February 6, 2014

The year 2013 saw vigorous enforcement activity in connection with the increasingly restrictive sanctions, particularly with respect to Iran.  Enforcement of the sanctions in the United States and the European Union has been accompanied by at times very significant penalties.  The flurry of activity towards the end of the year focused on multilateral efforts to address Iran’s nuclear program, leading to in questions concerning the prospects for eased Iran sanctions, the nature and duration of any relaxed sanctions, and possible legislative actions jeopardizing the efforts.

This update reviews sanctions developments in the United States, European Union and the United Kingdom in 2013 and assesses what the experiences in 2013 suggest about how business practices might evolve to adapt to current sanctions as well as the potential for easing of the Iran sanctions.

U.S. SANCTIONS

I.    Legislation

A.    Iran Freedom and Counter-Proliferation Act of 2012 (IFCA)

On January 2, 2013, President Obama signed into law the Iran Freedom and Counter-Proliferation Act of 2012 as a subtitle in the National Defense Authorization Act for Fiscal Year 2013.[1]  As set forth below, the IFCA expands the targets for U.S. sanctions on industries that are important to Iran’s economy.  The sanctions also target the provision of certain goods and services to Iran.  The IFCA expands the CISADA-style sanctions framework for foreign financial institutions.

Under the IFCA, five or more Iran Sanctions Act sanctions are to be applied to sanctioned persons.  In addition to blocking (including blocking of principal executive officers of a sanctioned entity), the available sanctions include prohibitions on:  Export assistance from the Export-Import Bank; export licenses; U.S. bank loans exceeding $10 million in any 12-month period; designation as a primary dealer in U.S. Government (USG) debt instruments or service as a repository of USG funds if the sanctioned entity is a financial institution; U.S. government procurement contracts; foreign exchange transactions subject to U.S. jurisdiction; financial transactions subject to U.S. jurisdiction; investment in equity or debt; and entry into the United States by corporate officers.  These prohibitions also may be applied to corporate officers of sanctioned entities.

The sanctions target the energy sector, including persons or entities found to be "part of" Iran’s energy sector as well as persons or entities that knowingly provide certain support to those determined to be "part of" Iran’s energy sector, and those that knowingly sell, supply, or transfer to or from Iran significant goods or services used in connection with Iran’s energy sector.

The sanctions expand the scope of targeted industries by imposing sanctions in connection with Iran’s shipping and shipbuilding sectors, as well as Iran’s port operators.  Specifically, sanctions may be imposed on any person or company found to be "part of" Iran’s shipping or shipbuilding sectors, or to operate a port in Iran.  The sanctions also target those who provide certain types of support to those industries, or sell, supply or transfer to or from Iran significant goods or services used in connection with Iran’s shipping or shipbuilding sectors.

In expanding U.S. sanction to metals and other minerals, the United States is targeting items that may be used for barter, swap or other means of exchange or transaction.  The sanctions also may be available if the items are used in connection with Iran’s energy, shipping or shipbuilding sectors, or in the nuclear, military or ballistic missile programs.  The sanctions may be applied to any person or company that sells, supplies, or transfers, directly or indirectly, to or from Iran any of the following:

• precious metal
• graphite (in certain applications)
• raw or semi-finished metals such as aluminum and steel (in certain applications)
• coal (in certain applications)
• software used for integrating industrial processes (in certain applications)

The IFCA specifically targets those dealing with Iranians on the SDN List, authorizing sanctions on any person or company that knowingly provides certain support to any Iranian person included on the SDN List (other than non-designated Iranian financial institutions).  In addition, foreign financial institutions (FFIs) risk the loss of U.S. correspondent or payable-through accounts for knowingly facilitating a significant financial transaction on behalf of any Iranian person included on the SDN list (other than non-designated Iranian financial institutions).

Under the IFCA, FFIs also risk the loss of U.S. correspondent or payable-through accounts for knowingly conducting or facilitating significant financial transactions for the sale, supply or transfer, directly or indirectly, to or from Iran of precious metals and other materials (if used in certain ways); or for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with Iran’s energy, shipping and shipbuilding sectors.

The IFCA expands the scope of U.S. sanctions in the financial sector by providing for sanctions on a person or company for knowingly providing underwriting services, insurance, or reinsurance for any activity with respect to Iran on which sanctions have been imposed under IFCA or any other provision of law relating to the imposition of sanctions with respect to Iran. 

The IFCA incorporates waivers and exceptions to the prohibitions or sanctions.  Sales of agricultural commodities, food, medicine, or medical devices to Iran are excluded from consideration under the IFCA sanctions, as are certain natural gas transactions and the Shah Deniz natural gas pipeline.  Further, the Significant Reduction Exception[2] created by the NDAA for FY 2012 also applies to the IFCA sanctions.  If the country with primary jurisdiction over an FFI is found to have significantly reduced its imports of Iranian crude oil, the FFI will be excepted from the sanctions.[3]

B.    H.R. 850 – Nuclear Iran Prevention Act of 2013

Congress considered a bill intended to further U.S. efforts to prevent Iran from acquiring nuclear weapons capability.  Introduced by Rep. Edward Royce (R-CA39) and last referred to the Senate Committee on Banking, Housing, and Urban Affairs on August 1, 2013, H.R. 850 would greatly expand the sanctions on Iran, functioning like a commercial trade embargo if fully executed.[4]  Additionally, the bill penalizes foreign companies and individuals that violate American sanctions by threatening such persons with restrictions on doing business with the United States.[5]

Designation of the IRGC as a Foreign Terrorist Organization

The proposed legislation directs the Secretary of State to determine whether Iran’s Islamic Revolutionary Guard Corps (IRGC) meets the criteria for designation as a foreign terrorist organization (FTO).[6]  If so, the bill directs the Secretary of State to designate the IRGC as an FTO.[7]  If not, the Secretary of State must report to Congress regarding any unmet criteria.[8]  Such a designation would make it illegal for any person in the U.S. or subject to U.S. jurisdiction to knowingly provide material support or resources[9] to the IRGC.[10]

Sanctions

The bill would also amend the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA) by authorizing the President to impose sanctions on a foreign person that knowingly conducts or facilitates any significant financial transaction with the Central Bank of Iran, or another Iranian financial institution subject to sanctions, for the purchase of goods or services by, from, or on behalf of a person in Iran.[11]  This provision excludes agricultural commodities, food, medicine, or medical devices.[12]

In addition, the bill would amend the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) to impose mandatory sanctions on financial institutions that facilitate significant transactions or provide significant financial services for a person that (1) is subject to human rights-related sanctions or (2) exports sensitive technology to Iran and is subject to the prohibition on procurement contracts.[13]

The bill directs the President to impose sanctions on any FFI that knowingly facilitates a significant financial transaction on behalf of any person directly or indirectly owned or controlled by an Iranian person included on the SDN List.[14] 

The bill would further limit the sanctions exception for petroleum transactions, requiring foreign nations to significantly reduce their volume of crude oil purchases from Iran and of Iranian origin to avoid the application of sanctions against their financial institutions which knowingly conduct or facilitate any significant financial transaction with the Central Bank of Iran or another Iranian financial institution already subject to sanctions.[15]

Reporting on Sanctions

The President must report to Congress periodically regarding the projected economic effects of international sanctions on Iran.[16]  Finally, the bill requires the Government Accountability Office to report to Congress regarding presidential implementation of specified sanctions on Iran.[17]

C.    S. 1881 – Nuclear Weapons Free Iran Act of 2013[18]

Introduced by Sen. Robert Menéndez (D-NJ) and last reported by Committee on December 20, 2013, S. 1881 would impose additional sanctions on Iran’s "strategic sectors" (i.e., its petroleum, construction, engineering, mining, and insurance industries), as well as on any other sectors the President designates as of strategic importance to Iran.[19]  The bill would also impose additional sanctions on foreign financial institutions facilitating transactions with certain Iranian banks, in particular transactions related to the "currency of a country other than the country with primary jurisdiction [over the foreign financial institution] with, for, or on behalf of the Central Bank of Iran" or designated Iranian financial institutions.[20] 

The bill would expand sanctions on Iran’s oil industry by requiring that countries significantly reduce their purchases of Iranian petroleum—not just crude oil.[21]  Those countries which did not significantly reduce their purchases of Iranian petroleum would not be eligible for exceptions to certain sanctions.[22]  In addition, it would impose new sanctions on entities in Iran’s special and free economic zones, as well as in its strategic sectors.[23]  The bill would also impose sanctions on individuals who engage in activities for or on behalf of the Government of Iran that enable Iran to evade sanctions, individuals involved in the Government of Iran’s corrupt activities or the diversion of certain humanitarian goods and medicine, or senior officials of certain designated entities.[24] 

The bill would also allow the President to impose restrictions on U.S. foreign assistance—including the provision of defense articles and services—to countries designated as Destinations of Diversion Concerns, if the President determined that such restrictions would prevent the diversion of certain goods or services to Iranian end-users or Iranian intermediaries.[25]  

The bill would authorize the President to suspend the application of its sanctions for a 180-day period if Iran agreed to specific and verifiable measures to implement the recently completed interim agreement between the P5+1 and Iran (known as the Joint of Plan of Action), if he certified every 30 days that, inter alia, Iran is complying with the provisions of the Joint Plan of Action and is proactively engaged in negotiations towards a final agreement to terminate its illegal nuclear activities.[26]  Following this period, the President could renew the suspension for two additional periods of up to 30 days each if he provided certification.[27]  This suspension authority is designed to provide the Administration with time to successfully implement the Joint Plan of Action and negotiate a final agreement. 

In addition, any sanctions suspended by the President pursuant to the Joint Plan of Action would be reinstated immediately if the President did not provide certification, Iran breached any of its commitments, or a final agreement was not reached.[28]  If a final agreement was reached, the President could suspend the imposition of sanctions under this bill for one year, and could renew that suspension for subsequent year-long periods by appropriate certification.[29]    

II.    Executive Orders

A.    Executive Order 13,645

On June 5, 2013, President Obama signed Executive Order 13,645, "Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Freedom and Counter-Proliferation Act of 2012 and Additional Sanctions with Respect to Iran."[30]  The E.O. continues the tightening of controls on foreign financial institutions and persons by implementing the IFCA and installing new sanctions.

The Executive Order builds on the IFCA, which targets the energy, shipping and shipbuilding sectors, by including new sanctions on persons doing business with the automotive sector, which is a "major revenue generator for Iran."[31]  Specifically, the E.O. authorizes sanctions against persons who are knowingly engaged, or are the owner or successor entity of a person who is so engaged, in significant transactions involving the "automotive sector of Iran," which encompasses "the manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles, as well as original equipment manufacturing and after-market parts manufacturing relating to such vehicles."[32]  Although undefined, OFAC has indicated it will determine what qualifies as a "significant transaction" based on "broad factors" set out in the Iranian Financial Sanctions Regulations,[33] which afford considerable discretion.

When a person falls violates within the provision, he is subject to any of the following sanctions:  denial of Export-Import Bank approval for any guarantee, insurance or extension of credit involving exports to the sanctioned person; agency refusal to issue licenses or grant permission to export under statutes requiring such approval; for financial institutions, denial of Federal Reserve Bank designation as a primary dealer of U.S. Government debt instruments or a prohibition against serving as a repository of U.S. Government funds; denial of government procurement contracts; denial of visas to corporate officers and controlling shareholders; or the application of any of these sanctions to a principal executive officer of the sanctioned person.[34] 

In addition, a person found to violate the IFCA or the discussed automotive restrictions could face any of the following sanctions:  a prohibition on the issuance of loans worth more than $10 million in a 12-month period; a prohibition on foreign exchange transactions subject to U.S. jurisdiction in which the person has an interest; a prohibition on financial institutions transferring credits or payments involving the sanctioned person’s interest; a block of all the sanctioned person’s property and interests in property subject to U.S. jurisdiction; a prohibition on U.S. persons investing in the sanctioned person; a restriction or prohibition on imports of goods, technology, or services from the sanctioned person; or the imposition of any of these penalties on the executive officers of the sanctioned person.[35] 

Also pursuant to the IFCA, the E.O. blocks the property or interest in property of any person deemed to have engaged in or materially supported the corruption or diversion of goods, or the misappropriation of proceeds from the sale of goods, intended for the people of Iran.[36]

The E.O. includes two new sanctions targeted exclusively at foreign financial institutions.  The first restricts the maintenance of accounts and blocks the property of institutions that conduct or facilitate significant transactions tied to Iranian rials, or maintain significant funds or accounts outside of Iran that are denominated in the rial.  The second authorizes the Secretary of the Treasury to restrict the opening and use of accounts by institutions that conduct significant transactions on behalf of an SDN or in connection with the Iranian automotive sector.[37]

The E.O. also extends the reach of existing sanctions by blocking the property of those that materially assist Iranians on the SDN list or persons whose property and interests in property are blocked under Executive Order 13,599, which targets the Government of Iran, the Central Bank of Iran, all Iranian financial institutions, and persons owned, controlled by, or acting on behalf of persons whose property is blocked.[38]

Finally, the E.O. amends Executive Order 13,622 by clarifying that it extends not only to the purchase or acquisition of petroleum or petrochemical products from Iran, but also to the "sale, transport, or marketing" of such products.[39]

B.    Executive Order 13,651

On August 6, 2013, President Obama signed Executive Order 13,651, "Prohibiting Certain Imports of Burmese Jadeite and Rubies,"[40] which prohibits the importation into the United States of any jadeite or rubies mined or extracted from Burma, and any articles of jewelry containing such gems.  While broader sanctions against Burma have been relaxed, the United States continues to be concerned with labor and human rights in specific sectors of the Burmese economy, notably in the jewelry and mining industries.  This Executive Order aims to address those concerns by reinstating prohibitions and restrictions on the importation of jadeite and rubies that were originally imposed by the Tom Lantos Block Burmese JADE (Junta’s Anti-Democratic Efforts) Act of 2008, but which lapsed following the Burmese Freedom and Democracy Act’s (BFDA) expiration on July 28, 2013.  The Executive Order also prohibits any transaction that evades or avoids, or has the purpose of evading or avoiding, any of the prohibitions on importing such goods.

In addition, this Executive Order amends Executive Order 13,310, "Blocking Property of the Government of Burma and Prohibiting Certain Transactions,"[41] by revoking sections 3 and 8 of that Order, which prohibited the importation of any product of Burma and waived certain prohibitions if such products conflicted with specific international obligations.  

