ExportLawBlog

Archive for the ‘OFAC’ Category

Aug

8

OFAC to UK: NYDFS Misread Our Rules

Posted by Clif Burns at 6:37 pm on August 8, 2012

Yesterday, I reported on the New York Department of Financial Services’ Order against Standard Chartered claiming that the Bank violated the rules of the Office of Foreign Assets Control by stripping out the names of Iranian entities in wires for legal U-turn transactions permitted before November 2008 under section 560.516(a)(1) of the Iranian Transaction Regulations. The New York agency attempted to premise this claim of illegality on section 560.516(c) of the regulations. That section reads:

Before a United States depository institution initiates a payment on behalf of any customer, or credits a transfer to the account on its books of the ultimate beneficiary, the United States depository institution must determine that the underlying transaction is not prohibited by this part.

This, NYDFS argued, required the U.S. bank to verify the legality of the transaction, something it couldn’t do if the customer data referring to Iran was stripped from the wires. I pointed out as long as the transaction was otherwise legal, this section wouldn’t be violated.

But in a letter on the Standard Chartered matter from OFAC to the U.K. authorities, obtained by Business Insider, OFAC makes a different and better point

Subsection 560.516(c) of the Iranian Transactions Regulations calls on U.S. financial institutions, including foreign financial institutions operating in the U.S., to confirm the applicability of a license only if the institution holds an account for a customer that is initiating or receiving a payment generally, the first and last banks in a transaction. Because U.S. financial institutions could not serve as either the originating or recipient bank on offshore-to offshore U-Turn transactions, this subsection did not apply to U.S. financial institutions serving as intermediaries on licensed U-Turn transactions.

That’s an excellent point. In a U-Turn transaction, the U.S. bank by definition would not be transferring money to or from one of its customers, and so this provision would not impose any obligation on the U.S. bank. Instead, this provision applies when, for example, there is a specific license permitting payment to or from a U.S. customer, as referenced by 560.516(a)(2), and in that case the U.S. bank would need to verify the existence and applicability of the license.

As I said yesterday, NYDFS shouldn’t get all tangled up in interpreting regulations that it doesn’t understand and has no authority to enforce.

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Jul

31

OFAC Drops CISADA Bomb on Two Banks

Posted by Clif Burns at 11:19 pm on July 31, 2012

Category: OFAC

The Office of Foreign Assets Control (“OFAC”) today applied sanctions under the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 against the Bank of Kunlun in China and the Elaf Islamic Bank in Iraq. Under these sanctions, U.S. financial institutions are “prohibited from opening or maintaining a correspondent account or a payable-through account” for the two banks, effectively cutting them off from foreign exchange and the U.S. financial system. This is the first time these sanctions have been applied. OFAC does not supply details on the basis for these actions other than to state that they were imposed under 561.201 of its Iranian Financial Sanctions Regulations.

Back in April, the Wall Street Journal identified Kunlun as significant player in providing financial services to Iran. Kunlun, which is controlled by state owned China National Petroleum Corp., on its website identifies the petroleum and petrochemical industries as its main customer base. Sanctions under section 561.201 are aimed at financial institutions that assist the Government of Iran to acquire WMD or support terrorist organizations, unlike 561.203 which is directed at foreign persons that facilitate transactions with blocked Iranian financial institutions such as the Central Bank of Iran or Bank Tejerat. Therefore, it seems reasonable to surmise that OFAC is taking the broad position that banks that help Iran sell petroleum products are, at least indirectly, furthering Iran’s nuclear program.

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Jul

25

Your Tax Dollars At Work

Posted by Clif Burns at 9:15 pm on July 25, 2012

Category: OFAC

ABOVE: Zachary Sanders

A long time ago in a galaxy far, far away, a young American teaching English in Mexico decided to take a trip to Cuba. Today, after fourteen years of legal maneuvering with the Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the young American, now a middle-aged lawyer, threw in the towel and agreed to give OFAC $6,500 to atone for his sins.

We reported on the travels and travails of Zachary Sanders, harmless tourist and OFAC target, back in 2009, and you can get more of the details of what originally happened in that post. The shorter version is that by the time OFAC got around to filing anything against Sanders, the five-year statute of limitations on his travel to Cuba had passed so they went after him for not answering a letter demanding incriminating details of his jaunt to the most dangerous country ever on the face of the earth. (Apparently OFAC’s copy of the Bill of Rights had the Fifth Amendment excised somewhere along the way.)

