Focus on Iran: Summer 2019
- I. U.S. Imposes New Secondary Sanctions on Iran's Iron, Steel, Aluminum, and Copper Sectors
- II. U.S. Adds Huawei and Its Affiliates to the Entity List
- III. New Sanctions Compliance Guidance from OFAC after Upward Enforcement Trend in 2019
- IV. Iranian Payment Processing Risks
- V. Trading with Iran via a Special Purpose Vehicle
- VI. Iran-Related Enforcement Actions
In part due to the re-imposition of U.S. sanctions, the Office of Foreign Asset Control (OFAC), the Department of Justice (DOJ), and the Bureau of Industry and Security (BIS) have been particularly active over the past few months. Most recently, President Trump issued a new executive order expanding sanctions to the iron, steel, aluminum, and copper sectors of Iran. Our previous issue included an in-depth discussion of the then-existing sectoral sanctions. In this issue we cover the recently imposed sanctions and discuss the broader implications of the new sanctions.
The new sanctions likely will lead to a further increase in enforcement actions. This year alone, two global banks – Standard Chartered and UniCredit Group Banks – have entered into billion-dollar settlements with various U.S. governmental agencies. The consequences of such penalties go beyond the dollar amount, such as scrutiny for future violations, restrictions on exports, and damage to a company's reputation. We expect OFAC and DOJ enforcement to continue to rise and, given that OFAC has recently published a comprehensive compliance guide, U.S. and non-U.S. companies will likely be held to a higher standard.
Notwithstanding this environment, some non-U.S. companies continue to do sanctions-compliant business in Iran – i.e., business that involves no targeted sectors (e.g., oil, natural gas, petrochemicals, shipping, shipbuilding, automobiles, iron, copper, steel, and aluminum), malign activities (e.g., terrorism or weapons of mass destruction (WMD) proliferation), or blocked persons (e.g., Specially Designated Nationals (SDNs), majority-owned subsidiaries of SDNs). Some U.S. companies have elected to continue exports of agricultural commodities, medicine, and medical devices to Iran under the "humanitarian exception" to the Iran primary sanctions. Similarly, European companies have also continued to only engage in sanctions-compliant trade. Below we discuss payment processing risks in engaging in sanctions-compliant trade.
Accordingly, in this edition of Focus on Iran, Miller & Chevalier's fourth issue, we cover the following:
- Implications of the newly imposed sanctions on Iran
- A summary of OFAC's comprehensive framework on compliance
- Challenges and risks in engaging in sanctions-compliant trade and innovative workarounds European countries are creating to facilitate sanctions-compliant trade
- Recent civil and criminal enforcement actions that OFAC, BIS, and DOJ have carried out since our most recent Focus on Iran publication in the fall.
On May 8, 2019, President Trump issued Executive Order 13871 of May 8, 2019, Imposing Sanctions with Respect to the Iron, Steel, Aluminum, and Copper Sectors of Iran (E.O. 13871). E.O. 13871 is the first round of new sanctions imposed on Iran since the full re-imposition of sanctions in November 2018 and the first Iran sanctions targeting a new sector of the Iranian economy since before the Joint Comprehensive Plan of Action (JCPOA a/k/a the Iran Nuclear Deal).
The new sanctions apply not only to Iranian persons operating in the iron, steel, aluminum, and copper sectors of Iran (the "covered metals sectors") but potentially to any person – either Iranian or non-Iranian – who (i) knowingly engages in a "significant transaction" for the sale, supply, or transfer of significant goods or services used in connection with the covered metals sectors; (ii) knowingly engages in a "significant transaction" for the purchase, acquisition, sale, transport, or marketing of the covered metals of Iran or products made from them; or (iii) materially assists, sponsors, or provides financial, material, or technological support for, or goods or services in support of, persons sanctioned under E.O. 13871. E.O. 13871 also targets foreign financial institutions (FFIs) that conduct or facilitate "significant financial transactions" in connection with such activities.
Like previous secondary sanctions targeting the Iranian oil, natural gas, petrochemicals, shipping, shipbuilding, and automotive sectors, E.O. 13871 authorizes OFAC to impose blocking sanctions that target individuals and companies, as well as correspondent/payable-through account sanctions that apply only to FFIs. Both blocking sanctions and correspondent/payable-through account sanctions serve to cut off non-U.S. individuals, companies, and FFIs from the U.S. economy and financial system.
Guidance issued by OFAC establishes a 90-day wind-down period that will allow non-U.S. persons to avoid sanctions exposure by winding down potentially covered transactions by August 6, 2019. Importantly, the guidance makes clear that any new business entered into during this 90-day window that would be sanctionable under E.O. 13871 will not be considered wind-down activity and could be sanctionable.
E.O. 13871 represents another effort by the U.S. to stifle an important source of revenue for the government of Iran and marks an expansion of sanctions that could have a tremendous impact on remaining non-U.S. business in or connected to Iran. As discussed in our previous issue of Focus on Iran, the U.S. government has previously targeted precious metals and raw or semi-finished metals, including aluminum and steel. E.O. 13871 expands upon those prior sanctions by targeting iron and copper, as well. From this point forward, any non-U.S. business in or connected to the covered metals sectors has a significantly increased sanctions risk profile.
