSA Section 242. [21]   OFAC FAQ No. 394. [22]   Id. [23]   OFAC FAQ No. 395. [24]   Id. [25]   Id. [26]   OFAC FAQ No. 405. [27]   OFAC FAQ No. 408. [28]   OFAC FAQ No. 409. [29]   OFAC FAQ No. 410. [30]   OFAC, Directive 4 (as amended on October 31, 2017) under Executive Order 13662, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive4_20171031.pdf. [31]   Id. § 223(d). [32]   See OFAC, Industry Guidance – Shah Deniz Consortium (November 28, 2012),available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/shah_deniz_guidance.pdf. [33]   OFAC FAQ No. 538. [34]   OFAC FAQ No. 412. [35]   OFAC FAQ No. 414. [36]   OFAC FAQ No. 418. [37]   OFAC FAQ No. 421. [38]   OFAC FAQ No. 536. [39]   OFAC FAQ No. 373. [40]   22 U.S.C. § 8924(a) and (b).  The pre-CAATSA version of 22 U.S.C. § 8923 provided that the President “may impose” sanctions on foreign persons that knowingly make a “significant investment” in a “special Russian crude oil project.”  Similarly, the pre-CAATSA version of section 8924(a) provided that the President “may impose” sanctions against foreign financial institutions that “knowingly enage[] . . . in significant transaction[s] involving” a person sanctioned under § 8923 for either (a) the transfer into Syria of defense articles, (b) the development of Special Crude Oil Projects, or (c) Gazprom’s “withholding significant natural gas supplies” from NATO, Ukraine, Georgia, or Moldova.  Furthermore, the pre-CAATSA section 8924(b) authorized the President to impose sanctions on foreign financial institutions that “knowingly facilitated a significant financial transaction on behalf of any Russian person” on the SDN List pursuant to the Ukraine Freedom Support Act or the Ukraine-specific executive orders. [41]   See § 8924, referencing § 8923(a)(2) (Syria); § 8923(b)(1) (Russia crude oil projects) and § 8923(b)(3) (Gazprom withholding of natural gas supplies from NATO, Ukraine, Georgia or Moldova). [42]   22 U.S.C. § 8924(b) and (c). [43]   22 U.S.C. § 8924(c). [44]   OFAC FAQ No. 541. [45]   Id. [46]   Id. [47]   OFAC FAQ No. 543. [48]   Id.  The list will be included in the Consolidated Sanctions List Data Files, and will be available for download in all Consolidated Sanctions List data file formats.  [49]   See Iran-Related FAQs, Question No. 174; see also Iran-Related FAQ Question 154, which offers a slightly different list of factors to explain how the Treasury Department will determine whether a transaction or financial service is “significant” for purposes of the Iranian Financial Sanctions Regulations:  “(1) the size, number, frequency, and nature of the transaction(s); (2) the level of awareness of management of the transaction(s) and whether or not the transaction(s) are a part of a pattern of conduct; (3) the nexus between the foreign financial institution involved in the transaction(s) and a blocked Islamic Revolutionary Guard Corps individual or entity or blocked Iran-linked financial institution; (4) the impact of the transaction(s) on the goals of CISADA; (5) whether the transaction(s) involved any deceptive practices; and (6) other factors the Treasury Department deems relevant on a case-by-case basis.” [50]   OFAC FAQ No. 542. [51]   Id. [52]   Id. [53]   CRIEEA §228 (a) [54]   OFAC FAQ No. 546. [55]   OFAC FAQ No. 545. [56]   Id. [57]   Id. [58]   Id. [59]   U.S. State Department, CAATSA Section 231(d) Defense and Intelligence Sectors of the Government of the Russian Federation (October 27, 2017), available at https://www.state.gov/t/isn/caatsa/index.htm. [60]   See U.S. State Department, Public Guidance/FAQ, Public Guidance on Sanctions with Respect to Russia’s Defense and Intelligence Sectors Under Section 231 of the Countering America’s Adversaries Through Sanctions Act of 2017 (October 27, 2017), available at https://www.state.gov/t/isn/caatsa/275118.htm. [61]   Id.  (“The Guidance names certain persons, but it is not a determination regarding imposition of sanctions. No asset freezes are being imposed on these named persons as a result of their inclusion in this Guidance, and inclusion in this Guidance does not, of itself, mean such persons are added” to the SDN or SSI Lists.).  “Blocking” sanctions require asset freezing; if an entity was warned that its assets would be frozen there would be immediate asset flight which would dull the impact of the measure. [62]   See Christian Krug and Kalina Oroschakoff, Germany and Austria warn US over expanded Russia sanctions, Politico, (June 15, 2017), available at https://www.politico.eu/article/germany-and-austria-warn-u-s-over-expanded-russia-sanctions/. [63]   OFAC FAQ No. 540. [64]   Id. [65]   Id. [66]   Id. The following Gibson Dunn lawyers assisted in preparing this client update: Adam Smith, Judith Alison Lee, Caroline Krass, Christopher Timura, Stephanie Connor, and Henry Phillips. 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 A. 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) Caroline Krass – Chair, National Security Practice, Washington, D.C. (+1 202-887-3784, ckrass@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) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@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) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, kkobildjanova@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Jesse Melman – New York (+1 212-351-2683, jmelman@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 33-112, bschwarz@gibsondunn.com) Mark Handley – London (+44 (0) 207 071 4277, mhandley@gibsondunn.com) Richard Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2017 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 16, 2017 |
Cuba Sanctions: The Trump Administration Takes Steps to Implement Rollback of Obama Era Sanctions Relief

