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Archive for the ‘OFAC’ Category

Apr

15

Sanctions on Somalia Announced

Posted by Clif Burns at 8:33 pm on April 15, 2010

Mogadishu It is not only birds that return in springtime. Calmer weather on the Indian Ocean guarantees a springtime efflorescence of Somali pirate skiffs and attacks on commercial shipping off the coast of Somalia. Pirates have already grabbed a supertanker (with $170 million of crude oil) and some profoundly stupid Somali pirates attacked a Navy cruiser last week. (Buh-bye, little pirate boats!)

Whether or not the timing of yesterday’s announcement of new smart sanctions on Somalia was prompted by the recent uptick in piracy or whether the timing was coincidental is impossible to say. In any event, the White House issued Executive Order 13536, which imposed new blocking sanctions on eleven Somali militants. The militants had so many aliases that the new designations led to 211 new entries on the Specially Designated Nationals (“SDN”) list. And the Executive Order authorizes future designations by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) of anyone that threatens the security and stability of Somalia by, inter alia, delivering arms to Somalia or interfering with the Djibouti Agreement, peacekeeping missions in Somalia (such as AMISOM), or the delivery of humanitarian aid in Somalia.

The Executive Order additionally allows designations of parties engaged in piracy off the coast of Somalia on the grounds that these activities also threaten the security and stability of Somalia. This has led some reputable sources, such as Business Week, to speculate that the Executive Order prohibits the payment of ransoms to Somalia pirates.

â€œThe wording could definitely be construed to make payments of ransoms illegal,â€ [a New York lawyer] who negotiated a ransom payment with Somali pirates for a U.S. owned ship hijacked in 2008 said in a telephone interview. â€œThe wording is just vague enough to give the Treasury some flexibility in how they apply it.â€

Er, no. Absolutely not. The order only covers payments to persons who have been specifically designated by OFAC on the basis of a determination that those persons have previously engaged in piracy. Paying ransom to an undesignated pirate isn’t covered or prohibited by the order. The language here not only is not vague but also it follows the well-established pattern of similar orders which only cover individuals after they have been designated by OFAC and placed on the SDN list.

What is the chance that Treasury would issue such a designation between the time that a ship was hijacked and a ransom was paid? I think it is quite small. OFAC’s goal here seems to be more to prevent Somali pirates from using their ill-gained assets once obtained rather than to risk destruction or loss of commercial vessels by interdicting the ransom payment in the first place.

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Mar

18

Voluntary Disclosure Leads to Criminal Prosecution (UPDATED)

Posted by Clif Burns at 8:43 pm on March 18, 2010

Bycosin AB SEE IMPORTANT UPDATE AT THE END OF THIS POST

The headline to this post — “Voluntary Disclosure Leads to Criminal Prosecution” — will probably send a chill down the spine of every export and sanctions lawyer who reads this post. How many times have all of us said to clients that, although there is no guarantee, voluntary disclosures almost never lead to criminal prosecutions? After the guilty plea today of Innospec, Inc., arising from sales of fuel additives to Cuba by Innospec’s former Swedish subsidiary Bycosin AB to Cuban power companies, we won’t be able to say that voluntary disclosures almost never lead to criminal prosecutions without mentioning that in Innospec’s case it did.

According to a Department of Justice press release, the guilty plea for the Cuba embargo violations* was part of a larger plea agreement which included guilty pleas by Innospec to charges under the Foreign Corrupt Practices Act (“FCPA”) that it had bribed Iraqi officials in connection with sales of tetraethyl lead to Iraqi fuel refineries. That press release also noted:

According to the plea agreement, Innospec also admitted that a subsidiary sold nearly $20 million in oil soluble fuel additives from 2001 to 2004 to state-owned Cuban power plants without a license from OFAC, in violation of the Trading With the Enemy Act. â€¦ Innospec agreed to pay $2.2 million to resolve outstanding matters with the [sic] OFAC related to the U.S. embargo against Cuba.