An analysis of the relevant provisions of the executive order is provided below.
Blocking Sanctions Targeting Non-U.S. Companies in Connection with Covered Metals Sectors
Section 1 of E.O. 13871 sets forth the "blocking" sanctions that target Iranian individuals and entities operating in the covered metals sectors and non-U.S., non-Iranian entities that do business in those sectors. Specifically, Section 1 authorizes OFAC to impose blocking sanctions on any person who:
- Operates in the iron, steel, aluminum, and copper sectors in Iran, as well as anyone that owns, controls, or operates an entity that is part of the covered metals sectors
- Knowingly engages in a "significant transaction" for the "sale, supply, or transfer" to Iran of significant goods or services used in connection with the covered metals sectors
- Knowingly engages in a "significant transaction" for the "purchase, acquisition, sale, transport, or marketing" of covered metals or products made from such metals from Iran
- Materially "assists, sponsors, or provides financial, material, or technological support" for, or goods or services in support of, any person blocked under Section 1 of E.O. 13871
- That is owned or controlled by, or acting or purporting to act for or on behalf of, directly or indirectly, any person blocked under Section 1 of E.O. 13871
These provisions are substantially similar to past sanctions targeting the Iranian oil, natural gas, and petrochemicals sectors, notably the provisions targeting significant transactions for the "purchase, acquisition, sale, transport, or marketing" of covered metals and provisions targeting material assistance, sponsorship, financial/material/technical support, or goods and services to or in support of sanctioned persons. However, the new metals sanctions cover a slightly broader set of actors than prior sector-specific blocking sanctions – i.e., persons that own, control, or operate an entity in one of the targeted sectors. That language suggests that foreign investment firms, for example, with ownership interests in companies operating in any of the covered metals sectors may now be at risk of being sanctioned themselves.
Correspondent and Payable-Through Sanctions Targeting FFIs in Connection with the Covered Metals Sectors
Section 2 of E.O. 13871 sets forth correspondent or payable-through account sanctions that target FFIs that knowingly conduct or facilitate a "significant financial transaction" in connection with the covered metals sectors. Specifically, Section 2 authorizes OFAC to impose such sanctions on any FFI that conducts or facilitates a significant financial transaction:
- For the sale, supply, or transfer to Iran of significant goods or services used in connection with the iron, steel, aluminum, or copper sectors of Iran;
- For the purchase acquisition, sale, transport, or marketing of these metals or products of these metals from Iran; or
- For or on behalf of any person blocked under the executive order.
Again, these sanctions on significant transactions conducted or facilitated by FFIs are substantially similar to several prior sanctions targeting, for example, Iranian SDNs, the Iranian state-owned oil company National Iranian Oil Company (NIOC) and its Switzerland-based trading company Naftiran Intertrade Company Sàrl (NICO), or the purchase, acquisition, sale, transport, or marketing of petroleum, petroleum products, or petrochemicals from Iran.
Huawei's inclusion on the Entity List follows the president's May 15, 2019 issuance of a new executive order on Securing the Information and Communications Technology and Services Supply Chain (the Telecom Security E.O.). The Telecom Security E.O. authorizes BIS to prohibit transactions that (i) "involve information or communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary" and that (ii) pose certain risks to U.S. information and communications technology, U.S. critical infrastructure, the U.S. digital economy, U.S. national security, or the security and safety of U.S. persons. Although the Telecom Security E.O. does not mention Huawei by name, its focus on information or communications technology developed by persons "subject to the jurisdiction or direction" of a "foreign adversary" are likely intended to target the telecommunications giant, which U.S. authorities have alleged has ties to the Chinese military and intelligence services.
Because of the inclusion of Huawei on the Entity List, both U.S. and non-U.S. persons are now prohibited from exporting any U.S.-origin goods, software, or technology to Huawei or its listed affiliates, as well as re-exporting certain foreign-made goods, software, technology that has above a de minimis percentage – generally 25 percent – of controlled U.S. content. More specifically, U.S. export controls now prohibit the "export," "re-export," or "in-country transfer" of any "item" that is "subject to the Export Administration Regulations" to Huawei or any of its 68 affiliates without a license from BIS. While broad, the restrictions do not cover all dealings with Huawei or its affiliates on the Entity List. For example, U.S. persons and non-U.S. persons may continue to purchase goods and services from Huawei, as well as to provide services to the telecommunications giant, so long as those services do not constitute an "export of technology," as defined below.
For more information regarding the Huawei's addition to the entity list, please see our recent Trade Compliance Flash.
OFAC has issued its most comprehensive compliance guidance to date, following a period of exceptionally active enforcement to begin 2019. Published on May 2, 2019, the new guidance titled "A Framework for OFAC Compliance Commitments" presents a more useful and practical tool for companies and compliance professionals to leverage in both day-to-day and long-term sanctions compliance decision-making than the previously published OFAC Enforcement Guidelines. U.S. and foreign organizations alike would be well advised to analyze the compliance program priorities that OFAC details in the Framework, as well as the common root causes for sanctions compliance breakdowns. Now that the Framework has been published – and a clear roadmap of best practices has been provided by OFAC – all companies, both U.S. and non-U.S., with any U.S. sanctions exposure have been put on notice by OFAC that they will be held to a higher standard in the future when it comes to defending the strength and effectiveness of their sanctions compliance programs. Failure to adopt and implement the priorities set forth in the Framework, could lead to serious OFAC enforcement risk and is more likely to lead OFAC to determine that apparent sanctions violations should be deemed "egregious" under the Enforcement Guidelines.
