Dec

13

Do Due Diligence or Penalties May Be Due


Posted by at 7:20 pm on December 13, 2017
Category: Iran SanctionsOFAC

Dentsply Sirona HQ via https://corporate.dentsplysirona.com/en/about-dentsply-sirona/_jcr_content/main/tilesquarecontainer/components/tilesquare_355870153/picture.img.582.HIGH.jpg/1488408622677.jpg [Fair Use]Dentsply Sirona agreed to pay the Office of Foreign Assets Control (“OFAC”) $1,220,400 to settle charges in connection with 37 unlicensed exports of dental equipment to Iran. The value of the shipments was not stated but it would have been close to the $1,695,500 that OFAC asserted was the base penalty amount.

The significant issue is that these were not exports of Dentsply Sirona, but rather of two subsidiaries of Dentsply before it merged into Sirona in February 2016. OFAC, and the other export agencies, apply a rule of successor liability and although that rule is more defensible in a merger case, such as this one, it also has been applied in asset deals. And there is some chance in this case that Sirona may not have known about this sanctions liability until OFAC came knocking on the merged company’s doors given that the matter was not voluntarily disclosed by the parties.

According to the charging documents, the Dentsply subs sold dental products from the United States to foreign distributors with knowledge that they would be re-exported to Iran.  In addition, they continued to do so even after receiving confirmation that the items had, in fact, been re-exported to Iran.

One of the aggravating factors cited by OFAC was that personnel of the subsidiaries deliberately concealed from the parent company their knowledge of and participation in sales to distributors that were going to be re-exported to Iran. Although this case, on the one hand, emphasizes the need for due diligence on sanctions violations as part of the mergers and acquisitions process, it also raises the question here as to how due diligence would have caught these violations. The company’s export records would only show exports to the distributors outside Iran and would not reveal the subsequent re-exports to Iran. And the employees who had been busy lying to the parent company could not be expected to come clean about the scheme when presented with a due diligence questionnaire or in a due diligence interview.

That raises a larger question. Why on earth is it an aggravating factor for a parent company (and a successor entity) that it had rogue employees in its subsidiaries? If the parent had a reasonable compliance program, exercised reasonable review over the sub’s hiring practices with background checks, and had no knowledge of the con game going on, why should the penalty be increased? That hardly seems fair. Rather, the appropriate response should be referring the employees’ violation to the DOJ for criminal prosecution of those employees themselves. After all, the aggravating factor here is itself fairly conclusive proof of criminal intent by the sub’s employees.

 

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Dec

7

BIS, For One, Does Not Welcome Our New Robot Overlords


Posted by at 6:28 pm on December 7, 2017
Category: BISCivil PenaltiesEntity List

Pilot Truck via http://www.pilotdelivers.com/images/photo-library/PFS011-web.jpg [Fair Use]The Bureau of Industry and Security (“BIS”) recently announced that Pilot Air Freight had agreed to a $175,000 fine ($75,000 of which was suspended) to settle charges that it had aided and abetted an attempted unlicensed export by one of its customers (against whom there is no record of any enforcement action) to IKAN Engineering Services, a company on the BIS Entity List. This seems rather high for what was essentially a software glitch.

According to the charging documents, Pilot had multiple interfaces for entering shipping data.  Its main interface, called “Navigator,” was linked to proprietary screening software that would screen shipment recipients against the Entity List and other relevant screening lists.   A second interface, called “Co-Pilot,” allowed customers to enter shipment data.   Apparently, entries made in “Co-Pilot” weren’t linked back to the Navigator screening software, so when a customer entered a shipment to IKAN, the shipment was not flagged.   It was apparently intercepted by Customs when it reached the Port of Long Beach.

There is nothing in the charging documents to suggest that Pilot knew of this glitch in its automated screening system.  It apparently thought that shipments were being screened.  This is unlike those cases where the exporter did not know of its obligation to screen shipments or knew of its obligation but decided not to screen certain shipments.   Certainly BIS has every right to penalize Pilot here, but the penalty should have taken into account what appear to have been the innocent and unintentional origins of the problem.   Almost everyone uses automated screening and would now appear to be at the mercy of the robots they employ to do the screening and the techies they hire to program the robots.

There’s another interesting wrinkle in the charging documents that BIS more or less glosses over.

