ExportLawBlog

Oct

20

And The Jackpot Winner Is … New York!

Posted by Clif Burns at 4:41 pm on October 20, 2015

All in a Day's Work by Damian Gadal [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/5xQkWj [cropped]

CrÃ©dit Agricole just agreed to pay $787.3 million to settle charges that it violated the U.S. sanctions on Iran and other countries by stripping references to those countries in communications sent to U.S. banks to process dollar-based transactions. And to quote Yogi Berra: “It’s dÃ©jÃ vu all over again.”

The payment is divided up as follows: $385 million to the New York State Department of Financial Services, $156 million to the U.S. Attorney’s Office for the District of Columbia, $156 million to the Manhattan District Attorney’s Office, and $90.3 million to the Federal Reserve. Once again the biggest chunk of change goes to the NYDFS which, as you probably know, doesn’t have the power to enforce any U.S. sanctions inasmuch as it’s just a state agency, notwithstanding its own delusions of grandeur.

But wait a minute. Where is OFAC in all this? I mean, after all, the last time I checked the Iran, Cuba and Sudan sanctions all had OFAC’s name written all over them. Well, OFAC announced today at the same time a $329.5 million fine against CrÃ©dit Agricole. Is that on top of the $787.3 million, pushing the fine over $1 billion? Nope. Read the fine print at the end of the OFAC press release:

CA-CIBâ€™s $329,593,585 settlement with OFAC will be deemed satisfied by the bankâ€™s payment of that amount to DOJ, DANY, and the Board of Governors for the same pattern of conduct.

As noted above, out of the $787.3 million, $402.3 million dollars is going to DOJ (through the U.S. Attorney for the District of Columbia), the DANY and the Federal Reserve, more than enough to satisfy the OFAC penalty under this somewhat odd arrangement. But it is not completely insignificant that OFAC did not say that payments to the NYDFS would discharge the OFAC penalty, perhaps indicating a bit of pique by OFAC with NYDFS trying to cash in on violations of OFAC rules.

In this context, an email that Reuters obtained back in June from OFAC to NYDFS in reference to an unnamed investigation of a foreign bank (presumably CrÃ©dit Agricole) by NYDFS was not very nice at all.

Given the ongoing negotiations, the situation regarding Iran is extremely sensitive at the moment. As a result, any actions that are taken in connection with sanctions violations pertaining to Iran may have serious impacts on the ongoing negotiations and U.S. foreign policy goals and objectives. The Iranians are not going to distinguish between enforcement actions taken at the state level versus enforcement actions taken at the federal level.”

One has to assume that the NYDFS, driven to feed its addiction to federal sanctions money, gave a terse and impolite response to OFAC that can’t be printed in a family blog, which explains the oddity of OFAC settlement in this case. I think we can safely assume that NYDFS isn’t being invited to OFAC’s holiday party this year.

Permalink

Comments Off

Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Oct

19

Beijing’s Review of U.S. Software Risks Export Woes for Those Who Allow It

Posted by Clif Burns at 10:43 pm on October 19, 2015

Category: BIS • China • Encryption

140515-D-VO565-003 by Chief of Joint Chiefs of Staff via Flickr https://flic.kr/p/nkMLsf [Public Domain - Work of U.S. Government]

An article that appeared last Friday in the Wall Street Journal suggests that at least one U.S. company is providing the Chinese government with access to proprietary U.S. source code as a condition for access to the Chinese market. What could possibly go wrong with that??

Just as a burglar, who normallyÂ suspects everyone else of having his own larcenous motives, puts extra bars on his own doors and windows, the Chinese seem to be worried that U.S. software might have backdoors that allow the U.S. to hack into Chinese systems. Imagine that.

IBM has begun allowing officials from Chinaâ€™s Ministry of Industry and Information Technology to examine proprietary source codeâ€”the secret sauce behind its softwareâ€”in a controlled space without the ability to remove it from the room, the people said. It wasnâ€™t clear which products IBM was allowing reviews of or how much time ministry officials can spend looking at the code. The people said the practice was new and implemented recently.

The Wall Street Journal suggests that this access, which is designed to quell Chinese fears that the U.S. will do unto China what China has done unto the U.S., is largely symbolic because the Chinese are not being given sufficient time to comb through thousands of line of code looking for back doors.