Initially, OFAC details the five facets of sanctions compliance programs it views as indispensable. If nothing else, organizations should carefully review these priorities and consider whether they may be lacking in any of the critical areas.
- Management commitment and support: OFAC lists several ways that management can demonstrate its commitment, such as the allocation of adequate resources, fostering a culture of compliance, appointment and empowerment of compliance officer(s), the quality and experience of selected compliance personnel, and the provision of communication channels including reporting mechanisms.
- Risk assessment: OFAC describes the scope of an effective risk assessment in order to properly design and maintain a risk-based compliance program. Conducting routine assessments of the potential threats and vulnerabilities specific to an organization is a central tenet of a healthy sanctions compliance program.
- Internal controls: Upon a thorough risk assessment, written policies and procedures should address the results in order to better "identify, interdict, escalate, report, and keep records concerning" problematic activity. OFAC outlines the primary objectives of internal controls, emphasizing their practicability and enforcement, and advises that programs be adjusted to reflect changes in sanctions (e.g., list updates, issuance of licenses, etc.).
- Testing and auditing: OFAC makes clear that organizations should test and audit the effectiveness of their compliance program and have a "responsibility to enhance" their compliance programs based on the results of such testing (e.g., updating or recalibrating program-related software).
- Training: All relevant employees should receive training on a periodic basis, which OFAC considers to be annually at a minimum.
Beyond providing insight into sanctions compliance program priorities, OFAC included an overview of common root causes for sanctions compliance deficiencies, which should be leveraged by organizations in seeking to adjust their programs going forward to avoid these common pitfalls.
- Lack of formal OFAC sanctions compliance program: While the sanctions regulations do not mandate formal programs, OFAC cites the lack of one as among the most common root causes of apparent violations that result in civil monetary penalties.
- Misinterpreting or failing to understand the applicability of OFAC regulations: Misunderstanding of the specific touchpoints that bring an organization and its activities within OFAC's jurisdiction tend to be particularly problematic. Relevant considerations include status as U.S. person, dealings with U.S. persons, being a U.S.-owned or controlled subsidiary, or the involvement of the U.S. financial system or U.S.-origin goods and technology.
- Facilitating transactions by non-U.S. persons, including through or by overseas subsidiaries or affiliates: Multi-national organizations' U.S. locations or personnel often cause compliance issues by referring opportunities to or somehow facilitating dealings between its non-U.S. locations and sanctioned parties/countries.
- Exporting or re-exporting U.S.-origin goods, technology, or services to OFAC-sanctioned persons or countries: OFAC notes its public enforcement has focused on large, sophisticated companies that engage in a pattern of such behavior over a period of years and that utilize non-routine business practices to conceal the activity. These actions particularly include non-U.S. persons that do so despite contractual language expressly prohibiting such dealings.
- Utilizing the U.S. financial system, or processing payment to or through U.S. financial institutions, for commercial transactions involving OFAC-sanctioned persons or countries: OFAC stresses that even if no party to a transaction is otherwise subject to U.S. jurisdiction, the inclusion of a U.S. financial institution in associated payments often results in a prohibited activity and a sanctions violation.
- Sanctions screening software or filter faults: Improper maintenance or use of such tools often results in failures to timely identify prohibited locations, parties, or dealings.
- Improper or incomplete due diligence on customers, clients, the supply chain, intermediaries, and counter parties: Inadvertent violations can often stem from a failure to adequately review product sourcing or pertinent parties' information, such as ownership information, business dealings, geographic location, etc.
- De-centralized compliance functions and inconsistent application of a sanctions compliance program: The effectiveness of compliance programs is often undermined by inconsistent application, which OFAC notes has often resulted from the scattering of compliance personnel and decision-makers throughout various offices.
- Utilizing non-standard payment or commercial practices: Such practices inconsistent with industry norms and practices can appear to OFAC as attempting to evade or circumvent sanctions or conceal prohibited activity.
- Individual liability: OFAC can take enforcement action against not only organizations engaged in prohibited activity but also individuals – particularly in supervisory, managerial, or executive level positions – that play integral roles in causing or facilitating violations. An individual's efforts to obfuscate and conceal activities from others within organization serve to aggravate such potential liability.
For details on how these compliance program essentials apply to recent enforcement actions, please see our recent Trade Compliance Flash.
Companies and financial institutions still face significant difficulties processing payment from Iran, even when an underlying transaction is compliant with Iran sanctions. Such difficulties are to be expected, especially given OFAC's focus on financial institutions in order to put its sanctions policy into effect. The past six months, however, have brought such payment-processing issues to the fore and clarified the steps that can be taken to minimize the risk of payment-processing issues. We summarize some common payment processing issues below:
Iranian SDN Banks
Processing payment from Iran generally involve at least one or two Iranian banks, i.e., the bank where the Iranian customer holds an account and any Iranian banks providing letters of payment or payment guarantees. Any Iranian bank's involvement in payment processing creates some sanctions risk. Notably, all Iranian banks are currently on the SDN List, meaning that they are off limits for U.S. persons and potentially trigger secondary sanctions for non-U.S. persons.