On November 8, 2017, the Treasury Department’s Office of Foreign Assets Control (“OFAC”), the Commerce Department’s Bureau of Industry and Security (“BIS”), and the State Department released amendments to the Cuban Assets Control Regulations (“CACR”) and Export Administration regulations (“EAR”), effective November 9, 2017, implementing President Trump’s June 16, 2017 National Security Presidential Memorandum (“NSPM”), “Strengthening the Policy of the United States Towards Cuba.”[1]  Additionally, while certain transactions with Cuban parties by U.S. persons remain permitted, the CACR now prohibit transacting with entities listed on the State Department’s new “Cuba Restricted List” (“List”), which was released simultaneously and consists of Cuban entities that the Administration considers to be “under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services personnel.”[2] Days earlier, United States Ambassador to the United Nations Nikki Haley rebuked the General Assembly’s adoption of its annual resolution calling for the end of the U.S. embargo on Cuba, which was overwhelmingly approved with 191 of the 193 member states voting in favor. In her remarks, Ambassador Haley proclaimed that the American people have spoken by choosing a new President, and that the United States will stand with the Cuban people and against the suffering and abuses inflicted by the Cuban government.[3] We have previously detailed President Trump’s June 2017 announcement that his administration would reimpose some of the sanctions on Cuba that were relaxed under President Obama.  Broadly speaking, the recent amendments achieve the goals articulated in the announcement:  keeping the Grupo de Administración Empresarial, a conglomerate run by the Cuban military, from benefiting from the opening in U.S.-Cuba relations and enhancing travel restrictions to “better enforce” the existing ban on U.S. tourism to Cuba.[4] As detailed below, certain provisions of the amendments allow for continued travel to, and, with respect to the Cuban private sector, increased trade with Cuba.  While this can be viewed as consistent with the Administration’s declared goal of “channel[ing] economic activities away from the Cuban military, intelligence, and security services, while maintaining opportunities for Americans to engage in authorized travel to Cuba and support the private, small business sector in Cuba,”[5] these provisions, when viewed together with the increased restrictions, muddy the already difficult-to-navigate regulatory waters. The new OFAC and BIS amendments cover three main areas: First, the OFAC amendments now prohibit U.S. persons and entities from engaging in direct financial transactions with entities listed on the State Department’s new “Cuba Restricted List,” while the BIS amendments state that BIS will generally deny license application for the export of items for use by entities on the list.[6]  The List includes over 175 entities and sub-entities that operate in a variety of economic sectors, notably, over 80 of which are hotels.[7] Second, the OFAC amendments restrict people-to-people travel that had previously been authorized, requiring, among other things, that nonacademic educational travel be conducted under “the auspices of an organization that is a person subject to U.S. jurisdiction and that sponsors such exchanges to promote people-to-people contact” and that such travelers are accompanied by a representative of that organization and participate in full-time schedule of activities.[8] Third, BIS has simplified the Support for the Cuban People (“SCP”) License Exception to the Cuba Embargo, now allowing for the export of all EAR99 items (and those controlled only for anti-terrorism reasons on the Commerce Control List (“CCL”)) to Cuba, provided the intended end user is in the Cuban private sector.[9] Cuba Restricted List What is Prohibited:            According to OFAC’s amended regulations, those under U.S. jurisdiction are now prohibited from engaging in direct financial transactions with those on the State Department’s new Cuba Restricted List.[10]  Additionally, BIS has instituted a policy of general denial of any application for license to export to Cuba where the end-user is on the List.[11]  Importantly, though, U.S. persons and entities that have already entered into “contingent or other types of contractual arrangements” prior to the issuance of the new regulations on November 9, 2017 (or the date on which the listed entity was added to the List), will be permitted to proceed with the transactions.[12]  This qualification is significant and suggests that the substantial investments made in Cuba by various U.S. parties since the Obama Administration’s easing of sanctions may not need to be unwound. Who is on the List: As noted, the Cuba Restricted List contains over 175 entities and subentities that are now blacklisted from engaging in financial companies with persons and entities under U.S. jurisdiction.  In addition to the over 80 hotels previously mentioned, the list contains Cuban ministries, holding companies and their subentities, retail stores, and manufacturers (including those in the beverage, fashion, real estate, rum production, and other industries).[13] Who is not on the List: Interestingly, however, the State Department has clarified that entities or subentities controlled by those on the List are not treated as restricted unless also specified by name.  Almost all other U.S. sanctions programs operate according to the “50 Percent Rule” which provides that non-listed entities owned or controlled by a listed entity (or entities) are automatically and identically restricted.  However, in this context, U.S. entities and individuals may continue to transact with those non-Listed entities and subentities.[14]  For instance, though the list includes the holding company Corporación CIMEX, S.A., it does not include Fincimex which is its financial services arm (and is involved in all remittances to the island).  This too is an important qualification that eases the impact of some of the new prohibitions. Elimination of Individual Person-to-Person Travel As mentioned, the OFAC amendments eliminate the authorization for individual person-to-person educational travel to Cuba.  