Some wag once said that the difference between soccer and rugby is that rugby is a game played by hooligans and watched by gentlemen while soccer is played by gentlemen and watched by hooligans. Well, another difference is that no rugby team has ever been on the SDN list.
On November 19, OFAC designated Colombia’s popular soccer team, Envigado Futbol Club S.A, as a Specially Designated Narcotics Trafficker. According to an OFAC statement, the team’s owner is a “key associate within La Oficina [drug cartel] and has used his position as the team’s owner to put its finances at the service of La Oficina for many years.” It is, of course, doubtful that Envigado has, or ever will have, assets under the control of U.S. persons, so the impact of blocking the club is mostly symbolic. But as a compliance lesson, it demonstrates that you can’t ever assume that a person or entity might not have been blocked.
Fun fact: James Rodríguez, a midfielder on Colombia’s World Cup Soccer Team in 2014 and the tournament’s top goal scorer, began his soccer career with Envigado FC.
In our prior post on the Russia sanctions and export of equipment to be used in oil production and exploration in shale, we noted that BIS had not yet weighed in on whether its export ban, like OFAC’s restriction, covered only production and exploration of oil in shale and not production and exploration which went through shale to oil reservoirs below. Well, in fact BIS has also recently updated its FAQs and has reached the same conclusion as OFAC. BIS is to be commended for phrasing its FAQ on this issue in a clear and intelligible way, unlike the cryptic version posted by OFAC.
Q11: When the August 6 rule refers to shale and uses the terms exploration or production in shale, do the restricted end uses apply only to situations, such as fracking, where the hydrocarbon is located in shale formations, or do they also apply to projects involving penetrating a layer of shale to reach a reservoir located below the shale formation? What about projects that involve unconventional methods of extracting oil from shale (e.g., from shale reservoirs or oil shale processing)?
A11: The license requirements of §746.5 of the EAR apply to the specified items when you know that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia, or are unable to determine whether the item will be used in such projects. Thus, the license requirement applies to exploration for, or production of, oil or gas from a shale formation. The license requirement does not apply to exploration or production through shale to locate or extract crude oil or gas in reservoirs.
OFAC today released a new FAQ on the Ukraine Sanctions and shale formations. The purpose of FAQs, at least outside the Treasury Department, is to present clear and concise answers to resolve questions that many people might have. OFAC seems to have the idea instead that the FAQs are a place for cryptic and oracular pronouncements to obscure questions.
So let’s play OFAC Jeopardy. I give you the answer and if you can tell me the question you win a free subscription to Export Law Blog:
The prohibitions in Directive 4 under Executive Order 13662 apply to deepwater, Arctic offshore, or shale projects with the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory. The term “shale projects” applies to projects that have the potential to produce oil from resources located in shale formations. Therefore, as long as the projects in question are neither deepwater nor Arctic offshore projects, the prohibitions in Directive 4 do not apply to exploration or production through shale to locate or extract crude oil (or gas) in reservoirs.
Now when you first read this, it seems that OFAC is saying something radical: that the Directive 4, which prohibits exports of goods and services in support of the listed projects doesn’t apply to shale projects unless they are in the Arctic or in deepwater, meaning that the question was “Do the Ukraine sanctions apply to shale projects not located in deepwater or in the Arctic offshore?” Of course, this would be a silly reading and result even by federal regulatory standards. I’m not even sure that there is shale in deepwater or the arctic offshore regions.
But then I figured out the real question. “Do the sanctions apply to oil projects where the oil is underneath a shale formation? Is that a “shale project” under Directive 4?” And the answer is no, shale projects are when you get the oil in shale not under shale. Oh, I see. . .
Now the burning question is this: the recently added section 746.5 of the EAR forbids exports of items with certain ECCNs when the exporter knows that the items “will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet) or Arctic offshore locations or shale formations in Russia.” Does this rule cover exploration and production of oil under shale formations? Who knows? UPDATE: BIS now says that its rule covers exploration and production in, rather than through, shale
But this gives us time for one more round of Jeopardy. Alex, I’ll take Regulatory Conundrums for $500. Answer: Because Directive 4 applies to exports by U.S. persons even if the items are not subject to the EAR and 746.5 applies to re-exports by foreign persons of items subject to the EAR.
