Information Bulletin from the ART DE LEX International Economic Compliance Practice (Issue 4, 2019)
THE UNITED KINGDOM.
EU BLOCKING RULES TO BE ADOPTED IN BRITAIN AFTER BREXIT
As part of its post-Brexit safeguard of Britain’s trade interests, the Parliament adopted Protecting Against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2019. The bill caused great interest during debates in both the House of Commons and the House of Lords.
During the debates, MPs questioned the Government about the functionality of the new Regulation and its compliance with E3 and ISTEX, as well as the Iran-related Joint Comprehensive Plan of Action (JCPOA). The Government representative in the debates emphasized that the regulatory mechanisms under the EU sanctions statute would switch to the national, British-based mechanisms upon Britain’s departure from the European Union. British businesses would be able to request, from the British Secretary of State for International Trade, authorization to comply with U.S. restrictions, as the British regulations would be closer to those of the European Union than to U.S. sanctions. The representative explained, “We do not recognise the extraterritorial power of the U.S. regulations, and we are therefore legislating to ensure that British companies do not have to comply with them in our courts or indeed elsewhere.”
THE UNITED STATES.
1. INTRODUCTION OF A FRAMEWORK FOR OFAC COMPLIANCE COMMITMENTS
On May 2, 2019, the U.S. Treasury Department introduced A Framework for OFAC Compliance Commitments. The document describes to all interested individuals and entities the expectations of OFAC for sanctions compliance programs (SCPs).
Though the Treasury does allow differential treatment of particular entities or individuals under the sanctions regulations, SCPs are required to include the following five elements:
1. Management Commitment
Management Commitment means the involvement of management officials in the promotion of a “culture of compliance.” This presumes that the management is highly competent in compliance practices, and that, as part of the SCP, management conducts regular meetings with the compliance team, which includes a designated compliance officer. At the same time, the management must undertake to facilitate autonomy and decision making in the team and also to provide full resource support to it.
When the management responds to identified breaches of compliance policies, it should not only correct the violations, but also should do whatever is necessary to prevent any possible relapse
2. Risk Assessment
The Framework presumes that risk assessment involves a complex research of the potential threats that might cause sanctions violations. Organizations should be alert to sanctions risks while developing relations with potential clients (through methods such as “Know Your Customer,” on-boarding procedures, and application of the OFAC risks matrix), as well as during M&A activities.
Risks assessment may cover:
(1) clients, parts of supply chain, middlemen, and other counterparties;
(2) goods and services which they offer, including parts thereof, financial and commercial components of the transactions, and consistency of the product; and
(3) geographical location of the organization, as well as its clients, parts of the supply chain, middlemen, and counterparts.
3. Internal Controls
The purpose of systems of internal controls is the identification, prevention, and elimination of breaches of the sanctions regime, as well as the maintenance of proper record-keeping of these actions. Internal controls programs should compile and distribute information to people in the organization concerning the administration and operation of the SCP, so that people become familiar with its policies and procedures.
Internal control programs should also secure ways for personnel safely to inform compliance officers about breaches of a sanctions regime or about suspicious activities by company officers
The Framework also notes that an internal or external auditor should be a part of, and a contributor to, the internal controls system.
4. Audit and Testing
The U.S. Treasury Department envisions independent testing and auditing as key components in the functionality of an SCP. Proper supervision of the latest updates of compliance-related software, systems, and other technologies are among its key competencies. Testing and auditing are encouraged for a particular sector of an organization’s sanctions policy, as well as for the compliance program in general.
5. Education.
Education and training of company employees about sanctions regulations should be priorities. Employees should complete sanctions training at least once a year. Organizations can also contribute to ongoing training and awareness by involving employees in compliance procedures. The Framework also recommend periodic assessment of the effectiveness of these educational efforts.
SCP as a mitigating factor for an ongoing enforcement case
The U.S. Treasury Department notes that the presence of an SCP is a mitigating factor for consideration by the Regulator when considering a violation of the sanctions regulations. This should include the presence, nature, and sufficiency of the SCP. Compliance of an SCP to A Framework for OFAC Compliance Commitments can be one of the key factors supporting a determination that a breach was non-egregious. If the SCP includes a procedure to eliminate breaches, this can mitigate the company’s liability if, pursuant to the SCP, there was an immediate remedial response.
2. THE HAVERLY SYSTEMS INC. CASE
On April 25, 2019, the U.S. Treasury Department announced a settlement with Haverly Systems Inc., a technology company incorporated under the laws of State of New Jersey, with offices in California and Texas, Haverly Systems agreed to pay $75,375 to the Federal Budget for two counts of violating the sanctions against Russia under the Ukraine Related Sanctions Regulations, 31 C.F.R. part 589 (URSR), arising from its commercial activity and financial transactions with an entity under sectorial sanctions, Rosneft PJSC.
From disclosed case materials it is clear that in 2015 the company provided technological services by providing licenses to software and maintenance of it to Rosneft PJSC, an entity under U.S. sectorial sanctions. Moreover, the company’s actions that were originally intended as a collection of receivables, were in fact an unsettled, several month-old debt that was determined to be prohibited debt financing extending 90 days.