III.    Significant OFAC REGULATIONS

A.    Amendment to the Iranian Financial Sanctions Regulations, 31 C.F.R. part 561

On March 15, 2013, OFAC published a new rule with amendments to the Iranian Financial Sanctions Regulations (IFSR) implementing Sections 503 and 504 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA) and provisions of Executive Order 13,622.[42]

Pursuant to the rule, agricultural commodities, in addition to food, medicine, and medical devices are exempt from NDAA sanctions,[43] which punish financial institutions that knowingly conduct or facilitate significant transactions with the Central Bank of Iran or an Iranian financial institution.  The regulations now treat private financial institutions and government-owned or -controlled institutions equally under the NDAA, except that central banks can only be sanctioned for conducting or facilitating petroleum-related transactions.[44]

Pursuant to the TRA, OFAC also narrowed the "significant reduction exception," which provides a limited exemption from NDAA sanctions for countries that significantly reduce crude oil purchases from Iran.  The new regulation specifies that the exception only applies to bilateral trade between Iran and the exempted country, and that any funds payable as a result of the trade must be paid to citizens, nationals, or permanent residents of the exempted country, or entities organized under its jurisdiction.[45]  Furthermore, any funds owed to Iran due to trade under the exception can only be used to pay for exports to Iran originating from the same country or used to purchase an exempted item, such as food or medicine, from a third country.[46]

The regulation also implements provisions of E.O. 13,622, which targets Iran’s petroleum exports.[47]  A foreign financial institution that knowingly conducts or facilitates a significant financial transaction with the National Iranian Oil Company or the Naftiran Intertrade Company, or for the purchase of petroleum or petrochemical products, will be barred from opening a correspondent or payable-through account with a U.S. financial institution.[48]

Finally, OFAC issued an interpretation of what it means for goods or services to originate in a country.  Goods must be grown, produced, manufactured, extracted, processed or substantially transformed in the originating country, while services must either be performed in the originating country or performed in the export destination by a citizen, national, or permanent resident of the originating country who ordinarily resides there.[49]

B.    Statements of Licensing Policy Related to the Telecommunications and Agricultural Sectors of Syria and Petroleum and Petroleum Products of Syrian Origin for the Benefit of the National Coalition of Syrian Revolutionary and Opposition Forces or Its Supporters

On June 12, 2013, OFAC published Statements of Licensing Policy Related to the Telecommunications and Agricultural Sectors of Syria and Petroleum and Petroleum Products of Syrian Origin for the Benefit of the National Coalition of Syrian Revolutionary and Opposition Forces or Its Supporters.[50]  The Statements clarify OFAC’s licensing approach to requests for specific authorization for transactions involving Syria’s telecommunications and agricultural sectors, as well as for transactions related to the petroleum industry for the benefit of the National Coalition of Syrian Revolutionary and Opposition Forces.  Regarding OFAC’s licensing policy towards transactions involving Syria’s telecommunications and agricultural sectors, the Statements suggest that specific licenses will be issued on a case-by-case basis to ensure private persons in Syria better access to the Internet and to enable projects to enhance and strengthen the agricultural sector in a "food insecure country."  Such licenses will not authorize transactions or activities with the Government of Syria, or with persons blocked pursuant to a number of Executive Orders, however.

In addition, regarding OFAC’s licensing policy towards transactions involving Syria’s petroleum or petroleum products for the benefit of the National Coalition of Syrian Revolutionary and Opposition Forces or its supporters, the Statements clarify that specific licenses will be issued on a case-by-case basis.  OFAC will authorize such transactions related to new investment, and the purchase, trade, export, import, or production of petroleum or petroleum products of Syrian origin if they benefit certain Syrian opposition forces.  Such licenses will not authorize transactions or activities with the Government of Syria, or with persons blocked pursuant to a number of Executive Orders.

The Statements also note that specific licenses issued pursuant to this policy do not authorize any transaction by any part of 31 C.F.R. Chapter V or any Executive Order other than E.O. 13,582.[51]

C.    Questions Related to the Issuance of Executive Order "Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Freedom and Counter-Proliferation Act of 2012 and Additional Sanctions With Respect to Iran" and the Implementation of Certain Provisions of the Iran Freedom and Counter-Proliferation Act of 2012

On July 1, 2013, OFAC released additional guidance regarding the implementation of IFCA[52] and Executive Order 13,645.[53]  In an update to its FAQ, OFAC answered a number of questions related to the IFCA and the Executive Order, including how OFAC will interpret key terms, how the Executive Order relates to the IFCA, and what effects the legislation and the Order will have on sanctions relating to Iran’s energy, shipping, shipbuilding, and automotive sectors.[54]  Notably, the FAQ suggest that OFAC will rely on a number of factors when determining whether financial transactions are "significant," including but not limited to the size, number, frequency, complexity, commercial purpose, and impact of the transactions, as well as whether the transactions involve deceptive practices.

In addition, the Frequently Asked Questions note that Executive Order 13,645 broadens the IFCA’s sanctions by allowing for the imposition of sanctions on persons that materially assist certain Iranian persons on the SDN list or whose property is blocked under Executive Order 13,599[55] or this Executive Order, and foreign financial institutions that knowingly conduct or facilitate a significant financial transaction on behalf of such persons. 

The Frequently Asked Questions also make clear that the Executive Order authorizes new sanctions for significant transactions related to the purchase or sale of Iranian rials and derivative, swap, future, forward, or similar contracts whose value is based on the exchange rate of the Rial, as well as transactions related to Iran’s automobile sector.

D.    Technical Amendments to Counter-Terrorism Sanctions Regulations Implemented by OFAC

On June 27, 2013, OFAC published a Final Rule[56] amending the Global Terrorism Sanctions Regulations (GTSR),[57] the Terrorism Sanctions Regulations (TSR),[58] and the Foreign Terrorist Organizations Sanctions Regulations (FTOSR).[59]  The Rule amends the GTSR and the TSR to clarify provisions related to charitable donations and who has an interest in property, as well as amends the TSR to add a definition of the term "financial, material, or technological support."  In particular, the Rule clarifies that section 3 of Executive Order 12,947[60] and section 4 of Executive Order 13,224,[61] which relate to the prohibitions on making donations, apply to donations "by to, or for the benefit of," and not only "to" those persons whose property and interests in property are blocked pursuant to those Orders.

The Rule further elaborates that a person whose property and interests in property are blocked pursuant to the GTSR, the TSR, or the FTOSR, has an interest in all property of an entity in which it owns, directly or indirectly, a 50% or greater interest.  The property and interests in property of that entity, therefore, are also blocked, and that entity is considered a person whose property and interests in property are blocked pursuant to the relevant sanctions program, regardless of whether that entity itself is listed or designated.

In addition, the rule amends the TSR to define the term "financial, material, or technological support" as:

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

This definition already appears in the GTSR, though it is not used in the FTOSR.  In addition to this definitional change, OFAC is revising the TSR to set at 180 days the maximum term of maturity for instruments in which funds in an interest-bearing account may be invested or held.  The previous maximum term was 90 days.  

E.    Guidance on the Sale of Food, Agricultural Commodities, Medicine, and Medical Devices by Non-U.S. Persons to Iran

On July 25, 2013, OFAC issued Guidance on the Sale of Food, Agricultural Commodities, Medicine, and Medical Devices by Non-U.S. Persons to Iran.[62]  This Guidance underscores that the U.S. sanctions regime broadly allows for the sale of food, medicine, and medical devices by U.S. and non-U.S. persons to Iran.  It also emphasizes that the financing or facilitation of such sales by non-U.S. persons does not trigger sanctions, as long as the transaction does not involve certain U.S.-designated persons (e.g., a designated Iranian bank) or prohibited conduct.  In addition, the Guidance clarifies that the conduct or facilitation of payments for such sales by foreign banks is not subject to U.S. sanctions where the payments originate from accounts of the Central Bank of Iran or from non-designated Iranian banks. 

F.    Technical Updates

Throughout 2013, OFAC provided a number of technical updates worth noting.  On August 8, OFAC announced that it was creating "spillover files" to capture any characters which exceeded the 1000-character limit in the SDN "remarks" field.[63]  OFAC announced that users of legacy files—which did not capture characters over the 1000 character limit—should review the data in the spillover files "and make business decisions about what data to include in their screening systems and what data to ignore."[64]  Such a review is important to ensure that users of legacy files do not unintentionally fail to detect potentially designated parties in certain transactions. 

On December 3, 2013, OFAC announced that on or about March 3, 2014, it will cease issuing its SDN data files in the 32 bit-self extracting archive known as "SDALLW32.EXE."[65]  It will continue to provide and update the 32 bit .zip archive, "SDALL.ZIP."  In addition, on December 5, 2013, OFAC announced that on or about March 5, 2014, it will also cease issuing its Palestinian Legislative Council ("PLC") data files in the 31 and 16 bit self-extracting archives, "PLCDAT32.EXE" and "PLC_DAT.EXE."[66]  OFAC will continue to update the 32 bit .zip archive, "PLC_DAT.ZIP."  These updates may impact automated SDN and PLC download processes and businesses should ensure that they are receiving the most up-to-date information.       

IV.    General Licenses

A.    Iran

1.    General License D

On May 30, 2013, OFAC released General License D,[67] under the Iranian Transactions and Sanctions Regulations.[68]  This License permits the direct or indirect export or reexport, from the United States or by U.S. persons, of certain fee-based personal communication services subject to the Export Administration Regulations (EAR).  These services include instant messaging, chat and email, social networking, photo and video sharing, web browsing, and blogging, as well as software necessary to enable such services.  The License also includes software and hardware incident to personal communications, such as mobile and satellite phones and operating systems, modems and wireless internet equipment, laptops, tablets, and privacy software.  The export or reexport of consumer Internet connectivity services and transmission facilities are also allowed by General License D.  United States banks, brokers, and securities dealers are permitted to process transactions authorized under this License, so long as they are consistent with federal regulations governing payments and dollar clearing transactions with Iran.[69]

However, General License D does not authorize the direct or indirect export or reexport of any of the aforementioned services, software, or hardware if the exporter knows, or has reason to know, that they are intended for use by the Iranian government.  Likewise, they may not be exported to any person whose property or interests in property are blocked.  Finally, General License D does not authorize the export or reexport of commercial-grade Internet services, transmissions facilities, web-hosting services, or domain name registration services. 

2.    Expansion of General License Concerning Medicine and Basic Medical Supplies

On July 25, 2013, OFAC updated section 560.530 (a)(3) of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560, to add additional items to the List of Basic Medical Supplies referenced in General License 31 C.F.R. 560.530(a)(3).[70]  On July 25, OFAC also published a number of answers to Frequently Asked Questions related to this General License,[71] including whether it authorizes the export of all medical devices and whether it authorizes the export of listed items to all entities in Iran.  The FAQ update concludes that the General License only authorizes the export of the items included on the List of Basic Medical Supplies.  Further, medical supplies cannot be exported or reexported to persons whose property or interests in property are blocked under counter-proliferation, counter-terrorism, counter-narcotics, or other authorities administered by OFAC.  Exporters and reexporters engaging in activities pursuant to this General License are expected to undertake due diligence related to all transactions. 

3.    General License E

On September 10, 2013, OFAC issued General License E to support humanitarian activity with Iran.[72]  The License permits nongovernmental organizations (NGOs) to export or reexport services to or related to Iran in support of a number of not-for-profit activities.  Such activities include, among others, those related to humanitarian projects to meet basic human needs in Iran, including the provision of donated health-related services; operation of orphanages; provision of relief services related to natural disasters; those related to non-commercial reconstruction projects in response to natural disasters; those related to environmental and wildlife conservation projects in Iran; and those related to human rights and democracy building projects in Iran.  The transfer of funds in support of these activities by a single NGO cannot exceed $500,000, in the aggregate, over a 12-month period.  In addition, NGOs which engage in these activities pursuant to this General License must submit quarterly reports providing information about the types of services exported, the dollar amounts of any transfers to Iran, the beneficiaries of those transfers, and any involvement with the Government of Iran, Iranian persons, Iranian financial institutions, or Iranian NGOs.  The License does permit United States depository institutions to process transfers of funds in furtherance of the activities authorized by the General License, so long as the transfer is consistent with 31 C.F.R. § 560.516.

The General License does not authorize the export or reexport of services to any person whose property and interests in property are blocked pursuant to any part of 31 C.F.R. Chapter V other than Part 560.  It also does not authorize any activities in furtherance of Iranian military or industrial infrastructure, or in connection with the Iranian energy, automobile, shipping, and shipbuilding sectors.

4.     General License F

On September 10, 2013, OFAC also issued General License F,[73] which authorizes the importation and exportation of certain services in support of professional and amateur sporting activities and exchanges involving the United States and Iran.  This General License allows such importation and exportation for activities related to exhibition matches and events, the sponsorship of players, coaching, refereeing, and training.  The License also permits United States depository institutions to process transfers of funds in furtherance of the activities authorized by the General License, so long as the transfer is consistent with 31 C.F.R. § 560.516.  It does not, however, authorize any transaction by a U.S.-owned or controlled foreign entity otherwise prohibited by 31 C.F.R. § 560.215 if that transaction would be prohibited by any other part of Chapter V if engaged in by a U.S. person.

B.    WMD Proliferators

1.    General License No. 7

In January 2013, OFAC issued and then revoked General License No. 7,[74] pursuant to the Weapons of Mass Destruction Proliferators Sanctions Regulations,[75] and the Iranian Transactions and Sanctions Regulations.[76]  General License No. 7 addressed transactions related to the seizure of the Iranian-flagged cargo ship MV Amina, which was detained in Sri Lanka in December after its owners defaulted on a payment to Germany’s DVB Bank SE.[77]  Transactions involving the Amina had previously been blocked in September of 2008.  OFAC issued General License No. 7 on January 9, permitting participation in transactions related to the arrest, detention and judicial sale of the Amina, including bidding on the vessel, financing its purchase, or providing services in furtherance of the detention or sale.  The License was set to expire on January 31, 2014.  However, on January 16, the Amina escaped Sri Lankan custody and fled into international waters, ultimately returning to Iran.[78]  Consequently, OFAC revoked General License No. 7 on January 19.

