Aug

13

SDNs of a Feather, Aggregate Together: New OFAC Guidance on 50 Percent Rule


Posted by at 8:15 pm on August 13, 2014
Category: OFACRussia SanctionsSDN List

SMP Bank Credit Cards via http://smpbank.ru/uploads/show/c20c2f8bd8d7d2550bdd3b4c38bbdd00839d8fd2.jpg [Fair Use]The Office of Foreign Assets Control (“OFAC”) today issued new guidanceand revised its FAQs, on its notorious fifty-percent rule. Under that rule, an entity in which a blocked person has a fifty percent interest or greater is itself blocked, even though it may not be listed on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List.”).

Under the new guidance, if multiple blocked parties own an interest in an entity, their interests will be aggregated and that entity will be blocked if that aggregated interest is 50 percent or more. So if SDN1 holds 1 percent of Company X and SDN2 holds 49 percent of Company X, Company X will be blocked because the aggregated interests of SDN1 and SDN2 equal 50 percent.

This new rule is not merely a clarification policy but a clear reversal of guidance previously given by OFAC. As you may recall, when Arkady and Boris Rotenberg, co-owners of SMP Bank, were added to the SDN List back in March, Visa and Mastercard initially stopped allowing their cards to be processed through SMP Bank. The two credit card companies had a change of heart after having been apparently advised by OFAC that there was no need to aggregate the Rotenberg brothers individual 38.5 percent interests. Then, at the end of April, OFAC designated SMP Bank and Mastercard and Visa cut them off again from their international payment system. Why OFAC has changed its mind here on aggregation is not clear.

Ironically, this new rule may have more  negative impact on U.S. businesses than it will on Putin and his friends because it will make SDN screening quite difficult in many cases. Under the old rule, when evaluating whether an entity was blocked, you only needed to screen individuals with an interest of 50 percent or more. Under the aggregation rule, you must now screen every owner to see whether multiple owners are blocked and in the aggregate hold an interest of 50 percent or more. It seems no one at OFAC thought about this.

Permalink Comments (4)

Bookmark and Share





Aug

12

Chong Chon Gang(nam Style) Sanctions


Posted by at 6:00 pm on August 12, 2014
Category: Cuba SanctionsNorth Korea SanctionsOFACU.N. Sanctions

Weapons found on Chong Chon Gang via http://www.un.org/ga/search/view_doc.asp?symbol=S/2014/147 [Fair Use]Avid readers of this blog will be familiar with the saga of the euphoniously named Nork vessel, the Chong Chon Gang, which was seized by the Panamanians in the Panama Canal while the vessel was attempting to carry a boatload, so to speak, of Cuban arms to North Korea. Although the Cubans claimed, ahem, that this was not a “transfer” of the arms to North Korea in violation of U.N. sanctions because they retained title to the goods, they were unable to explain why, if that were the case, they buried the missiles and other armaments under enough sugar to keep the chubby Nork dictator in sweets for the next millennium or so. The attempted suicide by the ship’s captain once the Panamanians found the buried missile parts and systems also did not do much to bolster the Cuban argument that this shipment was perfectly legal.

The U.N. Panel of Experts convened to consider the legality of the shipment brushed aside Cuba’s arguments and back in March found the shipment to be a violation of U.N. sanctions on North Korea. At the end of last month, the United States joined the party and announced a variety of additions to the SDN list arising out of the Canal incident. The two North Korean companies involved in the shipment as well as the Chong Chon Gang were designated, as were 17 other Nork ships in which the two shipping companies had an interest.

In the “Some People Are Never Satisfied” category, a blogger at Capitol Hill Cubans called the Nork sanctions “enforcement malpractice” and moaned that there were no sanctions imposed on the Cuban officials involved in the Nork shipments. A Miami Herald article provided a succinct answer to this complaint

A knowledgeable Washington official noted that perhaps Treasury did not feel it was necessary to sanction Cuban government entities and individuals because they already are under strong sanctions from the U.S. trade embargo.

Good point. Given that virtually all dealings by U.S. persons and companies with Cuban officials are prohibited under the current sanctions, what exactly did the blogger contemplate as additional sanctions here? Military intervention?