Pilot failed to flag this transaction even though the name and address in its possession closely matched the Entity List listing for IKAN.   As Pilot has acknowledged to BIS during this matter, properly configured screening software would have identified the attempted export as involving a listed entity and flagged it for review.

Even though BIS acknowledges that this was not an exact match, we have no idea how inexact the match was.  Even though Pilot agreed that it was not so inexact that it would have been missed by its screening software , it is hard to tell whether they really believed that or felt compelled to say it to keep BIS happy.  The failure of BIS to reveal the name used by the shipper suggests that the match might not have been as close as BIS would now have us believe.

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Dec

5

OFAC Issues Finding of Violation to Foreign Ship Registry for Dealings with Iran


Posted by at 12:38 pm on December 5, 2017
Category: Iran SanctionsOFAC

Dominica Seen From the Ship (10) by Gail Frederick [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/5MYWSL [cropped and processed]Last Tuesday the Office of Foreign Assets Control (“OFAC”) issued a “finding of violation” (but not a fine) against the Dominica Maritime Registry (“DMR”) for entering into a “Binding Memorandum of Understanding” with the National Iranian Tanker Company (“NITC”), an Iranian government entity listed on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”). Because this was a “contingent contract” in which a blocked party had an interest, DMR’s entry into the contract, according to OFAC, violated section 560.211 of the Iranian Transactions Sanctions Regulations.

The wrinkle in this case is that the Dominica Maritime Registry is located in Fairhaven, Massachusetts, the Government of Domenica having subcontracted its governmental maritime registry functions in 1999 to the Northeast Maritime Institute in Fairhaven, which is why, I suppose, OFAC thought it could sink its teeth into DMR.  Subcontracting maritime registry functions is an unusual, although not unprecedented, situation. The Republic of the Marshall Islands has also subcontracted its maritime registry functions to International Registries, Inc. in Reston, Virginia.

OFAC noted a number of aggravating factors in its decision. DMR, according to OFAC, did not voluntarily disclose the violation; it “knew” that NITC was on the SDN list; it failed to exercise a “minimal degree of caution” in signing the contract with NITC; and DMR executives “actively participated” in negotiating and executing the contract. As mitigating factors OFAC noted that DMR was a small company with no prior penalties and that it recently hired trade counsel to assist in OFAC compliance issues.

So here we have what appears to be an intentional violation that was not voluntarily disclosed and yet the only penalty is a finding of violation — or, in more colloquial terms, a half-hearted slap on the wrist followed by a beat-down with a few wet noodles. This is likely because the real mitigating factor was one that OFAC did not want to mention much less admit: sovereign immunity. If OFAC wanted to collect any fine imposed on DMR, it would  have been forced to resort to an action in federal court, where is would have run up against the Foreign Sovereign Immunities Act, 28 U.S.C. § 1602 et seq.

Of course, the FSIA issue here is whether the maritime registry function is a commercial activity exempted from the jurisdictional restrictions of the FSIA. The Supreme Court in Republic of Argentina v. Westover spelled out the test for making this determination

the question is not whether the foreign government is acting with a profit motive or instead with the aim of fulfilling uniquely sovereign objectives. Rather, the issue is whether the particular actions that the foreign state performs (whatever the motive behind them) are the type of actions by which a private party engages in “trade and traffic or commerce.

Dominica’s International Maritime Act of 2000 sets forth the various conditions for registration of vessels entitling them to fly a Dominican flag, including a determination of seaworthiness and compliance with various other regulatory requirements, including vessel marking. Once registered the vessel is accorded certain rights by the Dominican government, including the right to freely enter its ports. It seems beyond doubt that maritime registration, even if subcontracted to a U.S. corporation, is a governmental and not a commercial function.

Based on this, the real mitigating factor in this case had nothing to do with this being a first violation or that DMR was small and agreed to hire trade counsel. No, the real mitigating factor was that OFAC probably could not have collected any fine that it imposed.

