OFAC Fines Canadian Bank for Complying with Canadian Law

Posted by at 6:29 pm on January 31, 2017
Category: Cuba SanctionsEconomic SanctionsForeign CountermeasuresOFAC

Caught in the Act by Exile on Ontario Street [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/JG66R4 [cropped and processed]The Office of Foreign Assets Control (“OFAC”) recently whacked “Toronto-Dominion Bank … a financial institution headquartered in Toronto, Canada,” with a $516,105 fine for various sanctions violations including — get this — maintaining bank accounts for 62 Cubans in Canada.  Yes, OFAC is now going after Canadian banks for holding accounts for Cubans in Canada, apparently under the common delusion that Canada is the 51st state.

Of course, part of the problem here may be the endemic sloppiness in OFAC reports of its penalty actions. It’s not at all clear exactly what corporate entity is involved, as Toronto-Dominion Bank is not the name of any corporate entity that I could locate. It appears to be a reference to TD Bank Group, a Canadian corporation headquartered in Toronto, and not a reference to its U.S. banking subsidiary TD Bank, N.A., if for no other reason than that the U.S. banking operation does not have branches in Canada.

The jurisdictional hook alleged by OFAC to cause Cuban accounts in a Canadian bank to be illegal under U.S. law is, apparently, this:

Between August 7, 2007 and January 24, 2011, TD Bank processed 99 transactions totaling $459,341.62 to or through the United States on behalf of these customers in apparent violation of the CACR

OFAC can’t be bothered to explain what provision or how this violates the CACR, probably because it is just an “apparent” violation.  However, in all instances, violations must either be “by a person subject to the jurisdiction of the United States,” which TD Bank Group in Canada is not, or must involve “property subject to the jurisdiction of the United States.” The definition of “property subject to the United States” is set forth in 515.313 which only talks about securities and doesn’t mention currency. Apparently then OFAC’s theory here is part of its overreaching belief that dollars anywhere located and by whomever owned are, nonetheless, property subject to the jurisdiction of the United States. If you touch a U.S. Dollar, you can be sent to a U.S. jail.

Leaving aside the agency’s unconscionably expansive view of its own extraterritorial jurisdiction, OFAC, yet again, pretends that this tenuous extraterritorial connection over Canada trumps (so to speak) Canada’s own laws. The Canadian Foreign Extraterritorial Measures Act forbids TD Group from complying with the U.S. boycott of Cuba. It is one thing (though not much better) to tell a U.S. company, such as Carlson Wagonlit, choosing to do business in a country with an embargo blocking statute that it must violate that foreign statute; it is quite another thing to say that to a foreign company that is incorporated in that jurisdiction.

Moreover, sections 3 and 5 of the Canadian Human Rights Act also likely would make it illegal for TD Group to deny services based on national origin to the Cuban account holders. During the time period involved in the violations at hand, section 515.505 provided that Cuban nationals who had taken up permanent residence in Canada were still blocked unless they obtained a specific license from OFAC. So, in effect, OFAC is fining TD Bank for refusing to violate the human rights of Cubans, including Cubans who were permanent residents of Canada.

An odd footnote to the OFAC announcement of the TD Bank Group fine notes the change in 515.505 which would unblock Cuban’s who became permanent residents of Canada without need for a specific license. Presumably this offers the cold comfort that, in the future, Canadian companies will only have to violate the human rights of a smaller group of people to avoid an OFAC fine.

Photo Credit: Caught in the Act by Exile on Ontario Street [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/JG66R4 [cropped and processed]. Copyright 2009 Exile on Ontario Street

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OFAC Designation of Putin’s Spy Agency May Trip Up U.S. Exports

Posted by at 9:47 pm on January 24, 2017
Category: BISEncryptionOFACRussia SanctionsSanctions

Vladimir Putin via http://en.kremlin.ru/events/president/news/27394 [Fair Use]The recent OFAC sanctions on Russia’s FSB né KGB, which is the Kremlin’s spy agency, may have unintended consequences. According to this article on the Russian website by my friend Иван Ткачёв (Ivan Tkachev) the FSB, besides doing typical spy things, is also responsible for overseeing the importation of encryption devices into Russia. This shouldn’t come as a big surprise since the NSA, our very own spy agency, has its nose in the encryption export business as anyone who has ever filed an annual self-classification report or a semi-annual sales report for encryption products knows perfectly well.