[Hit the buzzer below to answer!]
Question: If Directive 4 prohibits all exports in support of the forbidden oil projects, why do we need 746.5 which prohibits exports of only certain items in support of the forbidden oil projects.
Today the Office of Foreign Assets Control cryptically announced a change in its FAQs relating to foreign aircraft that overfly or make emergency landings in Iran. The agency merely stated that it had revised FAQ 417 without describing the difference between the old and new FAQ or why the change was made. Of course, you might assume that OFAC wanted to make it clear that if your plane was about to fall out of the sky it was okay to make an unscheduled landing in Iran — passenger safety, and all that. But you would be wrong.
The old FAQ, which you can find here, said that non-U.S. airlines could overfly Iran and make emergency landings there as long as no payments were made to or through any of the specifically designated banks in Iran (like Bank Melli) or any entities on the SDN list (other than, of course, agencies and instrumentalities of the Iranian government). The new FAQ, however, adds a new wrinkle: the payments now cannot involve the U.S. financial system if a foreign carrier is involved; the U.S. financial system may only be used for U.S. carriers, which, under 31 C.F.R. § 560.522, are permitted to overfly and make emergency landings in Iran.
This policy change comes on the heels of news reports (like this one and this one) that foreign carrier overflights over Iran have recently increased. Why? Because no one wants to get blown out of the sky while flying over Iraq or Ukraine. Both Air France and Virgin Atlantic have suspended flights over Iraq.
Of course, you may say, certainly foreign carriers can find non-U.S. financial institutions to handle the payments to Iran. That, of course, may be the case, although given all the recent huge fine on foreign banks for Iran transactions, many of these banks may simply be unwilling to run the risk of further penalties given the small amounts they are likely to make handling these payments.
Global health care consortium Bupa agreed to cough up (sorry!) $128,704 to the Office of Foreign Assets Control to settle allegations that it provided health insurance to individuals on the SDN List and, in one instance, re-imbursed a policy holder for medical treatment received in Cuba. You might have assumed that there were limits to the injury that OFAC might try to inflict on SDNs or non-SDNs traveling in Cuba but you would, apparently, be wrong.
The SDN involved was designated under the Foreign Narcotics Kingpin sanctions. Unlike the Narcotics Trafficking Sanctions Regulations, the Kingpin Sanctions regulations do not provide an exception even for emergency medical services. (Of course, even though emergency medical services can be provided to SDNs under the Narcotics Trafficking Sanctions, the hospital or doctor cannot be paid for those services without an OFAC license authorizing such payment. Good luck getting treated in those circumstances.)
So the penalties for being a Narcotics Kingpen extend far beyond simply having your bank account blocked and, potentially, can include dying from lack of needed medical care. I have no special sympathy for narcotics kingpens, but this seems a little harsh.
Trying to interfere with the health care of people traveling Cuba seems even harsher. Moreover, penalizing the reimbursement of a non-Cuban outside Cuba for services previously provided in Cuba seems not to further the U.S. policy of depriving Cuba of resources given that the payment in Cuba was already made. It also illustrates the strained reading that OFAC gives to the Cuban Assets Control Regulations in its effort to penalize anything and everything that has any connection with Cuba.
The fundamental prohibition of the Cuba sanctions prohibits U.S. persons from participating in “transactions [that] involve property in which … [a Cuban] national … has at any time … [or] had any interest of any nature whatsoever, direct or indirect.” Of course, no Cuban national has an interest in the insurance policy under which the reimbursement payment was made. The only such property in that case would have been the funds paid by the policy holder to the Cuban health care provider. To say that the reimbursement transaction “involves” that property obviously stretches the meaning of “involves” to the breaking point, but it shows how broadly OFAC reads these regulations to assure that if you blow your nose and someone in Cuba hears the noise, you’ve violated the rules.