2.    General License No. 5C

On October 30, 2013, OFAC issued General License No. 5C[79] under the Weapons of Mass Destruction Proliferators Sanctions Regulations[80] and the Iranian Transactions and Sanctions Regulations.[81]  General License No. 5C authorizes all transactions related to the arrest, detention, and judicial sale of the MV Dianthe, which was identified as blocked property on September 10, 2008 pursuant to Executive Order 13,382.[82]  These transactions include, among other things, bidding on the purchase of the vessel and providing financing, insurance, or funding in connection with its purchase.  This authorization will expire at 11:59pm, Eastern Standard Time, November 30, 2014.  The License does not authorize the provision of services, or any transfer of funds or other property, that would otherwise be prohibited by 31 C.F.R. Part V, including to any person whose property and interests in property are blocked.  Further, all property and interest in property related to the vessel that were previously blocked pursuant to Executive Order 13,382 or 31 C.F.R. Part 544 remain blocked.  The License also notes that, if the vessel is sold pursuant to judicial sale, the purchaser can provide OFAC with evidence demonstrating that the basis for the blocking is no longer applicable so as to expedite its removal from the SDN list. 

3.    General License No. 8

On November 29, 2013, OFAC issued General License No. 8 under the Weapons of Mass Destruction Proliferators Sanctions Regulations and the Iranian Transactions and Sanctions Regulations.[83]  General License No. 8 authorizes all transactions related to the arrest, detention, and judicial sale of the Amin Crude Oil Tanker, which was identified as blocked property pursuant to Executive Order 13,382[84] on July 12, 2012.  These transactions include, among other things, bidding on the purchase of the vessel and providing financing, insurance or funding in connection with its purchase.  This authorization will expire at 11:59pm, Eastern Standard Time, November 30, 2015.  The License does not authorize the provision of services, or any transfer of funds or other property, that would otherwise be prohibited by 31 C.F.R. Part V, including to any person whose property and interests in property are blocked.  Further, all property and interest in property related to the vessel that were previously blocked pursuant to Executive Order 13,382 or 31 C.F.R. Part 544 remain blocked.  The License also notes that, if the vessel is sold pursuant to judicial sale, the purchaser can provide OFAC with evidence demonstrating that the basis for the blocking is no longer applicable so as to expedite its removal from the SDN list. 

C.    Burma

As part of a general easing of sanctions on Burma, OFAC issued General License No. 19[85] of the Burmese Sanctions Regulations[86] on February 22, 2013.  This License authorizes all transactions involving Asia Green Development Bank, Ayeyarwady Bank, Myanma Economic Bank, and Myanma Investment and Commercial Bank.  However, this License does not cover any new investment[87] in Burmese resource development, even if the transaction is conducted with or through one of the aforementioned banks.  In addition, General License No. 19 does not authorize the provision of financial services in connection with security services to the Burmese Ministry of Defense, or any armed group, and does not authorize the importation of Burmese jade or rubies, or any jewelry containing those gems.

D.    Syria

1.    General License No. 16

OFAC issued General License No. 16 on March 14, 2013, to allow increased financial support for the National Coalition of Syrian Revolutionary and Opposition Forces (the "Coalition").[88]  According to a Treasury spokesperson, this License allows U.S. individuals, companies, and financial institutions to contribute funds "for a wide range of activities, including reconstruction efforts and political organization."[89]  Any transfer of funds must be conducted through the Coalition’s office in Washington, D.C., using a licensed account at a U.S. financial institution.  The License does not permit the export, sale, or supply of any item listed on the United States Munitions List.[90]  Furthermore, the License does not authorize transactions with any Coalition group designated as a terrorist organization, such as al-Nusrah.[91]

2.    General License No. 11A

On July 12, 2013, OFAC issued Syria General License No. 11A,[92] which replaces General License No. 11.  The new General License authorizes nongovernmental organizations to export or reexport services in support of particular activities to Syria that would otherwise be prohibited by section 2 of Executive Order 13,582.[93]  Such activities include those supporting humanitarian projects to meet basic human needs in Syria; those supporting democracy building in Syria; those supporting education in Syria; those supporting non-commercial development projects directly benefiting the Syrian people; and those supporting the preservation and protection of cultural heritage sites in Syria. 

The General License authorizes certain U.S. financial institutions to process transfers of funds on behalf of U.S. or third country NGOs, provided that the transfer is not by, to, or through the Government of Syria or a person whose property is blocked pursuant to a number of Executive Orders.  It also authorizes NGOs to engage in transactions with the Government of Syria if they are necessary for the listed humanitarian activities, including, for example, the payments of taxes and fees.  The General License does not authorize the export or reexport of services or charitable donations to the Government of Syria or any other person blocked pursuant to a number of Executive Orders.  

In addition, U.S. persons engaged in transactions related to activities supporting the preservation and protection of cultural heritage sites in Syria must submit quarterly reports providing information about the parties involved, the value of the transactions, the services provided, and the dates of the transactions. 

E.    Sudan

On April 15, 2013, OFAC issued General License No. 1[94] of the Sudanese Sanctions Regulations.[95]  This License authorizes several academic and professional exchanges between the United States and Sudan.  These include academic exchange programs between U.S. and Sudanese academic institutions, even those which would otherwise be considered part of the Government of Sudan, and student exchange programs for undergraduate or graduate academic credit.  The License also permits U.S. persons to provide teaching services in fields such as humanities, law, public health, and business at Sudanese academic institutions, as well as to conduct noncommercial academic research.  U.S. academic institutions may also recruit, hire, and employ teachers from Sudanese academic institutions, provide scholarships to Sudanese students to allow them to participate in academic exchange programs, and administer standardized tests such as the SAT, ACT, TOEFL, and LSAT in Sudan.  Likewise, U.S. financial institutions are permitted to process transfers of funds and student loan payments for Sudanese students pursuant to an academic exchange program.  Finally, General License No. 1 permits 501(c)(3) nonprofit organizations, as well as nonprofit legal and medical associations, research institutions, and academic programs, to provide not-for-profit "professional training seminars" on topics such as sustainability, education, health, and civics, as well as to conduct noncommercial research.

However, it is important to note that General License No. 1 does not authorize the export of any goods, technology, or services requiring licensing by another federal agency.  These include items listed on the Commerce Control List (CCL), such as laptops, computers, cell phones, and other handheld devices.  Academic institutions may release certain computer software or devices to students, so long as it does not otherwise require a license and is ordinarily incident and necessary to the educational program.  In addition, technology and physical sciences are absent from the list of permissible disciplines for teaching services and professional training seminars.

F.    Zimbabwe

After the successful passage of Zimbabwe’s constitutional referendum in March 2013, which, among other provisions, limits the power of the presidency,[96] OFAC effectively lifted sanctions against two Zimbabwean banks by issuing General License No. 1 on April 24, 2013.[97]  The License permits transactions involving the Agricultural Development Bank of Zimbabwe and Infrastructure Development Bank of Zimbabwe, provided that the transactions do not also involve a party already blocked by sanctions.  More sanctions may be lifted in the future as part of an "action for action" strategy to promote democratic reform in Zimbabwe.[98]

G.    Global Terrorism Sanctions (SDGT), Terrorism Sanctions (SDT), Foreign Terrorist Organization (FTO) Sanctions Regulations:  The Palestinian Authority

In response to the announced resignation of Palestinian Authority Prime Minister Salam Fayyad, OFAC issued General License No. 7a, clarifying the definition of "Palestinian Authority."[99]  The term "Palestinian Authority," as stated in this License, has been expanded  to include "the Palestinian Authority government of President Mahmoud Abbas and Prime Minister Salam Fayyad, or any successor Prime Minister appointed by President Abbas, including all branches, ministries, offices, and agencies (independent or otherwise) thereof" (emphasis added).  This License does not change the substantive sanctions regulations involving the Palestinian Authority.

V.    GOVERNMENT AGENCY GUIDANCE

A.    Advisory:  Use of Exchange Houses and Trading Companies to Evade U.S. Economic Sanctions Against Iran

On January 10, 2013, OFAC issued an advisory on the use of exchange houses and trading companies, alerting U.S. institutions to practices intended to circumvent U.S. and international economic sanctions concerning Iran.[100]  The advisory gave several examples of these evasion practices:  Omitting references to Iranian addresses; omitting the names of Iranian persons or entities in the originator or beneficiary fields; and transmitting funds from an exchange house or trading company without referencing the involvement of Iran or designated persons.

OFAC also highlighted fact patterns that U.S. financial institutions might encounter. For example,

A trading company attempts to send a payment through the United States on behalf of Company Z with an address in Iran.  The payment is stopped for review by the U.S. financial institution’s filter due to the Iranian address on the payment, and is ultimately blocked or rejected in accordance with U.S. sanctions.  The trading company later resends the funds in a payment of identical or similar value on behalf of Company Z, only this time the company’s address has been altered to reflect a non-sanctioned jurisdiction.[101]

OFAC identified measures U.S. institutions can take to mitigate the risk of processing transactions designed to evade U.S. sanctions.[102]  Those measures include:  1) monitoring payments involving third-party exchange houses or trading companies that may be processing commercial transactions related to Iran; 2) conducting account and/or transaction reviews for individual exchange houses or trading companies that have repeatedly violated or attempted to violate U.S. sanctions against Iran; and 3) communicating with correspondents that maintain accounts for, or facilitate transactions on behalf of, third-country exchange houses or trading companies in order to request additional information and/or alert them to these practices.

B.    Guidance:  Iran Threat Reduction and Syria Human Rights Act of 2012

On February 6, 2013, OFAC updated its FAQ to include a section dealing with Section 504 of the TRA, which expands the scope of sanctionable transactions with the Central Bank of Iran and designated Iranian financial institutions.[103]   Section 504 of the Act, which took effect on February 6, 2013, amends the NDAA in several ways.  Most notably, it narrows the NDAA’s significant reduction exception to (a) exempt from sanctions only transactions that conduct or facilitate bilateral trade in goods or services between the country granted the exception and Iran, and (b) require that funds owed to Iran as a result of the bilateral trade be credited to an account located in the country granted the exception and not be repatriated to Iran.[104]

The OFAC FAQ page also addresses questions related to section 4 of the Executive Order that authorizes the implementation of certain sanctions set forth in the TRA. In particular, the Order prohibits foreign subsidiaries of U.S. entities from knowingly violating the Iranian Transactions Regulations, and imposes civil penalties on the U.S. parent company for any such violations.

C.    Clarifying Guidance:  Humanitarian Assistance and Related Exports to Iranian People

On February 6, 2013, OFAC published clarifying guidance on humanitarian assistance and related exports to Iranian people.[105]  The guidance "provides an overview of current policies with respect to humanitarian assistance and exports to the Iranian people for U.S. persons and financial institutions as well as for third-country financial institutions."[106]  Under U.S. law, the sale and export of nearly all types of food, medicine, and basic medical supplies to Iran are broadly authorized.  Some types of humanitarian exports may be authorized, as long as they meet specific OFAC licensing requirements.  By extension, financial institutions that process or facilitate such transactions are generally permitted to do so by U.S. law.

The clarifying guidance is divided into two parts. In Part I, the clarifying guidance gives an overview of policies with respect to humanitarian assistance, remittances and exports to the Iranian people, and also provides guidance for license applications.[107] In Part II OFAC "provides guidance for those seeking to determine their eligibility to engage in activities already authorized by general license or that are exempt from sanctions."[108]  Part II further identifies specific regulations that U.S. persons should consult when considering certain authorized transactions.

VI.    REPORTS

A.    Trade Sanctions Reform and Export Enhancement Act:  4Q FY 2012

Between July 1 and September 30, 2012, OFAC received 423 licensing applications requesting authorization to export agricultural commodities, medicine, and medical devices to Iran and Sudan.  OFAC issued 495 licensing determinations (230 of which were received in the same quarter).  Of the 495 determinations, 321 licenses were issued, and of the 321 issued licenses, 295 involved products for Iran and 27 for Sudan. [109]

B.    2012 Terrorist Assets Report

On May 28, 2013, OFAC released the 2012 Annual Report on Assets in the United States of Terrorist Countries and International Program Designees.[110]  The purpose of the Report is to update Congress "concerning the nature and extent of assets held in the United States by terrorism-supporting countries and organizations engaged in international terrorism."[111]  As of December 31, 2012, "51 organizations or groups had been designated as [Foreign Terrorist Organizations (FTOs)] by the Department of State."[112]  These FTOs include 10 Middle Eastern terrorist organizations as well as terrorist organizations located in South America, Europe, Asia, and Africa.  As of December 31, 2012, blocked assets relating to international terrorist organizations totaled $21,826,293.[113]

The Report further identifies and designates organizations inside the United States that are branches of, or have been determined to provide support to or be owned or controlled by, designated terrorist groups or individuals.[114]  Additionally, the Report identifies assets relating to state sponsors of terrorism. The states currently designated as sponsors of terrorism are:  Cuba, Iran, Sudan, and Syria.[115]

VII.    DESIGNATIONS

A.    List of Entities Sanctioned Under the Iran Sanctions Act

List of persons sanctioned under the ISA, as amended by the Comprehensive Iran Sanctions Accountability, and Divestment Act (CISADA) and TRA, or under TRA is available at:  http://www.state.gov/e/eb/tfs/spi/iran/entities/index.htm.  There were seven designations in 2013:

• Bimeh Markazi-Central Insurance of Iran (Iran).[116]  Sanctions prohibit: procurement contracts with the USG; export assistance from the Export-Import Bank of the United States; financial transactions subject to U.S. jurisdiction; transactions with respect to property and interests in property subject to U.S. jurisdiction; issuance of visas to corporate officers of the sanctioned entity.
• Dimitris Cambis (Greek national).[117]  Sanctions prohibit:  procurement contracts with the USG; export assistance from the Export-Import Bank of the United States; financial transactions subject to U.S. jurisdiction; transactions with respect to property and interests in property subject to U.S. jurisdiction; foreign exchange transactions subject to U.S. jurisdiction.
• Ferland Company Limited (Cyprus and Ukraine).[118]  Sanctions prohibit:  financial transactions subject to U.S. jurisdiction; transactions with respect to property and interests in property subject to U.S. jurisdiction; foreign exchange transactions subject to U.S. jurisdiction; issuance of visas to corporate officers of the sanctioned entity; private U.S. bank loans exceeding $10 million any 12-month period.
• Impire Shipping (Greece).[119]  Sanctions prohibit:  procurement contracts with the USG; export assistance from the Export-Import Bank of the United States; financial transactions subject to U.S. jurisdiction; transactions with respect to property and interests in property subject to U.S. jurisdiction; issuance of visas to corporate officers of the sanctioned entity.
• Jam Petrochemical Company (Iran).[120]  Sanctions prohibit:  financial transactions subject to U.S. jurisdiction; transactions with respect to property and interests in property subject to U.S. jurisdiction; foreign exchange transactions subject to U.S. jurisdiction.
• Kish Protection and Indemnity (Iran).[121]  Sanctions prohibit:  procurement contracts with the USG; export assistance from the Export-Import Bank of the United States; financial transactions subject to U.S. jurisdiction; transactions with respect to property and interests in property subject to U.S. jurisdiction; issuance of visas to corporate officers of the sanctioned entity.
• Niksima Food and Beverage JLT (Dubai).[122]  Sanctions prohibit: financial transactions subject to U.S. jurisdiction; transactions with respect to property and interests in property subject to U.S. jurisdiction; foreign exchange transactions subject to U.S. jurisdiction.