Iranian SDN banks are not all equally risky. For example, the re-imposed secondary sanctions target material support for and/or significant transactions on behalf of Iranian SDNs, except "Iranian depository institution[s] whose property and interests in property are blocked solely pursuant to Executive Order 13599 of February 5, 2012." See Executive Order 13846 of August 6, 2018, Section 1(a)(iii)(A). Similarly, the "humanitarian exception" to the Iran primary sanctions authorizes certain payment processing transactions that would otherwise be prohibited, except to the extent that they involve SDNs "subject to any sanctions under…the terrorism, proliferation of weapons of mass destruction, or narcotics trafficking programs administered by OFAC." 31 C.F.R. § 560.530(d)(5).
The technical language creates two classes of Iranian SDN banks:
- "Blocked" SDN banks: So-called "blocked" SDN banks are those Iranian depository institutions blocked solely pursuant to Executive Order 13599. For example, OFAC added Bank Keshavarzi Iran to the SDN List pursuant to Executive Order 13599 and no other sanctions authorities. Accordingly, Bank Keshavarzi Iran falls within the secondary sanctions exception for "Iranian depository institution[s] whose property and interests in property are blocked solely pursuant to Executive Order 13599," such that the re-imposed secondary sanctions do not apply. Similarly, Bank Keshavarzi Iran is not "subject to any sanctions under…the terrorism, proliferation of weapons of mass destruction, or narcotics trafficking programs administered by OFAC," such that a transaction involving the blocked SDN bank does not violate the terms of the humanitarian exception for agricultural, medicine, and medical device transactions.
- "Designated" SDN banks: So-called "designated" SDN banks are those Iranian financial institutions designated under any sanctions authority besides Executive Order 13599. For example, OFAC originally designated the German-based, Iranian-owned Europäisch-Iranische Handelsbank (EIH) as an SDN pursuant to Executive Order 13382, which targets WMD proliferators. Accordingly, EIH and other banks like it are not designated solely pursuant to Executive Order 13599 and do not fall within the exception to the secondary sanctions. Similarly, EIH is an SDN subject to sanctions under OFAC's WMD proliferation program, such that its involvement does violate the terms of the humanitarian exception for agricultural, medicine, and medical device transactions.
Roughly half of Iranian banks are "designated" SDNs and half are "blocked" SDNs. Accordingly, companies and financial institutions that have elected to continue business in Iran should generally have an idea of the program under which any Iranian banks involved in a transaction have been sanctioned, which will determine whether they are designated or blocked. Payment processing through banks designated pursuant to any sanctions authority besides Executive Order 13599 are off limits to U.S. persons and may create secondary sanctions risk for non-U.S. persons, in certain circumstances.
Unknown Banks or Companies in Payment Processing Chain
Since the re-imposition of secondary sanctions in November 2018, some Iranian banks seek to route payment through non-Iranian banks or companies in a way that may not disclose the Iranian origin of the payment. For example, a European exporter may send an invoice to or accept a purchase order from an Iranian customer, and then receive a payment for the amount owed from a previously unknown company in Pakistan, the United Arab Emirates, or Hong Kong. Iranian banks may sometimes engage in such circuitous payment processing even when the underlying transaction presents very low U.S. sanctions risk. While there may be a reasonable explanation for such circuitous payment processing, the presence of unknown banks or companies in a payment chain may also be a red flag suggesting sanctions evasion or money laundering.
Companies and financial institutions can mitigate the risk of unknown banks or companies in a payment processing chain in a number of ways. First, to the extent possible, it is generally best to insist on transparent, direct payments from the Iranian customer's bank, with no payments through unknown banks or companies. Companies and financial institutions outside Iran may have little insight into or control over how Iranian financial institutions decide to route payment, but it may nevertheless be beneficial to insist on transparency whenever possible. Second, companies should consider additional due diligence on any unknown banks or other companies that appear in a payment chain. If this due diligence uncovers any evidence that the unknown company is used for sanctions evasion or money laundering, then payment through that entity may have to be rejected.
Conversion from Rial
Finally, most Iranian transactions involve conversion from Iranian rial to a foreign currency, which can raise sanctions issues as well. Notably, Iranian law generally requires authorization from the Central Bank of Iran (CBI) to convert rial into non-Iranian currency. The National Defense Authorization Act for Fiscal Year 2012 (NDAA) authorizes OFAC to impose secondary sanctions on any foreign financial institution determined to have knowingly conducted or facilitated a "significant financial transaction" with the CBI, which could theoretically include a transaction for the conversion of rial to another currency.
In addition, Section 6 of Executive Order 13846 creates risks for other financial institutions that support rial conversion, including by "knowingly conduct[ing] or facilitate[ing] any significant transaction related to the purchase or sale of Iranian rials or a derivative, swap, future, forward, or other similar contract whose value is based on the exchange rate of the Iranian rial" or "maintain[ing] significant funds or accounts outside the territory of Iran denominated in the Iranian rial."