Instead, individuals who desire to travel to Cuba on this basis must do so under the auspices of an organization that is “subject to U.S. jurisdiction and sponsors such exchanges to promote people-to-people contact,” and the individual traveler must be accompanied by a representative of the sponsoring organization.[15]  Further, those traveling under this general license must maintain a “full-time schedule of education exchange activities intended to enhance contact with the Cuban people, support civil society in Cuba, or promote the Cuban people’s independence from Cuban authorities, and that will result in meaningful interaction between the traveler and individuals in Cuba.”[16]  Of course, all authorized travel must now exclude direct financial transactions with those entities included on the Cuba Restricted List.[17] Despite these new restrictions, individuals who have made travel plans under the pre-amendment regulations may proceed with their plans, so long as certain requirements are met.  For example, individuals who made person-to-person travel plans and completed at least one travel-related transaction prior to June 16, 2017 may engage in person-to-person travel and related transactions.[18]  Moreover, OFAC has stated that any authorized travel (under any of the travel licenses) that has already been “initiated” that involves direct financial transactions with entities on the Cuba Restricted List will continue to be permitted so long as “those travel arrangements were initiated prior to the State Department’s addition of the entity or subentity to the list.”[19]  The vague wording of this exception leaves open the question of what constitutes an already “initiated” authorized travel and what is considered to “involve a direct financial transaction” with an entity on the Cuba Restricted List.[20]  The fact that transactions with unlisted entities owned or controlled by listed parties remain permitted further complicates the situation. Support for the Cuban People The last significant amendment to the Cuba sanctions regime relates to the Support for the Cuban People (“SCP”) License Exception.  In October 2016, BIS had already broadened the Exception to authorize direct sales, including through online platforms, of eligible consumer goods to eligible individuals in Cuba for their personal use.  The Exception had listed certain types of items that qualified for export, including “tools and equipment,” so long as those items were for use by, inter alia, private sector entrepreneurs.[21]  The current amendments remove the categorical requirements and allow for the export to Cuba of all items designated EAR99 or those controlled only for anti-terrorism reasons on the CCL, so long as they are for use by the Cuban private sector for private sector economic activities.[22] While the amendments categorize this change as a “simplification,” it broadens the scope of the License Exception by alleviating the burden of determining whether items qualify for export under the License’s prior categorizations. A Return to the Embargo? It is too early to tell whether these amendments signify that an eventual return to the pre-Obama era nearly total embargo is imminent.  Recent stories about human rights abuses in Cuba, attacks on U.S. diplomats in Havana, and the expulsion of various Cuban diplomats serving in the United States are not a promising sign.  However, while the regulations certainly impose new limits on parties with whom U.S. persons may transact and claw back the types of permitted travel, the amendments do not fully rescind any of the Obama era authorizations.  Indeed, the amendments leave open the door to continued trade through grandfathering in pre-existing contracts and travel-related transactions with parties on the Cuba Restricted List, allowing person-to-person travel if such travel plans were made prior to the issuance of the new regulations, and simplifying the SCP License Exception. The amendments additionally raise further questions:  What qualifies as an existing “contingent or other types of contractual arrangement” with an entity on the List?  Can such contracts be renewed in perpetuity?  What is the rationale behind including some Cuban military controlled entities on the List and not others, and will the authorization to trade with the non-listed subentities of blacklisted entities persist?  How many additional Cuban entities will be added to the Restricted List?  What constitutes “initiated” for the purposes of existing person-to-person travel plans?  OFAC and BIS will need to clarify these and other ambiguities in the time ahead. Looking Forward Despite the political rhetoric, the doors to Cuba, unlocked by the previous administration, remain open.  While the amendments certainly restrict certain activities, they do not go so far as to completely revoke the previous administration’s authorizations.  Perhaps most significantly, the prohibitions against transacting with those on the Cuba Restricted list undoubtedly will hamper future economic opportunities especially in the core tourism sector which was a primary focus of the State Department’s list.  Nevertheless, even the Department’s list is partial, allowing transactions with non-listed subentities.  Moreover, the “simplification” of the SCP License Exception removes doubt concerning permissible items for export to the Cuban private sector – which may allow greater certainty with respect to the rules of the road for those entities who seek to take advantage of the narrower opportunities for trade and travel.    [1]   See Fact Sheet, “Treasury, Commerce, and State Department Implement Changes to the Cuba Sanctions Rules” (Nov. 8, 2017), https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_fact_sheet_11082017.pdf.    [2]   See id.    [3]   Meetings Coverage, “As General Assembly Adopts Annual Resolution Urging End to United States Embargo on Cuba, Delegates Voice Concern About Possible Reversal of Previous Policy (Nov. 1, 2017), https://www.un.org/press/en/2017/ga11967.doc.htm.    [4]   Fact Sheet, “White House Fact Sheet on Cuba Policy” (June 16, 2017), https://www.whitehouse.gov/blog/2017/06/16/fact-sheet-cuba-policy.    [5]   Fact Sheet, “Treasury, Commerce, and State Department Implement Changes to the Cuba Sanctions Rules” (Nov. 8, 2017), https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_fact_sheet_11082017.pdf.    [6]   See id.    [7]   See 82 Fed. Reg. 52089 (Nov. 9, 2017), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24449.pdf.    [8]   31 C.F.R. § 515.565(b), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24447.pdf?utm_campaign=pi%20subscription%20mailing%20list&utm_source=federalregister.gov&utm_medium=email.    [9]   15 C.F.R. § 740.21, https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24448.pdf. [10]   31 C.F.R § 515.209, https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24447.pdf?utm_campaign=pi%20subscription%20mailing%20list&utm_source=federalregister.gov&utm_medium=email. [11]   15 C.F.R. § 746.2, note to (b)(3)(i), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24448.pdf. [12]   OFAC, “Frequently Asked Questions Related to Cuba” (Updated Nov. 8, 2017), at 22-23, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_faqs_new.pdf. [13]   See 82 Fed. Reg. 52089 (Nov. 9, 2017), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24449.pdf.  The State Department may add additional entities or subentities in the future.  See id. [14]   See Department of State, “Frequently Asked Questions on the Cuba Restricted List” (Nov. 8, 2017),https://www.state.gov/e/eb/tfs/spi/cuba/cubarestrictedlist/275382.htm. [15]   OFAC, “Frequently Asked Questions Related to Cuba” (Updated Nov. 8, 2017), at 5-6, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_faqs_new.pdf.  According to OFAC’s FAQ’s, an organization for this purpose “is an entity that sponsors educational exchanges that do not involve academic study pursuant to a degree program that promote people-to-people contact.”  Id. at 6.  Similarly, the amendments restrict authorized educational travel (travel under the auspices of an academic educational program) to be conducted under the auspices of an organization that is subject to U.S. jurisdiction.  See id. at 4-5. [16]   Id. at 5-6. [17]   See id. [18]   Id. at 6.  Interestingly, educational travel that is not compliant with the amended regulations that was planned will be permitted so long as at least one transaction occurred prior to the date the regulations went into effect (November 9, 2017) and not the date of the announcement (June 16, 2017).  See id. at 5. [19]   Id. at 2. [20]   OFAC provides examples of “initiated” travel arrangements elsewhere in the FAQs as “at least one travel-related transaction (such as purchasing a flight or reserving accommodation).”  See id. at 3.  However, it is unclear whether this definition applies broadly, and if so, what other activities may constitute a “travel-related transaction.” [21]   Final Rule, Amendments to Implement United States Policy Toward Cuba, at 5, https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24448.pdf. [22]   Id; 15 C.F.R. § 740.21. The following Gibson Dunn lawyers assisted in preparing this client update: Adam Smith, Judith Alison Lee, Caroline Krass, Christopher Timura and Jesse Melman. 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 A. 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) Caroline Krass – Chair, National Security Practice, Washington, D.C. (+1 202-887-3784, ckrass@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) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@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) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, kkobildjanova@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Jesse Melman – New York (+1 212-351-2683, jmelman@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 33-112, bschwarz@gibsondunn.com) Mark Handley – London (+44 (0) 207 071 4277, mhandley@gibsondunn.com) Richard Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2017 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 10, 2017 |
Proposed Changes to the CFIUS Review Process

On November 8, 2017, a bipartisan group of lawmakers introduced a long-awaited bill that could significantly alter the process by which the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) reviews foreign investment in the United States.[1] The proposed Foreign Investment Risk Review Modernization Act of 2017 (“FIRRMA”) would modernize the CFIUS review and approval process, which has struggled to keep pace with a surge of foreign investment in the United States over the last several years.  If passed, the bill would revamp the CFIUS review process and update the regulations to address the national security concerns implicated in the transfer of sensitive U.S. technology to countries of “special concern,” most notably China.  FIRRMA would also expand the Committee’s mandate to include certain joint ventures, minority position investments and real estate transactions near military bases or other sensitive government facilities.  The legislation, introduced as President Donald Trump was in Beijing for talks with Chinese President Xi Jinping, would increase the number of foreign investments in the U.S. that would be required to win CFIUS approval. Background CFIUS is an inter-agency committee authorized to review the national security implications of transactions that could result in control of a U.S. business by a foreign person (“covered transactions”).[2]  CFIUS is authorized to block covered transactions or impose measures to mitigate any threats to U.S. national security.  Established in 1975 and last reformed in 2007, observers have pointed to an antiquated regulatory framework that hinders the Committee’s ability to review an increasing number of Chinese investments targeting sensitive technologies in the United States. These concerns predate the administration of Donald Trump, who campaigned on a promise to stem foreign—particularly Chinese—investment in the United States.  In January 2017, a council of advisors formed under the Obama Administration pointed to a “concerted push” by China to distort the domestic semiconductor market in ways that “undermine innovation, subtract from U.S. market share, and put U.S. national security at risk.”