Case materials also state that Rosneft PJSC postponed and transferred the time for payment several times, justifying it by the necessity to obtain certain tax documentation. Rosneft PJSC settled two of the bills, sent on May 31, 2016 (the first one) and January 11, 2017 (the second one). However, the case notes that between May 31, 2016 and January 11, 2017, Rosneft PJSC attempted to pay four times, Rosneft PJSC therefore could abuse sanctions regime and not to pay its debts at all, playing on the sanctions-related fears and risks of its American counterpart.
After several attempts to receive what was due (all the attempts of Rosneft PJSC to pay having been blocked by the American banks as violating the sanctions regulations), Haverly Systems decided to take Rosneft’s advice and amend the bill, significantly altering several details in it. After the Haverly Systems sent the amended bill to Rosneft PJSC, it received payment.
It is worth noting that the Treasury does not see this case as an egregious one, and the company itself is not considered a significant commercial entity (“Haverly is a small company with a limited number of employees.”). Though the Treasury considers Haverly Systems’ actions as a minimal breach of sanctions regulation (“minimal actual harm to the sanctions program objectives”), its actions with respect to the second bill were branded as “reckless disregard for U.S. economic sanctions requirements.”
It is possible that this type of contradictory assessments can be considered as evidence of the political substance of this case, which is sort of exponential.
3. DESIGNATION OF THE RUSSIAN SPECIAL FORCES “TEREK” RAPID RESPONSE TEAM AND LAW ENFOCRMENT OFFICIALS
On May 16, 2019, the U.S. Treasury Department designated the “Terek” special rapid response team, along with its commander Abuzayed Vismuradov, as well as a number of other Russian law enforcement officials, onto SDN list. The Treasury substantiated its actions as an enforcement of the “Magnitsky Act,” which authorizes punishment of those responsible for detention, torture, and death of Sergey Magnitsky, as well punishment for other systematic human rights abusers.
The press release notes that “Terek” played an essential role in actions against the LGBTI-community of Chechnya. The designation also covers several Russian law enforcement officials, along with officials of the Russian Ministry of Interior (MVD) and Federal Penitentiary Service of Russia (FSIN).
4. NEW SANCTIONS AGAINST RUSSIA’S DEFENSE SECTOR
On May 22, 2018 the United States Department of State introduced certain restrictions against Tula Instrument Design Bureau (KBP), named after Academician Shipunov, the Moscow Machine Building Plant “Avangard” (MMZ Avangard) and the Gatchina Surface-to-Air Missile (SAM) Training Center, in each case for violation of Non-Proliferation of Weapons of Mass Destruction legislation as applied to Iran, North Korea, and Syria. As a result of this action, these entities are barred from participating in public procurements by the United States and are not allowed to participate in the weapons trade sector of the United States.
Established in 1942, Avangard is the sole supplier of missiles for S-300 and S-400 surface-to-air missile systems. Since 2002 the Avangard enterprise is part of Almaz-Antey group.
Established in 1927, Shipunov KBP produces firearms, weapons, air defense system, autocannons, turning guns, turrets, remotely controlled weapon stations, anti-aircraft guns, weapon systems for tanks and armored vehicles, missiles, ATGM, artillery shells, mortar shells, guidance systems, high-precision weapons, short-range weapons systems, and grenade launchers. The enterprise is a part of Rostech State Corporation.
5. CHINA AND IRAN RESUME OIL TRADE.
Openly ignoring American sanctions against trade with Iran, China has resumed purchases of Iranian oil. As noted by Bourse & Bazaar, at a time of the rapid deterioration of Sino-American relations, China has acted through a state-owned corporation.
According to the analysis, on May 17, 2019, during the visit by Iranian Foreign Minister Mohammad Javad Zarif to China, the PACIFIC BRAVO tanker, with a cargo of two million barrels of oil from the Soroosh and Kharg terminals departed to China.
Although PACIFIC BRAVO is bound for Indonesia, it was recently acquired by the Bank of Kunlun, a financial organization under the control of the Chinese oil conglomerate CNPC. TankerTrackers.com is certain that China is the oil tanker’s true destination. The United States Treasury commented on the situation and emphasized a presence of serious sanctions risks.
Government sources in Beijing have stated that China condemns the unilateral actions by the United States against Iran. It is also noted that up until this moment, the Chinese government has not openly encouraged its businesses to circumvent American sanctions and conduct bilateral trade with Iran.
6 DERIPASKA PUBLISHES ON HIS WEBSITE A NON-CONFIDENTIAL VERSION OF THE OFAC CASE-FILE ON HIM AND HIS REPLY TO IT.
On May 27, 2019, Oleg Deripaska published on his website a non-confidential version of a document from the OFAC file on his case, the OFAC Evidentiary Memorandum.
The document includes media reports from Forbes, The Telegraph, The Guardian, The Times, as well as some of the legal documents for U.S. sanctions programs. Some of the materials are, however, classified.
At the same time, Deripaska published on his website a reply to the memorandum. He criticized a number of the OFAC arguments and claims, and described the document as a “poorly researched report.”