While the rial-focused sanctions technically apply only to financial institutions, companies may face difficulties as well if a financial institution declines to process payment because of rial-related risk.
However, there are several steps that companies and financial institutions can take to mitigate the risk of rial conversion. Most notably, OFAC regulation makes clear that a transaction is less likely to be significant if "the Central Bank of Iran's role is limited to providing settlement services or foreign currency exchanges in transactions between a non-designated Iranian financial institution and a foreign financial institution." 31 CFR § 561.404(g). Accordingly, companies and financial institutions can mitigate rial-related risk by using "non-designated" banks, i.e., banks blocked solely pursuant to Executive Order 13599, and by limiting interactions with the CBI to currency conversion. In addition, because of the sanctions imposed under Section 6 of Executive Order 13846, it may be safest to effect rial conversion through the CBI, lest any private bank that offers similar services be sanctioned for knowingly conducting a significant transaction related to the purchase or sale of Iranian rials or maintaining a rial-denominated fund outside Iran.
Germany, France, and the U.K. announced that they are developing a payment channel with Iran called INSTEX SAS – Instrument in Support of Trade Exchanges. INSTEX is a "special purpose vehicle" that aspires to allow European businesses to trade with Iran, despite U.S. sanctions. Initially, the channel will be used to facilitate legitimate trade with Iran, namely, sales of food, medicine, and medical devices, but it is possible it will expand in the future.
INSTEX remains in its infancy, but the long-term purpose of INSTEX will be to facilitate trade between Europe and Iran while reducing the need for transactions between European and Iranian financial systems. In order for INSTEX to be operational, Iran will need to set up a comparable Iranian vehicle in Iran, which Iran announced it would – the Special Trade and Finance Institute (STFI). In theory, the two special purpose vehicles will communicate with each other and pay European exporters for sales to Iran from funds within Europe and the Iranian special purpose vehicle will pay Iranian importers from funds within Iran. In practice, a European exporter with an order from an Iranian importer for medicine will provide INSTEX with documentation of the transactions. Once it has approved the sale, INSTEX will register it on a ledger of trade. Then, INSTEX will find a comparable transaction that involves a European importer and Iranian exporter. INSTEX will then approve payment from the European importer to the European exporter of medicine. On the Iranian side, the INSTEX counterpart will coordinate similar payment from the importer of medicine to the Iranian exporter. This method bypasses the need for European banks to communicate with the Iranian financial system. Such a system, in theory, will reduce payment processing risks, such as dealing with designated SDN banks.
The challenge with this type of system is whether INSTEX can maintain enough of a trade balance to allow for payments to be settled in a timely fashion.
Since our most recent publication in the Fall of 2018, OFAC, BIS, and DOJ have continued to aggressively enforce the Iran sanctions, with sanctions designations, civil fines, and criminal charges. The Iran-related enforcement, litigation, and prosecutions are set forth below:
Civil Enforcement Actions
UniCredit Group Banks Settle with OFAC for Processing Payments through U.S. Financial Institutions for Islamic Republic of Iran Shipping Lines (IRISL): In April 2019, three UniCredit related entities entered into a global settlement of $1.3 billion with federal and state government partners and OFAC for various U.S. sanctions violations. UniCredit Bank AG (UniCredit AG) settled with OFAC for $553,380,759 for 2,158 apparent violations of Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. part 544 (WMDPSR) and other sanctions programs. Between January 2007 and December 2011, UniCredit Bank AG operated U.S. dollar accounts for IRISL and several other companies owned or affiliated with IRISL. In September 2008, OFAC designated IRISL pursuant to Executive Order 13382 for providing services to Iran's Ministry of Defense and Armed Forces Logistics. Although the bank's legal counsel advised bank employees that they should not carry out U.S. dollar transactions on behalf of IRISL or its affiliates, bank employees did not follow this directive for all IRISL-affiliated customers. OFAC's investigation showed that UniCredit AG processed U.S. dollar payments on behalf of IRISL and its affiliates in a non-transparent matter, for example, by confirming that payment instructions did not include references to U.S.-sanctioned persons and countries. The bank processed these payments according to a "OFAC neutral" bank policy that instructed bank personnel to submit payment instructions so that U.S. intermediary parties could not detect the involvement of OFAC-sanctioned parties. Notably, UniCredit AG did not seek legal guidance, either from internal or external counsel on its "OFAC neutral" policy. The DOJ also charged UniCredit AG with sanctions violations as well, and the bank has pled guilty. All banks processing U.S. dollar transactions internationally should confirm that their employees are properly trained in sanctions compliance, test and audit the effectiveness of their compliance programs, and seek legal guidance with respect to any policies or procedures that are implemented.