Further details about the Cuba sales can be found in an SEC Form 10-Q filed by Innospec in 2006. That 10-Q notes that Innospec, in a routine internal audit of sanctions compliance conducted in 2004, discovered that Bycosin AB, a Swedish subsidiary it acquired in 2001 had been selling fuel additives to Cuba. Innospec shortly thereafter sold Bycosin and, undoubtedly as part of the sales agreement, filed a voluntary disclosure with OFAC detailing the sales to Cuba by Bycosin.

As a result of additional internal investigations, Innospec made a further disclosure to OFAC of sales to Cuba by one of its U.S. subsidiaries as well as by a French subsidiary. The company also disclosed that a subsidiary of Bycosin maintained an office in Cuba in connection with its sales activities in Cuba and that employees of one of Innospec’s U.S. subsidiaries traveled to Cuba twice in connection with the Cuban sales. Innospec’s 10-Q noted, not surprisingly, that E.U. Council Regulation No. 2271/96 made it illegal for the company’s E.U. subsidiaries to comply with the U.S. embargo on Cuba.

It’s not clear why any of this would justify turning a routine voluntary disclosure to OFAC into a criminal prosecution by DOJ, particularly in light of the fact that the activities of the foreign subsidiaries were compelled by the E.U. directive. Perhaps the differentiating factor here is that the company was also engaged in FCPA violations and the Cuba sanctions charges were simply piled on by the DOJ as a negotiating tactic with Innospec. Still this prosecution is bound to have a chilling effect on voluntary disclosures to OFAC.

*UPDATE: When this item was posted last night, the Innospec plea agreement had not yet been made available on PACER. A friend of mine at DOJ emailed me to note that the plea agreement recited the TWEA violations but that Innospec was not charged with TWEA violations and was only charged with the FCPA violations. The DOJ press release on which I relied did not make this clear. A copy of the plea agreement can be downloaded or viewed here.

Even with this clarification, I am still disturbed that information provided in a voluntary disclosure would be used at all in connection with a criminal prosecution, particularly where it is used with the implicit threat that criminal charges would be filed on the disclosed matters if the discloser did not settle the other criminal charges.

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Jan

27

This Isn’t the Transparency You Were Hoping For?

Posted by Clif Burns at 8:39 pm on January 27, 2010

Category: OFAC

Locked Horns My colleague Stan Marcuss points out that the Office of Foreign Assets Control (“OFAC”) appears to have changed course in treating Freedom of Information Act (“FOIA”) requests and has decided to hand out OFAC license applications willy-nilly to anyone who can afford a postage stamp. Several years ago, after someone requested copies of all licenses to ship food, medicine and medical devices to Iran, OFAC sent letters to the affected parties asking them if they wished to assert protection under Exemption 4 of the FOIA which exempts from disclosure confidential commercial information. If a licensee asserted the exemption, OFAC normally would withhold the license from disclosure.

Now, citing the new administration’s policy of transparency, OFAC has sent letters indicating that these licenses will be released to the public. The filing of such a license, and the contents thereof, will be freely disclosed over the objection of the licensee even though such disclosure may discourage some from filing these licenses in the future, clearly in contravention of the Trade Sanctions Reform and Export Enhancement Act of 2000 which clearly sought to encourage the export of such humanitarian supplies to sanctioned countries. Even if we don’t like the government of Iran, Congress passed TSRA because it did not want to see the people of Iran deprived of food and life-saving medicines and medical devices. Those requesting TSRA licenses, of course, don’t really have those interests in mind.

At least two things make OFAC’s new position more than a little absurd. OFAC is still using FOIA Exemption 6 to black out the names of any individuals mentioned in disclosed documents. The absurdity here is that this policy is even used to withhold the names of terrorist and other specially designated nationals (“SDNs”)Â when releasing information on enforcement actions against companies that have engaged in transactions with SDNs. That means, of course, that Osama Bin Laden has more protections under OFAC’s interpretation of the FOIA than an exporter shipping food to a sanctioned country.

Worse, when an agency promises transparency, one might reasonably assume that transparency would extend to providing information on export enforcement cases that might actually assist exporters in trying to interpret and to understand the scope of OFAC’s vaguely worded regulations. Â Not so. Â OFAC continues to release as little information as possible about enforcement actions. Â That sort of transparency would prevent the OFAC from being able to use ambiguities in its own regulations to deter certain exports — a practice I like to call in terrorem regulation.