[3]  A confidential Department of Defense report given to policymakers earlier this year reportedly concluded that the U.S. must ramp up its screening of Chinese investments in U.S. technology companies to protect economic and national security.[4]  On September 13, 2017, President Trump blocked a private equity firm backed by Chinese investors from acquiring U.S. Lattice Semiconductor Corporation.[5]  This one high-profile case notwithstanding, numerous other recent deals involving Chinese acquirers and the U.S. technology sector have been approved. CFIUS Covered Transactions, Withdrawals, and Presidential Decisions (2009-2015) Year Number of Notices Notices Withdrawn During Review Number of Investigations Notices Withdrawn After Commencement of Investigation Presidential Decisions 2009 65 5 25 2 0 2010 93 6 35 6 0 2011 111 1 40 5 0 2012 114 2 45 20 1 2013 97 3 48 5 0 2014 147 3 51 9 0 2015 143 3 66 10 0 Total 770 23 310 57 1 Source: CFIUS Annual Report to Congress for CY 2015 (September 2017). Expanded Scope of Covered Transactions The proposed bill would broaden the scope of transactions subject to CFIUS review to include: any non-passive (even non-controlling) investment by a foreign person in any U.S. “critical technology” or “critical infrastructure” company; any change in the rights that a foreign investor has with respect to a U.S. business if that change could result in foreign control of the U.S. business or a non-passive investment in a U.S. critical technology or critical infrastructure company; 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, such as a joint venture; the purchase or lease by a foreign person of real estate that is in close proximity to a U.S. military installation or other sensitive U.S. government facility or property; and any transaction or agreement designed or intended to evade or circumvent CFIUS review.[6] FIRRMA updates the CFIUS definition of “critical technologies” to include emerging technologies that “could be essential for maintaining or increasing the technological advantage of the United States over countries of special concern with respect to national defense, intelligence, or other areas of national security, or gaining such advantage over such countries in areas where such an advantage may not currently exist.”[7] Notably, FIRRMA would not expand the Committee’s mandate with regard to “greenfield” or start-up investments.  The current CFIUS regulations explicitly exclude transactions in which a foreign person “makes a start-up, or ‘greenfield’ investment in the United States [and that] investment involves such activities as separately arranging for the financing of and the construction of a plant to make a new product, buying supplies and inputs, hiring personnel, and purchasing the necessary technology.”[8]  The scope of the current “greenfield” exception is ambiguous and generally interpreted narrowly.  Prior to FIRRMA’s introduction, Members of Congress had expressed particular concerns about greenfield transactions involving real estate acquisitions close to military installations, an issue that is addressed in FIRRMA by expanding the scope of covered transactions to include the purchase or lease by a foreign person of private or public real estate in close proximity to a U.S. military installation or other sensitive government facility.[9] “Light” Filings In its current form, the CFIUS review process commences when the parties to a transaction submit a voluntary notice or CFIUS otherwise becomes aware of a covered transaction.[10]  The voluntary notice is 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.[11] 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. The proposed bill would authorize parties to submit a voluntary “declaration” in lieu of the notice, which would be a streamlined filing with basic information about the transaction that would be required at least 45 days prior to the completion of a transaction.[12]  Such declarations would be mandatory for covered transactions involving the acquisition of a 25 percent or greater voting interest in a U.S. business by any foreign person in which a foreign government holds a voting interest of 25 percent or more.  The bill requires CFIUS to issue regulations that make mandatory declarations for additional transactions based on factors such as the U.S. technology or industry at issue, the difficulty for CFIUS of obtaining information through other means, and the difficulty associated with remedying any harm done to national security were the transaction to be completed.  Upon receipt of the declaration, CFIUS may either clear the transaction, request that the parties submit a written notice, initiate a unilateral review of the transaction, or inform the parties that it is unable to complete action with respect to the transaction based on the declaration alone.  The bill authorizes CFIUS to impose civil penalties on parties who fail to comply with these requirements.  The current CFIUS regulations do not contemplate mandatory filings. FIRRMA would also permit CFIUS to assess and collect filing fees for any covered transaction, capped at one percent of the value of the transaction or $300,000, whichever is less.  Currently there is no filing fee for CFIUS notifications. Notably, the bill establishes a “Committee on Foreign Investment in the United States Fund,” authorizing Congressional appropriations to cover the newly expanded operations of CFIUS.  Such moneys could be used to receive the filing fees collected by the Committee, and to increase the resources at the Committee’s disposal. Review Process As it stands, the 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.[13]  The initial 30-day phase begins one business day after the Committee determines that a notice is complete and satisfies regulatory requirements.  During this initial review period, CFIUS members examine the transaction in order to identify and address any national security concerns, which may involve seeking additional information from the parties.  