Stanley Black & Decker Settles with OFAC for Foreign Subsidiary's Sales to Iran: On March 27, 2019, OFAC entered into a settlement agreement in which Stanley Black & Decker, Inc., (Stanley Black & Decker) and its foreign subsidiary, Jiangsu Guoqiang Tools Co., Ltd. (GQ), agreed to pay $1.869 million to settle its potential civil liability for 23 apparent violations of the Iranian Transactions Sanctions Regulations (ITSR). The apparent violations occurred after Stanley Black & Decker acquired a majority interest in GQ in 2013. In due diligence beforehand, Stanley Black & Decker learned that GQ sold products to Iran and conditioned the purchase on GQ's discontinuance of these sales. GQ continued making sales to Iran for two years, despite knowing this violated corporate policies and U.S. sanctions. Upon discovery, Stanley Black & Decker initiated an internal investigation and ultimately disclosed the matter to OFAC. The investigation revealed that, with the participation of various GQ board members and senior management, GQ had apparently engaged in "non-routine business practices" to continue Iran sales, such as utilizing trading companies in the United Arab Emirates and China as conduits, creating fictitious bills of lading with incorrect ports of discharge and places of delivery, and instructing customers not to write "Iran" on business documents.
In addition to the $1.869 million penalty, the settlement agreement required Stanley Black & Decker and GQ to implement detailed compliance reforms, including (1) structural reforms evincing a management commitment to sanctions compliance, (2) the performance of a comprehensive sanctions risk assessment, (3) improved internal controls tailored to address sanctions risk, (4) testing and audit procedures to validate the effectiveness of the internal controls, and (5) an expansive sanctions training program. All U.S. companies would be wise to review these compliance reforms, particularly in situations where a newly acquired subsidiary had pre-existing sales to sanctioned countries, as the requirements seem to reflect OFAC's expectations for how U.S. companies with a multi-national footprint will structure their U.S. sanctions compliance policies going forward.
ZAG IP Settles with OFAC for Purchasing and Selling Iranian Goods: ZAG IP (ZAG), a U.S. company that sources and markets cement raw materials, settled with OFAC for $506,250 for five apparent violations of 31 C.F.R. § 560.206 – engaging in a prohibited trade-related transaction with Iran. ZAG purchased a total of 263,563 metric tons of Iranian-origin cement products, specifically clinker, from a company located in the United Arab Emirates, with knowledge that the cement clinker was sourced from Iran, and then resold it to a company in Tanzania. The aggregate value of the transactions was $14,495,961. ZAG entered into a contract with a Tanzanian company to supply cement clinker sourced from an Indian supplier, but before the first shipment, the Indian supplier notified ZAG that it would not have enough cement clinker to meet its order. ZAG located an alternative supplier through a United Arab Emirates trading company and relied on the company's misrepresentation that cement clinker was not subject to U.S. economic sanctions on Iran. ZAG voluntarily disclosed the apparent violation to OFAC. As part of its remediation effort, ZAG developed and implemented a U.S. Export Controls and Economic Compliance Manual and appointed a sanctions compliance officer. Companies would be wise to seek independent legal advice from outside counsel before engaging in any high-risk trade.
Standard Chartered Settles with Regulators for $1 Billion for U.S. Dollar Transactions Involving Sanctioned Persons and Countries: Standard Chartered Bank entered into settlements with New York state and federal regulators for violations of the sanctions against Iran and concealing transactions for clients in Iran and other sanctioned countries. Standard Chartered will pay $639 million to OFAC for violating the ITSR, the Cuban Assets Control Regulations, the now-repealed Burmese Sanctions Regulations, and the Sudanese Sanctions Regulations. In 2013, OFAC and other regulators asked Standard Chartered to investigate its corporate customers between June 2009 and June 2015. During this period, the bank processed 9,335 transactions totaling $437,553,380, to or through the United States, that involved sanctioned persons or countries—most of which involved Iran-related accounts in Dubai and United Arab Emirates branches. The bank also processed U.S. dollar transactions through its New York branch by having customers located or residing in Iran give payment instructions through the bank's Dubai branch. The bank did not voluntarily disclose these violations and OFAC determined they were egregious.
Kollmorgen Corp. Settles with OFAC for Foreign Sub's Provision of Services to Iran: Kollmorgen Corp. (Kollmorgen) voluntarily disclosed six apparent violations of the ITSR by its Turkish subsidiary Elsim and on February 7, 2019, agreed to pay a fine of $13,000 to settle the matter with OFAC. Despite Kollmorgen's implementation of compliance measures at Elsim when it acquired the company in 2013, particularly with regard to Iran business, Elsim's managing director, a Turkish national named Evren Kayakiran, allegedly persisted in business operations that violated the ITSR for over two years. In particular, Elsim management dispatched Elsim employees to Iran to service machines and provide other services to Iran and threatened the staff with termination for refusal to do so. When potential violations came to light, Kollmorgen conducted an internal investigation and Elsim management tried to conceal the illicit activities by misleading Kollmorgen's attorneys. For his willful violations and his role directing Elsim's staff to commit and cover up the violations as well, OFAC sanctioned Kayakiran by designating him as a Foreign Sanctions Evader (FSE), which is the first time OFAC has designated an individual while resolving an enforcement matter. The Treasury Under Secretary for Terrorism and Financial Intelligence emphasized that this action is a "marked change to how we will counter these acts of deception" and serves as "a clear warning to anyone in supervisory or managerial position who directs staff to provide services, falsify records, commit fraud, or obstruct an investigation into sanctions violations exposes themselves to serious personal risk."