Photo Credit: Dominica Seen From the Ship (10) by Gail Frederick [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/5MYWSL [cropped and processed]. Copyright 2008 Gail Frederick

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Dec

1

OFAC Fines Foreign Company for Following Applicable Foreign Law


Posted by at 8:41 am on December 1, 2017
Category: Cuba SanctionsForeign CountermeasuresGeneralOFAC

American Express Office in Rome, image by User Mattes [CC-BY-3.0] (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons http://commons.wikimedia.org/wiki/File:American_Express_office_in_Rome.jpgThe Office of Foreign Assets Control (“OFAC”) recently announced that it has extracted $204,277 from American Express as a result of 1,818 credit card transactions in the amount of $583,649.43 for purchases made in Cuba. At issue were Mastercard and Visa corporate credit cards issued by BCC Corporate SA to corporations for use by the employees of those corporations, which cards were then used by those employees to make the Cuban purchases that were at issue.. BCC is a wholly-owned Belgian subsidiary of Alpha Card Group, another Belgian company  and a 50/50 joint venture of BNP Paribas Fortis and American Express.

The immediate question here, which OFAC can’t be bothered to answer, is how OFAC has the authority to fine a Belgian company for its dealings with Cuba. The Cuban Assets Control Regulations prohibit Cuba transactions by persons “subject to the jurisdiction of the United States.” Section 515.329 of the CACR define persons subject to the jurisdiction of the United States to include companies “owned or controlled” by a corporation organized under the laws of the United States

The CACR does not define “owned or controlled.”  That’s probably because everyone — except apparently OFAC — understands what that means, namely that the U.S. company owns 100 percent of the company or some lesser amount coupled with de jure or de facto control. In the case of a 50/50 joint venture neither party owns or controls the venture.  (Owned in this context cannot mean any interest, no matter the size, since that would render the addition of “or controlled” unnecessary).

To make matters worse, OFAC is — yet again — punishing a company for complying with applicable foreign law.   Anyone who reads this blog knows that I have pointed out time and time again that it is illegal for companies doing business in the European Union. Council Regulation (EC) No 2271/96 of 22 November 1996 prohibits companies incorporated in the E.U., such as BCC Corporate SA, from complying with the U.S. embargo on Cuba. OFAC does not, of course, mention BCC’s obligation to comply with local law or even cite it as a mitigating factor here. This is particularly egregious where the company at issue is not even subject to U.S. jurisdiction.

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Nov

27

Mugabe Leaves, Mnangagwa Arrives, Sanctions Remain


Posted by at 6:27 pm on November 27, 2017
Category: OFACSDN ListZimbabwe Sanctions

Emmerson Mnangagwa via https://en.wikipedia.org/wiki/File:Emmerson_Mnangagwa_2017.png#file [Public Domain - Work of USG employee]
ABOVE: Emmerson Mnangagwa

Last Tuesday, while you were thinking about the upcoming Thanksgiving holiday, Robert Mugabe, who has been dictator of Zimbabwe for the last 37 years, resigned.  Then while you were storming the doors of a local brick and mortar on Black Friday to cart off a new 4k flat screen TV, former Zimbabwean First Vice-President Emmerson Mnangagwa was sworn in as the new President, er, dictator of Zimbabwe.

So, you ask, whither the U.S. sanctions on numerous persons and companies in  Zimbabwe?  Here’s a hint:  Mnangagwa’s nickname is “The Crocodile” and he’s been Mugabe’s right hand man for years until the opportunity to replace Mugabe presented itself and Mnangagwa shoved him aside.  Here’s another hint:  Mnangagwa is, like Mugabe, on the SDN list, mostly for himself being knee-deep in everything that got Mugabe on the list and kept him there, including the notorious military massacre of the Ndebeles in Matabeleland.

The denial of bail for jailed political opponents of Mnangagwa, Ignatius Chombo and Kudzanai Chipanga, does not give much reason to hope that democratic reforms — a prerequisite to any sanctions reform for Zimbabwe — will occur in the near future.

Even though many of the member of Zimbabwe’s ruling class and associated companies and agencies are under sanctions, and will likely remain so for the near future, Zimbabwe is a major recipient of U.S. foreign aid, recently receiving $220 million from the United States. As you probably know, that could change if Mnangagwa is determined to have taken power through a coup. Section 508 of the Foreign Assistance Act, as continued through various subsequent appropriations bills, prohibits foreign aid to countries where a duly elected head of government is deposed by military coup or decree. Whether or not Mugabe was “duly elected” remains, I suppose, open to doubt, but even so State Department spokesman Heather Nauert declined to answer questions as to whether Mnangagwa’s takeover was even a coup. “I’m not going to take that bait,” was what she said to worm out of answering that question.

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