Archive for the ‘OFAC’ Category


Jul

21

ExxonMobil Fined Two Million Dollars for Two Milliliters of Ink.


Posted by at 7:11 am on July 21, 2017
Category: OFACRussia SanctionsSDN List

By Dyor, STRF.ru (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons [cropped]
ABOVE: Igor Sechint

Yesterday the Office of Foreign Assets Control (“OFAC”) announced that it was fining ExxonMobil $2 million in connection with contracts signed by ExxonMobil with Rosneft in violation of the Ukraine Related Sanctions Regulations. The basis for the fine was not dealing with Rosneft itself; rather, OFAC premised the fine on the fact that Igor Sechin, an individual designated under Executive Order 13661 and the Ukraine Sanctions, signed the contracts. Simultaneously with the OFAC announcement, ExxonMobil filed suit in federal court in Texas seeking to overturn the penalty.

The OFAC announcement is unusual in that rather than simply announcing the fine and going through its usual analysis of how it calculated the penalty, OFAC responds to arguments made by ExxonMobil that it did not violate the sanctions.  ExxonMobil argued that OFAC had designated Sechin in his private capacity and not in his capacity as an official of Rosneft. OFAC harrumphs, as if it were completely obvious, that there is no private/official distinction in designations. According to OFAC, it is completely clear that there will be a problem if the blocked officer signs any agreement with a U.S person. It supports this with a Burma FAQ that deals with a different situation, that was contained in a section dealing with the Burma regulations and that OFAC has removed from its website.

OFAC’s glib rejection of a public/private distinction is not founded in any analysis of the regulations at issue. In fact, as everyone has known for quite some time, the rules do not clearly address situations where an officer of a company is designated and blocked by OFAC but the company itself is not. The Ukraine regulations refer to Executive Order 13661 as defining what activities are illegal. That relevant part of the order is Section 4 which prohibits

the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to this order

It also prohibits the “receipt … of funds, goods, or services” from any such blocked person.

So how does Sechin’s signature of the Rosneft deals step over a line? Certainly ExxonMobil wasn’t providing any funds, goods or services for his benefit. The contracts were for the benefit of Rosneft. Nor did ExxonMobil receive any “funds, goods, or services” from Sechin in the contract. Unless perhaps OFAC thinks that Sechin provided a service to ExxonMobil when he whipped out his pen and spent three seconds spreading ink over the signature line.

If that is the illegal service that was being provided, and it seems that it is because OFAC is drawing a line at the signature line, it’s not very defensible. Let’s say that Sechin hid in a closet and told another company official to sign. That’s a service too. In fact, there is no way to imagine a scenario where a top official of a company does not ultimately approve a major contract, which is also a service, meaning that OFAC’s effort to maintain a distinction between sanctioning Rosneft and sanctioning its officers falls completely apart.

The FAQ relied on by OFAC does not help its position either. Because OFAC has disappeared this crucial guidance (in fact the only guidance from OFAC anywhere on the signature issue) from its website, I’ve retrieved it from the Wayback Machine:

285. If a Burmese Government minister is an SDN, how does that impact the ministry he leads?

A government ministry is not blocked solely because the minister heading it is an SDN. U.S. persons should, however, be cautious in dealings with the ministry to ensure that they are not, for example, entering into any contracts that are signed by the SDN. [03-18-13]

Significantly, guidance on the minister of a government ministry is not necessarily relevant to a situation involving an official of a private company. Additionally, it is hard to justify punishing a company for violating the Ukraine sanctions because it did not read a web document about another set of sanctions.  Not to mention that this guidance no longer exists at all.

It’s easy to see what ExxonMobil sued. I’ll be watching the lawsuit closely. Pass the popcorn.

UPDATE:  FAQs 398 and 400 released after the Rosneft contracts that caution against entering into contract signed by SDNs.  Both of these concern OFAC’s 50-percent guidance and not the Ukraine sanctions.  Neither explains how an SDN signing a contract in his or her official capacity actually violates a rule that OFAC has promulgated and published in the Federal Register and the Code of Federal Regulations.

