sanctions risk managementsymposiumseven deadly sanctions/export controls sins unveiled in recent...

SanctionsRiskManagement Symposium

September 18-19, 2017 | The Princeton Club | New York, NY

incooperation with

SaskiaRietbroekPrincipal

SanctionsAlert.com(moderator)

SevenDeadlySanctions/ExportControlsSinsUnveiledinRecentOFACandBISCases– AndTheirLessonsSeptember19,2017 4:00PM– 4:50PM

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PeterJeydelAssociateSteptoe&JohnsonLLP

KevinWolfPartnerAkinGumpStraussHauer &Feld,LLP

AndyGelinasExecutiveDirectorGlobalFinancialCrimesLegalAdvisoryGroupMorganStanley

Navigating the Turbulent Currents of International Sanctions and Export Controls | September 18-19, 2017 | The Princeton Club | New York, NY

Sanctions Risk Management Symposiumincooperation with

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KevinWolfPartnerAkinGumpStraussHauer &Feld,LLP

EntityListDevelopmentsZTECase



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§ March2012– AllegationsofillegalconductfirstsurfaceinReuters§ ZTEUSAisservedwithanadministrativesubpoenafromBISandacriminalsubpoenafromFBI§ U.S.attorney’sofficefortheNorthernDistrictofTexasopensagrandjuryinvestigation

§ October2012– HouseIntelCommitteeReport§ TheHousePermanentSelectCommitteeonIntelligencesubmitsan“InvestigativeReportontheU.S.

NationalSecurityIssuesPosedbyChineseTelecommunicationsCompaniesHuaweiandZTE”whichallegedthatZTE:§ Failedtoanswerkeyquestionsorprovidesupportingdocumentationsupportingitsassertions§ AssertedthatansweringtheCommittee’srequestsaboutitsinternalcorporateactivitieswouldleavethe

companycriminallyliableunderChina’sstates-secretslaws§ DidnotalleviateCommitteeconcernsaboutthecontrolofChinesestate-ownedenterprisesinZTE’sbusiness

decisionsandoperations§ MaintainsaChinesePartyCommitteewithinthecompanyandhasnotclarifiedwhatrelationshipithaswiththe

largerChineseCommunistParty§ FailedtodiscloseinformationaboutitsactivitiesintheU.S.andfailedtoprovideanyanswersorevidenceabout

itscompliancewithintellectualpropertyorU.S.export-controllaws

ZTETimeline



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TimelineCont.§ March2016– ZTEaddedtotheEntityList

§ Createdalicenserequirementtoexport,re-export,ortransfer(in-country)toZTEanyitemssubjecttotheEAR

§ ZTEfoundtohavebreachedUnitedStatessanctionsagainstIranbysellingU.S.origingoodstothecountry

§ FoundtohavemadeknowinglyfalseandmisleadingrepresentationsandstatementstoBISandotherU.S.lawenforcementagencies

§ EngagedinanelaborateschemetopreventdisclosuretoandaffirmativelymisleadtheU.S.Government

§ April2016– ZTEnamesanewChiefExecutiveandChairman,ZhaoXianming§ “ZTEacknowledgesthemistakesitmade,takesresponsibilityforthemandremainscommittedto

positivechangeinthecompany,”

§ November2016- BISextendsZTEtemporarygenerallicense§ February24th 2017- BISextendsZTEtemporarygenerallicense



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TimelineCont.§ March7th 2017– PenaltyforExportControl&SanctionsViolationsisAnnouncedby

DOJ,OFAC,BIS:§ ZTEpledguiltytothreecriminalcounts:ConspiracytoviolatetheExportAdministrationRegulations

(EAR)andtheIranianTransactionsandSanctionsRegulations(ITSR);obstructionofjusticeandfalsestatements

§ Agreedtoacombinedcivilandcriminalpenaltyof$1.19billion§ ZTEhasagreedtopayapenaltyof$661milliontoCommerce’sBIS§ U.S.DistrictCourtfortheNorthernDistrictofTexasimposes$430,488,798incombinedcriminal

finesandforfeitureonZTEaspartofapleaagreementwiththeDepartmentofJustice§ ZTEagreestopaytheDepartmentoftheTreasury’sOfficeofForeignAssetsControl(OFAC)