Yantai Jereh Settles with OFAC and BIS for Shipments to Iran: In December 2018, the subsidiary of the Chinese oilfield services company Yantai Jereh Oilfield Services Group (Yantai Jereh) settled with OFAC and BIS for a combined $3.4 million. On at least 11 occasions, Yantai Jereh allegedly violated U.S. sanctions on Iran and U.S. export controls by shipping oilfield service products to Iran. The alleged scheme began in 2013 when a sales executive of Yantai Jereh met with potential buyers in Iran and developed a plan to unlawfully ship products containing U.S. content to Iran through an intermediary in a third country. During a government inquiry and investigation, Yantai Jereh employees made false statements in interviews with BIS, concealing the nature of the company's Iran business, removing standard export control provisions from Iran-related contracts, using a Chinese trading company as an intermediary, and falsifying information in U.S. export filings. In exchange for the substantial payment, which was several times the total value of the underlying goods intended for shipment to Iran, BIS agreed to remove Yantai Jereh from the BIS Entity List, allowing the company to regain access to U.S. goods, services, and technology.
Société Générale SA Settles with OFAC for Processing U.S. Dollar Transactions in Violation of Sanctions Programs: In November 2018, shortly after the re-imposition of secondary sanctions targeting Iran, Société Générale SA (SocGen) reached agreements with OFAC to settle allegations that it had processed and concealed transactions that violated U.S. sanctions in connection with Cuba, Sudan, and Iran, and agreed to pay a $53,966,916.05 civil penalty. Most notably, the Paris-headquartered multinational investment bank allegedly processed 30 transactions involving Iran totaling $34,152,962.50, in violation of the ITSR. SocGen processed these transactions through U.S. financial institutions pursuant to credit facilities designed to finance various Iran-related activities. SocGen stopped processing these transactions after it received advice from U.S. outside counsel that any processing by a U.S. person of payments made by Iranian borrowers are prohibited by the ITSR. SocGen allegedly engaged in similar misconduct in connection with Sudanese and Cuban transactions. It also entered into settlement agreements with DOJ, the Federal Reserve, and various New York state authorities for a total of $1.3 billion to resolve charges. SocGen's November 2018 settlement is separate from its prior June 2018 $1.3 billion settlement with U.S. and French authorities to resolve allegations that SocGen had made unlawful payments to Libyan officials and manipulated the benchmark London InterBank Offered Rate (LIBOR), discussed in our FCPA Review and Money Laundering Enforcement Trends publications.
Criminal Enforcement Actions and Litigation Developments
DOJ Charges Iranian Citizen for Conspiring to Equip Iranian Airlines with U.S. Origin Aircraft Parts: In June 2019, the DOJ unsealed two indictments charging Amiri Larijani, a citizen of Iran. The first indictment charges him with conspiracy to acquire U.S. origin aircraft parts to supply to entities and end users in Iran in violation of the International Emergency Economic Powers Act (IEEPA), the ITSR, and the Export Administration Regulations (EAR). According to the indictment, Larijani was the Operations Manager for Kral Aviation and along with co-conspirators purchased U.S.-origin aircraft parts and accessories from U.S. companies. Larijani and his co-conspirators concealed from U.S. sellers the ultimate end use and end users of the purchased parts and caused these parts to be shipped to airlines in Iran, which included Mahan Air, Sahand Air, and Kish Air. Mahan Air was designated by OFAC as a SDN for providing financial, material, and technological support to Iran's Islamic Revolutionary Guard Corps-Qods Force. The U.S. Department of Commerce has placed Mahan Air on its Denied Parties List. Kral Aviation is on the Commerce Department's Entity List. The second indictment, charges Larijani, Mahan Air, Kral Aviation and others with conspiracy to export U.S. goods to Iran, provide services to Mahan Air, and defraud the United States. If convicted, Larijani faces a maximum of 20 years imprisonment.
Australian National Sentenced to Two Years in Prison for Exporting Electronics to Iran: On March 21, 2019, Australian national David Russell Levick was sentenced after pleading guilty to four counts of violating IEEPA. Levick was previously the general manager at ICM Components, Inc., located in Australia. According to plea documents, Levick solicited purchase orders from the representative of an Iranian trading company for certain aviation-related equipment – namely aviation sensors, emergency flotation kits, and high-vibration light equipment – for which a license was required before exportation to Iran. Levick allegedly concealed the ultimate end-use and end-users of the parts from manufacturers, distributors, shippers, and freight forwarders located in the U.S. and elsewhere. Levick also allegedly structured payments to avoid trade restrictions imposed by Iranian financial institutions. Levick was sentenced to 24 months in prison and must pay a forfeiture amount of $199,227, which the government alleges to be the total value of goods involved in the Iranian transactions.