 

Photo Credit: By Dyor, STRF.ru (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons [cropped]. Copyright 2009 Dyor, STRF.ru

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Jun

30

Jury Award for $60 Million Entered Against Transunion over SDN List Reports


Posted by at 4:49 pm on June 30, 2017
Category: OFACSDN List

https://www.instagram.com/p/BKeO97kg4MG/On June 20, a federal jury awarded a $60 million damage verdict against mammoth credit reporting agency Transunion arising from the company’s misuse of the Office of Foreign Assets Control’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”) on credit reports. The plaintiffs in that case where individuals who were not on the SDN List but whom Transunion identified as such, resulting in adverse credit decisions for these individuals.

The class action lawsuit was based on a number of related violations of the federal Fair Credit Reporting Act and a similar California statute. Among the violations at issue were the provisions of section 1681(e) which requires credit bureaus to “follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” The Third Circuit in Cortez v. Trans Union, 617 F.3d 688 (3d Cir. 2010), previously rejected Transunion’s efforts in that case to make the implausible argument that the SDN List information it supplied with respect to credit applicants was not part of their credit report.

In the current case, the complaint details the experience of one of the representative plaintiffs with Transunion’s OFAC reporting. That plaintiff, named Sergio L. Ramirez, had a car loan denied because his name was similar to two entries on the SDN List, namely, Sergio Humberto Ramirez Aguirre and Sergio Alberto Cedulo Ramirez Rivera. Not only were the names different, but also the birthdate for Plaintiff Ramirez, which Transunion had in its file on the plaintiff, was different from the birthdates listed in the entries for the two aforementioned SDNs.

OFAC has issued guidance about the use of the SDN List by credit bureaus:

The text on the report should explain that the individual’s information is similar to the information of an individual on OFAC’s SDN list. It should not state that the information matches or that the credit applicant is in fact the individual on the SDN list unless the credit bureau has already verified that the person is indeed the SDN.

Even assuming that Transunion followed this guidance, which is not clear, it seems hard to justify transmitting the information to the car dealership when Transunion had information that clearly indicated the credit applicant was not either of the SDNs. It seems to me that credit bureaus can easily protect themselves from outcomes like the $60 million verdict by transmitting SDN information with a disclaimer but doing so only in cases where the credit bureau does not itself have information, such as birthdates, places of birth, etc., sufficient to resolve the potential hit.

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Jun

16

New Cuba Travel Rules: No Place to Stay, No Place to Eat, Nothing to Do While There


Posted by at 3:41 pm on June 16, 2017
Category: Cuba SanctionsOFAC

Women with Cigar by Daniele Febei [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/7cPMmY [cropped and processed]

President Trump today announced new sanctions on Cuba, effectively rolling back many, if not most, of the changes made by the Obama administration to loosen the sanctions.  The most significant changes will make travel to Cuba by U.S. citizens to Cuba more difficult, if not virtually impossible.

The executive order signed by Trump has not yet been released, but FAQs on the new policy have been posted to OFAC’s website. The biggest change will be with respect to individual people-to-people travel that was permitted starting March 15, 2016. Under the new rules, educational travel under the people-to-people exception will only be permitted if organized “under the auspices of an organization that is subject to U.S. jurisdiction that sponsors such exchanges.” What organizations will meet this test is not clarified in the new FAQs.

OFAC says that the individual people-to-people license remains in effect until OFAC issues new regulations, but there is a wrinkle, actually more a tectonic fault than a wrinkle. If you  purchased a ticket or hotel room before today, you can rely on the old license even after the new rules are formally adopted by OFAC. The flip side of this, however, is that you make individual travel arrangements after today at your own risk.  This is because in that case if the new rules are adopted before you complete your travel to Cuba, you’re out of luck and the individual general license no longer applies. In the worst case scenario, if the rules are changed while you’re in Cuba and you have made your travel arrangements after today, you will be in violation of the new rules unless you can instantly teleport yourself off the island.

