Archive for the ‘OFAC’ Category

Aug

30

OFAC’s FAQs on Venezuela Sanctions Omit the Most Frequently Asked Question

Posted by at 11:49 pm on August 30, 2017
Category: OFAC • Venezuela

CITGO Gas Station by Mike Mozart [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/oMJJ6w [cropped]Last week the Office of Foreign Assets Control (“OFAC”) announced a set of new sanctions on Venezuela and it’s petroleum company Petroleos de Venezuela, S.A. (“PdVSA”) as set forth in the newly published Executive Order 13808. Under the Executive Order, U.S persons are prohibited from dealing in (1) new debt of the Government of Venezuela extended after August 24 with a maturity greater than 30 days, (2) new debt of PdVSA extended after August 25 with a maturity greater than 90 days, (3) bonds issued by the Government of Venezuela or (4) dividends or other profit distributions paid to the Government of Venezuela by entities owned by the Government of Venezuela. At the same time, it issued four general licenses authorizing, among other things, wind-down transactions, transactions involving CITGO and transactions involving agricultural commodities, medicine or medical devices.

The prohibitions on dealing in new debt closely parallel similar restrictions that OFAC imposed on certain Russian entities and, in fact, OFAC issued FAQs on the new Venezuela debt prohibitions that are identical to the FAQs on the Russian debt prohibitions. As a result, and once again, OFAC doesn’t answer in its FAQs what is in fact the most frequently asked question about new debt — namely, does new debt cover instances where PdVSA or the Government of Venezuela fails to pay for goods or services rendered within 30 or 90 days after the services are rendered or the goods are provided.

Certainly, it seems clear that it would be debt where the contract provides for and allows payment after these 30-day and 90-day periods as applicable. But suppose, you have a contract with PdVSA which provides for payment net 30. Does that become “new debt” with a maturity greater than 90 days when, on day 91, PdVSA fails to pay? And since the FAQs say that the prohibitions do not extend to debt extended prior to August 25, 2017, when was this debt extended if the goods or services were provided prior to August 25. Did that occur on Day 31? Or day 91? Given what appears to be the not uncommon practice of these two entities of not paying on time, these are not simply brain teasers that I have cooked up to tease the folks at OFAC.

Of course, it seems that there would be a good argument that an involuntary extension of debt in such a situation should not be covered, although nothing in the order or the FAQs makes this clear. If such involuntary extensions are included in the prohibitions, should the contracting party file a voluntary disclosure as soon as possible after PdVSA accounts receivable age out over 90 days? And even if involuntary extensions of debt are exempted, what does the party to the agreement with PdVSA or the Government of Venezuela have to do to prove that the extension of debt is involuntary. Sue? Withhold further services? Stop future deliveries? Send a nastygram from its lawyers demanding payment?

Rather than answer these questions, which, no doubt, large numbers of people with accounts receivable from PdVSA or the Government of Venezuela are asking at this very moment, OFAC’s FAQs dither around on the esoterica of, among other things, whether the new sanctions prohibit getting bank financing to purchase goods from PdVSA (no) or prohibit maintaining correspondent accounts for state-owned Venezuelan banks (no, as long as no debt of greater than 30 days is extended). This is all baffling and simply further evidence that the people at OFAC who administer these regulations have little idea of how business actually works.

Photo Credit: CITGO Gas Station by Mike Mozart [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/oMJJ6w [cropped]. Copyright 2014 Mike Mozart

 

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Copyright © 2017 Clif Burns. All Rights Reserved.
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Aug

15

OFAC Repeals, IPSA Facto, Iran General License H.

Posted by at 6:29 pm on August 15, 2017
Category: General • Iran Sanctions • OFAC
IPSA Phoenix Office via Google Maps [Fair Use]
ABOVE: IPSA Phoenix Office

Last Thursday, the Office of Foreign Assets Control (“OFAC”) announced that IPSA International had agreed to pay a fine of  $259,200 to settle charges that it violated the Iranian Transactions and Sanctions Regulations (“ITSR”)  in connection with background investigations conducted on Iranian nationals by IPSA’s foreign subsidiaries.  In order to support the charges against IPSA, OFAC unnecessarily concocted a theory which effectively repeals Iran General License H and substantially increases the risk that U.S. companies will be fined for what had previously thought to be legal activities by foreign subsidiaries involving Iran.

