SEC Name and Shame Obligation Survives Implementation Day

Posted by at 11:29 pm on January 28, 2016
Category: Iran SanctionsSEC

Shame for Mihaha - graffiti by Gabriel [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/8spfHr [cropped]One of the issues that has received little attention in all the hubbub about Implementation Day is the survival of the name and shame provisions adopted by Congress in section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which amended the Securities and Exchange Act of 1934 to require that all “issuers” who are required to file annual or quarterly reports with the SEC must report certain Iran-related activities by the company itself or its “affiliates.” The activities that must be reported are activities specified in sections 5(a) and 5(b) of the Iran Sanctions Act, sections 104(c)(2) and 105A(b)(2) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 and any transactions with the Government of Iran or with persons blocked under Executive Orders 13224 or 13382.

These transactions include knowingly

  • Making and investment of $20 million or more that directly and significantly contributes to Iran’s ability to develop its petroleum resources;
  • Providing goods and services valued at $1 million (or an aggregate of $5 million in a 12-month period) that directly and significantly contribute to Iran’s ability to import refined petroleum;
  • Assisting Iran in the development of chemical, biological or nuclear weapons or a destabilizing amount of conventional weapons;
  • Assisting in the transfer of items to Iran that can be used for human rights violations including conventional firearms, stun guns, and hardware, software and technology for monitoring and censorship;
  • Assisting (in the case of foreign financial institutions) the IRGC to acquire weapons of mass destruction or delivery systems for such weapons; or
  • Engaging in any transaction or dealing with the Government of Iran or any company owned by the Government of Iran “without the specific authorization of a Federal department or agency.”

Significantly, section 219 may require disclosure of activity that is not prohibited under U.S. sanctions. If any of the above described transactions is engaged in by a foreign company (that is not a subsidiary of U.S. company) and does not involve any U.S. origin goods, the transaction, although subject to one or more sanctions (such as debarment from U.S. government procurement), is not prohibited as a matter of law.

Some, but not all, of the secondary sanctions listed above were lifted on Implementation Day for foreign firms (other than those that are U.S. subsidiaries). Nevetheless, the reporting requirements set forth in section 219 remain in place for those foreign firms that are also issuers required to file annual or quarterly reports.

The situation is somewhat more complex for foreign companies that are owned or controlled by U.S. companies. Prior to Implementation Day, the activities listed above were absolutely prohibited to those companies. Now, General License H  permits some (but, again, not all) of those activities (provided no U.S. persons facilitate those activities other than through revising policies or making global IT systems available). Importantly, it permits, for foreign subsidiaries of U.S. companies, transactions or dealings with the Government or Iran and its state-owned enterprises.

As with completely foreign firms, these foreign subsidiaries that are owned and controlled by U.S. companies will be required to report all of the above listed activities, except for one, under section 219. The exception is for transactions or dealings with the government of Iran and its state-owned enterprises authorized by General License H. Because the SEC has stated that a general license constitutes the specific authorization referred to in Section 219, those transactions by foreign subs of U.S. parents will no longer be required to be reported under Section 219. Ironically, because General License H applies only to entities owned or controlled U.S. persons, wholly foreign firms that do not meet that criterion will still be required to report these transactions with the Government of Iran and its state-owned enterprises under section 219.

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Financing For Cuba Exports Eased for Everything but Agricultural Exports

Posted by at 11:42 pm on January 26, 2016
Category: Cuba SanctionsOFAC

Malecon, Havana by Bryan Ledgard [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/nAvqjV [cropped]Today the Office of Foreign Assets Control (“OFAC”) announced more amendments to the Cuban Assets Control Regulations which, among other things, broadens the general license for travel to Cuba to include other activities such as professional meetings, participating in sports events, and movie and television production. The new rules alter provisions relating to financing of permissible exports of goods but, oddly, does so in such a way that there are now more restrictions on financing exports of agricultural goods than there are on financing for other permitted exports such as informational materials, building materials authorized under license exception SCP, and consumer communications devices authorized under license exception CCD.

Under the amended rules, the provisions in sections 515.533(a)(2)(i) and (ii) which described the only permissible payment and financing terms for exports to Cuba have been revised to impose that restriction only on “agricultural commodities, as that term is defined in 15 CFR part 772” and “agricultural items authorized for export or reexport pursuant to 15 CFR 746.2(b)(2)(iv).” This is a bit odd given that there is no 15 C.F.R. § 746.2(b)(2)(iv). This is presumably a reference to 15 C.F.R. § 746.2(b)(3)(iii) which deals with BIS licensing policy for “agricultural items” and which covers items that are not “agricultural commodities” as defined in Part 772 of the EAR or license exception AGR. I can only speculate that this is a reference to an amended section 746.2 which has not yet been released by BIS.