VIII.    Major OFAC Enforcement Actions

1.    Ellman International, Inc.[123]

Ellman International, Inc. agreed to settle apparent violations of the Iranian Transactions and Sanctions Regulations[124] (ITSR), 31 C.F.R. part 560.  Under prior ownership and management, Ellman had exported medical equipment to Iran and purchased the services of a physician from approximately 2005 to 2008.  The transactions totaled $317,211 in value, in violation of § 560.204 and § 560.201 of the ITSR.  The base penalty was $426,000.  Upon acquisition of the company, Ellman’s new owners reported the violations to OFAC, but the submission was determined not to be a voluntary disclosure under OFAC Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, Appx. A.  OFAC noted the active involvement by senior management (under prior ownership); the absence of a sanctions compliance program; the likelihood that the transactions were eligible for OFAC licenses; and, substantial cooperation on the part of the new owners and management.  Ellman agreed to pay $191,700.

2.    Dal-Tech Devices, Inc.[125]

OFAC alleged that Dal-Tech Devices, Inc. violated the ITSR by selling radio frequency measurement devices worth $3,226 to a firm in Austria with the knowledge that the items were intended for transport to Iran.  When the devices were returned, undelivered, from Austria, Dal-Tech sent the goods to Slovenia, from where they were shipped to Iran.  OFAC found the matter egregious.  The base penalty was $500,000.  The settlement coincides with a Deferred Prosecution Agreement with the United States Attorney’s Office for the District of Delaware.  Dal-Tech Devices has agreed to pay $10,000 to settle the violations.  The settlement amount reflects knowing and willful conduct by an employee; knowledge, or reason to know, on the part of prior management that the goods were destined for Iran; and the absence of prior OFAC enforcement actions.

3.    Offshore Marine Laboratories[126]

Offshore Marine Laboratories (OML) allegedly violated the ITSR and Executive Order 13,382, "Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters," by exporting eight shipments of spare parts for offshore drilling rigs to the United Arab Emirates.  The shipments were intended to supply an offshore rig in Iranian waters and were sent between July 2007 and July 2008.  The rig owner and operator are located in Iran.  Five of the shipments occurred after the rig owner’s property and property interests were blocked under E.O. 13,382.  The base penalty was $167,000.  To settle the case, OML agreed to pay $97,695.  In establishing the settlement amount, OFAC considered the harm to the objectives of the U.S. sanctions program, as the transaction aided Iranian petroleum resources.  OFAC also noted that OML had:  no compliance program; no prior OFAC violations; provided substantial cooperation during the investigation; and taken the appropriate remedial measures.

4.    American Optisurgical, Inc.[127]

OFAC alleged that American Optisurgical, Inc. (AOI) violated the ITSR and the Reporting, Procedures, and Penalties Regulations, 31 C.F.R. part 501 (RPPR) when it exported or attempted to export unlicensed medical goods and services to Iran or to a third party with knowledge or reason to know that the goods were intended for Iran.  Thirty-six such incidents are alleged to have occurred between 2005 and 2010.  American Optisurgical is also alleged to have failed to fully respond to two administrative subpoenas issued by OFAC in 2009.  The transactions were valued at approximately $202,765, the base penalty was $449,000 and AOI agreed to pay $404,100 to settle potential civil liability.  In reaching this agreement, OFAC considered a number of factors, including the willful or reckless conduct of AOI; the direct involvement of senior management; the active concealment of the violations by the company; and AOI’s continued exports notwithstanding receipt of OFAC administrative subpoenas.  Among the mitigating factors:  AOI had not previously been subject to an OFAC enforcement action; the exports likely could have been licensed by OFAC; and AOI agreed to toll the statute of limitations.

5.    Bank of Guam[128]

The Bank of Guam allegedly twice violated the ITSR by processing wire transfers related to the delivery of furniture to Iran.  The Bank of Guam agreed to pay $27,000 to settle the violations.  As payment for delivery of furniture and other goods, the Bank of Guam originated a $2,265 wire transfer, on behalf of a customer, to a trading company in the United Arab Emirates.  The transfer initially was rejected by a U.S. financial institution because of the reference to Iran in the originator to beneficiary portion of the payment message.  The customer successfully made that wire transfer and one additional transfer after a Bank of Guam employee advised the customer to remove references to Iran in the payment message.  By originating the wire transfers, the Bank of Guam may have violated OFAC’s regulatory ban on engaging in transactions related to "goods, technology, or services for export, reexport, sale, or supply, directly or indirectly, to Iran or the Government of Iran."  31 C.F.R. § 560.206.  The bank did not voluntarily disclose the violations.  The base penalty was $20,000.  The settlement reflects an aggravation to the base penalty as a result of the recklessness of the bank’s staff in processing transfer notwithstanding the knowledge of the purpose of the payment, and in advising the customer to remove the reference to Iran from the payment detail.  OFAC also noted the lack of any other violations in the preceding five years.

6.    Tung Tai Group[129]

The Tung Tai Group has agreed to pay $43,875 to settle alleged violations of the Cuban Assets Control Regulations, 31 C.F.R. part 515 (CACR).  In August 2010, Tung Tai entered into contracts to buy and sell scrap metal originating in Cuba.  Although the violation was not voluntarily disclosed by Tung Tai, the company has no history of OFAC regulations violations.  As a result, the settlement was reduced from the base penalty amount of $65,000.

7.    EGL, Inc.[130]

EGL, Inc., now part of the CEVA Logistics group of companies (CEVA), is alleged to have violated both the CACR and the ITSR.  In violation of the ITSR, affiliates of EGL, which by then was part of CEVA, allegedly acted as the freight forwarder for ten shipments of supplies to an oil drilling rig located in Iranian coastal waters from August to October of 2008.  The rig was operated by Petropars, a company affiliated with the National Iranian Oil Company.  Separately, from 2005 to 2008, EGL’s foreign affiliates engaged in 280 transactions providing freight forwarding services for shipments to and from Cuba.  EGL has agreed to pay $139,650 to settle potential liability related to these events after it made a voluntary self-disclosure of the alleged CACR violations but did not disclose the alleged ITSR violations.  The agreed payment was reduced from a base penalty of $206,889 after OFAC’s consideration of EGL’s substantial cooperation.  The company agreed to toll the statute of limitations and produced responsive materials.  However, OFAC also noted that the transactions had resulted in significant harm to OFAC sanctions programs, and found that EGL had reason to know that the supply shipments were destined for a rig owned by an Iranian company.

8.    Maritech Commercial Inc.[131]

OFAC alleged that Maritech Commercial, Inc. violated the Weapons of Mass Destruction Proliferators Sanctions Regulations by providing fuel inspection services on board five vessels affiliated with the Islamic Republic of Iran Shipping Lines (IRISL) between April 2009 and June 2010.  The vessels had been identified as blocked property and were put on OFAC’s list of Specially Designated Nationals and Blocked Persons.  The IRISL has been known to attempt to evade sanctions and had changed the names on four of the vessels in question to avoid detection, but Maritech Commercial failed to verify the ships’ identities through their unique International Maritime Organization (IMO) numbers.  At the time, Maritech Commercial did not screen serviced ships by their IMO numbers.  Maritech Commercial did not voluntarily disclose the violations.  OFAC concluded that the violations were non-egregious.  The base penalty was $32,000.  To settle potential civil liability, Maritech Commercial agreed to pay $20,800.  OFAC considered a number of factors in reaching the settlement:  OFAC found that the company acted recklessly; Maritime Commercial lacked a sanctions compliance program at the time of the alleged violations; the company had no history of prior OFAC violations; and Maritech was a small company.

9.    SAN Corporation[132]

OFAC alleged that SAN Corporation violated the ITSR on or about September 30, 2007.  SAN allegedly sold nutritional supplements to an entity in Kuwait with knowledge that the supplements were intended for use in Iran.  The base penalty amount was $25,000.  SAN agreed to settle potential civil liability by paying $22,500.  In reaching the settlement, OFAC considered the following factors:  SAN acted recklessly when it sold the goods knowing that they were destined for Iran and notwithstanding notice from the Iranian end user of the need for an OFAC license.  Further, SAN did not fully cooperate with OFAC’s investigation.  OFAC also noted that SAN had no history of prior OFAC violations, and SAN could have sought a license under the Trade Sanctions Reform and Export Enhancement Act of 2000 to legally sell the goods.

10.    American Steamship Owners Mutual Protection and Indemnity Association[133]

American Steamship Owners Mutual Protection and Indemnity Association (The American Club) is a mutual insurance association for merchant ship owners and charterers.  OFAC alleged that The American Club committed fifty-five violations in connection with three different regulation groups:  the CACR, the ITSR, and the Sudanese Sanctions Regulations (SSR).  The American Club allegedly processed three Protection and Indemnity (P&I) insurance claims totaling approximately $40,584 between January 2004 and June 2006 involving Cuba.  It processed eighteen P&I claims, issued six Letters of Undertaking/Guarantee, and issued one letter of indemnity as security or countersecurity for a Letter of Undertaking/Guarantee involving Sudan.  Those events took place between November 2003 and March 2007 and totaled approximately $686,000.  Finally, The American Club processed twenty-one P&I insurance claims, one Letter of Undertaking/Guarantee, and issued five letters of indemnity involving Iran and totaling approximately $488,000.  The total base penalty amount for all the alleged violations was $1,729,000.  The company agreed to settle potential civil liability with OFAC by paying $348,000.

In determining the settlement amount, OFAC accounted for various circumstances of the alleged violations.  The American Club had actual knowledge or reason to know that some of the actions involved sanctioned countries, and the company is a sophisticated commercial enterprise.  OFAC found mitigating factors as well.  The American Club did not appear to act willfully or recklessly; it took remedial steps and cooperated with OFAC; the P&I claims and LOUs may have been licensable at the time of the transactions; and The American Club had had no other violations during the preceding five years.

11.    ATP Tours, Inc.[134]

ATP Tours, Inc. allegedly violated the ITR by facilitating or making eighteen separate salary payments to an individual who is ordinarily a resident of Iran.  The payments were completed between May 2007 and July 2010 for services rendered and expenses incurred in relation to ATP tennis tournaments that the individual officiated.  OFAC determined that these actions were not self-reported by ATP, alleged that such payments violated 31 C.F.R. §§ 560.206 and 560.208, and concluded that the alleged violations were non-egregious.  The base penalty was $135,000.  To settle potential civil liability for the alleged violations, ATP agreed to pay $48,600.  The settlement reflects OFAC’s consideration of the aggravating and mitigating circumstances.  Contributing to the aggravating circumstances was the fact that eight of the eighteen payments were completed after OFAC had issued a "Warning Letter" to ATP on August 11, 2008, demonstrating reckless disregard for U.S. sanctions obligations.  Additionally, ATP did not have an OFAC compliance program.  Among the mitigating circumstances:  ATP was a non-profit, member-based organization; in the preceding five years ATP had not been subject to an OFAC enforcement action; ATP cooperated with OFAC’s investigation; ATP established an OFAC compliance plan;  and the alleged violations represented very low harm to the overall sanctions program.

12.    Wells Fargo Bank, N.A.[135]

Wells Fargo Bank, N.A. settled any potential civil liability with OFAC for allegedly violating the Foreign Narcotics Kingpin Sanctions Regulations, 31 C.F.R. part 598, by maintaining accounts and processing transactions for two individuals who had been designated pursuant to the Kingpin Act.  Wells Fargo opened accounts for Claudia Aguirre Sanchez prior to her designation in December 2007 as "Claudia Aguirre."  Although Aguirre Sanchez provided to Wells Fargo a U.S. address and a U.S. Social Security Number (SSN) when she opened the accounts, the date of birth that she provided at the time matched the date of birth listed on the SDN List.  In addition, Wells Fargo opened accounts for Carlos Antonio Ruelas Topete after Ruelas Topete was designated under the name "Carlos A. Ruelas."  Again, although Ruelas Topete provided a U.S. address and a U.S. SSN, the date of birth provided to the bank matched the date of birth included on the SDN List.  Wells Fargo processed 58 transactions with a total value of $22,211.94 on behalf of Aguirre Sanchez, and 756 transactions with a total value of $53,780.39 on behalf of Reulas Topete.  The total base penalty was $37,996.

Wells Fargo agreed to settle the potential civil liability by paying $23,937.  OFAC determined that Wells Fargo had voluntarily disclosed the apparent violations and OFAC had concluded that the conduct was non-egregious.  Among the other mitigating considerations identified by OFAC:  Wells Fargo had not had a violation in the five years preceding the transactions at issue; the transactions may have been licensable at the time of the violations; Wells Fargo cooperated in the investigation; and Wells Fargo had implemented significant remedial measures.  In terms of aggravating considerations, OFAC noted that Wells Fargo was a sophisticated financial institution and had not incorporated screening based on date of birth into its compliance measures.

13.    Intesa Sanpaolo S.p.A.[136]

Intesa Sanpaolo S.p.A. allegedly violated the ITR, the CACR and the SSR.  Intesa maintained a customer relationship with Irasco S.r.l., an Italian company owned or controlled by the Government of Iran.  OFAC determined that Intesa failed to identify Irasco as fitting the definition of GOI.  Further, Intesa did not take adequate precautions to prevent the processing of transactions for or on behalf of Irasco that terminated in the United States or with U.S. persons.  Intesa processed 31 wire transfers totaling $3,142,565 between November 2004 and December 2006.  The base penalty for the apparent violations of the ITR was $3,371,000.

