Jul

7

Who Elected Ben Lawsky to Conduct U.S. Foreign Policy?


Posted by at 5:18 pm on July 7, 2014
Category: Iran SanctionsOFAC

Official Portrait of Ben Lawsky http://www.dfs.ny.gov/about/staff_bios/blawsky.htm [Fair Use]
ABOVE: Ben Lawsky


Of the $8.9 billion fine being paid by BNP Paribas for violations of U.S. sanctions on Cuba, Iran and Sudan, $2.24 billion is going to the State of New York and, specifically, to Ben Lawsky’s Department of Financial Services. All of this will gild Lawsky’s credentials, overstuff the NYDFS’s coffers, and pay for NYDFS’s holiday parties and expensive lunches for eons to come, while not a single cent of this astonishing sum of money being handed over to the New York agency will go to anyone whom the sanctions seek to protect like, say, Sudanese refugees.

The NYDFS consent order justifies this mega-fine, in part, on BNP’s processing of $160 billion in dollar-denominated transactions for Iranian customers. This is the overwhelming bulk of the $190 billion total of dollar-denominated transactions at issue here for all three sanctioned countries. This amount for Iran covers, according to the consent order, the ten-year period between 2002 and 2012. Astute readers will remember, from the NYDFS/Standard Chartered fiasco, that we’ve been here before with NYDFS. Prior to November 2008 — i.e., for most of the period cited by NYDFS — it was perfectly legal for BNP’s NY branch to process off-shore dollar-denominated Iranian transactions under the so-called U-Turn transactions rule.

So, when Lawsky and his crew complain in the consent decree that the failure of BNP to include references to Iran in the legal U-turn transactions “rendered its New York Branch and other New York-based financial institutions helpless to detect payments that should have been rejected or blocked under U.S. law,” they are spouting utter nonsense given that these payments were legal before November 2008 and not required to be rejected or blocked. But Lawsky’s goal is to enrich NYDFS here, not to observe legal niceties like what OFAC’s rules actually said before November 2008.

There are two major problems here. First, NYDFS’s case is completely dependent upon the scope and extent of federal sanctions, because without a federal sanctions violations, none of the record keeping issues are material. And, obviously, the New York state regulators either have no clue, or do not care, as to the actual scope of those sanctions. Second, and more importantly, to the extent that everything is based ultimately on federal sanctions, the enforcement of those sanctions is ultimately a matter of U.S. foreign policy, something that should be in the hands of OFAC, the DOJ and the rest of the federal government and not in the hands of either the State of New York or, worse, the hands of a single New York regulator.

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Jul

2

OFAC Gores Red Bull for Skateboarding in Havana


Posted by and at 6:45 pm on July 2, 2014
Category: Cuba SanctionsEconomic SanctionsOFACSanctions

Ryan Scheckler Skateboards in Havana via http://www.redbull.com/cs/Satellite/en_INT/Gallery/Ryan-Sheckler-shreds-Cuba-and-Panama-021242761792131#/image-12 [Fair Use]

Last Friday, OFAC announced that Red Bull North America, Inc. (“RBNA” or, when we’re feeling informal, “Red Bull”) agreed to pay $89,775 to settle allegations that “seven representatives” of RBNA traveled to Cuba in order to “film a documentary” in 2009 without OFAC authorization but with the approval of RBNA’s “management.”  RBNA is the U.S. subsidiary of Red Bull GmbH, the Austrian elder statesman of excessively caffeinated energy drinks.  Although OFAC provided no details about the film itself, it is likely a 2009 documentary, described by Red Bull here, which the company made about Ryan Sheckler skateboarding in Havana.  Apparently there is no place left in the world that is safe from skateboarders other than, perhaps, some interior stretches of Antarctica.

Of course, there is a general license for journalistic activities in Cuba, which would seem to cover making documentaries, as opposed to, say, filming Transfomers LVIII: The Final (And We Really, Really Mean It This Time) Apocalypse.  But OFAC’s general license is restricted to “persons regularly employed as journalists by a news reporting organization.”  As we’ve noted before OFAC has not applied this limitation in a consistent fashion, suggesting that Michael Moore wasn’t a journalist but Charlize Theron was. Although Red Bull seems quite active in the documentary business, OFAC apparently viewed them as simply a commercial marketing endeavor in a country where Red Bull is undoubtedly sold.  In fact, judging from the Red Bull Cliff Diving World Series event held in Havana this May, a good amount of Red Bull is being consumed in Cuba.