If the review is not complete at the end of the initial 30-day review period, CFIUS may initiate a subsequent 45-day investigation.  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 that languish in the review and investigation phases, or not to file at all. FIRRMA would extend the initial review period from 30 to 45 days and authorize CFIUS to extend the 45-day investigation phase by 30 days in “extraordinary circumstances.”[14]  This measure effectively increases the maximum review period to 120 days, which is expected to reduce the need for parties to withdraw and refile notices at the end of the current, cumulative 75-day period if the Committee requires additional time to complete its review. National Security Considerations FIRRMA would update the list of factors used to determine whether a transaction poses a national security risk to include whether a country of “special concern”—meaning one that “poses a significant threat to the national security interests of the United States”—is seeking to acquire certain critical technologies; whether a transaction could reduce the United States’ technological and industrial advantage relative to such countries, and whether transactions could expose personally identifiable information, genetic information, or other sensitive data of U.S. citizens.[15]  This could have a profound impact on foreign transactions in the U.S. technology market, which is increasingly dependent on such data. In a departure from past U.S. practice, which did not explicitly take into account U.S. strategic aspirations, the bill expands the definition of “critical technologies” to include those “that could be essential” for maintaining or gaining technological advantage over countries of “special concern” with respect to national defense, intelligence, or other areas of national security, or “gaining such an advantage over such countries in areas where such an advantage may not currently exist.”[16] CFIUS would also be required to examine whether any covered transaction creates or exacerbates domestic cybersecurity vulnerabilities or allows a foreign government to gain a “significant new capability to engage in malicious cyber-enabled activities against the United States, including such activities designed to affect the outcome of any election for Federal office.”[17]  The term “malicious cyber-enabled activities” is defined in the bill to include any act, “primarily accomplished through or facilitated by computers or other electronic devices” that is “reasonably likely to result in, or materially contribute to, a significant threat to the national security of the United States” and that has the purpose or effect of: significantly compromising the provision of services by one or more entities in a critical infrastructure sector; harming, or otherwise significantly compromising the provision of services by, a computer or network of computers that support one or more such entities; causing a significant disruption to the availability of a computer or network of computers; or causing a significant misappropriation of funds or economic resources, trade secrets, personally identifiable information, or financial information.[18] Other national security factors to be considered include the extent to which the transaction could increase the cost to the U.S. government of acquiring or maintaining equipment and systems necessary for defense, intelligence, or other national security functions and whether the transaction could increase U.S. reliance on foreign suppliers to meet national defense requirements. Exempted Countries The bill would allow CFIUS to exempt transactions involving parties from certain countries based on criteria such as whether the country has a mutual defense treaty in place with the United States, a mutual arrangement to safeguard national security with respect to foreign investment, or a parallel process to review the national security implications of foreign investment.  FIRRMA would also enhance collaboration with U.S. allies and partners by allowing for the disclosure of information regarding a transaction to any domestic or foreign government for national security purposes or to any third parties where the parties have consented to the disclosure. Notably, parallel measures to review foreign investment have been proposed in a number of other countries.  In August, citing similar concerns with China’s technological investments, the European Union called for more rigorous screening of foreign acquisitions involving European companies.[19]  Germany increased the authority of its Ministry for Economic Affairs and Energy (“BMWi”) to review foreign investments.  On October 17, 2017, the United Kingdom published several legislative proposals that would increase its ability to review and intervene in transactions that raise national security considerations or involve national infrastructure. Mitigation Currently, if CFIUS finds that a covered transaction presents national security risks, it may enter into an agreement with, or impose conditions on, parties to mitigate such risks.[20]  FIRRMA would prohibit CFIUS from entering into any mitigation agreement or imposing any condition on a transaction unless the Committee first determines that the agreement or condition resolves any national security concerns raised by the transaction. The bill would also require the Committee to formulate and follow a plan for monitoring compliance with any mitigation agreement or condition.  If any party fails to comply with such agreements or conditions, CFIUS could negotiate remedial measures, require the parties to submit future covered transactions to CFIUS review for a five-year period, or seek injunctive relief. FIRRMA would provide the Committee with authority to negotiate or impose interim agreements or conditions on already-completed transactions while CFIUS conducts its review.  