The restrictions on payment and financing terms in 515.533(a)(2) are a requirement for “payment of cash and advance” or “financing by a banking institution located in a third country” other than a Cuban or U.S. bank. The reason that these restrictions remain on exports of agricultural commodities is that these restrictions are mandated by the Trade Sanctions Reform and Export Enhancement Act of 2000, which, although it was intended to expand trade to Cuba, contains in section 7207(b)(1) these two requirements for exports of agricultural products. The paradoxical result is that the statute that was intended to liberalize trade in agricultural commodities to Cuba now requires restrictions on that trade not required for other exports.

The theoretical effect of these changes is that U.S. exporters could, in theory, offer delayed payment terms to Cuban purchasers and that U.S. banks can finance the transactions. The practical effect is likely to be less. It is doubtful that many exporters or banks will be willing to run the risk of extending payment or financing terms to Cuban purchasers.  Instead, it seems likely that exports to Cuba will follow the normal practice of payment of cash against documents of title. A new section 515.584(f) now allows U.S. banks to confirm letters of credit issued by Cuban banks with respect to non-agricultural exports, something not previously permitted, but again whether U.S. banks will confirm Cuban letters of credit remains to be seen.

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Heads We Win; Tails You Lose

Posted by at 10:11 am on January 20, 2016
Category: Iran SanctionsOFAC

Ground Hog by John Sonderman [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/4zUjkf [cropped]Well, Implementation Day has come and gone.  Hassan Rouhani peeked out of his house, did not see his shadow, and his handlers declared that winter would soon be over … at least if you’re in Europe.  If you’re in the United States, not so much, where the sanctions remain pretty much the same, albeit more confusing.  Meanwhile half of the CEOs of European companies are booking first class flights on Air France to Tehran where they will sign lucrative contracts to sell their goods and services.

For U.S. persons, there are a few minor benefits to Implementation Day.   U.S. companies can sell civil aircraft parts to Iran as long as they get a license from OFAC.  And you can now enjoy Iranian foodstuffs such as Iranian caviar and pistachios.   In addition, foreign subsidiaries of U.S. companies can deal with Iran as long as the parent company, its employees and all U.S. persons carefully tread the treacherous facilitation line where one misstep leads to immediate catastrophe, penalties and, maybe, jail terms for all.

The only other benefit of Implementation Day to anyone in the U.S. involves removals of certain persons and companies from the SDN List.  But, but, but (surprise!) there are major caveats.   The removed parties are still blocked and off-limits to U.S. persons if they are part of the Iranian government (including state-owned enterprises) as defined in section 560.304. Second, they can’t be an Iranian financial institution as defined in section 560.324.

Now this is where the fun begins.   Many of the entries removed from the SDN List on Implementation Day were either Iranian government entities or financial institutions.   So, OFAC now has a new list for you to check of people removed from the SDN list who are still blocked and off-limits to U.S. persons.  That’s right:  implementation day brought U.S. citizens yet another list to check.  These are the entities marked with an asterisk in Attachment 3 to Annex II of the JCPOA which are now compiled in the new list, the E.O 13599 List, and which can be found here (at least until OFAC, to keep its web designers employed, reorganizes its website again and breaks all previous links).

But the fun doesn’t stop there.  The federal government, aware of its own incompetence and keen to punish those who rely on it, says this in the otherwise excellent January 16 guidance on the effect of implementation day:

Please be advised that, under the ITSR, U.S. persons continue to have an obligation to block the property and interests in property of individuals and entities listed in Attachment 3 to Annex II of the JCPOA that do not have an asterisk next to their name and are not included on the E.O. 13599 List if such persons meet the definition of either the Government of Iran or an Iranian financial institution as set forth in section 560.304 or 560.324 of the ITSR, respectively.

In plain English, just because we screwed up and didn’t put a removed party on the 13599 List and that party is in fact related to the Government of Iran, we still get to fine you if you blithely assume that removed parties not on the 13599 List are safe to deal with.  Heads we win, as they say, tails you lose.

Happy Implementation Day, everyone!

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OFAC List Prevents Professor From Slaying Imaginary Dragons

Posted by at 10:51 am on January 15, 2016
Category: OFACSDN List

Epic Building by Epic Games via https://epicgames.com/images/values/epic_building.jpg [Fair Use]
ABOVE: Epic Games HQ

Although I confess to being baffled as to why grown-ups play online video games (at least until after they have read the entire Western canon), recently a grown-up (and a college professor at that) pitched a fit after the OFAC blocking software of Epic Games choked on his name and told him he was not allowed to open an account with them and play one of their video games. More fun probably than playing the video game (and pretending to be a buff warrior in possession of awesome weapons and spells) is unraveling what occurred next.