The problem here, however, is that most software programs these days, particularly ones that might have “back door” entry concerns, will have encryption; and the EAR poses special restrictions on exporting certain types of encryption source code to certainÂ government end-users. Encryption source code that is classified as ECCN 5D002 (i.e., is not mass market) and is not publicly available is classified under section 740.17(b)(2)(i)(B) of license exception ENC. Under paragraphs (1) and (2) of the Note to 740.17(b)(2), such encryption source code can, after a classification request, be immediatelyÂ exported under license exception ENC to any end-user (including a government end-user) in a Supplement 3 country and to non-government end-users in countries, such as China, which are not a Supplement 3 country. However, exports of 5D002 encryption source code that is not publicly available, i.e., that is not available by download or otherwise to members of the public, can only be exported to a government end-user outside Supplement 3, such asÂ the Chinese government,Â with a license from the Bureau of Industry and Security. Â (A very good chart explaining the baroque complexities ofÂ Â license exception ENC Â can be found here.)

Now, here’s the catch. Most encryption algorithms are publicly available, but the code used by specific software to implement that algorithm is not. Indeed, if that code were publicly available, the Chinese wouldn’t need to review it, and the reviewing company would not insist that the code be examined in a “controlled space.” Indeed, you have to imagine that it is precisely the non-public code implementing the public algorithm which would be of most interest to Chinese reviewers concerned about U.S. software having back doors for Uncle Sam to come snooping.

Let me be clear: I’m not saying that IBM has broken any laws here. We don’t know whether the software being examined is 5D002 softwareÂ or, if it is, that IBM hasn’t applied for and received a license. Rather my point is this: companies that consider giving source code access to the Chinese should only move ahead with a great deal of caution if the software utilizes encryption.

Permalink

Comments Off

Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Oct

15

Federal Court Gives OFAC Carte Blanche to Seize Funds

Posted by Clif Burns at 9:12 pm on October 15, 2015

Category: OFAC • SDN List

OgKKO Gas Station via OKKO's Facebook Page (https://www.facebook.com/okkoua/photos/pb.115758917345.-2207520000.1444957116./10153638688832346/?type=3&theater)[Fair Use] A federal court recently upheld, in OKKO Business v. Lew, a decision by the Office of Foreign Assets Control Â (“OFAC”) to refuse to unblock funds sent by a Ukrainian company as an auction deposit for an auction conducted by a Belarusian company on OFAC’s List of Specially Designated Nationals and Blocked Persons. Â The court’s opinion, a thinly-disguised love note addressed to OFAC, endorsed OFAC’s overly broad interpretation of what constitutes an “interest in property” held by an SDN and leaves open the question of what, if any, limits can ever be placed on OFAC’s authority.

At issue was an auction deposit sent by OKKO Business, a filling station operator in Ukraine. Â OKKOÂ sent a â‚¬200,000 bidder’s deposit in 2012 to UE Belarusian Oil Trading House, an entity that was designated as an SDN in 2008. The deposit was required to participate in an auction to be conducted by UEB. If the bidder lost the auction, the deposit would be returned to the bidder. If the bidder won the auction, the deposit would be returned to the bidder upon its execution of a sales contract with the seller. If the bidder won but refused to enter into such a contract the funds would be forwarded to the seller. There was no contingency under which UEB would ever be entitled to all or any part of the funds. Because the deposit transited a U.S. bank, the funds were blocked

OKKO sought unsuccesfully to unblock the funds, arguing that it did not know that UEB was sanctioned when it transferred the funds, that it had terminated the contract with UEB, and that it would not conduct further business with UEB. OFAC denied the request, stating simply that because UEB has an “interest” in the deposit, it was required to be blocked and that OFAC did not normally unblock funds in cases involving “commercial activity.”

Notwithstanding the difficulty in determining what “interest” UEB could be said in the deposit in this situation, the federal court ate up OFAC’s rationale with a spoon of extreme judicial deference stating that there was “no limit on the scope of interest” that could be blocked by OFAC. The court went on to state that it was completely irrelevant that UEB had no “legally enforceable ownership interest” in the auction deposit. Finally, the court bolstered it’s argument that UEB had an interest in the auction deposit because it was “not certain” that Okko would demand the funds back if it lost the auction. (Yeah, right, they are just going to walk away from â‚¬200,000; perhaps the district court judge had no idea of the value of the Euro and thought that â‚¬200,000 was worth something like $2.00.)