In apparent violation of the CACR, between October 2004 and March 2008, Intesa processed 53 wire transfers, totaling $1,643,326, involving Cuba.  The base penalty for the alleged violations of the CACR was $1,867,000.  In apparent violation of the SSR, between November 2004 and October 2007, Intesa processed 67 funds transfers, totaling $2,858,065, involving Sudan.  The base penalty of the apparent violations of the SSR was $4,124,000.

Accordingly, the total base penalty for the apparent violations of the ITR, the CACR and the SSR was $9,362,000.  The apparent violations were settled for $2,949,030.  The settlement amount reflected aggravating factors including Intesa’s failure to maintain an adequate compliance program in connection with U.S. sanctions; OFAC also noted that Intesa knew or had reason to know that the customer met the definition of the GOI and that related payments to the United States violated the ITR; the payments caused harm to the integrity of the U.S. sanctions programs; and Intesa was a commercially sophisticated, international financial institution.  OFAC also found mitigating factors.  OFAC noted that Intesa’s conduct was not willful or reckless; no Intesa managers or supervisors had actual knowledge or awareness; Intesa cooperated with the investigation; Intesa implemented remedial measures; and Intesa had not been subject to an enforcement action in the five years preceding the transactions at issue.

14.    Stanley Drilling Equipment & Supply, Inc.[137]

Stanley Drilling Equipment & Supply, Inc. allegedly violated the ITR.  Between June 2008 and October 2012 Stanley Drilling exported two shipments of goods and attempted to export four shipments to the UAE with reason to know that the shipments were intended for an oil drilling rig in Iranian waters.  The total value of the goods was $93,329, and the base penalty was $156,000.  Stanley Drilling did not voluntarily disclose the alleged violation, and OFAC concluded that the violations were non-egregious.

The matter was settled for $84,240.  The settlement reflects several considerations.  Stanley Drilling did not have an OFAC compliance program.  Further, because of the connection to Iranian petroleum resources, the transactions were particularly harmful to U.S. sanctions.  The harm to the objectives of the U.S. sanctions programs was reduced, however, because four of the shipments were detained and did not reach their destination.  OFAC also noted that while Stanley Drilling had reason to know of the destination of the goods, it did not have actual knowledge.  Finally, OFAC noted that Stanley Drilling was a small company and had not previously been found to have violated OFAC sanctions.

15.    American Express Travel Related Services Company, Inc.[138]

American Express Travel Related Services Company, Inc. (TRS) settled any potential civil liability with OFAC for allegedly violating the Cuban Assets Control Regulations (CACR) when, between December 2005 and November 2011, TRS subsidiaries and foreign branches issued 14,487 tickets for travel between Cuba and countries other than the United States.  Many of the travel destinations maintain blocking statutes that prohibit compliance with the CACR, including by U.S. persons.  The matter was voluntarily disclosed to OFAC by TRS.  The base penalty for the alleged violations was $3,629,250.  The matter was settled for $5,226,120.

In 1995 and 1996, TRS was investigated for what OFAC described as "similar apparent violations of the CACR" in connection with Cuba-related travel services by a then recently acquired subsidiary.  According to OFAC, it had notified TRS that the conduct of the acquired subsidiary constituted apparent violations of the CACR. 

The prior investigation was listed as an aggravating factor, with OFAC alleging that TRS failed to implement effective procedures for detecting Cuba-related travel until 2010 even though it had agreed to do so when the 1995-1996 matter was pending.  Other alleged aggravating factors included:  U.S. management allegedly should have known that the conduct at issue would or might take place; harm caused to U.S. sanctions program objectives; TRS’s status as one of the largest and most sophisticated travel services provider for authorized Cuba travel; alleged significant sanctions history during the preceding 5 years; alleged inadequate compliance programs; and alleged ongoing booking of Cuba travel for corporate clients during a "wind-down period" following the 2010 disclosure.  The mitigating factors included TRS’s substantial cooperation, including by producing records and information to OFAC, and the absence of a penalty notice or Finding of Violation in the five years preceding the transactions at issue.  OFAC gave neither aggravating nor mitigating weight to the blocking statutes.

16.    Communications and Power Industries LLC[139]

Communications and Power Industries LLC (CPI) allegedly violated the Iran Transactions and Sanctions Regulations when between March 2006 and October 2010 the Swiss branch office of CPI’s U.S. subsidiary:  Sold x-ray generators to an entity in Iran in 30 instances; twice attempted to sell x-ray generators and a medical digital imaging workstation to an entity in Iran; directed its Canadian affiliate to make three shipments of x-ray generators and one shipment of automatic exposure control field kits to an entity in Turkey at the request of an entity in Iran; and referred to the Canadian affiliate an order from an entity in Iran for a medial digital imaging workstation and one x-ray generator.  The base penalty was $1,100,096 and settled for $346,530.  CPI had voluntarily disclosed the matter and OFAC determined that the violations were non-egregious.

OFAC concluded that CPI displayed reckless disregard for U.S. sanctions law in delaying an assessment of the applicability of U.S. sanctions to the Swiss branch of the subsidiary; CPI lacked the appropriate OFAC compliance program at the time of the apparent violations.  OFAC also noted that CPI undertook a thorough investigation upon discovering the apparent violations; implemented remedial measures; and had no history of violations.  OFAC further noted that the apparent violations represented a small share of CPI’s sales; the sales probably could have been licensed under existing OFAC policy; and CPI cooperated with the investigation.

17.    World Fuel Services Corporation[140]

OFAC alleged that World Fuel Service Corporation (World Fuel) violated the Iranian Transactions Regulations (ITR) when it facilitated a sale by a non-U.S. affiliate of fuel for a vessel at a port in Iran on or about June 23, 2008.  OFAC further alleged that World Fuel violated the Sudanese Sanctions Regulations (SSR), when its U.S. affiliate facilitated services and fuel purchases for an aircraft that stopped in Khartoum, Sudan on or about January 29, 2009.  Finally, World Fuel allegedly violated the Cuban Assets Control Regulations (CACR) when two U.S. subsidiaries coordinated services for 30 unlicensed flights to Cuba between March 2007 and April 2009. 

The total value of the transactions was $79,219, the base penalty $73,151, and the violations were settled for $39,501.  World Fuel had voluntarily disclosed the violations of the ITR and SSR, but not the CACR.  OFAC concluded that the violations were non-egregious.  In establishing the settlement, OFAC considered the fact that World Fuel had no prior violations; World Fuel cooperated in the investigation; and World Fuel enhanced its compliance program.

18.    Finans Kiymetli Madenler Turizm Otomotiv Gida Tekstil San. Ve Tic[141]

Finans Kiymetli Madenler Turizm Otomotiv Gida Tekstil San. Ve Tic ("Finans"), a Turkey-based trading company, allegedly violated the Iranian Transactions and Sanctions Regulations (ITSR) when, between February 2012 and May 2012, it originated at least three electronic funds transfers, processed through financial institutions located in the United States, for the benefit of the Government of Iran and/or Iranian persons.  The transactions had a total value of $257,808.  Two of the transactions were blocked by the U.S. financial institution.  OFAC concluded that Finans violated the prohibition on the export of services directly or indirectly from the United States to Iran or the Government of Iran.  Finans did not voluntarily disclose the violations, and OFAC determined that the violations constituted an egregious case.  OFAC assessed the base penalty, $750,000.

Among the factors OFAC considered:  Finans was reckless in concealing or omitting material information in the funds transfers; management had at least reason to know of the conduct; the conduct, which included processing transaction on behalf of an oil and gas development company in Iran, harmed and possibly significantly harmed, U.S. foreign policy objectives; Finans did not have an OFAC compliance program; Finans did not cooperate with the investigation; and Finans had not received a Penalty Notice or Finding of Violation during the five years preceding the transactions at issue.  OFAC noted the deterrent value of the penalty with respect to foreign financial institutions that maintain accounts for third-country trading companies. 

19.    Alma Investment LLC[142]

Alma Investment LLC ("Alma"), a UAE-based investment company, allegedly violated the Iranian Transactions and Sanctions Regulations by originating at least six electronic funds transfers between September 2009 and February 2010, with a total value of $103,283, that were processed though financial institutions located in the U.S. for the benefit of persons in Iran.  OFAC concluded that Alma, which it was believed also served as a general trading company, violated the prohibition against the exportation of services, directly or indirectly, from the U.S. to Iran or the Government of Iran.  The violations were not voluntarily disclosed and OFAC concluded that the violations were egregious.  OFAC assessed the amount of the base penalty, $1.5 million.

In establishing the penalty, OFAC noted that Alma acted recklessly or even willfully in concealing material information concerning the funds transfers; management had actual knowledge and/or reason to know of the conduct, and that Alma had multiple associations with Iranian entities.  OFAC concluded that Alma’s conduct resulted in harm and possibly significant harm to U.S. sanctions objectives; Alma did not have a compliance program; and Alma did not cooperate with the investigation.  OFAC also noted that such a penalty could encourage greater due diligence by foreign financial institutions that maintain accounts for third-country trading companies/money transmitters.

20.    Ameron International Corporation[143]

OFAC conducted an investigation into whether Ameron International Corporation ("Ameron") allegedly violated that Iranian Transactions and Sanctions Regulations (ITSR) when it: allegedly approved capital expenditures requests from Dutch and Singapore subsidiaries to purchase equipment needed to fulfill orders for a project in Iran; allegedly referred to foreign subsidiaries business opportunities that Ameron could not have performed directly under the ITSR; and allegedly provided testing services from a U.S. facility to the Singapore subsidiary with reason to know that the services would be provided to an entity located in Iran.  OFAC also investigated whether Ameron allegedly violated the Cuban Assets Control Regulations when the Colombian branch of the U.S. subsidiary allegedly sold concrete pipe to a consortium that included a Cuban partner.  Per a publicly disclosed settlement, the matters were settled for $434,700 (with a total base penalty of $690,000).

21.    KMT Group AB[144]

KMT Group AB (KMT) of Sweden, on behalf of two subsidiaries, agreed to settle apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR) for $125,000.  KMT’s U.S. based subsidiary manufactured high pressure water jetting pump units for industrial pipe cleaning, surface preparation, hydrostatic testing and hydro demolition, and a German affiliate was the sales agent.  The German subsidiary attempted to export nine pumps from the U.S. to Iran with the knowledge that they were intended specifically for reexport to the South Pars Industrial Gas Complex in Iran.  U.S. Department of Homeland Security’s Customs and Border Protection (CBP) seized the pumps and partial payment for the pumps upon redelivery to the U.S.  The German subsidiary had forfeited two of the pumps and the partial payment.

The matter was not voluntarily disclosed; OFAC did not consider this to be an egregious case.  The base penalty was $500,000.  In establishing the settlement, OFAC noted that the German subsidiary displayed reckless disregard for U.S. sanctions, including failing to disclose to the U.S. subsidiary the final destination of the pumps.  OFAC also noted that the pumps had been seized by CBP before they could be shipped to Iran so there was no actual sanctions harm; partial payment of $579,026 had been seized; the German subsidiary had not had a penalty notice in the five years preceding the transactions at issue; the KMT group companies had taken remedial actions and had cooperated with the investigation.  OFAC noted that in addition to the $125,000 penalty, KMT had agreed not to contest the forfeiture proceedings in connection with the remaining seven pumps.

22.    Weatherford International Ltd.[145]

Weatherford International Ltd. and certain subsidiaries and affiliates (collectively Weatherford) agreed to settle apparent violations of the Cuban Assets Control Regulations , the Iranian Transactions and Sanctions Regulations and the Sudanese Sanctions Regulations.  Weatherford conducted 441 transactions worth $69,268,078 that provided oilfield equipment and services in connection with the Cuban government and/or blocked Cuban nationals, as well as travel-related transactions for Weatherford employees to and from Cuba, in apparent violation of the CACR.  The transactions occurred between 2005 and 2008.  In apparent violation of the ITSR, between 2003 and 2007 Weatherford provided oilfield services to Iran, including 100 transactions worth $23,001,770, involving the direct or indirect export of goods, technology and/or services to Iran, and/or the facilitation of those transactions by U.S. persons.  Finally, in apparent violation of the SSR, Weatherford conducted oilfield services business in Sudan in 2005 and 2006, including 45 transactions worth $295,846.  The transactions involved the direct or indirect export of goods, technology and/or services from the U.S. to Sudan.  The base penalty for the apparent violations of the CACR, ITSR and SSR was $107,089,941. 

Weatherford agreed to settle the apparent violations for $91,026,450.  Weatherford’s settlement with OFAC was part of a global settlement that included the Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Attorney’s Office for the Southern District of Texas (USAO).  The OFAC penalty will be deemed fully satisfied by the fines and penalties assessed pursuant to agreements with the USAO and the penalties paid to BIS.  The global settlement also includes Weatherford’s consent to external audits of its compliance efforts for 2012, 2013, and 2014.

OFAC noted aggravating factors:  OFAC found Weatherford’s conduct willful and indicative of a long-term pattern; certain executives and senior management knew or had reason to know of the conduct; the apparent violations resulted in significant harm to the long-term objectives of U.S. sanctions; Weatherford was a sophisticated oilfield services provider; and OFAC concluded that Weatherford’s compliance program at the time of the apparent violations was "substantially deficient."  OFAC noted mitigating factors:  Weatherford had not previously been the subject of an OFAC administrative action or received a penalty notice.  Weatherford took remedial measures; and Weatherford cooperated with the investigation by undertaking an internal investigation with the assistance of outside counsel, providing extensive documentation, and by agreeing to toll the statute of limitations.

23.    Compass Bank[146]

Compass Bank (Compass) of Birmingham, Alabama, originated a wire transfer of £8,900 (approximately $14,898) destined for a third-country company’s account in the United Kingdom.  The invoice indicated that the transaction was in payment for the shipment of a tractor from the U.K. to Omdurman, Sudan.  Compass compliance personnel reviewed the transaction and determined that it did not violate the SSR.  Compass concluded that there was no violation of the SSR because none of the parties was on the SDN List and because the conduct was authorized by a general license.  The conduct was not voluntarily disclosed; OFAC concluded that the matter was non-egregious.