In considering the penalty amount, OFAC said it determined and took into account that “RBNA did not voluntarily self-disclose” and that “RBNA had prior knowledge of U.S. sanctions on Cuba and took steps to conceal the transactions.”  Of course, we don’t quite understand how you conceal a documentary, particularly where Red Bull posted extensive information about it on the Internet, which is where OFAC likely discovered this transaction. On the other side of the equation, OFAC cited  RBNA’s institution of an OFAC compliance program, no other sanctions violation from 2004 to 2009 and the “non-egregious” nature of the violation.

We have over the past few years called attention to the confusion and lack of information in OFAC’s enforcement action announcements.  Last April, we highlighted what we thought was one of the more egregious “non-egregious” settlements that OFAC has announced.   The latest settlement with RBNA, furthers the confusion by imposing a fine on the low scale even after OFAC finds, albeit wrongly, that Red Bull concealed the documentary.

While OFAC makes up for its small-ish RBNA fine in its hefty enforcements against banks (à la the almost $1 billion settlement OFAC reached with BNP Paribas this week), most U.S. companies’ dealings with Cuba are going to be more on par with isolated occurrences like the one involving RBNA.  In the end, the RBNA settlement is good news for RBNA, its Red Bull parent and any other U.S. company in a similar situation.  If a U.S. company ever finds itself in the future before OFAC in an isolated situation like RBNA, the first thing to do is to pull out RBNA’s settlement announcement and try negotiating from there.

 

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Jun

26

How Not To Smuggle Guns To Nigeria


Posted by at 8:38 pm on June 26, 2014
Category: Arms ExportCriminal Penalties

Mugshot of Sheriff Olaleran Mohammed [Fair Use]
ABOVE: Sheriff Mohammed


A federal jury in Minnesota, on June 16, convicted a naturalized U.S. citizen on charges that he illegally exported guns to Nigeria without a license. At issue were eight handguns that Sheriff Olaleran Mohammed stuffed into brown paper bag and placed between the seats of a 1998 Mercury that was being shipped via a cargo ship container to Nigeria. Spanish police discovered the guns when the ship called in Valencia, Spain, on its way to Lagos.

The trial brief filed by Mr. Mohammed’s lawyers before the jury trial gives a pretty clear idea why he was ultimately convicted. First, the brief tries to rely on the exemption in section 123.17(c) of the ITAR for temporary exports of not more than three nonautomatic weapons for personal use. Since there were eight guns in the paper bag in the Mercury, I guess the idea here was that the defendant could invoke the exemption three times to cover his eight guns, or something like that.

The other argument forwarded by the defendant’s trial brief on the export charge is that Mr. Mohammed had no idea whatsoever that it was illegal to export firearms for personal use to Nigeria without a license. Which is, of course, why he stuffed them in a paper bag and hid them in a 1998 Mercury he was sending to Nigeria.

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Jun

24

It’s Good To Be The King


Posted by at 11:15 pm on June 24, 2014
Category: DDTCITARUSML

Intersil Low Dose Irradiator via http://www.intersil.com/en/applications/rad-hard/eldrs.html [Fair Use]Last week the Directorate of Defense Trade Controls (“DDTC”) announced that it had fined Intersil Corporation, a California-based manufacturer and developer of semiconductors and integrated circuits, $10,000,000 of which $6,000,000 goes to Uncle Sam and the remaining $4,000,000 goes to Intersil’s compliance program and remedial measures. Along with the fines, DDTC has required Intersil to jump through a number of now-typical compliance and re-education hoops, including appointing an ombudsman, hiring a special compliance officer, rewriting its compliance programs, engaging in audits, making frequent reports to DDTC and writing “I will not violate the ITAR” three million times on a blackboard after school. Well, of course, only the last item was not actually required.

According to the Proposed Charging Letter, Intersil incurred the ire of DDTC by classifying certain of its products as ECCN 3A001.a.1, 3A001.a.2, and EAR99 even though the items were radiation hardened and space qualified and, therefore, covered instead by USML Category XV(e). Why Intersil made this mistake is not revealed in the documents but since Intersil was applying for BIS licenses for the goods when required, it is hard to imagine that it was anything other than a good faith mistake (which is, probably, the reason why this information is omitted.) As a result, there were 3,152 unauthorized exports of Intersil’s products, although, due to the statute of limitations, only 339 exports were actually charged, with DDTC swearing left and right that although it couldn’t help mentioning the 3,152 exports it was paying absolutely no attention whatsoever to those in formulating the $10 million penalty.