The other change that will significantly impact travel is the prohibition on all transactions by U.S. travelers in Cuba with “entities related to the Cuban military, intelligence, or security services.” This is directed at Grupo de Administración Empresarial, S.A. (“GAESA”) which controls a large portion, probably around 60 percent, of the Cuban economy and most of the tourist sector. Almost all of the shops, hotels and restaurants in Old Havana are run by GAESA, as are most of the hotels elsewhere in Cuba. U.S. tourists who buy a bottle of cold water from a supermarket run by GAESA anywhere on the island will risk getting in hot water with OFAC when they return home.

This obviously poses problems for every traveler in Cuba whether they are on a specific license or are traveling under any of the twelve general license categories. Certainly one cannot expect GAESA to warn U.S. tourists or to plaster its name over all of its properties, hotels, restaurants, gas stations, supermarkets and stores. Never fear, however — the FAQs say that when the new regulations are adopted the State Department will publish a list of GAESA entities. So, all tourists will have to do is carry the twenty-page list around with them and check the list before ordering a dacquiri, buying a cigar, checking into a hotel, or eating in a restaurant, or doing anything else on their travels. (That sounds like fun.)

You might think that private rentals, like those handled by AirBNB, will be spared the GAESA taint. But you would be wrong. VaCuba, which handles remittances for AirBNB, is owned by GAESA.

The good news is this: if you can somehow manage to get to Cuba under the new rules and find a legal place to stay, you can still buy cigars and bring them back with you. At least, if you haven’t bought them from a store owned by GAESA.

Photo Credit: Women with Cigar by Daniele Febei [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/7cPMmY [cropped and processed]. Copyright 2009 Daniele Febei

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Jun

15

Delaware Bill Proposes Mandatory OFAC Screening: What Could Go Wrong?


Posted by at 1:37 pm on June 15, 2017
Category: OFACSDN List

Rehoboth_Boardwalk

I love Delaware. I’ve spent many days on the Delaware beaches. Even so, recent legislation proposed in the Delaware House deserves ridicule and I’m willing to do that, even if that means I’m banned from ever having another slice of Grotto Pizza or bucket of Thrasher’s Fries.

The bill in question, House Bill No. 57, prohibits the Delaware Secretary of State from registering LLCs where the members are subject to OFAC sanctions.  It also requires registered agents to screen members to avoid presenting applications with sanctioned members.

The bill is the brainchild of the Delaware Coalition for Open Government  (“DelCOG”), which after untold hours researching Delaware LLCs, has discovered two (yes, two) cases where Delaware has registered LLCs on the OFAC SDN List. The companies in question are 200G PSA Holdings, LLC and Agusta Grand I, LLC, which were designated as Specially Designated Narcotics Traffickers by OFAC on February 13, 2017. Both companies were registered in Delaware, respectively, on January 29, 2013, and October 28, 2014. Because the designation occurred after the companies were registered in Delaware, the proposed legislation would not have had any impact on the registration of these companies.

DelCOG and the bill’s drafters seem to be unaware that SDNs will get registered in Delaware only when their designation occurs after registration. If it occurs before, the companies will be unable to pay their fees because banks will almost certainly block all payment of registration and agent fees. So the proposed legislation does not really accomplish its intended purpose at all.

What is does do is create is ample opportunity for confusion. Here’s some language from the bill:

The Secretary of State shall neither certify for formation or domestication nor register as a limited liability company any citizen, group, organization, or government of a listed Sanctioned Nation in the Active Sanctions Program of, or any Specially Designated National listed as such by, the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury when federal law is violated thereby.