At issue are two contracts entered into by IPSA: one with a foreign government (“Contract #1”) and the other by IPSA’s Canadian subsidiary with a foreign government-owned financial institution (“Contract #2).  Both contracts required background checks on various individuals, some of whom were in Iran.   Those background checks, including the ones in Iran, were conducted not by IPSA but by its Canadian subsidiary and another subsidiary in Dubai.  OFAC concedes that both subsidiaries “managed and performed” the background investigation contracts involving the Iranian nationals.  Significantly, OFAC does not allege or claim that the results of these investigations were ever communicated by either foreign subsidiary to IPSA in the United States.   Nevertheless, OFAC claims the conduct of these investigations in Iran constituted a violation of the ITSR.

In the case of Contract # 2, OFAC alleges that IPSA violated the prohibition against facilitation in section 560.208 of the ITSR when it “reviewed, approved, and initiated the foreign subsidiaries’ payments to providers of the Iranian-origin services.”  That, if true, would make out a fairly clear-cut facilitation violation by IPSA.

Things get problematic, however, in the case of Contract #1. OFAC asserts that in that case  IPSA imported Iranian-origin services into the United States in violation of section 560.201 of the ITSR.  This was not because the results of the background checks were communicated to IPSA in the United States because, as we’ve noted, OFAC has not alleged that occurred.  It was because the background checks in Iran were conducted “for the benefit of” IPSA.

This is a troubling rationale because everything done by foreign-incorporated subsidiary of a U.S is company is “for the benefit” of the parent company in the United States.    Under this benefit theory, General License H, which permits certain activities by foreign subsidiaries, is completely eviscerated.  IPSA’s  signing and entering into the contract performed by the subsidiaries clearly facilitated those activities in violation of section 560.208 of the ITSR, so there was no need to suggest a violation based on a benefit theory.  It is unclear why OFAC would have chosen in the case of Contract #1 to argue importation of services under a benefit theory rather than facilitation unless it intended to create uncertainty about the proper scope of General License H.

 

 

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Aug

10

Rafa Marquez Shown Red Card By OFAC

Posted by at 1:08 pm on August 10, 2017
Category: Narcotics Sanctions • OFAC • SDN List
By F. Vera | DailyHarrison.com (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)] via Wikimedia Commons https://commons.wikimedia.org/wiki/File%3ARafaelMarquezAlvarez.jpg [cropped and color corrected]
ABOVE: Rafael Márquez Alvarez

Yesterday the Office of Foreign Assets Control (“OFAC”) designated legendary Mexican footballer Rafael Márquez under the Foreign Narcotics Kingpin Sanctions Regulations. According to the press release accompanying the designations Márquez allegedly acted as a front man for, and held assets for, Flores Hernandez and his “drug trafficking organization.”

The press release takes specific note, if not some scarcely concealed glee, that Márquez is a “Mexican professional soccer player.” In fact, Rafa Márquez is not just any professional player. He is arguably the best defender in Mexican history and certainly its most decorated. He currently plays for the Mexican club Atlas and captains the Mexican national soccer team. All of which makes you wonder why on earth he would waste time fronting for a drug kingpin and whether OFAC’s charges that he did so are even credible.  Tom Brady may have deflated a few footballs but it is unimaginable that he would ever go full Walter Heissenberg and involve himself with a methamphetamine distribution network.

Márquez, as you have probably guessed, is vigorously denying these charges.

So by now you’re probably wondering this: where’s the red card that OFAC has shown Márquez? We all know, don’t we, that blocking an employee doesn’t block the organization. The Mexican national team isn’t blocked just because Márquez is on it. When Mexico and the United States play in the 2018 World Cup, the U.S. team won’t get in trouble, will they, if Márquez is playing for Mexico?

