Archive for February, 2009



Quel Fromage: Lactalis Fined by OFAC

Posted by at 3:31 pm on February 27, 2009
Category: General

Président CheesesThe Office of Foreign Assets Control (“OFAC”) released today its monthly report on civil penalties, and it was indeed a short list with one short entry. And since there’s only one entry it, not surprisingly, involved the “terrorist” island just to our south.

According to the report, French cheese giant Lactalis’s New York subsidiary agreed to pay $20,950.38 to settle allegations that, between February 2004 and March 2007, the subsidiary made six unlicensed wire transfer payments in which Cuba or Cuban nationals had an interest. Lactalis is responsible for Président products, including the heavily marketed Camembert it produces under that brand name, as well as Sorrento, Rondelé, Société Roquefort and other famous cheese brands. Lactalis did not voluntarily disclose the matter to OFAC.

Of course, OFAC, consistent with its less-is-more approach to penalty transparency, doesn’t provide any further information on the situation leading to the agreed fine, but a coincidence relating to the dates of the wire transfers can allow some speculation that a blog, as opposed to a real newspaper, can get away with. A report in the Cuban press in February 2004 — the date of the first wire transfer — indicated that Lactalis made a presentation to the Cubans in the Melia Hotel in Havana indicating the company’s intention to amplify its presence on the Cuban market.

Lactalis’s subsidiary in New York is its only subsidiary in the Americas, and so my guess is that it made wire transfers in connection with the presentation in Havana, probably a transfer to reimburse the French-based employees that made the presentation. The remaining wire transfers may also have been to reimburse non-U.S. employees for expenses that they were incurring in Cuba while marketing Lactalis’s products. Chances are the wires referenced Cuba (even though they were not destined to Cuba) which is how they got picked up by the banks involved and reported to OFAC.

This is, of course, just my guess. Any other ideas welcomed in the comments.

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That Depends on What the Definition of 50 Percent Is

Posted by at 8:28 pm on February 26, 2009
Category: General

Department of TreasuryOn Tuesday, the Office of Foreign Assets Control (“OFAC”) revised the FAQs on its website to address a problem in interpreting guidance it issued last February on transactions with a company in which a Specially Designated National (“SDN”) had an interest That guidance stated:

A person whose property and interests in property are blocked pursuant to an Executive order or regulations administered by OFAC (a “blocked person”) is considered to have an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50% or greater interest. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC’s list of Specially Designated Nationals (“SDNs”).

That guidance raised, but didn’t answer, what sort of, and degree of, due diligence was required to ferret out ownership interests by SDNs.

The new FAQ responds to a question posed by a bank with respect to wire transactions in which it was a correspondent bank and had no relationship with the sending or receiving account holders:

OFAC would not expect the bank to research the non-account parties listed in the wire transfer that do not appear on the SDN List and, accordingly, would not pursue an enforcement action against the bank for having processed such a transaction.

If a bank handling a wire transfer currently has information in its possession leading the bank to know or have reason to know that a particular individual or entity involved with or referenced in the wire transfer is subject to blocking, then the bank will be held responsible if it does not take appropriate steps to ensure that the wire transfer is blocked.

But even if the correspondent bank isn’t required to conduct due diligence on the parties to the wire transfer, OFAC reiterated that banks are required to conduct due diligence on their own account holders to determine whether an SDN has a direct or indirect 50 percent interest in the account holder:

OFAC expects banks to conduct due diligence on their own direct customers (including, for example, their ownership structure) to confirm that those customers are not persons whose property and interests in property are blocked.

This due diligence is more complicated than it seems a first glance given the way OFAC phrased the restriction. If an SDN “owns, directly or indirectly, a 50% or greater interest” in another entity, that entity is blocked. At first glance it might seem that the due diligence obligation could be fulfilled by asking an account holder to supply a list of all entities with a 50% of greater interest.

But consider a few examples. Suppose the SDN owns a 50% interest in a company that owns 100 percent of the account holder. That would seem to be covered by the OFAC guidance, and would require an inquiry well beyond the shareholders of the account entity, but also the shareholders of the shareholders, and on and on up the tree until all individual shareholders are found. Now consider a case where an entity that owns 51 percent of the account holder is itself 51 percent owned by an SDN. Although the SDN controls the account holder it only owns an indirect 26 percent interest in the account holder and appears not to be covered by the guidance. Let’s complicate things further and consider a case where the account holder has a 40 percent shareholder in which the SDN has a 100 percent interest and a 60 percent shareholder in which the same SDN has a 40 percent interest. In that situation the SDN has a 64 percent indirect interest in the account holder and requires blocking the account holder even though the SDN wouldn’t have control over the account holder.

The bottom line is that although the rule in the OFAC guidance appears simple, it actually imposes complicated due diligence requirements and also potentially captures situations where the SDN has no control over the account holder.

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Web Host Uses OFAC Sanctions To Boot Dissident Bloggers

Posted by at 5:25 pm on February 24, 2009
Category: General

BISWhile looking for background on the recent action of the Office of Foreign Assets Control (“OFAC”) extending a General License permitting transactions with two sanctioned Belarusian companies, I stumbled across this post at That site is a DC-based blog run by dissident Belarusians opposed to the current dictatorial regime of Alexander Lukashenko. Apparently, the web hosting provider for blocked the anti-Lukashenko site based on — of all things — the U.S. sanctions against Lukashenko and related individuals and entities. The website was migrated to another hosting company and is now up and running again.

Of course, those familiar with the targeted, regime-based sanctions against Belarus’s dictator and his cronies might be more than a little surprised by the web hosting provider’s action and its more than slightly ironic outcome. Those sanctions target specified individuals and companies related to the Lukashenko regime only and do not target all Belarusians wherever located.