The base penalty for the transaction was $25,000, and the matter was settled for $19,125.  OFAC noted that the transaction was rejected by another financial institution and so no benefit was conferred; Compass had not received a penalty notice or finding of violation during the preceding 5 years; and Compass took remedial action and cooperated with the investigation.  As aggravating factors, OFAC noted that Compass managers knew of the conduct and were aware that it implicated SSR concerns, and that the Compass compliance personnel demonstrated a lack of understanding of the SSR.

24.    Royal Bank of Scotland[147]

The Royal Bank of Scotland plc (RBS) settled alleged violations of the Cuban Assets Control Regulations, the Burmese Sanctions Regulations, Executive Order 13448 (Blocking Property and Prohibiting Certain Transactions Related to Burma) and/or the Tom Lantos Block Burmese JADE (Junta’s Anti-Democratic Efforts) Act,[148] the Sudanese Sanctions Regulations, and the Iranian Transactions Regulations.  The potential civil liability was settled for $33,122,307.

Between August 2005 and October 2009, RBS allegedly processed 24 wire transfers totaling $290,206 involving Cuba.  The base penalty for the alleged violations of the CACR was $780,000.  Between July 2005 and July 2009, RBS allegedly processed 46 wire transfers totaling  $375,946 in alleged violation of the BSR, Executive Order 13448, and/or the JADE Act.  The base penalty for the alleged Burma-related violations was $5,769,308.  Between July 2005 and August 2009, RBS allegedly processed 326 wire transfers totaling $32,469,380 in alleged violation of the SSR.  The base penalty for the alleged violations of the SSR was $54,860,306.  Between September 2005 and November 2009, RBS allegedly processed 38 wire transfers totaling $795,345 in alleged violation of the ITR.  The base penalty for the alleged violations of the ITR was $4,835,000.  The total base penalty for all alleged violations was $66,244,614 and the statutory maximum penalty was $132,489,228.

RBS voluntarily self-disclosed the alleged violations.  OFAC concluded that the alleged violations were egregious based on the following:  the conduct allegedly was reckless; several members of RBS management with oversight responsibilities in connection with the specific business units allegedly were aware of the conduct; the transactions allegedly conferred significant benefits to the sanctioned persons; RBS is a large, sophisticated financial institution; and RBS compliance policies and procedures allegedly were inadequate for purposes of ensuring U.S. sanctions compliance.  OFAC concluded that the penalty should be commensurate with the seriousness of the conduct and deter similar financial institutions for engaging in such conduct.  Among the mitigating factors that resulted in a reduction of the penalty:  RBS had not received a penalty notice or finding of violation in the five years prior to the first of the transactions at issue; RBS provided substantial cooperation to OFAC, including by conducting a historical review, providing comprehensive information to OFAC, and signing a tolling agreement which was extended multiple times; and RBS took remedial actions by prohibiting USD payments to certain sanctioned countries, engaging in a comprehensive effort to address all sanctions related issues across its business units, and initiating an effort to review its entire customer base.  OFAC further reduced the penalty given RBS’s agreement to settle its potential liability for the alleged violations.

The settlement with OFAC was part of a global settlement involving the Federal Reserve Board of Governors and the Department of Financial Services of the State of New York.  RBS’s obligation to OFAC will be deemed satisfied by payment of an equal or greater sum in penalties assessed by the Federal Reserve Board in connection with the same pattern of conduct.

25.    HSBC Bank USA, N.A.[149]

HSBC Bank USA, N.A. (HBUS) agreed to settle the potential civil liability associated with three apparent violations of the Global Terrorism Sanctions Regulations for $32,400.  In December 2010, HBUS allegedly received a funds transfer that originated in a third-country and was destined for HSBC Bank Middle East, Limited (HBME).  The originating institution’s customer allegedly was identified by HBUS’s interdiction software as a potential match to an SDN.  HBUS allegedly requested additional information concerning the transaction, and received an MT199 free format SWIFT message, which included additional information from the remitting institution.  At the time, HBUS’s interdiction software did not screen all SWIFT MT199 messages for potential sanctions matches, and so it did not detect a possible connection with a designated entity and owner.  An HBUS Compliance Officer allegedly did not manually screen the entity name and the owner or recognize them as potential SDNs.  HBUS allegedly processed the transaction. 

HBUS later allegedly processed two additional transfers:  $14,963 in January 2011 and $13,710 in April 2011.  Although no SDNs were referenced and each had a different originator from the prior transfer, the transfers allegedly noted the same order number and HBME account as the December 2010 transfer.

The total base penalty was $20,083.  OFAC concluded that the conduct was not egregious and that the violations did not result from willful or reckless conduct.  Among the mitigating factors:  The apparent violations were voluntarily disclosed by HBUS; HBUS took appropriate remedial measures and implemented a more robust compliance program; and HBUS had not received a penalty notice or Finding of Violation for similar apparent conduct in the five years prior to the earliest of the three transactions.  Among the aggravating factors:  HBUS personnel responsible for OFAC compliance allegedly were aware of the December transfer and allegedly had reason to be aware of the two following transfers; the violations resulted in a benefit to an SDN; HBUS is a large and sophisticated financial institution; HBUS allegedly initially submitted an incomplete response to the administrative subpoena; and HBUS allegedly did not screen MT 199 messages.  Additional mitigation was extended because of HBUS’s willingness to settle the alleged violations.

IX.             Major State Enforcement Actions

In addition to federal agencies, certain state agencies have aggressively enforced their own regulations on transactions with sanctioned entities.  In particular, the New York State Department of Financial Services (DFS), under the supervision of Superintendent Benjamin Lawsky, has pursued actions against financial institutions, sometimes independently of its federal counterparts.

A.    Royal Bank of Scotland

On December 11, 2013, DFS entered into a consent order with the Royal Bank of Scotland (RBS) PLC, whereby RBS agreed to pay DFS $50 million for allegedly conducting transactions with New York correspondent banks involving Iran, Sudan, and, to a lesser extent, other countries subject to sanctions.[150]  The settlement was based on RBS’s alleged processing of transactions through New York correspondent banks which allegedly were at odds with U.S. national security and foreign policy and raised safety and soundness concerns for regulators.  From 2002 until 2011, RBS allegedly conducted more than 3,500 transactions, valued at approximately $523 million, through New York correspondent banks for Sudanese and Iranian customers and beneficiaries.  RBS also allegedly provided written guidance to employees in the United Kingdom instructing them how to complete U.S. dollar payment messages involving sanctioned entities to avoid U.S. detection.[151]  In 2010, RBS initiated an internal investigation into this matter, self-identified the transactions and voluntarily disclosed its findings to a number of government agencies, including to DFS; cooperated with those agencies and the DFS’s investigation, including by conducting an historical review; took disciplinary measures against certain employees; took remedial measures to address the weaknesses; and established a more robust compliance program.[152]  RBS also agreed to pay $50 million to federal authorities as part of a global settlement.

B.    Bank of Tokyo Mitsubishi-UFJ, Ltd.

On June 20, 2013, DFS and Bank of Tokyo Mitsubishi-UFJ, Ltd. (BTMU) entered into a consent order whereby BTMU agreed to pay $250 million for allegedly clearing U.S. dollar payments through New York involving Iran, Sudan, and Myanmar.[153]   According to the Consent Order, from 2002 until 2007, employees of BTMU in Tokyo allegedly cleared approximately 28,000 U.S. dollar payments totaling close to $100 billion through New York involving Iran.[154]  BTMU also allegedly processed U.S. dollar payments involving Sudan and Myanmar and certain entities on the Specially Designated Nationals list.[155]  BTMU allegedly provided written instructions to its Tokyo-based employees to omit certain bank information from remittances.[156]  In 2007, BTMU conducted an internal investigation into these transactions and voluntarily reported its findings to U.S. authorities.[157]  BTMU also ceased its practices and undertook remedial efforts.  As part of the settlement, BTMU agreed to identify an independent consultant acceptable to DFS to conduct a comprehensive sanctions compliance review of the BSA/AML sanctions compliance programs, policies and procedures currently in place at BTMU’s New York branch and to make recommendations for improving its compliance program.[158] 

C.    Iran Freedom and Counter-Proliferation Act of 2012 Compliance Letter

On July 24, 2013, DFS sent a letter seeking information from twenty insurance providers concerning their compliance with the Iran Freedom and Counter-Proliferation Act of 2012. [159]  Noting that the IFCA imposes sanctions on entities that provide underwriting services, insurance, or reinsurance for, inter alia, any activity with respect to Iran for which sanctions have been imposed, DFS remarked that it knew of several companies that have insured trades made with Iran.[160]  In order to "seek information about reinsurers’ plans to implement compliance and due diligence programs designed to avoid any potential violations of the IFCA," DFS requested that each insurance provider respond to a list ten questions focused on the provider’s compliance policies.[161]  Such questions included being asked to identify all lines of business that the provider, affiliates, or subsidiaries write that may be subject to the IFCA sanctions, as well as being asked to list all insureds the provider identified as potentially engaging in business with Iran or any entity or person affiliated with Iran.[162]  While the DFS has not publicly acted on information received, such request is indicative of the agency’s increasingly aggressive stance towards penalizing sanctions violations. 

THE EUROPEAN UNION AND THE UNITED KINGDOM

I.    REGULATIONS

A.    European Union

The European Union (EU) has adopted a significant number of new sanctions in 2013, although some of those simply amended the list of persons, entities and groups targeted.[163]  Substantive developments concerned the following countries:

Belarus

Sanctions (including an arms embargo, travel ban and asset freeze) against Belarus’ President Lukashenko and some of his officials have been in place since May 2006, and against Belarus generally since October 2010.  These were amended and extended in 2012, and were further extended until October 31, 2014.[164]

Central African Republic

On December 23, 2013, the EU adopted Decision 2013/798 implementing UN Security Council Resolution 2127 of December 5, 2013 imposing an arms embargo on the Central African Republic.[165]

Faroe Islands

On August 20, 2013, the European Commission adopted restrictive measures against the Faroe Islands, a self-governing Danish territory in the North Atlantic which, unlike Denmark itself, is not part of the EU.[166]  The measures were in connection with Denmark’s unilateral adoption of fishing quotas.  These measures included limitations on the use of EU ports by Faroe vessels carrying out certain fishing activities.  This dispute has now been referred by Denmark, acting for the Faroe, both to an arbitral tribunal under the United Nations Convention on the Law of the Sea (UNCLOS) and to the World Trade Organization, alleging breaches of international law. 

Republic of Guinea

In January 2013, trade sanctions were eased in order to allow (i) the sale, supply, transfer or export of explosives and related equipment; and (ii) the provision of financing, financial assistance, technical assistance, brokering services and other services related to explosives and related equipment, on the condition that the equipment be intended solely for civilian use in mining and infrastructure investments and that an independent body verify that the providers of the related services are identified.[167]  Restrictions (including an arms embargo, an asset freeze, and a travel ban on members of the National Council for Democracy and Development) were originally imposed in October 2010 in response to the state’s violence against political demonstrators in the capital city, Conakry, in 2009.  These have been extended until October, 2014.[168]

Iran

On November 27, 2013, the EU published a Decision and related Implementing Regulation re-listing certain Iranian entities which had been removed from the EU’s sanctions concerning Iran pursuant to a decision of the Court of Justice of the European Union (discussed in further detail below).[169]

As explained in greater detail below, on January 20, 2014, the European Union implemented an interim agreement concluded between Iran and the P5+1 (the United States, United Kingdom, France, China, Russia and Germany) on November 24, 2014.

Israel

On July 19, 2013 the EU published "Guidelines on the eligibility of Israeli entities and their activities in the territories occupied by Israel since 1967 for grants, prizes and financial instruments funded by the EU from 2014 onwards."[170]  These Guidelines apply to all Israeli entities with their place of establishment within the occupied territories, and make any such Israeli entity ineligible for any EU grants, prizes, or other funding.  The Guidelines also apply to the activities of any Israeli legal person conducted within the occupied territories, and make such activities ineligible for any EU grants, prizes, or other funding.

The Guidelines do not apply to Palestinian entities, or to activities aimed at humanitarian purposes, and will come into effect in relation to prizes, grants, and funding available under the EU’s 2014 budget.

Democratic People’s Republic of Korea (North Korea)

In response to the latest nuclear tests conducted on February 12, 2013, the EU adopted a new set of sanctions reflecting past sanctions,[171] e.g., an embargo on arms and related material, a ban on exports of certain goods and technology, a prohibition of procurement from North Korea of arms, related material and other goods and technology, a ban on provision of certain services, a ban on provision of new North Korean banknotes and coins, a ban on trade in gold, precious metals and diamonds with the Government of North Korea, a ban on exports of luxury goods, and a ban on funding trade where such support could contribute to North Korea’s nuclear, ballistic missile, or other WMD programs.

Libya

In order to allow assistance to the Libyan government in its disarmament initiatives, the European Union amended the exceptions to the embargoes on arms and related material and on equipment which might be used for internal repression.[172]

Moldova

By European Council decision, on September 27, 2013, the EU amended and extended restrictive measures (including a travel ban) against certain political leaders in the Transnistrian region of the Republic of Moldova responsible for a campaign of intimidation against Latin-script Moldovan schools.[173]

Myanmar / Burma

As noted in our 2012 Year-End Sanctions Update, in April 2012 the EU suspended sanctions against Myanmar for one year in response to significant progress towards democracy.  As of May 2, 2013, the EU’s sanctions were lifted permanently. As before, however, the arms embargo continues.[174]

Somalia

Mirroring a July 2013 UN Security Council Resolution, the EU adopted a new derogation from the arms embargo in relation to equipment for the UN Assistance and Training Missions in Somalia.[175]

Syria

The European Union renewed its trade sanctions relating to Syria for a further year until June 1, 2014, with an exception for allowing weapons sales to the Syrian opposition.[176]   The latter issue was a source of a strong division between EU Member States; Austria and Sweden, for instance, were strongly opposed to providing arms to the opposition, whereas France and the United Kingdom were in favor of easing the sanctions.[177]

A further EU Decision and Regulation in relation to Syria was adopted on December 13, 2013, in order to support the activities of the Organisation for the Prohibition of Chemical Weapons, to assist the UN’s humanitarian aid efforts, and to enable payments for civilian medical supplies, food, shelter and sanitation.[178]  The EU also introduced a prohibition on trade in items of archaeological, historical, cultural, scientific and religious importance illegally removed from Syria.