Apparently, what’s transparent for the goose isn’t really transparent for the gander.

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Jan

5

The Name Game Chinese Style

Posted by Clif Burns at 8:16 pm on January 5, 2010

Category: China • OFAC • Sanctions

Tiananmen Square An interesting story in today’s Wall Street Journal details instances in which a number of U.S. companies imported items from China Precision Machinery Import Export Corporation despite the fact that CPMIEC is on the Office of Foreign Assets Control’s Specially Designated Nationals List. The reason for this, asserts the story, is that Chinese companies on the SDN list “have proved adept at creating aliases or subsidiary shell companies to mask their ownership.”

Consider this example cited in the article:

John Iliff, general manager of American Forge & Foundry, says the single shipment of oil-drainage tanks it received in 2006 from the CPMIEC unit set off no alarms. “Trading in illegal goods certainly never crossed our minds,” he says.

The shipment came from China JMM Import & Export Shanghai Pudong Corp., which didn’t appear on any sanctions list until Thursday. Records indicate the company shares an address and phone number with a CPMIEC unit that was previously banned: CPMIEC Shanghai Pudong Corp. The Treasury determined that the two companies are affiliated.

That designation of JMM Import & Export occurred just a few days ago on December 31, 2009, almost three years after the cited shipment. But there were several red flags that American companies might have picked up on before OFAC’s belated designation of the CPMIEC affiliate. Not only is there a similarity in the names of the two companies, but they shared the same street address. Standard procedure should be not only to check names on the SDN list but addresses as well.

But the larger issue here is that the obvious ease with which Chinese companies can morph into new entities effectively renders company-based sanctions almost completely ineffective. It’s obviously as easy for Chinese companies to rename themselves as it is for underage Chinese gymnasts to acquire new, earlier and eligible birth dates on official documents. I’m not so sure what the solution is here but it doesn’t appear to be imposing penalties or additional compliance obligations on U.S. companies that deal with affiliates of companies on the SDN list.

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Dec

24

How the OFAC Stole Christmas

Posted by Clif Burns at 8:18 am on December 24, 2009

Category: Cuba Sanctions • OFAC

A spokesman for the Treasury Department’s Office of Foreign Assets Control (“OFAC”) told Export Law Blog this morning that discussions between OFAC and the North Pole over Santa Claus’s Christmas Eve itinerary had broken down and were not expected to be resumed before Santa’s scheduled departure on December 24 at 10 pm EST.

The dispute arose from a dilemma that the U.S. sanctions against Cuba posed for Santa’s planned delivery of toys to children in Cuba. If Santa delivers toys for U.S. children first, there will be toys destined for Cuba in the sleigh in violation of 31 C.F.R. Â§ 515.207(b). That rule prohibits Santa’s sleigh from entering the United States with “goods in which Cuba or a Cuban national has an interest.” On the other hand, if Santa delivers the toys to Cuban children first, then 31 C.F.R. Â§ 515.207(a) prohibits the sleigh from entering the United States and “unloading freight for a period of 180 days from the date the vessel departed from a port or place in Cuba.”

A press release from the North Pole announced that the OFAC rules left Santa no choice but to bypass the children of the United States this Christmas. A spokesman from OFAC warned that if Santa attempted to overfly the United States, his sleigh would be forced to land and his cargo seized. He continued:

We know that the outcome is harsh, but we cannot allow Fidel Castro’s regime to continue to be propped up by Santa’s annual delivery of valuable Christmas toys to Cuban children.

Congressional leaders did not return our calls.

This post is an annual Christmas Eve tradition and appeared previously in 2007 and 2008 in slightly altered form. Export Law Blog would like to take the opportunity of this post to extend its best holiday wishes to all of its readers. Posting will be light between now and the end of the holidays due as much to the holidays as to a heartless clerk at the D.C. Circuit Court of Appeals who established a briefing schedule that requires me to file a brief on December 30.

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