DOJ Charges Huawei, CFO, and Affiliates with Criminal Sanctions Violations: The DOJ indicted Chinese telecom provider Huawei, two of its subsidiaries, and Huawei CFO Meng Wanzhou (Meng), in the Eastern District of New York for violating sanctions against Iran. Huawei's U.S. affiliate, Huawei Device USA, and its alleged Hong Kong subsidiary, Skycom Tech Co., Ltd. (Skycom), were also charged under several of the counts. Meng, a Chinese citizen, allegedly defrauded U.S. financial institutions in the company's scheme to circumvent U.S. sanctions on Iran and now faces potential extradition from Canada to the United States to stand trial for four total counts under the indictment. The DOJ asserts that Huawei surreptitiously conducted business in Iran by concealing its ownership of Skycom, a Hong Kong company that allegedly handles business dealings with Iran. As CFO, Meng allegedly denied the companies' relationship and misrepresented Huawei's compliance with U.S. sanctions and export laws to a major bank, which then cleared U.S. dollar transactions in contravention of U.S. sanctions. Huawei also allegedly lied about its relationship and dealings with Skycom to U.S. government authorities, providing false information to U.S. Congress, and making false statements to FBI agents. Upon learning of the U.S. government's investigation, the company allegedly tried to move potential witnesses outside of U.S. jurisdiction and to conceal and destroy evidence located in the United States.
Defense Contractors Charged with Defrauding the Military and Violating Sanctions Laws for Shipping Materials Through Iran: In November 2018, a federal grand jury indicted three defense contractor executives for their roles in a scheme to allegedly defraud the U.S. military out of an $8 billion contract to supply food to troops in Afghanistan. Abdul Huda Farouki, CEO of defense contractor Anham FZCO; Mazen Farouki, President and Founder of international logistics company Unitrans International Incorporated; and Salah Maarouf, who operated a company that procured goods and services for Anham, allegedly knowingly submitted to the government false estimates of the completion dates for food storage warehouses contemplated under the contract. They also allegedly violated the sanctions against Iran by shipping materials for the warehouse through Iran, instead of through legal shipping routes. All three were charged with counts of major fraud, one count of conspiracy to violate the restrictions on doing business with Iran, four counts of substantive violations of those restrictions, and one count of conspiracy to commit international money laundering. And all three defendants have entered pleas of not guilty before the court.
U.S. Intelligence Agent Indicted for Disclosing Classified Information to Iran: In February, a grand jury indicted a former U.S. Air Force intelligence specialist, Monica Witt, with conspiracy to and delivery of national defense information to representatives of the Iranian government. Witt, who served in the U.S. military for over a decade, defected to Iran in 2013. The indictment alleges she extensively disclosed classified information to Iranian government officials. Witt allegedly disclosed the code name and mission of a U.S. Department of Defense Special Access Program, disclosed the identity of a U.S. intelligence agent and their counterintelligence activities against a specific target, and created plans for Iran to find and target her former intelligence colleagues. The indictment also charges four Iranian nationals with conspiracy and attempts to commit computer intrusion through fake messages to Witt's former intelligence colleagues. Arrest warrants have been issued for Witt and the other defendants, who all remain at large.
United States Detained Iranian Journalist as Witness: The United States detained an Iranian journalist, Melanie Franklin a/k/a Marzieh Hashemi, on a material witness warrant for 10 days in January. Material-witness warrants are rare, and only used when the government has reason to believe the witness will flee rather than testify. A U.S. judge in the District of Columbia issued the warrant. Pursuant to the material witness warrant, the DOJ detained Ms. Hashemi, a dual citizen of Iran and the U.S., to ensure she would testify before a grand jury investigating violations of U.S. law. During her detention, Ms. Hashemi had four appearances before a court and was represented by appointed counsel. When Ms. Hashemi completed her testimony before the grand jury, she was released from U.S. custody and has since returned home to Iran. Her testimony remains under seal, although news outlets have speculated that she testified before the grand jury that indicted the former U.S. Air Force Intelligence specialist, Monica Witt.
Other Iran-Related Developments
Iran Must Implement Changes or Risk Financial Action Task Force Countermeasures: At its plenary meeting in Paris in February 2019, despite Iran's failure to implement its July 2016 Action Plan, the Financial Action Task Force (FATF) decided not to re-impose countermeasures against Iran. However, FATF renewed calls for enhanced due diligence when dealing with Iran and has given Iran until June 2019 to enact legislation in line with FATF standards. If Iran does not enact the remaining legislation, then FATF will require increased supervisory examination for branches and subsidiaries of financial institutions based in Iran. This suggests that FATF may no longer be willing to fully suspend countermeasures if all legislation has not been adopted by June. FATF acknowledged that Iran has made progress towards meeting FATF standards by establishing a cash declaration regime, enacting amendments to its Counter-Terrorist Financing Act, and enacting amendments to its Anti-Money Laundering Act. However, it noted that Iran had yet to:
- Adequately criminalize terrorist financing, including removing the expense for designated groups "attempting to end foreign occupation, colonialism, and racism";
- Identify and freeze terrorist assets in accordance with U.N. Security Council resolutions;
- Ratify the U.N. Convention against Transnational Organized Crime (Palermo Convention) and the international Convention for Suppression of the Financing of Terrorism;
- Ensure an adequate and enforceable customer due diligence regime;
- Ensure the full operational independence of the Financial Intelligence Unit and clarify that the submission of STRs for attempted TF-related transactions are covered under Iran's legal framework;
- Demonstrate how authorities are identifying and sanctioning unlicensed money/value transfer service providers; and
- Ensure that financial institutions verify that wire transfer contain complete originator and beneficiary information.
Until Iran implements the full Action Plan, Iran will remain on the FATF Public Statement, and financial institutions should continue to apply enhanced due diligence with respect to business relationships and transactions with persons from Iran.
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