Zimbabwe

In early 2013, the European Union concluded that a peaceful and credible constitutional referendum in Zimbabwe would represent an important milestone in the preparation of democratic elections, and would justify the suspension of the majority of all remaining EU targeted restrictive measures against individuals and entities.[179]  Consequently, on March 25, 2013, the EU suspended sanctions on 81 individuals and 8 companies until February 20, 2014, with 10 individuals (including President Robert Mugabe) remaining listed.[180]  Moreover, on September 17, 2013, the EU announced a start to the removal of sanctions on the Zimbabwe Mining Development Corporation (ZMDC), with the relevant legislation published on September 23, 2013.[181]  However, in August, EU foreign ministers decided against a wider lifting of EU sanctions against Zimbabwe for the time being.

B.    United Kingdom

In common with other EU Member States, the EU measures set out above apply in their totality in the UK.

The UK’s legislative activity during 2013 has been limited to implementing European Union sanctions into local law, and to extending certain of those EU measures to some of its overseas territories.  Each legislative instrument lists the particular overseas territories to which it applies, with most only applying to a sub-set of the whole.[182]

In August 2013, HM Treasury published advice on the United Kingdom’s sanctions regimes, including detailed Frequently Asked Questions covering financial sanctions.[183]  HM Treasury also issued a new license application form for all sanctions regimes other than Iran and Libya.

II.    MAIN CASE-LAW IN 2013

A.    European Union

In 2013 there have been a number of decisions by the European courts in Luxembourg regarding European sanctions, and the legality of imposing them on certain individuals or entities.  These have covered the Iranian, Anti-Terrorism, Tunisian and Ivory Coast (Côte d’Ivoire) sanctions regimes.

Challenges to inclusion within the Iranian sanctions regime

Several successful challenges have been brought by entities included in the Iranian sanctions lists.  Most of these claims turned on the evidence relied on by the European Commission in determining that the entity should be included in the list of sanctioned entities.  In some such cases, the Council of the European Union placed reliance on classified or confidential information that it asserted could not be placed before the Court. The Court was unwilling to attach any weight to such evidence, and held that basing a listing on such evidence was an infringement of the applicants’ rights. In broadly similar Judgments, the listings of Bank Mellat, Bank Sedarat, Qualitest FZE, and Iran Transfo were each quashed.[184]  The Council of the European Union has appealed the Judgments as to Bank Mellat and Bank Sedarat.

In a similar vein, Hanseatic Trade Trust & Shipping (HTTS) GmbH successfully challenged its listing in the EU’s Iran Sanctions list.  In this case, the European Council sought to rely on evidence that had come to light subsequent to the initial listing. The Court held that as such evidence could not have formed the basis for the original listing decision it could not be relied on to support that decision.[185]

Two unsuccessful challenges were brought by the UK subsidiaries of Bank Saderat and Bank Mellat, each challenging their respective inclusions on the Sanctions list.  Both cases were dismissed on the basis that sanctions imposed on a parent company are, in the case of the EU’s Iran sanctions, automatically imposed on a subsidiary and that, therefore, the only evidentiary consideration was whether the companies were actually subsidiaries.  Both of these Judgments regarding the subsidiaries were handed down after the respective parent companies had successfully challenged their listing.[186]

A number of further decisions by the General Court of the European Union were handed down on September 6 and 16, 2013,[187] arising from applications made by 34 separate sanctioned entities or individuals, all but three of which are also included on the SDN List.  While four of the applications, two relating to Bank Melli Iran, one to Islamic Republic of Iran Shipping Lines (IRISL) and some of its subsidiaries, and one to Europäische-Iranische Handelsbank (spelled Europaeische-Iranische Handelsbank on the SDN List) were unsuccessful, in the other cases the General Court struck down the listings. 

The bases for success varied from applicant to applicant. In the cases of Post Bank Iran, Iran Insurance Company, Good Luck Shipping and the Export Development Bank of Iran, the General Court held that the Council of the European Union was unable to provide sufficient evidence that these entities provided support to Iran’s nuclear program.[188]

In the cases of Naser Bateni, Persia International Bank, and Iranian Offshore Engineering & Construction Company, the General Court held that the reasons for listing given by the Council of the European Union did not, in and of themselves, substantiate a listing: for Mr. Bateni, this was his directorship of a designated entity;[189] for Persia International Bank, it was its 60% ownership by a designated entity;[190] and in the case of Iranian Offshore Engineering & Construction Company it was three denials of export licenses.[191]  For Bank Refah Kargaran, the General Court held that the Council was unable to provide any evidence to support its basis for listing.[192]

If such a Judgment of the General Court is not appealed and the entity or individual in question is not re-listed, the effect of the General Court’s Judgment is retrospective, in that it will effectively operate to remove the entity or individual’s name from the listing regulation with effect for the entire period from its promulgation until the date of the General Court’s decision.

On November 28, 2013, the European Court of Justice (ECJ) handed down two Judgments in appeals against General Court Judgments annulling the listings of two companies in Iran sanctions, the Fulmen and Kala-Naft cases.   In Fulmen, the ECJ upheld the annulment of the designation, whereas in Kala-Naft it reversed it.

In Fulmen, the ECJ upheld the General Court’s view that the listings should be annulled for lack of supporting evidence.  Fulmen had provided rebuttal evidence, and the Council failed to adduce evidence to support its case.  The ECJ did not accept the Council’s argument that it need not have to provide such evidence due to the confidential nature of the evidence or the clandestine nature of the alleged activities.[193]

Kala Naft had been designated for selling equipment to the oil and gas sectors which could be used for Iran’s nuclear program.  The Court of Justice of the EU accepted that reasoning as sufficiently specific.  The General Court had held that selling equipment to the oil and gas sectors insufficient to justify inclusion in the EU’s sanctions against Iran, as it did not demonstrate support for nuclear proliferation.  The ECJ disagreed, holding that trading in key equipment and technology could be regarded as support for the nuclear industry.[194]

On November 12, 2013, in North Drilling Co. v. Council, the General Court annulled North Drilling’s designation, the reasoning behind which was that it was alleged to be a wholly-owned subsidiary of the National Iranian Oil Company.[195]  North Drilling claimed that it had had no connection with NIOC since 2011, following privatization.  The Council alleged that North Drilling was still under State control, but the Court considered it unfair to allow reliance on reasoning which had never been put to the applicant.

These Iranian cases demonstrate that the evidentiary basis for sanctions listing can be tested in the courts, and that the European Council will not be permitted to rely on undisclosed evidence. It is not a surprising outcome that the European Court of Justice is currently considering the adoption of special procedures to allow it to hear classified or secret evidence.[196]

In the case of the successful applicants linked to the IRISL, on October 10, 2013 the EU published Council Regulation 971/2013.[197]  This new Regulation not only effectively overturned the Court’s decision by extending the criteria for inclusion on the sanctions list, but also broadened the criteria specifically to include all subsidiaries of IRISL, as well as agents of IRISL, insurance and service providers to IRISL and its subsidiaries and agents.

Most recently, on December 12, 2013, the General Court considered the designation of 11 individuals on Iran sanctions lists due to positions they were alleged to have held with IRISL and related shipping corporations.  The General Court ordered these designations annulled because the designation of IRISL itself was illegal, as the Council had failed to demonstrate by evidence that any of the individuals met the standards for inclusion and that the Council’s reasoning was too vague.

Application to suspend sanctions preventing company from performing contracts

On August 29, 2013, the President of the General Court refused an application by Iran Liquefied Gas Company, a company which had challenged its inclusion in the Iran sanctions, seeking suspension of the provisions of the sanctions legislation preventing it from performing contracts with European companies until its annulment action had been heard by the European Court.[198]  While acknowledging that such interim measures are available in principle, the Court refused to grant them in this case as the underlying application was inadmissible (having been raised out of time and on the wrong legal basis).

Challenges to inclusion within the Syrian sanctions

On September 13, 2013, the General Court of the European Union upheld sanctions imposed on two Syrian nationals.[199]  The Court dismissed the actions for annulment, holding that the European Council was entitled to include the individuals on the list, despite not having notified either of them of their inclusion, because they were able to challenge such inclusion in court and had been provided sufficient reasons for their inclusion.  The Court noted the Council’s broad discretion in including persons on sanctions lists, and the limited scope for interference by the Court in the Council’s decisions.

Challenges to inclusion within the Tunisian sanctions

On May 28, 2013 the General Court struck down the listings of certain Tunisian individuals under the Tunisian sanctions regime;[200] and then on July 30 (just before the expiry of the two-month appeal period), the same individuals were re-listed under Council Implementing Regulation (EU) No. 735/2013.[201]

Challenges to inclusion within the Ivory Coast (Côte d’Ivoire) sanctions

The European Court has also heard seven challenges to the inclusion of particular individuals on the EU’s Ivory Coast (Côte d’Ivoire) Sanctions list.  In two of these cases, the Court held that the basis for listing was clearly explained and allowed scope for rebuttal, while the evidence cited for the listing was sufficient.[202]  The other cases all turned on whether the challenges to the listing had been brought within the required 2-month period.  The Court held that the 2-month period ran from 14 days after the publication of the listing in the Official Journal and, as such, each of the challenges were out of time.[203]

The continuing interest in a listing challenge of those already de-listed

Due to the length of time it takes for a case to be heard in the European Court, it has been relatively common for an individual who is challenging his or her listing in the Court to have been de-listed from the particular sanctions regime before any hearing takes place. Despite the attempts of applicants to positively try to clear their names, it has been the practice of the Court in the past to dismiss such challenges as being no longer justiciable.[204] However, it appears from two Judgments in 2013 that the Court has modified its stance on this issue. In both Adulbasit Abdulrahim v. Council of the European Union and Chafiq Ayadi v. Council of the European Union, the Court has held that an applicant has a continuing interest in testing the original legality of a listing, even after the person has been de-listed.[205]

B.    United Kingdom

Melli Bank — Commercial Court

On May 13, 2013, the Commercial Court in London heard an application for summary judgment by Melli Bank PLC against Holbud Limited.  Melli Bank PLC is the UK subsidiary of an Iranian bank. Both parent and subsidiary are included in EU Sanctions lists. The claim was for unpaid commitment fees under a facility agreement.  Holbud’s defence was that, as Melli Bank PLC had become a "designated person" under the EU’s Iran Sanctions list shortly after the facility agreement had been signed, the contract had been frustrated by the designation and/or repudiated by Melli Bank.  Even at the summary judgment stage (where the test is that a defendant must have no real prospect of successfully defending the claim), the Court dismissed these arguments. It held that, as the EU’s sanctions allowed for licenses to be granted for contracts in existence prior to a designation, and as Holbud had never applied for such a license, the performance of the contract had not been frustrated.  The Court further held that at all times the Bank was ready and willing to perform the contract and that there was thus no repudiation of the contract by Melli Bank.[206]  The Judgment stands as a warning that commercial obligations can survive the designation of a contractual counterparty, so long as legal avenues to allow payments (such as license applications) remain available.

Bank Mellat — Supreme Court

On June 19, 2013, the UK’s Supreme Court handed down two Judgments relating to sanctions or financial restrictions, imposed upon the Iranian Bank Mellat by the Financial Restrictions (Iran) Order, 2009, (S.I. 2009/2725) (U.K.) (the "2009 Order"). The more important of these Judgments is Bank Mellat v. Her Majesty’s Treasury (No. 2), [2013] UKSC 39. The 2009 Order had singled out Bank Mellat, but no other Iranian banks, as being a financial institution which had effectively aided and abetted Iran’s nuclear weapons program.  The 2009 Order directed all UK financial institutions to cease any and all business relationships with Bank Mellat.

By a majority, the Supreme Court struck down the 2009 Order as unlawful on two principal grounds.  The first was that the 2009 Order was discriminatory for singling out Bank Mellat without justification. Further, by allowing other Iranian banks to conduct the very business that Bank Mellat was restrained from conducting (a point expressly made by HM Treasury at the time of introducing the 2009 Order), the 2009 Order would arguably have had no actual preventative effect, and was therefore unnecessary, irrational, and unreasonable.[207]  The Supreme Court held that HM Treasury erred when it failed to impose the same restrictions on all Iranian banks — an oversight long since corrected.

The Supreme Court also upheld Bank Mellat’s appeal that the 2009 Order had been imposed in breach of the obligation to allow it an opportunity to make representations to HM Treasury.

The second Supreme Court Judgment concerned an appeal regarding the use by the Supreme Court of the "closed material procedure" (CMP).[208]  CMP is used by the lower courts when the evidence advanced by the government is considered too sensitive to be used in open court, or even in private.  Instead, the court sits in a closed hearing with one of the parties absent.  The interests of that party are protected by special advocates appointed by the Court, who make submissions on behalf of the absent party.  This question arose because both the High Court and the Court of Appeal had held closed hearings as part of this case, and indeed the Supreme Court — for the first time in its fairly shortly life — also held a closed hearing.  Lord Neuberger — who delivered the majority Judgment — upheld the use of a CMP model by the Supreme Court, but signaled that any future applications for a CMP would be scrutinized carefully, and only be allowed in very limited circumstances.

Since the Supreme Court’s Judgment, Bank Mellat has indicated that it plans to sue HM Treasury for approximately £500 million ($744 million) in damages.[209]

Bank Melli, Persia International Bank and DVB Bank SE – Commercial Court

On July 31, 2013, Bank Melli, Persia International Bank and DVB Bank SE were granted summary judgment by the Commercial Court in a claim for recovery of over €40 million from certain Iranian shipping companies under a ship finance facility, and related Iranian guarantors for default under the facility.[210]  Those borrowers argued that EU sanctions against Iran rendered it unlawful or impossible for the contract to be performed, as it would have involved sanctions violations.

The Court rejected this argument, holding that the agreement was an instrument imposing a repayment obligation.  Moreover, the borrowers had not sought to obtain a license permitting the payment from the competent national authority.

The effect of this authority and related case law would appear to be that a company must take all possible steps to comply with an existing contract with a sanctioned entity (including making any available license applications to HM Treasury) before it can safely decline to discharge its contractual obligations.