Muhammad Zakir Khan, an assistant professor at Broward College in Florida, tried to sign up for an account online with Epic Games in order to play something called “Paragon” (which sounds more like a dish detergent than a video game, but that’s another issue). His effort to create the account was refused, and he was informed that this was because of a match against the SDN List, something that Mr. Khan had never heard of, so, like any other online warrior, he took the battle to Twitter, tweeting:

@EpicGames My name is Khan and I am not a terrorist.

Within a just a few hours, the CEO of Epic Games responded (via Twitter of course):

Sorry, this isn’t intended. We’re working to fix ASAP. Cause: Overly broad filter related to US trade restrictions.

Later, he tweeted how they thought they might fix the problem:

We’re working to figure this out. Ideally, not at signup, but by matching name and billing address at purchase time.

Obviously Epic deserves some credit for its efforts to take on OFAC and its SDN list, even though phaser energy guns and revivifying potions are of no use against either. Unfortunately, once there is a name match there is no simple automated solution to resolving the hit. In the case of Mr. Khan, having his address would have been useless because there is no address listed for the Mohammad Khan on the SDN List that caused the hit. Indeed, there is no single adequate way that one can automate resolving false hits. Computers may be able to drive cars, vacuum your living room, and play Jeopardy, but this is something that best practice requires be done by an actual human being.

But there is another point to be made here. Why on earth do we care at all whether terrorists and narcotics kingpins spend money to play online video games? In fact, wouldn’t we prefer that terrorists and drug dealers spend more time slaying imaginary dragons and enemies on their computers and less time doing what they do in the real world?

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BIS Still Mulling Over Cybersecurity Export Rules

Posted by at 11:30 pm on January 13, 2016
Category: BISCyber WeaponsCybersecurity

Untitled by Kevin Wolf via https://scontent.fash1-1.fna.fbcdn.net/hphotos-xfa1/t31.0-8/12471591_10208490792490184_1220994233873918423_o.jpg [Public Domain - Work of U.S. Government]Yesterday Kevin Wolf, the Assistant Secretary of Commerce for Export Administration, testified before the House Subcommittee on Cybersecurity, Infrastructure Protection, and Security Technologies on the much reviled controls in the Wassenaar Arrangements on exports on certain software and technology. His testimony provides detailed insight into the interaction between the Bureau of Industry and Security, which is charged with implementing the Wassenaar Arrangement controls, and the technology and cybersecurity industry and community which was concerned about the overbreadth of the Wassenaar controls of “intrusion” software. This blog has previously articulated some of these concerns, particularly the extent to which the Wassenaar controls on “intrusion” software could reach auto-updating software, Address Space Layout Randomization (ASLR) security measures, and hot-patch programs.

Assistant Secretary Wolf’s testimony reveals that Commerce’s concerns about the potential overbreadth of the Wassenaar controls on intrusion software led the agency to take the “unprecedented step” of releasing the controls as a proposed rule and soliciting industry comments. Such a step is “unprecedented” because normally Commerce simply adopts and adds to the CCL all changes adopted by the Wassenaar Arrangement. The result of the request for industry comment, according to the testimony, was more than 260 comments, “virtually all of them negative.” The negative reaction was echoed in outreach meetings held by Commerce with industry. Assistant Secretary’s testimony summarizes these concerns, including the concerns we have expressed about how they would reach certain auto-updating and hot-patching programs.

Most importantly, Assistant Secretary Wolf’s testimony says this:

Neither the Commerce Department nor the Administration has reached a conclusion about how to respond to the public comments. We are still reviewing and considering them. … The commenters had many suggestions regarding how to address their concerns. The Administration will be reviewing all of them and many other ideas for how to address the policy objectives of the control but without unintended collateral harms. As I have said many times in response to questions about the rule, the only thing that is certain about the next step is that we will not be implementing as final the rule that was proposed.

The moral of this story is clear, even if the shape of the ultimate rule is not. The export industry, as demonstrated conclusively throughout the export control reform initiative, has been loath to comment on proposed rules, whether from fear of standing out from the crowd or because of a belief that such comments will have no effect. As a result, Assistant Secretary Wolf has been known to remark that industry gets the rules they deserve. The response of Commerce here to the issues raised in the comments and industry outreach, however, shows that there are times when public input will have an impact. So the moral of the story is simple: you may not get everything you ask for, but you’ll almost never get what you want if you don’t even ask for it.

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