However, the web hosting provider’s terms of service used to terminate services to the dissident bloggers state:

Each individual which is a National or Citizen of a Sanctioned Country is hereby prohibited from registering or signing up with, subscribing to, or using any service of [this webhosting service], regardless of where said individual is located.

Those terms also define Belarus as a “sanctioned country,” along with Balkans, Burma, Côte d’Ivoire, Cuba, Democratic Republic of the Congo, Iran, Iraq, former Liberian Regime of Charles Taylor, North Korea, Sudan, Syria, and Zimbabwe. The terms of service’s provision that denies services to all “nationals” of Belarus clearly goes beyond the sanctions themselves.

The problem here, among other things, is that if the Internet is a public accommodation (an unsettled question at the moment), this provision in the terms of service and its application to a blogger because of his national origin might raise issues under state and federal anti-discrimination laws. This is one good reason why companies need to be careful in applying OFAC sanctions with too broad a brush.

The same hosting provider has used this provision to shut down other websites that oppose the regimes in sanctioned countries. Iranian dissident bloggers in Iran have been shut down by this hosting provider, as have anti-government bloggers in Zimbabwe.

The issue with respect to the Iranian bloggers is more difficult because the Iranian sanctions are comprehensive, unlike the targeted regime-based sanctions against Belarus and Zimbabwe. In this case, the sanctions are properly applied by the provider against the Iranian-based bloggers unless the information exception applies. And it seems to me that the information exception does apply here. Section 560.538 of the Iranian Transactions Regulations permits a U.S. company to engage in all transactions “necessary and ordinarily incident to the publishing and marketing of manuscripts, books, journals, and newspapers … in paper or electronic format.” Here, the web hosting provider is merely a publisher of the electronic content and provides no other services, including some that would be allowed under section 560.538 such as editing and formatting. Indeed, the web hosting provider’s activities would seem to have been allowed even under the old, and much-maligned, “camera-ready copy” rule.

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BIS Releases New Export Compliance Audit Module

Posted by at 5:37 pm on February 23, 2009
Category: BIS

BISNot too long ago when I posted on Cabela’s settlement of export violation charges alleged by the Bureau of Industry and Security (“BIS”), I noted that part of the settlement agreement required Cabela’s to complete BIS’s “Export Management Systems Review Module.” I went on to criticize that requirement because the Review Module was last revised in May 2000 and contained a number of out-dated requirements, including a requirement to keep a dead-tree copy of the Internet-accessible Denied Persons List. The review module also included questions about the discontinued Shipper’s Export Declarations without any mention of the Automated Export System which replaced the filing of SEDs.

It seems to me that if BIS wants to tout the EMS audit module as the touchstone of export compliance, it might want to update it a little more often than every decade.

Well, as they say, be careful what you wish for because last Friday BIS updated its site with a brand spanking new audit module which, in addition to remedying the out-of-date portions I complained about, is a pretty thorough top-to-bottom revision of the module. It’s longer too — with 31 pages instead of the 18 pages of the old module. (Granted that the font is larger in the new module, it doesn’t appear to be big enough to account for the additional 13 pages.) You can access the module from the page you are directed to when you click the “Compliance Program Assistance” link in the left column of the BIS home page.

Trying to find the module with a Google search, however, may take you back to the old module which, for some reason, is still on BIS’s site. While I was looking for the new module, a Google search took me to this page which included a link to the old module. It looks like these pages have been “de-linked” from the rest of the site, but nothing can hide from Google. So, if you are looking for the new audit module, be forewarned that the old ones are still on BIS’s site

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DDTC Lifts Export Ban on AdComm

Posted by at 6:21 pm on February 19, 2009
Category: DDTC

No Exports!The Directorate of Defense Trade Controls issued a Federal Register notice, printed today, that lifted the 1997 statutory debarment of AdComm, Inc. AdComm became debarred after it purchased the assets of a debarred party, Electrodyne, which had been debarred based on its conviction for violations of the Arms Export Control Act. Debarred parties cannot be involved in any transactions involving the export of defense articles or defense services.

As some may remember, Electrodyne had several contracts with NASA and the U.S. Air Force to build components to be used in communications, radar and weapons systems. Electrodyne then contracted with companies in Russia and Ukraine to build the components, thus disclosing, without a license and in contravention of the Arms Export Control Act, technical data controlled by the International Traffic in Arms Regulations (“ITAR”).

In 1996, Electrodyne pleaded guilty to these charges, but that was hardly the end of the matter. The docket sheet shows two appeals by Electrodyne of the sentences imposed by the District Court and it was not until the third sentencing, in 2001, that the matter became final. In the first appeal, the Third Circuit vacated the sentence by the district court and remanded for further proceedings. And although the second appeal only concerned the sentence imposed by the district court in its second go-round on sentencing, the Third Circuit reversed the judgment of the district court. This reversal, it might be argued, effectively eliminated the basis for the statutory debarment of Electrodyne, although it might also be argued that this was sloppy language and that the court didn’t intend to reverse the conviction but just to vacate the second sentence.

In all events, a statutory debarment remains in place, even after a reversal of the conviction, unless the debarred party petitions DDTC to lift the debarment on that basis, something AdComm, by that time standing in Electrodyne’s shoes, didn’t appear to have done. More interestingly, the debarment order contained the standard language that the period of debarment was normally three years after conviction and that after that period the debarred party could petition DDTC to lift the debarment. It’s curious, then, that this debarment was in place for almost twelve years. Certainly Adcomm, as merely a third-party successor to Electrodyne that hadn’t been involved in the wrongdoing at issue, would have had a good basis to go into DDTC after three years, i.e. in 2000, to lift the debarment.

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