Well, that’s not clear. Section 598.406 of the Foreign Narcotics Kingpin Sanctions Regulations prohibits any U.S. person from providing any “services . . . for the benefit of” Márquez. You can’t play soccer without two teams, so the U.S. players are performing a service for Márquez by playing (and not just if they lose). Maybe even Mexico will insist on playing Márquez in that game hoping that the U.S. will have to forfeit the game.

Of course, there’s always the possibility that OFAC will issue a general license — analagous to Iran General License F which permits U.S. athletes to compete in professional sporting events in and with Iran (although even that license carves out blocked persons). Or maybe OFAC will issue a specific license for the World Cup.

Another possibility is that by the time of the World Cup Márquez will have successfully challenged the designation and will have been unblocked. Márquez is unlikely to prevail if his argument before OFAC is that he didn’t have anything to do with Flores. OFAC will no doubt say that it has evidence that he did and that such evidence is classified because disclosing it would reveal intelligence sources and methods. The more fruitful course for Márquez, and the one most often used for getting OFAC to undesignate a party, would be to argue to OFAC (if true) that he no longer has any dealings with Flores and that he will commit not to have any in the future. He might propose a compliance monitor to the agency to back up that promise. And he could promise to use his megastar status to make PSAs and visit schools and engage in other good works.

Another possibility is that Mexico will impose blocking sanctions on Buster Posey, Bryce Harper, and Anthony Rizzo, and promise to lift them only if the sanctions on Rafa are lifted by OFAC. Stay tuned. ¡El miedo no anda en burro!

Photo Credit: By F. Vera | DailyHarrison.com (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)] via Wikimedia Commons https://commons.wikimedia.org/wiki/File%3ARafaelMarquezAlvarez.jpg [cropped and color corrected]. Copyright 2011 F. Vera

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Copyright © 2017 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Aug

2

Touch a U.S. Dollar Anywhere, Go Directly to U.S. Jail

Posted by at 11:58 pm on August 2, 2017
Category: Iran Sanctions • OFAC

DSME Drillship via http://cse-transtel.com/wp-content/uploads/2016/06/DSME-Ultra-Deep-Water-Drillship-Project.jpg [Fair Use]Two companies in Singapore, CSE Global and CSE Transtel, agreed to pay the Office of Foreign Assets Control (“OFAC”) $12,027,066 to settle charges that they violated the Iran Transactions and Sanctions Regulations (“ITSR”). The charges arose from CSE Transtel supplying telecommunications goods and services to energy projects in Iran. OFAC did not allege that these goods and services originated in the United States. Rather, OFAC alleged that because the vendors were paid in U.S. Dollars that CSE had caused the export of financial services from U.S. Banks to Iran in violation of section 560.204 of the ITSR.

Now we’ve been through this U.S. dollar business with OFAC before. In the typical case, OFAC’s claim of jurisdiction over the foreign company is based on the fact that the foreign company’s bank and the foreign company’s customer’s bank would have used correspondent accounts denominated in dollars and held in U.S banks to effectuate the transaction. Of course, whether the transfer of dollars between U.S. banks in connection with a foreign company’s sale of goods to Iran is the export of a financial service to Iran is not entirely clear. But at least in this scenario you can see a direct flow of dollars related to a specific Iranian transaction.

But the Singapore situation is different because Singapore is authorized to engage in offshore dollar clearing transactions. And, as the OFAC release admits, the transactions in question were effectuated through U.S. Dollar accounts held in Singapore banks. The way that U.S. Dollar transactions are cleared in Singapore is described here. Suffice it to say, there are cases where U.S. Dollar transactions can be cleared in Singapore under this system without a U.S. bank ever being involved. If, for example, CSE and its vendor had U.S Dollar accounts at the same bank, or were the only dollar transactions between two Singapore banks on a clearing day, the Singapore clearing house would clear the transactions without the need for either bank to make up a dollar deficit as part of the clearing process.