The bill would also authorize CFIUS to negotiate or impose agreements or conditions in order to mitigate any related national security risks, in cases where parties have voluntarily chosen to abandon the transaction (in practice CFIUS already sometimes imposes these conditions upon withdrawal). Judicial Review Although the current CFIUS statute already exempts actions and findings of the President from judicial review, FIRRMA would extend this exemption to most actions and findings of the Committee.  Petitions regarding Committee actions would be permitted only in cases where one or more parties to a covered transaction allege that the action is contrary to a constitutional right, power, privilege, or immunity.  Notably, only parties who initiated the review by filing a notice or declaration would be permitted to file such a petition, and only after the Committee has completed all action with respect to the transaction.  The U.S. Court of Appeals for the District of Columbia Circuit would have exclusive jurisdiction over such claims only to affirm the Committee action or remand the case to the Committee for further consideration.  Discovery in such cases would be limited to the administrative record. These provisions are designed to clarify parties’ rights in the wake of the only  case in which a CFIUS decision was challenged in the courts, the D.C. Circuit’s 2014 decision in Ralls Corp. v. Committee on Foreign Investment in the United States.  After CFIUS and President Obama ordered the Chinese-owned Ralls Corporation to divest a wind-farm project in close proximity to a Department of Defense facility, the D.C. Circuit held that the Committee had violated Ralls’ due process rights by failing, prior to the order to divest, to provide Ralls with access to the unclassified information that the government had relied on, and to give Ralls the opportunity to rebut that unclassified information. Conclusion In a combative political season, FIRRMA has a rare amount of bipartisan support.  The Senate bill is backed by Republicans Marco Rubio of Florida, John Barrasso of Wyoming, James Lankford of Oklahoma and Tim Scott of South Carolina, along with Democrats Amy Klobuchar of Minnesota, Gary Peters of Michigan and Joe Manchin of West Virginia.  Companion legislation was introduced in the House of Representatives by North Carolina Republican representative Robert Pittenger, along with Republicans Devin Nunes of California, Chris Smith of New Jersey, and Sam Johnson and John Culberson of Texas, and Democrats Dave Loebsack of Iowa and Denny Heck of Washington.  Several administration officials have voiced support for reforming the CFIUS review process, including Treasury Secretary Steven Mnuchin, Defense Secretary James Mattis, and Commerce Secretary Wilbur Ross. But despite its widespread support, FIRRMA’s progress through the legislative process could be hobbled by the volume of contentious issues on the legislative agenda for the remainder of the year, including tax and immigration reform, government funding and the debt limit. FIRRMA is not the only legislative effort to overhaul the CFIUS review process.  On October 18, 2017, U.S. Senators Chuck Grassley (R-IA) and Sherrod Brown (D-OH) introduced the United States Foreign Investment Review Act, a legislative proposal to review the economic impact of any proposed foreign acquisition alongside the CFIUS national security review.  The Grassley/Brown measure would authorize the U.S. Department of Commerce to review transactions potentially resulting in the foreign control of a U.S. business based on a number of “economic factors.”  Despite the support of influential and bipartisan sponsors, it is less likely that the more protectionist Grassley-Brown measure will progress this year. [1]      Press Release, U.S. Senator John Cornyn, Cornyn, Feinstein, Burr Introduce Bill to Strengthen the CFIUS Review Process, Safeguard National Security (Nov. 8, 2017), available at https://www.cornyn.senate.gov/content/news/cornyn-feinstein-burr-introduce-bill-strengthen-cfius-review-process-safeguard-national. [2]      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. [3]      President’s Council of Advisors on Science and Technology, Ensuring Long-Term U.S. Leadership in Semiconductors (January 2017), available at https://obamawhitehouse.archives.gov/sites/default/files/microsites/ostp/PCAST/pcast_ensuring_long-term_us_leadership_in_semiconductors.pdf (“Our core finding is this: the United States will only succeed in mitigating the dangers posed by Chinese industrial policy if it innovates faster. Policy can, in principle, slow the diffusion of technology, but it cannot stop the spread. And, as U.S. innovators face technological headwinds, other countries’ quest to catch up will only become easier. The only way to retain leadership is to outpace the competition.”) [4]      Doug Palmer, Cornyn debuts bill to reform CFIUS and stem tech transfers to China. Politico (November 8, 2017), available at https://www.politicopro.com/trade/article/2017/11/cornyn-unveils-cfius-bill-to-stem-technology-transfer-to-china-164716/. [5]      Press Release, The White House, Statement from the Press Secretary on President Donald J. Trump’s Decision Regarding Lattice Semiconductor Corporation (Sept. 13, 2017), available at https://www.whitehouse.gov/the-press-office/2017/09/13/statement-press-secretary-president-donald-j-trumps-decision-regarding. [6]      FIRRMA Section 3 (a)(5)(B)(i) – (vi). [7]      FIRRMA Section (8)(B). [8]      31 C.F.R. § 800.301(c), Example 3. [9]      FIRRMA Section 3 (5) (B)(ii). [10]     31 C.F.R. § 800.401(a), (b). [11]     § 800.402(c). [12]     FIRRMA Section (5). [13]     31 C.F.R. § 800.506. [14]     FIRRMA Section 8 [15]     FIRRMA Section 3 (a) (4) (defining country of “special concern”). [16]     FIRRMA Section 3 (8).  