For items where encryption is a primary function, an FSB approval of the product is necessary prior to import. For items where encryption is ancillary (such as mobile phones, laptops, etc.) notification must be given to the FSB. Clearly a request for approval filed by a U.S company with the FSB is now forbidden. Even a notification for ancillary encryption products may be problematic.

A prior designation of FAU Glavgosekspertiza Rossii, a Russian federal agency that it is required to approve construction project designs, created similar unintended consequences and led OFAC, on December 20, 2016, to issue a general license permitting U.S. companies to seek reviews from FAU Glavgosekspertiza Rossii for certain construction projects in Russia. Perhaps a general license will be issued to permit filing these encryption notices and approval requests with the FSB, but there is no telling when at this point.

The other issue which may occur and which would require action by the Bureau of Industry and Security is that the FSB was also added to the Entity List. If the notifications or approval requests contain any technology subject to the EAR, a BIS license is required. It seems likely that this will be the case given the broad definition of technology in the EAR unless all the information in the documents supplied to the FSB has been “published” as defined in section 734.7 of the EAR.


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OFAC Guidance Clarifies Application of Facilitation Doctrine to Legal Advice

Posted by at 11:32 pm on January 18, 2017
Category: Iran SanctionsOFAC

U.S. Treasury Department by Oran Viriyincy [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/ecNvDu [cropped]For many years, OFAC loved to toy with lawyers at conferences by rattling the facilitation sabre. Spokespersons for the agency would do so by suggesting that the day was coming when OFAC would go after lawyers under the facilitation doctrine, particularly when lawyers were providing advice to people that they were outside the scope of U.S. economic sanctions.

This was not an idle threat.  OFAC had tried this before.  Donald Looper, an American lawyer, had his briefcase seized by Customs as he returned to the United States after advising a Bermuda corporation on a proposed deal with Libya.  OFAC claimed that he was, by providing such advice, assisting his client in evading or avoiding sanctions.   Looper brought suit to prevent the examination of attorney-client privileged material in his briefcase.   The District Court had this to say about OFAC’s position:

[t]he Constitution certainly cannot abide the Kafkaesque interpretation that OFAC proposes–that the Libyan sanctions prohibit, at the whim of OFAC regulators, any effort to structure transactions with the purpose of complying with the remainder of the Libyan sanctions regulations, including any attempt to hire an attorney for guidance.

Ouch. Notwithstanding this smackdown, OFAC continued, at least informally, to caution attorneys that advice to clients might overstep the facilitation prohibition insofar as a lawyer might, in the language of the typical prohibition on facilitation, “approve … any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person.”

Lawyers have typically attempted to negotiate this issue by trying to make sure that advice provided to non-U.S. persons that they were not covered by sanctions programs was not given in a way that could be characterized as approval of the transaction. This was a strategy, of course, that worked better for outside counsel than in-house counsel.

By a guidance released last week on January 12, OFAC finally put this issue to rest.

U.S. persons have been able to provide, and may continue to provide, the services below relating to the requirements of U.S. sanctions laws to covered persons: Opining on the legality of specific transactions under U.S. sanctions laws regardless of whether it would be prohibited for a U.S. person to engage in those transactions.

This statement, however, was immediately followed by an obtuse qualification:

U.S. persons may solicit information from [U.S. persons and non-blocked foreign persons] and conduct research to make a determination as to the legality of transactions under U.S. sanctions laws provided there is no importation of services where the importation of services is prohibited by any part of [OFAC’s regulations].

My best guess is this means that if a lawyer were, say, advising a German company on the legality under the Iran sanctions of a transaction by a German company in Iran, the U.S. lawyer could not query the counterparties in Iran (or their lawyers) about the scope of the transaction to make that determination. However, I’m not sure why that would ever be necessary. Comments from any readers on what this qualification might actually mean are welcome.