$100,871,266pursuanttoasettlementagreement§ “Weareputtingtheworldonnotice:Thegamesareover,”- CommerceSecretaryWilburL.Ross

§ March22nd 2017- JudgeImposesOwnMonitorinZTEPleaDeal§ U.S.DistrictJudgeEdKinkeade fortheNorthernDistrictofTexasrewrotethepleaagreementto

namehisownindependentcorporatemonitor,formerJudgeJamesM.Stanton



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KeyTakeAways

§ TheDepartmentofJusticeallegesthatcriminalviolationsoccurduring theinvestigationwhilethecompanyisrepresentedbyoutsidecounsel

§ Administrativemeasurestocompelcooperationandobtainevidencefromnon-U.S.companieslocatedoutsidetheU.S.

§ Increasinguseofmonitorsinmulti-agencysanctionsinvestigationsandlongerperiodsofmonitorship

§ DualusegoodsinvolvingIranandNorthKorea§ NoallegationsrelatingtoinvolvementofU.S.subsidiaryofZTE- conductandevidenceoccurredoutsidetheUnitedStates



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TrendstoWatchinEnforcementCases§ InstitutionoftheDepartmentofJustice’svoluntaryself-disclosureprogramforexportcontroland

sanctionviolation(October2016)§ DOJstatesthattheintentionoftheguidanceisto“deterindividualsandcompaniesfromviolatingexportcontrols

andsanctionslawsandtoprovidegreatertransparencyaboutwhatisrequiredfromcompaniesseekingcreditforself-reporting”

§ ContinuingeffectoftheYatesMemo(September2015)onsanctionsandexportcontrolinvestigations§ Theguidanceoutlinestherequirementthataself-reportingcompanyseekingcooperationcreditmustmakeafull

disclosuretotheDOJ

§ Growingintersectionofcybersecurityandexportcontrolandsanctionsviolations§ Severeconsequencesofmismanaginganinternalinvestigationandinteractionswithout

governmentagencies§ TalkofenforcementdecreasingunderthenewAdministrationdoesnotmatchrealityatthispoint



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AndyGelinasExecutiveDirectorGlobalFinancialCrimesLegalAdvisoryGroupMorganStanley

HalliburtonCase



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Halliburton:JustPlainLazy???

§ InDec.2016,Halliburtonagreedtopay$304,706tosettlepotentialcivilliabilityforapparentviolationsof§ 515.201(b)oftheCubanAssetsControlRegulations(CACR)

§ OFACallegedthat2non-U.S.subsidiariesofU.S.companyHalliburtonEnergyServices,Inc.violatedCubasanctionsbyexportinggoods,servicesinsupportofoilandgasproductionconsortiumoperatinginAngola,inwhichGovernmentofCuba hadaninterest

§ CubaPetroleo (akaCupet),astate-ownedCubancompany,held5%interestinconsortium§ OFACdeterminedthatHalliburton“actedwithrecklessdisregardforU.S.sanctions”becauseitfailedtoconductreasonableduediligencetodeterminewhobelongedtotheconsortium

§ Halliburton’ssanctionscomplianceprogramwasinadequatebecauseitdidnotincludeaproceduretoscreenallconsortiummembers



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Halliburton:KeyTakeAways:

§ Readfineprint:Halliburton“shouldhaveknownthataCubanentitybelongedtotheconsortiumbecausetheconsortiumoperatorprovided[]documentsthatshowedthatCupet wasamember”

§ Gotheextramile:“[o]ther contemporaneousdocumentsthatstatedCupet heldaninterestintheConsortium,includinganewsarticleandanoticeinanAngolangovernmentregistry”