But here is the most interesting part of the charging documents:

Several of the unauthorized exports were subsequently re-exported or retransferred without authorization due in part to the misclassification of the ICs.On August 20, 2010, a DDTC official misinformed Intersil that for any ICs that “HAVE already been exported under EAR jurisdiction, these [ICs] ARE NOT retroactively subject to the retransfer provisions of 22 CFR 123.9.: Intersil was further misadvised that Intersil did not need to inform its foreign customers to submit ITAR re-export authorization for these items and that this “decision to not retroactively aply USML controls for these already exported [ICs] will continue to be applicable even if a future formal CJ determination asserts USML controls apply.”

Interestingly, notwithstanding this bad advice, Intersil is charged with causing various unauthorized re-exports from, and retransfers in, foreign countries due to its misclassification of the integrated circuits. Whether or not any of these were the result, at least in part, of DDTC’s admittedly bad advice that the retransfer provisions would not apply to items exported under the EAR is not clear, but let’s give DDTC the benefit of the doubt and assume that these were all unrelated.

Even so, there is still an interesting moral to this story. Exporters who make mistakes have to pay large fines and engage in burdensome remediation activities. DDTC officials who make mistakes have to do, er, well, nothing at all because, well, you know, mistakes happen. As they say, it’s good to be the king.

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Jun

23

Seeing Through the Smoked-Filled Rooms of Sanctions


Posted by at 6:37 pm on June 23, 2014
Category: Economic SanctionsGeneralOFACRussia SanctionsSanctionsSDN List

By Erifnam at en.wikipedia [GFDL (www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], from Wikimedia Commons http://commons.wikimedia.org/wiki/File%3AK_Street_NW_at_19th_Street.jpg

The Canadian newspaper The Globe and Mail reported last week that lobbying records made public this month show the CEO and a lobbyist for Kinross Gold Corp., a Canadian gold mining company and one of the world’s largest, “have had numerous communications” with Prime Minister Stephen Harper’s foreign affairs policy adviser, Canada’s deputy minister of foreign affairs and the Canadian ambassador to Russia in order to discuss “policies and regulations related to the imposition of economic sanctions.”

With almost a third of Kinross’s global gold production reportedly coming from its two mines in Russia, Kinross has good reason to to try to find out, to the best extent possible, whether the Canadian government plans to impose sanctions relating to Russia that may affect Kinross business in that country.

Canadian sanctions against Russia, like U.S. and EU laws, involve prohibitions on dealings with targeted persons and give government authorities wide latitude to designate individuals and entities with essentially no public notice or consultation.  Under U.S. law, for example, OFAC can designate an SDN at any time without having to comply with public notice and review requirements imposed on almost all government agencies so long as the person meets the often broad criteria of a sanctions target under an executive order.

Moreover, OFAC deems any entity owned 50% or more by an SDN to be treated as an SDN itself.  As we previously reported, the so-called 50% rule has caused a variety of compliance conundrums relating to Russia as a few individuals, like Gennady Timchenko, Arkady Rotenberg and Boris Rotenberg, own major companies in many sectors of the Russian economy.  To boot, Kinross may have gotten understandably skittish when, south of the border, President Obama issued his latest Russian sanctions-related executive order in late March permitting imposition of sanctions on those operating in various sectors of the Russian economy, including metals and mining.  Under that criteria, Kinross itself might later be designated an SDN.

Sanctioning governments have, of course, reasons for their secrecy.  Intended targets can’t be announced prior to sanctions being imposed and, therefore, given a head start in transferring their property and money to safe haven countries.  But with little guidance and a lot at stake, Kinross has every reason to reach out to government officials to gain any clarity possible and do one’s best to make sure business can continue as usual or, if not, how to adjust its operations to comply with applicable laws.

Kinross is not alone.  U.S. federal lobbying records for this year’s first quarter are now publicly available.  For example, Coca-Cola, Xerox and Citgo are among the variety of companies that have reported lobbying efforts relating to sanctions against Russia.  Because sanctions against Russia weren’t imposed until the end of the first quarter in March, we expect to see disclosures in subsequent quarters from more companies involved in such efforts.

If there are smoke-filled rooms in economic sanctions, the smoke is mostly from government cigars (and maybe Cuban-origin for the Canadians).  The smoke arises where statutes, regulations and executive orders give government agencies dangerously broad discretion in identifying the sanctions targets and enforcing sanctions laws in ways that are not readily apparent from the laws themselves.

Future economic sanctions laws are not likely to be written any clearer.  Much of their effectiveness lies in not knowing who will be targeted and, as a result, the better chance there is that companies and individuals will police themselves in order to avoid possible violation.  In such an uncertain environment, finding people who can get as much information as possible from government officials enforcing sanctions will always be an invaluable resource.

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