 

Permalink Comments (1)

Bookmark and Share





Aug

8

Let Them Eat Goat


Posted by at 4:27 pm on August 8, 2014
Category: Russia Sanctions

Goat by JonStammers(Own work) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://www.flickr.com/photos/62611896@N00/291467411Yesterday Russia published the list of food products that can no longer be imported from the United States, Canada, the European Union, Australia and Norway. These sanctions, a curious response to U.S. and E.U. sanctions on Russia, seem calculated to punish mostly Russian consumers, who may well see higher food prices and empty grocery store shelves. Muscovites and other Russians will be pleased to learn, however, that horse and goat meat are exempted from the ban. Also, in case you think Putin has no heart whatsoever, items destined for baby food are exempted from the ban.

Here is a translation of the list. (My Russian is rusty, so I welcome any corrections.)

FEACN CU Code* *** Item
0201 Meat of bovine animals, fresh or chilled
0202 Meat of bovine animals, frozen
0203 Pork, fresh, chilled or frozen
0207 Meat and edible offal of poultry, under heading 0105, fresh,chilled or frozen
0210** Meat salted, in brine, dried or smoked
0301, 0302, 0303, 0304, 0305, 0306, 0307, 0308 Fish and crustaceans, molluscs and other aquatic invertebrates
0401, 0402, 0403, 0404, 0405, 0406 Milk and dairy products
0701, 0702 00 000, 0703, 0704, 0705, 0706, 0707 00, 0708, 0709, 0710, 0711, 0712, 0713, 0714 Vegetables, edible roots and tubers
0801, 0802, 0803, 0804, 0805, 0806, 0807, 0808, 0809, 0810, 0811, 0813 Fruit and nuts
1601 00 Sausages and similar products of meat, meat offal or blood; food preparations based thereon
1901 90 110 0
1901 90 910 0
Food products, including cheese and curd made from vegetable oil
2106 90 920 0,
2106 90 980 4
2106 90 980 5,
2106 90 980 9
Foods (milk-based products and those based on vegetable fat)

*For the purposes of this list only Foreign Economic Activity Commodity Nomenclature of the Customs Union (FEACN CU) commodity codes should be considered; the name of goods is given for user convenience only.

**For the purposes of this item both the FEACN CU commodity code and the name of the product should be considered.

***Except for goods destined for baby food.

The last two entries on the list are somewhat confusing. The listing for heading 1901 refers to vegetable-oil-based cheese and curds, but the specific commodity codes appear to refer to certain malt extracts. The listing for heading 2106 refers to certain dairy and oil based food products, with 2106 90 920 0 referring to compound alcoholic preparations for beverage manufacture. The remaining three codes listed under that heading were missing from any version of the Russian (and Customs Union) tariff schedules that I could find.

Permalink Comments (3)

Bookmark and Share





Aug

4

The Auto Sound and the OFAC Fury


Posted by and at 3:30 pm on August 4, 2014
Category: Economic SanctionsIran SanctionsOFACSanctions

Soundstream Audio Car http://www.soundstream.com/images/intl-team/pic/england/england/images/new/UK%20(1).jpg [Fair Use - Soundstream is Epsilon sub]

OFAC announced that it assessed a $4,073,000 penalty against California-based Epsilon Electronics Inc.  Epsilon sells, among other things, audio and video equipment for cars (think of any number of MTV auto-improvement shows).  OFAC alleged that over an almost four-year period from 2008 to 2012, Epsilon sold such equipment valued at over $3.4 million to a UAE company, Asra International Corporation LLC, that “reexports most, if not all, of its products to Iran and has offices in Tehran.”  What is notable about the Epsilon penalty is the rare occurrence that OFAC described sanctions violation as “egregious.”

We have noted from time to time the confusion in OFAC enforcement announcements that describe “non-egregious” cases that appear on the facts provided to be anything but.  But now with Epsilon, we have precedent for what it takes to push OFAC over the limit.  So, what did Epsilon do to warrant the branding of an egregious offender?

Included in OFAC’s allegations were Epsilon’s attempts “to hide or purposely obfuscate its sales to Iran, when it changed a Web site to remove a photo gallery of Epsilon’s products that was labeled ‘Iran’” and “to mislead OFAC by providing false information in its subpoena responses and other letters to OFAC.”  It also doesn’t help that, as OFAC points out, Asra’s website indicated that it only distributed products to Iran (Asra’s website is curiously now under construction).