The phrases “listed Sanctioned Nation in the Active Sanctions Program” is not defined in the proposed bill. This is an apparent reference to this web page on the OFAC site which lists countries subject to comprehensive sanctions like Syria and Iran but also countries with regime-based sanctions, such as Iraq and Venezuela, where only designated individuals and entities are affected. This sets up the possibility that when anyone in Venezuela (who is not an SDN) is a member of an LLC seeking registration the Delaware Secretary of State will have to decide whether this violates federal law. The same will occur if the member is a U.S. permanent resident that is also an Iranian citizen. Neither of these instances would violate federal law, but who knows what the Secretary of State of Delaware will decide.

The proposed legislation also wanders into CFIUS territory with equally dubious results. The bill requires registered agents to determine if the purpose of the proposed LLC conflicts with the “prohibited or restricted investment … requirements” of Exon-Florio, 50 U.S.C. App. § 2170. In such cases, the registered agent cannot file the registration application on behalf of the LLC and must advise them to file a CFIUS notice. Apparently, the drafters of the bill are not aware that the CFIUS notice process is voluntary.

This bill amply demonstrates the problems that arise when states take it upon themselves to interpret and enforce federal law.

Photo Credit: Rehoboth Boardwalk by Clif Burns Copyright 2014 Clif Burns. All rights reserved.

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Copyright © 2017 Clif Burns. All Rights Reserved.
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Jun

9

OFAC Fines Honda For Complying with Canadian Law


Posted by at 9:25 am on June 9, 2017
Category: Cuba SanctionsOFAC

Image via https://pixabay.com/p-1202440/?no_redirect [Public Domain]Apparently Cuban diplomats in Cuba like to drive spiffy new Hondas (as opposed to the somewhat older cars almost everybody else in Cuba drives). But, because a dealership in Ottawa financed leases on those cars for the Cuban Embassy through Honda Canada Finance Inc. (“HCFI”), a subsidiary of California-based American Honda Finance Corporation (“AHFC”), there was all hell — or rather $87,255 — to pay to OFAC.

OFAC went out of its way to point out a not-uncommon deficiency in HCFI’s screening process:

The Cuban entity had the word “Cuba” in its name and provided documentation to HCFI demonstrating it was a Government of Cuba entity. Although AHFC and HCFI had policies and procedures in place review transactions against OFAC’s List of Specially Designated Nationals and Blocked Persons for compliance with U.S. economic sanctions laws, they did not include the names of countries subject to OFAC-administered comprehensive sanctions in their screening system.

Many screening processes simply check names against lists and stop there. So, HCFI screened “Embassy of Cuba” and when that did not show up in the SDN list, the leases were issued. I can’t tell you how many times I’ve seen something like this.

As usual, and longtime readers will know where I’m going, OFAC works itself up in a high dudgeon over these leases without bothering to mention at all the Canadian Foreign Extraterritorial Measures Act.  That law makes it clearly illegal  for HCFI, a Canadian company in Canada and fully subject to Canadian law, to deny financing based on the U.S embargo of Cuba.  This applicable Canadian law is not even mentioned as a mitigating factor. Once again, it appears that the U.S. is telling one of its closest allies that we don’t really care what their laws are.

But wait, there’s something in the OFAC release that hints that this might not be entirely the case. The transactions leading to the penalty occurred between 2011 and 2014. OFAC lists as a mitigating factor that “it issued a specific license to AHFC in June 2015 regarding the subject leases.” In most cases, getting an OFAC license to deal with the Cuban government in a third-country would be considered a near impossibility. One has to wonder whether AHFC, after it disclosed the violations, applied for a license and relied on the Canadian Foreign Extraterritorial Measures Act as a basis.  This might indeed be the reason why the licenses were granted here and why HCFI wasn’t forced to repo the diplomats’ cars.

The takeaway here is that U.S. companies with foreign subsidiaries in countries with statutes blocking compliance with the Cuba embargo might consider applying for a license and basing the request on the blocking statute.  Because the U.S. company is applying for the license, the application itself would not violate the Canadian blocking law, which only covers “persons in Canada” from complying with the U.S. embargo on Cuba.  Given the massive delays at OFAC in getting license granted this may not be a practical solution. But it is, at least, something to consider.

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Copyright © 2017 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)