Sep
14
OFAC Issues New Iraq Regulations
Posted by Clif Burns at 11:14 pm on September 14, 2010
Category: OFAC
On Monday, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) repealed the Iraqi Sanctions Regulations, formerly found at 31 C.F.R. § 575.101 et seq. and replaced them the Iraq Stabilization and Insurgency Sanctions Regulations which will be found at 31 C.F.R. § 576.101 et seq. This, among other things, formally ends the import and export restrictions found in the Iraqi Sanctions Regulations, although these had been substantially ameliorated by four general licenses issued by OFAC on May 8, 2003. Imports of Iraqi cultural property into the United States would remain prohibited under the provisions
The stabilization regulations now put in place follow the model of other targeted sanctions programs designed to prohibit transactions by U.S. persons with individuals and entities deemed a threat to Iraqi stability and to block the assets of such individuals. Interestingly, section 576.412 of the new regulations codifies guidance that OFAC has previously set forth only in informal documents issued by OFAC on its website. The section reads:
A person whose property and interests in property are blocked pursuant to § 576.201(a) has an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50 percent or greater interest. The property and interests in property of such an entity, therefore, are blocked, and such an entity is a person whose property and interests in property are blocked pursuant to § 576.201(a), regardless of whether the entity itself is listed in the Annex to Executive Order 13315, as amended, or designated pursuant to § 576.201(a)(2) or (3).
As this blog has noted before, to the extent that the regulation deals with indirect ownership interests, it can be difficult to determine whether the rule applies or not. Suppose that the entity in question is 51 percent owned by a company that is, in turn, 51 percent owned by an SDN. The SDN only owns a 25.5 percent interest indirectly in the company, although the SDN may well have effective control of that entity. Or maybe OFAC means that in this case the SDN has a 51 percent interest because it controls the company with a 51 percent interest.
On the other side of this conundrum, consider this example: suppose the company in question has two shareholders, one of which has a 40 percent interest. Suppose further that an SDN has a 100 percent interest in the 40 percent shareholder and a 40 percent interest in the 60 percent shareholder. In that situation the SDN has a 64 percent indirect interest in company in question and arguably requires blocking the company in question even though the SDN wouldn’t have control over that company.
Because of these ambiguities OFAC really has an obligation to clarify the interpretation of the 50 percent rule, particularly now that it is part of the agency’s printed regulations. Don’t hold your breath.
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4 Comments:
Your point is well taken, Clif. In a time when the Treasury Secretary and Deputy Secretary and the White House are pushing for increased exports and economic growth, OFAC remains as anti-business as ever, declining to share with the public what it wants the public to do in any concrete way. OFAC should simply remove compliance doubt by putting out regulations that are more than broad contours — to do with the U.S. services trade what Commerce’s BIS and now State’s DDTC are doing with exports of goods. What is de minimis under territorial sanctions? How are on-shore computer servers that are used by foreign subsidiaries treated? If the policy is to let all banks receiving documents indicating use of an IRISL vessel reject, rather than blocking them, why isn’t this policy stated in a general license? Why not post current precedential interpretative letters (OFAC hasn’t added any letters since 2004!). Why not post the semi-annual reports to Congress on each sanctions program that are now done by Treasury rather than the President (which used to be published in the Weekly Compilation of Presidential Documents)? These steps would start to make U.S. business feel that it was OFAC’s partner, and not the target of sanctions.
@ Ex OFAC: Unless that is a picture of the Director of OFAC being toppled, I would expect OFAC to continue its policy of willfully violating the Administrative Procedures Act, which provides, inter alia, at 5 USC 552(a)(2) that
“(2) Each agency, in accordance with published rules, shall make available for public inspection and copying—
(A) final opinions, including concurring and dissenting opinions, as well as orders, made in the adjudication of cases;
(B) those statements of policy and interpretations which have been adopted by the agency and are not published in the Federal Register;
(C) administrative staff manuals and instructions to staff that affect a member of the public”.
This section further provides that such documents created after November 1, 1996, and which are not published in the Federal Register, must be made available electronically. Failure do to so has consequencies for any agency attempting to enforce such policies, interpretations or instructions against the public: “A final order, opinion, statement of policy, interpretation, or staff manual or instruction that affects a member of the public may be relied on, used, or cited as precedent by an agency against a party other than an agency ONLY if—(i) it has been indexed and either made available or published as provided by this paragraph; or (ii) the party has actual and timely notice of the terms thereof” (capitalization added for emphasis).
There is no foreign affairs function exclusion to 5 USC 552. It is difficult to think of any export control agency that lives up to the statutory requirements that most every other federal regulatory agency somehow manages to follow.
Clif, I’m all for more/better guidance, but isn’t the answer to your 51 percent problem that the assets of the immediate parent must be blocked because it is 50% or more owned by the SDN and, therefore, the asets of the subsidary in turn must be blocked (regardless of SDN control) because of the 51% ownership of blocked parent?
@Maverick: I think you’re right in that instance. Most of the problems are going to occur, I think, where the SDN has ownership in two or more shareholders of the company in question.