§ Knownuances: givenCupet’s mere5%interest,OFACobviouslydidnotapplythe“50%Rule”indeterminingwhetherprovidinggoods,servicestoconsortiumviolatedCubasanctions.Instead,OFACdeterminedthatHalliburtonviolated§ 515.201(b)CACRbydealinginpropertyinwhichCubaoraCubannationalhadaninterest§ § 515.201(b)prohibitsU.S.personsfromengagingintransactionsthatinvolvepropertyinwhichCuba,

oranynationalthereof,hasatanytimeonorsincetheeffectivedateof[that]sectionhadanyinterestofanynaturewhatsoever,directorindirect

§ Higherstandard:asithasdoneinmanyFIenforcementactions,OFACnotedthat“Halliburtonanditsaffiliatedcompaniesaresophisticatedentitiesthatregularlydealinoilfieldgoodsandservicesaroundtheworld”



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PeterJeydelAssociateSteptoe&JohnsonLLP

B-WhaleCase

TheBWhaleCaseandtheHiddenRisksofOFACJurisdiction

• Taiwanesecompany• NobusinessintheUnitedStates

• NosubstantialpresenceintheUnitedStates

HowdidOFACassertjurisdiction?



Sanctions Risk ManagementSymposium

September 18-19, 2017 | The Princeton Club | New York, NY

incooperation with

Questions?

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BonusSlidesProvidedby

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BISEnforcementGuidelines

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§ GuidanceonChargingandPenaltyDeterminationsinSettlementofAdministrativeEnforcementCases

§ RevisedJune22,2016§ Promotesgreatertransparencyandpredictabilitytotheadministrative

enforcementprocess.§ AlignsproceduresofDOC’OfficeofExportEnforcementwiththoseofOFAC,

bothofwhichadministerbulkofprogramsunderInternationalEmergencyEconomicPowersAct.

§ https://www.bis.doc.gov/index.php/documents/pdfs/1567-administrative-enforcement-guidelines/file



SecondarySanctions

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§ Alsocalled“extraterritorial”sanctions;§ ExtendpowerofU.S.lawindirectly,tonon-U.S.firms;§ MaydirectlyprohibitforeignsubsidiariesofU.S.companiesfromengagingincertaintypesofactivity;

§ Mayindirectlytargetnon-U.S.firmsbytryingtorestricttheiraccesstotheU.S.market;

§ Createriskareasfornon-U.S.companies.



OFACEnforcementActionAgainstExxonMobil

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§ July20,2017§ $2Mpenalty§ FirstOFACcaseinvolvingviolationsofRussia/Ukrainesanctions§ Dealtinservicesofindividualwhosepropertywasblocked§ SignedlegaldocumentsrelatedtooilandgasprojectsinRussiawithIgorSechin,PresidentofRosneft,andanindividualidentifiedonOFAC'sSDNlist



SectoralSanctionsIdentifications(SSI)List

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§ EntitiesonSSIListdonotfaceassetfreezes,andU.S.personsarenot strictlyprohibitedfromdealingwiththem.

§ Theyaresubjecttorestrictionsregardingaccesstocertaintypesoffinancingand,insomecases,accesstoU.S.exports.

§ Entitiesofwhich50%ormoreisownedbyaSSIlistedentityarealsosubjectto“sectoral”sanctionspursuanttoOFAC’s50%rule.



OFAC’s50%Rule

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§ Anyentityowned intheaggregate,directlyorindirectly,50%ormorebyoneormoreblockedpersons,isitselfconsideredtobeablockedperson.

§ Rulespeaksonlytoownershipandnottocontrol.§ AU.S.personmaynotengageinanytransactionswithsuchanentity,unlessauthorizedbyOFAC.

§ RuleappliestoentitiesonboththeSDNListand SSIList.

VSD=VoluntarySelfDisclosure





BasePenaltyMatrixfromOFAC

EnforcementGuidelines

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Sourcedata:OFACwebsite

CompilationandAnalysisbySanctionsAlert.com

SettlementsAssessment



OFACEnforcementActionsAgainstBanks(2003– September5,2017) Sourcedata:OFAC

website






OFACEnforcementActionsAgainstInsurers(2003– September5,2017)





OFACEnforcementActionsAgainstIT/Telecom(2003– September5,2017)



SevenSins

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Pride

Envy

Gluttony

LustAnger

Greed

Sloth



OFACenforcementactions– BytheNumbers



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