But in the other possible (and more likely) situations where the dollars clear in Singapore but dollar transfers are needed to make up differences between banks, it still can’t be said that the dollar transfers to settle the dollar position of the Singapore bank is the export of a financial service to Iran. Say a bank in Singapore pays $10,000 for a customer’s Iran transaction but during the day pays out $200,000 and receives $100,000 where none of these other dollar transactions have anything to do with Iran. It will need to transfer $100,000 to the Singapore clearing house, which will be effectuated through a U.S. Dollar correspondent account in the United States. In that case the bank in the United States has not transferred any financial service to Iran because the payment relates to an aggregate of transactions valued at $300,000, almost all of which have nothing to do with Iran.

The only scenario in the Singapore clearing situation where the U.S. bank would transfer a financial service to Iran would be where the Iran payment by the Singapore bank is the only U.S. dollar transaction by the Singapore bank during the clearing day. In that case, the transaction looks like a traditional one where the dollar payment is cleared through the U.S. bank. But there is no reason to believe that any or all of the CSE Iran transaction were the only dollar transactions during that clearing day. But that doesn’t stop OFAC from inaccurately claiming that every dollar transaction conducted by CSE through its Singapore accounts caused a transfer of financial services from the United States to Iran.

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(No republication, syndication or use permitted without my consent.)
Jul

28

Sausage Making Looks Good Compared To This Law

Posted by at 3:02 pm on July 28, 2017
Category: OFAC • Russia Sanctions

Carsten's Sausage Factory via https://commons.wikimedia.org/wiki/File:Packing_Carsten%27s_weiner_sausages_on_an_assembly_line,_Tacoma,_Washington_(4670205658).jpg [Public Domain]The Russia Sanctions Review Act of 2017, which may or may not get vetoed by the White House, has now passed both the House and the Senate as sections 215  and 216 of the euphoniously named Countering America’s Adversaries Through Sanctions Act ( or the “CATS Act”)(seriously?). Section 216 attempts to circumscribe the authority of the White House to alter sanctions on Russia without a sign-off by Congress.  I doubt anyone will be surprised to learn that the bill is a confusing mess that likely will not accomplish its purpose, unless its purpose is simply to tell voters that Congress means business, very serious business.

The legislation requires the President to file a report with Congress before he acts “to terminate” Russia sanctions, acts “to waive the application” of the sanctions against specific persons or takes “a licensing action that significantly alters United States’ foreign policy with regard to the Russian Federation.”  Depending on whether this action is intended to significantly alter U.S  foreign policy with respect to Russia, the legislation sets forth a 30- or 60-day review period by Congress — 30 days if no; 60 days if yes.   The proposed action may not take effect within the review period unless specifically authorized by a joint resolution of both house of Congress.

Alert readers (or basically anyone other than members of Congress) will immediately see the hole in this scheme — a hole big enough to fire a Nork  No-Dong missile through.  That hole is the general license, a concept which dates back at least to the general license for Cuba travel issued by the Carter administration in 1977 (i.e. seven years before Mark Zuckerberg was even born).  A “general license” with respect to Russia sanctions is definitely not a “termination” of them.   And whether a particular general license “significantly alters United States’ foreign policy” with regard to Russia, well that’s a judgment call on which reasonable people could always disagree and on which no court will ever venture an opinion.

The Federal Register notice granting the broad general license to engage in activities otherwise prohibited by Russia sanctions will simply note that in the considered opinion of OFAC the general license, which OFAC reserves the right to withdraw at any time, does not significantly alter U.S. foreign policy towards Russia.   And if Congress disagrees with that administrative determination, what is it going to do?  Arrest OFAC? Scream and holler on C-SPAN?  No, it will do what it always could have done before and without passing the CATS Act — pass a law reversing the general license.

Your tax dollars at work.

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(No republication, syndication or use permitted without my consent.)

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