But what OFAC explicitly identified as its egregious benchmark was violations occurring after OFAC sent a cautionary letter to Epsilon in 2012.  After receiving the letter, OFAC alleged that Epsilon issued five invoices to Asra for products that Epsilon knew or had reason to know were intended for Asra’s resale in Iran.

Whatever the reason for Epsilon’s actions, even if a back-office mishap, the moral of the story is to treat OFAC’s cautioning not as a mere warning but as a pronouncement that OFAC is watching and there is a need to get your house in order.  A decision to continue with business as usual comes at a substantial risk unless a company can satisfy itself that what it is doing does not violate U.S. law.  That may be a tall order when OFAC has already informed you that it suspects violations have occurred.

A debate over OFAC’s adjectival use of “egregious” and “non-egregious” is not a matter of semantics.  Epsilon sold over $3.4 million worth of merchandise and now will be forced to pay that amount and over half a million more to the U.S. Government.  So, when OFAC gives you a yellow light, it’s best to slow down rather than speed up because OFAC has traffic cameras everywhere and your ticket will be in the mail.

Clif adds:  Another thing that accounts for OFAC’s fury and the mega-fine is that Epsilon had the temerity to challenge OFAC and file a response challenging OFAC’s Pre-Penalty Notice.  OFAC rejected Epsilon’s arguments summarily in the Penalty Notice, declining to reduce the proposed penalty by even a nickel.   Suffice it to say, OFAC was not amused by the extra work involved in responding to Epsilon’s objections.

The scarcely concealed ire by OFAC obscures an important issue.  What is at issue here are subwoofers and amplifiers used to pimp out cars in Iran, something that no doubt irks the mullahs and the Iranian government (presumably even more than it irks OFAC) as young Iranians cruise down the street blaring “Swagga Like Us.”   Whatever one may think of such behavior, one thing is certain: playing loud music in a car will not under any circumstances enrich uranium or detonate a nuclear device. Certainly Epsilon deserved a fine here but OFAC should have imposed one more in accord with subwoofers than centrifuges.

Permalink Comments Off

Bookmark and Share





Jul

30

BIS Announces Future Restrictions on Exports of Unspecified Items to Russia


Posted by at 8:12 pm on July 30, 2014
Category: BISRussia Sanctions

By Russian.dissident (Own work) [CC0], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3ALUN-A.jpgAs the sanctions pile up on Russia, the Bureau of Industry and Security (“BIS”) announced new sanctions yesterday. Of course, what exactly is covered by the sanctions isn’t quite clear, but as they say on birthdays and in diplomacy, it’s the thought that counts.

The sanctions were announced on the BIS website but were not accompanied by any Federal Register notices or EAR amendments. Indeed, the announcement deals with future sanctions at an unspecified date on a broad, but not clearly defined, category of goods:

BIS will institute a policy denying export, reexport or foreign transfer of certain items for use in Russia’s energy sector that may be used for exploration or production from deepwater, Arctic offshore, or shale projects that have the potential to produce oil.

Although what this means is not entirely clear, several things can be fairly safely assumed. First, the sanctions will target goods already on the Commerce Control List inasmuch it talks about a policy denying export and therefore seems to target goods for which licenses would currently be required. Second, and as a corollary to the first, it does not appear that new items will be added to the CCL as part of these new sanctions. Third, the items targeted will be a subset of those items currently requiring licenses and not all items on the CCL requiring licenses. This is analogous to previous BIS sanctions on Russia which covered not all items on the CCL but those that required licenses to Russia and which were “high technology items … that contribute to Russia’s military capabilities.”

The rub of course is figuring out how to define the subset of CCL items controlled for export to Russia that “may be used for exploration of production” of oil.   I suppose that clearly excludes some items on the CCL, like electric chairs (ECCN 0A981.b) and African Swine Fever virus (ECCN 1C352.a.1), but everything else is probably up for grabs, particularly given that we are talking about items that “may be used” for oil exploration. Fortunately, this is announcement deals with a denial policy that “BIS will institute,” so we can all hope that when the policy goes into force there will be some itemization of the ECCNs involved.

Permalink Comments Off

Bookmark and Share




« Previous posts | Next posts »