In Persia International Bank v. Council the Court considered the test for ownership and control in the context of the EU’s Iran sanctions.  This is most relevant for the purposes of whether a company is owned or controlled by an "Iranian person" as, if so, it is itself an "Iranian person." In this case Persia International Bank was 60% owned by Bank Mellat, and Bank Mellat had the ability under a shareholders agreement to appoint three directors and one independent, non-executive director, out of a board of seven.  The Court held that a 60% shareholding was not sufficient to determine ownership.  In addition, the Court held that Bank Mellat did not have the ability to control the company’s board (based partly on the need for FSA approval of directors, and a distinction between executive and non-executive directors).  Finally, the Court held that—given the circumstances—Bank Mellat could not be said to "own" Persia International Bank.  The case is an illustration of the fact-specific analysis that must be carried out in determining the application of the "owned or controlled" test, with the analysis extending to powers under a shareholders agreement and board control, rather than just a mathematical calculation based on shareholdings.

John Bredenkamp — Administrative Court

An action for judicial review has been brought before the English courts by the Zimbabwean businessman John Bredenkamp against the UK’s Foreign and Commonwealth Office.  Mr. Bredenkamp was subject to an asset freeze under the EU’s Zimbabwe Sanctions list, and he alleges that his inclusion in those sanctions was based on the uncorroborated evidence of a conversation to which the UK ambassador to Zimbabwe had been a party.  While the English courts are not empowered to declare an EU law to be invalid, it was held, as a preliminary issue to his judicial review application, that the English courts are competent to review actions effected by the UK authorities in the sequence of events leading to a sanctions listing, as well as decisions by the UK authorities not to delist an individual or entity (see R (on the application of Bredenkamp v. Secretary of State for Foreign and Commonwealth Affairs, [2012] EWHC 3297 (Admin)).  We understand that other claims for judicial review have since relied on this Judgment and have been allowed to proceed.  A subsequent Judgment in this case ordered HM Government to make certain disclosures of documents and information regarding its decision designate him under the legislation.

The hearing of the Bredenkamp judicial review application took place in June 2013 and the Judgment is awaited.[211]

III.    EU MEMBER STATE ENFORCEMENT ACTIONS IN 2013

A.    United Kingdom

On July 1, 2013 the Financial Conduct Authority (FCA) (one of the successor regulators that has taken over from the Financial Services Authority) published its Thematic Review in relation to banks’ responses to the risks of money laundering, terrorist financing, sanctions, and the export of dual-use goods in the trade finance sector.[212]  The review covered 17 different banks of varying sizes operating both in the UK and in the UK’s offshore jurisdictions.  The review was generally positive regarding the sanctions screening and due diligence processes effected by the banks on their own customers, but noted examples of poor controls with regard to third parties involved in the transaction such as agents, insurance companies, shippers, freight forwarders, delivery agents, inspection agents and, indeed, commercial counterparts.  In relation to the export of dual-use goods, the FCA was highly critical of the approach of the banks, with inadequate staffing, inadequate staff training, and poor screening being recurring themes.  The FCA has warned that some banks that formed part of the review will be the subject of further investigation, and possible future penalties.

In April 2013, it was reported that Royal Dutch Shell was exploring ways of repaying historic debts to the National Iranian Oil Company (NIOC), without breaching EU sanctions.  As the EU sanctions allow for the licensed export of foodstuffs or medicines to Iran, it was reported that one of the options being explored was a barter deal to pay the pre-sanctions debts with grain or pharmaceuticals.  Although the UK government gave no official statement in relation to the proposal, no approval for the possible transactions was given.[213]

On February 22, 2013, the English Court of Appeal overturned the conviction of Ramin Pouladian-Kari (Ramin Pouladian-Kari v R, [2013] EWCA Crim 158).[214]  Mr. Pouladian-Kari had been convicted of shipping electrical switchgear to an Iranian company called Iran Tablo Company without the required export license and contrary to s.68(2) of the Customs and Excise Management Act 1979 and the Export Control Order.  He had been sentenced to 12 months in jail, suspended for 2 years, and ordered to complete 200 hours of unpaid work.  A co-accused, Arbrene Hussain, pled guilty and was sentenced to 6 months in jail, suspended for 2 years, and ordered to complete 100 hours of unpaid work.

The conviction was overturned on the basis that the court Recorder had not dismissed a juror who had sent a note to the judge indicating that, in his place of work (which involved trade finance in the Middle East and North Africa), the particular transactions in the case would have been met with "automatic rejection . . . on compliance grounds."  The Court of Appeal held that leaving this juror on the case led to a "real possibility of unconscious jury bias such that a fair trial was not possible."  The Court also ruled that a re-trial was not in the public interest.

In our 2012 Year-End Sanctions Update, we reported that UK citizen Michael Ranger had been sentenced to three and a half years jail time for supplying North Korean weapons to Azerbaijan in breach of the Export Control Order.  Mr. Ranger was refused leave to appeal his sentence in March 2013.[215]

B.    Spain

On January 11, 2013, the Spanish Interior Ministry announced that it had arrested two employees of Fluval Spain S.L. in relation to a shipment of nickel/chromium alloy valves destined (through UAE intermediaries) for Iran’s nuclear industry.  The arrests were the culmination of an investigation commenced in March 2012. The Spanish police also conducted a raid and search of Fluval Spain’s offices[216] and, on January 10, 2013, the Spanish authorities raided a related company, Lazaro Ituarte S.A., and seized documents and computers as part of that investigation.[217]  No formal charges against those men or the company have yet been made.

In our 2012 Year-End Sanctions Update, we reported that in November 2012 Spanish customs officials had raided a company’s premises on suspicion of the supply of goods to Iran’s nuclear industry via Turkey.  The company, ONA Electroerosión S.A., has since denied the allegations which relate to three shipments of turbine propellers valued at US $1.2m and, as yet, no formal charges have been made.[218]

C.    Sweden

In our 2012 Year-End Sanctions Update and 2013 Mid-Year Sanctions Update, we reported that in December 2012 a Swedish man had been arrested and charged with attempting to export dual-use items in breach of Iranian sanctions.  On February 6, 2013, a court in Lund, Sweden, convicted the man of knowingly trying to export dual-use goods to Iran via intermediaries in Dubai.[219]  The man, whose identity has not been released, was given a suspended sentence.

D.    Germany

German media has reported that the German authorities are currently investigating 136 sanctions-related cases, of which two thirds relate to Iran.[220]

In our 2013 Mid-Year Sanctions Update, we reported that on February 20, 2013, it was announced that the German authorities had charged two men (one Iranian, the other of dual German-Iranian nationality) with supplying engines for the Ababil III drone to Iran between 2008 and 2009.  The Frankfurt State Court has not yet decided whether to proceed to a trial.[221]

In our 2012 Year-End Sanctions Update and 2013 Mid-Year Sanctions Update, we reported that four men had been arrested in Germany in November 2012 on suspicion of supplying parts to an Iranian nuclear reactor.  On April 26, 2013, the four men were charged with supplying 92 valves to an Iranian heavy water reactor in 2010 and 2011.  The valves were valued at several million Euros, and were transshipped via a number of Asian countries.[222]  The men were found guilty and sentenced in November 2013.[223]

E.    Cyprus

In our 2013 Mid-Year Sanctions Update, we reported that in April 2013, the Cypriot Supreme Court overturned an injunction granted by the Limassol District Court on the basis that to uphold the injunction would have served to frustrate the application of EU asset-freezing sanctions against Anatoly Ternavsky, a Belarussian oligarch included on the EU’s Belarussian sanctions list.[224]

The dispute concerned control over a Cypriot company called Rayhill Limited, which has an indirect ownership interest in the Russian oil transport company Naftatrans. One shareholder of Rayhill had called a shareholder meeting, at which a new board of directors was appointed. A second Rayhill shareholder called Prime Limited, a British Virgin Islands (BVI) company beneficially owned by Mr. Ternavsky, did not attend the shareholder meeting but applied to Limassol District Court for an injunction to prevent the Cypriot Registrar of Companies from registering the new directors.  The Limassol court granted the injunction, and it was this judgment which was appealed to the Supreme Court.

The Supreme Court held that to allow the injunction to stand would be to allow Mr. Ternavsky to deal with his assets within the EU, and thus would be contrary to the application of the EU’s asset-freezing sanctions.

The case is an illustration of the potentially broad nature of the EU’s asset freezes.  The company owned by Mr. Ternavsky was physically located outside the EU (BVI) and is not itself included on the EU’s sanctions list.  Moreover, the underlying assets held through the company were also outside the EU (Russia).  Nonetheless, the Court looked through the corporate structure, and Mr. Ternavsky’s indirect and beneficial interest, to determine that Mr. Ternavsky was attempting to influence corporate actions in an EU company, and ruled that this would be in breach of the EU’s asset-freezing sanctions.

F.    Countries Outside the EU Voluntarily Imposing the EU’s Sanctions

It is increasingly the case that non-EU countries are agreeing voluntarily to enforce some or all of the restrictions imposed by EU sanctions.  For example, on May 14, 2013, the EU announced that 11 European countries outside the EU had signed up to the new Syrian sanctions regime that would allow some trade with the Syrian opposition.  These countries were:  Croatia,[225] Turkey, Macedonia, Montenegro, Iceland, Serbia, Albania, Liechtenstein, Norway, Moldova and Georgia.[226]

IV.    BRITAIN’S OFFSHORE JURISDICTIONS

Jersey

In our 2012 Year-End Sanctions Update and our 2013 Mid-Year Sanctions Update, we reported that, although the United Kingdom had revoked its Iranian sanctions regime in favor of the heightened EU sanctions, Jersey was yet to issue a similar revocation as of the date of the Update.  This remains the case today, and the Money Laundering and Weapons Development (Directions) (Iran) (Jersey) Order, 2013, with its direction that any individual or entity carrying on "financial services business" from or within Jersey, or any Jersey entity carrying on such a business anywhere in the world, cease all business with Iranian banks, will (unless revoked in the interim) remain in force until January 19, 2014.[227]

Isle of Man

In our 2012 Year-End Sanctions Update, we reported that the Isle of Man had also been slow to follow the UK’s lead in revoking its Iran sanctions.  These were retrospectively revoked as of February 27, 2013, by way of the Financial Restrictions (Iran) (Revocation) Order, 2013 laid before the Manx Parliament on March 19, 2013.[228]

Bermuda

The piecemeal approach to sanctions legislation mentioned above in relation to the UK’s overseas territories has been abandoned by Bermuda. On March 21, 2013 Bermuda published the International Sanctions Regulations, 2013.[229]  Schedule 1 lists all the sanctions-related Orders in Council which apply in Bermuda — including Orders which had not previously been expressed to apply to Bermuda, while Schedule 2 lists those Orders now revoked from applying to Bermuda.  It is now essential to consult these Bermudian regulations directly, rather than looking to the UK legislation in determining the application of various sanctions to Bermuda.

LOOKING FORWARD

On November 24, 2013, the P5+1[230] successfully concluded negotiations with Iran on a Joint Plan of Action (hereinafter "the interim agreement")[231] to limit Iran’s nuclear activities and suspend certain United States and European Union sanctions on the country.  Both sides are now working towards a comprehensive agreement that would further limit Iran’s nuclear activities and significantly unwind U.S. and European Union sanctions.  While the interim agreement permits some previously prohibited transactions, the vast majority of sanctions on Iran will remain in place. 

In exchange for a number of Iranian steps to curtail its uranium enrichment activities, limit its development of the Arak reactor, and allow for international inspections, the United States and the European Union agreed to take a number of sanctions-relaxing measures, including pausing efforts to further reduce Iran’s crude oil sales; enable the repatriation of an agreed amount of oil revenue held abroad; suspend sanctions on Iran’s petrochemical exports; suspend sanctions on gold and precious metals, as well as on Iran’s auto industry; and establish a financial channel to facilitate humanitarian trade for Iran’s domestic needs using Iranian oil revenues held abroad.[232]  The United States and European Union also agreed to refrain from imposing new nuclear-related United Nations Security Council, European Union and United States sanctions. 

On January 20, 2014, the United States implemented the interim agreement and provided guidance concerning each sanction-relaxing measure it agreed to undertake pursuant to the agreement.[233]  OFAC announced that it would provide sanctions relief relating to certain activities and "associated services" which take place exclusively during the six month period beginning on January 20, 2014 and ending on July 20, 2014.[234]  The term "associated service" is interpreted as "any necessary service—including any insurance, transportation, or financial service—ordinarily incident to the underlying activity covered [by the interim agreement]."[235]

U.S. agencies retain the authority to impose sanctions identified in the interim agreement for activities that occurred prior to January 20, 2014, as well as the authority to broadly impose sanctions under other authorities, such as those designed to combat the proliferation of weapons of mass destruction.[236]  In addition to the guidance, OFAC also released a list of FAQs related to the implementation of the interim agreement.[237]

The European Union also implemented the interim agreement on January 20, 2014, by means of Council Regulation (EU) No 42/2014 (the Amending Regulation).[238]  The Amending Regulation removed restrictions on the insurance and reinsurance of Iranian crude oil, petroleum products and petrochemical products,[239] introduced bases for the licensing of transfers of funds and/or economic resources to the Iranian Ministry of Petroleum, so long as they are necessary for the purposes of importation or purchase of Iranian petrochemical products,[240] and raised the thresholds above which transactions with Iranian persons requiring prior notification and or authorization under Articles 30 and 30a of Regulation 267/2012.  

In this latter respect, HM Government in the United Kingdom has issued revised and updated guidance on the notification and authorization requirements in the light of the Amending Regulation.[241]  The changes introduced by the Amending Regulation mean that the current threshold for transfers on "transactions regarding foodstuffs, healthcare, medical equipment or for agricultural or humanitarian purposes" requiring prior authorization increased to € 1 million.  The threshold for providing prior notification of personal remittances increased to € 400,000. 

The prospects of reaching a comprehensive agreement remain uncertain.  The United States Congress continues to threaten to pass further sanctions legislation, potentially scuttling the agreement.  In addition, the Office of Foreign Assets Control—illustrating that it will continue aggressively enforcing sanctions regulations still in effect—recently announced new Iran sanctions designations.[242]  

In the coming months, businesses should pay careful attention to what is and is not permitted under U.S. law; the interim agreement does not ease the majority of sanctions on Iran and companies eager to engage with the country may be surprised to learn that OFAC is aggressively enforcing the vast sanctions regime covering that country.