But if the SDN’s interest need not be a “legally enforceable” interest to be blockable, it’s hard to see where this stops. Consider this: an SDN hacks into an account, steals money and deposits it at a U.S. bank in its own name. The bank blocks its and, under the rationale of the court in this case, the victim of the hacking can’t get the funds back without OFAC’s permission because the hacker has an interest, even if not legally enforceable, in any account he controls. The only principle left in determining what is a blockable interest is that it is whatever OFAC says it is.

Permalink

Comments Off

Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

Oct

13

We Read the Zimbabwe Herald So You Don’t Have To

Posted by Clif Burns at 10:13 pm on October 13, 2015

Category: OFAC • Zimbabwe Sanctions

U.S. Navy photo by Mass Communication Specialist 2nd Class Jesse B. Awalt/Released (DefenseImagery.mil, VIRIN 090202-N-0506A-310) [Public domain], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3ARobert_Mugabe%2C_12th_AU_Summit%2C_090202-N-0506A-310.jpg

ABOVE: Robert Mugabe

The Zimbabwe Herald, the alleged newspaper and confirmed propaganda organ of the sanctioned Mugabe regime, is all excited by the launch of the China International Payment System (CIPS). The system, which was launched earlier this month, seeks to use SWIFT-formatted messages to facilitate cross-border payments in renminbi. Although the renminbi is the fourth most utilized currency for cross-border payments, it still only accounts for less than 3 percent of all such payments, making it doubtful that CIP will, at least any time soon, cause the renminbi to challenge the dollar, the euro or the pound sterling as an international currency.

So why are Mugabe’s minions so excited about CIPS? The headline says it all: China Unveils International Payment System – Checkmates Piracy of U.S. Treasury.” The image of OFAC flying a Jolly Roger over Treasury while the agencyÂ roams the seas, swigging rum and saying “Yo Ho Ho!” is, of course, a lively piece of propaganda right up there with that old chestnut “running capitalist dogs.” The story refers to sanctions on Zimbabwe as “illegal” no less than four times (for its slower readers) but fails to offer any theory of why exactly they are “illegal,” other than, I suppose, because Mugabe says so. (Dictators, naturally, have wide berth to say what is and isn’t legal.)

Of course, sanctions against Mugabe and his cronies and crony companies do make it difficult to engage in international trade given that the dollar constitutes about 45 percent of all such payments. Any dollar payment involving a sanctioned individual or company in Zimbabwe will be blocked the moment it hits a U.S. bank as it almost inevitably will. It’s doubtful that a renminbi payment system will provide any immediate or significant relief to Mugabe and company.

But I suppose everyone can dream, can’t they? Â (I’m a Cubs fan, so I should know.)

Permalink

Oct

7

New Sanctions Against the Norks Introduced in Congress

Posted by Clif Burns at 11:21 pm on October 7, 2015

Category: North Korea Sanctions

Kim Jong Un Official Photo - Fair Use

Yesterday Senator Cory Gardner introduced S.2144, entitled the “North Korea Sanctions Enforcement Act.” (The official text of the proposed bill is not yet available at congress.gov but a discussion draft can be found here.)

Not surprisingly, the new bill seems mostly to be a feel-good exercise or a little Congressional chest-beating after not being able to sink the Iran deal. Â Whether or not this bill has a chance of passage is difficult to predict.

The bill would do the following:

designate North Korea as a jurisdiction of primary money laundering concern;
instruct the President to come up with a plan to make U.N. members enforce U.N. sanctions against Korea;
require export licenses under section 6(j) of the (expired) Export Administration ACt for goods that contribute to North Korea’s military or terrorism capabilities;
enact an arms embargo against North Korea;
withhold foreign assistance from countries that supply lethal military equipment to North Korea;
prohibit federal procurement from persons engaging in certain activities with North Korea, such as exporting luxury goods;
increase customs inspections of goods transported through foreign ports that do not engage in adequate inspection activities to prevent exports of certain goods to North Korea; and
require the State Department to issue enhanced travel warnings regarding travel to North Korea.

Some of these provisions certainly seem unnecessary. Licenses are alreadyÂ required for all exports to North Korea other than food and medicine designated EAR99, and North Korea is already designated under section 6(j) as a country supporting international terrorism. Further, there is already an arms embargo in place against North Korea. I suppose these provisions might limit the ability of the White House to lift these sanctions but, frankly, it seems unlikely that this White House, or any White House in the foreseeable future is likely to start selling arms to the Norks or drop licensing requirements for other exports to them.

Permalink

« Previous posts | Next posts »