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OFAC Expands Prohibitions on Re-Exports by Foreign Persons

Posted by at 4:16 pm on January 13, 2017
Category: Iran SanctionsOFAC

Aban Oil Rig via http://www.abanoffshore.com/downloads/DD1PL%20Investor%20Presentation%20231015.pdf [Fair Use]Yesterday the Office of Foreign Assets Control (“OFAC”) announced that it had levied a $17,500 fine against Aban Offshore Ltd. (“AOL”), an Indian oil rig company, because AOL’s subsidiary in Singapore arranged to have oil rig equipment, presumably U.S. origin although not stated as such, re-exported from Saudi Arabia to Iran. This was alleged to have been in violation of section 560.204 of the Iranian Transactions and Sanctions Regulations (“ITSR”) which prohibits re-exportations from the United States to Iran.

The OFAC action is more than a little peculiar. Both AOL and it’s Singapore subsidiary are not U.S. persons and so it would seem that section 560.205 of the ITSR, which covers “reexportation of goods … by persons other than United States persons” would be the applicable provision. Of course, that section only penalizes re-exports of items that require a license from BIS for export to Iran. See § 560.205(a)(2). The oil rig equipment was almost certainly EAR99, although the OFAC document is oddly silent on this point, and would not have required a license under either sections 742.8 or 746.7 of the EAR.

It looks like what OFAC is doing here is pretending that section 560.205 does not limit section 560.204 at all. On its face, and without reference to section 560.205, section 560.204 prohibits re-exports by anyone, U.S. persons and non-U.S. persons alike, from the United States to Iran without regard to whether the item would require a BIS license. But if section 560.204 is intended to be read that broadly, there is no reason for section 560.205 to exist at all. It would simply be swallowed up by the breadth of section 560.204 rather than serve as a qualification of the scope of 560.204 for non-U.S. persons.

Granted agencies have broad latitude to interpret their own regulations, but that latitude does not go so far as to allow an agency to read one rule in a way as to render another rule absolutely meaningless.  As it stands, OFAC has read section 560.205 out of its rules and held that non-U.S. persons can now be held liable for re-exports of U.S. origin EAR99 items to Iran.


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Homeless Travel Blogger Advises Readers To Violate OFAC Rules

Posted by at 6:03 pm on January 10, 2017
Category: Cuba SanctionsOFAC

Ben Schlappig via http://onemileatatime.img.boardingarea.com/wp-content/uploads/2008/01/Ben-Schlappig-10bw-cropped-e1427813265841.jpg [Fair Use]
ABOVE: Ben “Lucky” Schlappig

A homeless blogger named Ben “Lucky” Schlappig, who makes his living flying on airplanes and staying in hotels, has decided to take up the practice of law along with advising fellow travelers on the intricacies of the airline and hotel reward programs. The result is pretty much what you would expect when Lucky opines on the legality of traveling to Cuba as a tourist.

Technically Americans can only travel to Cuba for one of about a dozen approved reasons. … In practice, most people traveling to Cuba as tourists choose either “Support For The Cuban People” or “People-To-People Exchanges” as the reason for visiting.

So technically you can’t go if tourism is your stated reasons [sic], though in practice there are tens of thousands of American tourists going. That’s because they keep the categories intentionally broad, and you won’t generally be asked about the details of why you’re going to Cuba. Arguably when you’re a tourist somewhere you have “people-to-people exchanges” and also “provide support” to the people.

Without hesitation I’d feel comfortable recommending people visit Cuba as tourists and just state one of those as the reasons.

Arguably, when you’re relying on a pretend lawyer, your mileage may vary.  Also, never trust anyone who goes by the name of “Lucky.”

Of course, OFAC anticipated that amateur lawyers like Lucky would say that all tourism in Cuba was inherently a people-to-people exchange, so it gave an example here, in the actual rules (which Lucky clearly did not bother to read), to put the kibosh on such silliness:

An individual plans to travel to Cuba to rent a bicycle to explore the streets of Havana, engage in brief exchanges with shopkeepers while making purchases, and have casual conversations with waiters at restaurants and hotel staff. None of these activities are educational exchange activities that will result in meaningful interaction between the traveler and individuals in Cuba, and the traveler’s trip does not qualify for the general license.

So, just as you should not trust my opinions on how to get the most frequent flyer miles from your airline, you probably shouldn’t trust Lucky when he tells you to travel to Cuba as a tourist.

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