OFAC won here not because it was right but because it was persistent, not because it was fair but because it had an unlimited amount of the taxpayers’ money and Sanders had his salary as a public interest lawyer, not because it was defending the country against terrorists but because it bore a grudge against a little guy who wanted to drink a daiquiri at El Floridita.

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Jul

13

Burma Sanctions Shaved

Posted by Clif Burns at 1:41 am on July 13, 2012

Category: Burma Sanctions • OFAC

Burma Back in May this blog reported on Secretary of State Clinton’s announcement that the U.S. would issue general licenses permitting export of financial services to, and investment in, Burma. Yesterday those general licenses were issued by the Department of Treasury’s Office of Foreign Assets Control (“OFAC”).

As I had reported, Secretary Clinton’s announcement of the upcoming general licenses suggested that there would be some qualifications based on potential humans rights concerns relating to certain companies or sectors of the Burmese economy, although she didn’t suggest what those might be. Now we know: the General Licenses do not cover certain dealings with the Burmese Ministry of Defense, state or non-state armed services or groups owned by these services or the MOD. No new investments may involve these groups but financial services may be exported to those groups as long they are not “in connection with the provision of security services.” Security services are not defined, and OFAC staff is unlikely to provide any guidance into what this term means if you call them up, so, for all practical purposes, no financial services may be exported to these groups. This means, in its broadest sense, no money may be transferred to these groups by a U.S. person for any reason.

The general licenses also do not permit export of financial services, or investments in, an blocked person, i.e., any person on OFAC’s List of Specially Designated Entities and Blocked Persons. The general license does, however, permit, notwithstanding the prohibition on dealing with blocked persons, exports of financial services to Burma which involve

transfers to or from an account of a financial institution whose property and interests in property are blocked pursuant to those authorities, provided that the account is not on the books of a financial institution that is a U.S. person.

The part of this provision permitting transfers from accounts of blocked Burmese financial institutions seems to be contradicted by the very next provision of the General License

This general license does not authorize any debit to a blocked account.

Because a transfer from a blocked account and a debit to a blocked account are the same thing and because an account of a blocked financial institution would normally be considered a blocked account, the provision prohibiting all debits to blocked accounts would seem to prohibit the transfers from a non-U.S. account of a blocked financial institution permitted by the former provision. Perhaps the point here is that the non-U.S. account of a blocked entity is not a blocked account, but then there is no need for the language permitting the debit “provided that the account is not on the books of a financial institution that is a U.S. person.” In any event, exporters can avoid this ambiguity by assuring that payments for exported goods do not originate from blocked financial institutions in Burma. A number of private banks in Burma are not on the SDN list, although several are, such as Myawaddy Bank and the Innwa Bank which was just designated simultaneously with the release of the new general licenses for Burma.

Two other important points bear stating regarding these new general licenses. First, investments in Burma in excess of $500,000 and any investments with Myanma Oil and Gas Enterprise will be subject to required annual reports to the Department of State. The reporting requirements, which appear extensive and burdensome, are detailed on this State Department web page. Interestingly, the report will require a copy of, or a “concise summary” of, the reporting company’s anti-corruption policy regarding its operations in Burma.

Second and finally, nothing in these general licenses permits the import of goods from Burma, which remain generally prohibited with certain exceptions, including exceptions for household goods, personal effects and informational materials.

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Jun

22

Stupid Quote of the Day

Posted by Clif Burns at 2:00 pm on June 22, 2012

Category: BIS • Iran Sanctions • OFAC

Red Penalty Card Ahem. Here is what Nahal Iravani-Sami, president of the Iranian American Bar Association, has to say about whether retail clerks at Apple Store should sell items to customers even if it is disclosed they plan on illegally exporting those items to sanctioned countries:

“The responsibility for enforcement should fall on border patrol, law enforcement, the U.S. post office, customs — government agencies.” As it is, the law “promotes dishonesty and invites profiling. When you come down to it, it’s absurd.”

So, folks, it’s time to take that portion on red flags out of your export compliance program. Just let Customs worry about it. After all, that’s their job, not yours.

What’s even more amazing is that Ms. Irvani-Sami is a prosecutor. I wonder if she would say the same thing about selling a weapon to somebody who said he was going to use it to rob a bank? Make the sale! Don’t worry about stopping the bank robbery. That, after all, is what the police are for.

I’m quoted with Ms. Irvani-Sami in the above-linked article at MSNBC on shopping while Iranian at Apple. As you can see from what I said there, I am certainly aware of the conflicting interests involved and the need to balance export enforcement with human rights laws and local anti-discrimination provisions. Even so, just saying “leave it to Customs,” as Ms. Irvani-Sami does, is remarkably foolish.

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