The current CFIUS regulations define “critical technologies” as “critical technology, critical components, or critical technology items essential to national defense, identified pursuant to this section, subject to regulations issued at the direction of the President …” 50 U.S.C. § 4565 (a) (7). [17]     FIRRMA Section 15 [18]     FIRRMA Section 3. [19]     Jim Brunsden, Brussels seeks tighter vetting of foreign takeovers, Fin. Times, available at https://www.ft.com/content/04fa752c-7dda-11e7-ab01-a13271d1ee9c. [20]     U.S. Department of the Treasury, CFIUS Process Overview, available at https://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-overview.aspx (last visited November 9, 2017). The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Caroline Krass, Jose Fernandez, 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 Group: United States: Judith A. 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) Caroline Krass – Chair, National Security Practice, Washington, D.C. (+1 202-887-3784, ckrass@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) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@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) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, kkobildjanova@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@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) Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) © 2017 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 1, 2017 |
Webcast: IPO and Public Company Readiness: Regulatory Compliance Issues

​Public companies face unique challenges as they confront and seek to manage OFAC, AML and FCPA compliance risk. Disclosure obligations and market reactions can intensify the pressures arising from alleged or actual violations of these laws. Companies preparing to go public must assess their compliance programs in order to avoid or mitigate incidents that could harm their business, disrupt the IPO process or damage their reputation as a newly public company. Companies also must be prepared to successfully respond to the scrutiny regarding compliance issues in the diligence and disclosure process associated with an IPO. Our highly experienced and distinguished panel of Gibson Dunn partners from the Capital Markets, Financial Institutions and White Collar Defense and Investigations Practice Groups will provide invaluable and practical advice and tips on how companies can prepare for public company reporting and scrutiny of their compliance programs. View Slides [PDF] PANELISTS Stephanie L. Brooker is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher where she is Co-Chair of Gibson Dunn’s Financial Institutions Practice Group and a member of the White Collar Defense and Investigations Practice Group. Ms. Brooker is 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, where she served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia, tried 32 criminal trials, and briefed and argued criminal appeals. Ms. Brooker’s practice focuses on internal investigations, regulatory enforcement, white collar criminal defense, and compliance counseling involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, anti-corruption, securities, tax, and wire fraud. Joel M. Cohen is a partner in the New York office of Gibson, Dunn & Crutcher where he is Co-Chair of Gibson Dunn’s White Collar Defense and Investigations Practice Group and a member of its Securities Litigation, Class Actions and Antitrust and Competition Practice Groups. Mr. Cohen’s experience includes all aspects of FCPA/anti-corruption issues, insider trading, securities and financial institution litigation, class actions, sanctions, money laundering and asset recovery, with a particular focus on international disputes and discovery. Mr. Cohen was the prosecutor of Jordan Belfort and Stratton Oakmont, which is the focus of “The Wolf of Wall Street” film by Martin Scorsese. He was an adviser to OECD in connection with the effort to prohibit corruption in international transactions and was the first Department of Justice legal liaison advisor to the French Ministry of Justice. Andrew L. Fabens is a partner in the New York office of Gibson, Dunn & Crutcher where he is Co-Chair of Gibson Dunn’s Capital Markets Practice Group and a member of the Securities Regulation and Corporate Governance Practice Group. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. Stewart L. McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher where she is Co-Chair of Gibson Dunn’s Capital Markets Practice Group and a member of the Steering Committee of the Securities Regulation and Corporate Governance Practice Group. Ms. McDowell’s represents business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She represents both underwriters and issuers in a broad range of both debt and equity securities offerings, in addition to buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments. Adam M. Smith is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher where his practice focuses on international trade compliance and white collar investigations with a focus on economic sanctions and export controls. Mr. Smith served as Senior Advisor to the Director of the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and as the Director for Multilateral Affairs on the National Security Council. While at OFAC he played a primary role in all aspects of the agency’s work, including briefing Congressional and private sector leadership on sanctions matters, shaping new Executive Orders, regulations, and policy guidance for both strengthening sanctions and easing measures. Mr. Smith counsels a global roster of clients in the financial, services, manufacturing and technology sectors to help them understand, navigate and comply with increasingly complex financial regulations. Peter W. Wardle is a partner in the Los Angeles office of Gibson, Dunn & Crutcher where he is Co-Chair of Gibson Dunn’s Capital Markets Practice Group. Mr. Wardle represents issuers and underwriters in equity and debt offerings, in addition to both public and private companies in mergers and acquisitions, including private equity, cross border, leveraged buy-out, distressed and going private transactions. He also advises clients on a wide variety of general corporate and securities law matters, including corporate governance issues. 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. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.