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Economic Sanctions Trends and Keys to Compliance
Doing business overseas has always been complex. In recent years, however, companies have faced billions of dollars in penalties for violating federal regulations related to international conduct. More than ever, companies venturing across the border need to be mindful of the U.S. government’s national security and foreign policy goals and the regulations that protect them.
U.S. regulatory experts Kevin Fitzgerald and Greg Husisian, of Foley & Lardner LLP in Milwaukee and Washington, D.C., respectively, recently discussed U.S. economic sanctions, the trends and the best practices for compliance.
The government’s economic sanctions regulations, administered by the Office of Foreign Assets Controls (OFAC), are constantly changing because of international events. Sanctions vary from country to country.
In general, economic sanctions prohibit transactions with countries, entities and individuals designated as having taking actions that are counter to U.S. foreign policy. The ban not only targets foreign countries but also Specially Designated Nationals–persons found to have violated U.S. sanctions regulations, such as terrorists, international narcotics traffickers and those engaged in proliferating weapons of mass destruction. In many cases, the sanctions are so stringent that they forbid any type of economic contact with a banned subject, including exports, imports, contracts, and financial and other services, without the specific approval of OFAC.
In some cases, it can be difficult to tell if a person or entity fits within these categories. Persons who have been targeted often take steps to cover their tracks, and to make it difficult to identify them as designated persons. OFAC also has placed more of the burden on U.S. companies to “know their customer.” For example, under recent OFAC guidance, if a banned entity owns more than 50 percent of a sub-entity, conducting business with the sub-entity also is banned, Husisian said.
Federal regulations require U.S. businesses to block or freeze assets brought to them from banned entities, Husisian said. Assets can include many things, such as bank deposits, premiums, financial interests and contract payments. Wherever a blocking obligation arises, a company cannot simply refuse to complete a transaction with a banned subject and return the money; it must accept the asset and freeze it. It then must report the blocked transaction to OFAC within 10 days.
OFAC often publishes general licenses, which allow certain types of business to be conducted with sanctioned persons, entities or countries. Even where a course of conduct squarely falls within the sanctions, however, U.S. companies should not assume that they cannot undertake the transaction. Cover persons always can request a specific OFAC license to engage in economic activity with the banned entity. Care should be taken that any such license request covers the full gamut of anticipated activity. For example, even where conduct is allowed, such as for the provisions of legal services, a license still is required to get paid for the services, Husisian said.
OFAC regulations also generally ban the facilitation of economic activity. Facilitation is broadly defined to include not only direct transactions such as completing a shipment to an embargoed destination but also services such as business support, including creating invoices or documentation.
In some cases, subsidiaries of U.S. companies can sell to sanctioned countries, such as Iran, provided that the sales are accomplished without the use of U.S.-origin goods, without the involvement of U.S. nationals, without the oversight or approval of the U.S. parent, and other cautionary steps. In many cases, however, the increasing risk of such conduct being viewed as a form of evasion of the sanctions means that companies are increasingly hesitant to undertake such sales, even though they technically are allowed under all of the sanctions (with the exception of the Cuban sanctions). “Whenever you know that you are going to be involved in an OFAC-restricted country, it can be problematic,” Husisian said.
Right now, doing business with Iran is giving companies pause. The U.S. government is very aggressive on Iran sanctions, Husisian said. In addition, new EU sanctions on doing business with Iran also potentially are applicable, making it especially risky for companies that formerly traded with Iran through subsidiaries or affiliated companies to continue with business as usual.
One tripping point for companies is continuing to honor old contracts after sanctions have been enacted. Honoring those contracts requires OFAC permission, Husisian said, as there is no grandfather exception under most sanctions regimes. Often companies can work with OFAC to determine the best way to disentangle themselves from newly sanctioned business arrangements.
So, what are companies to do? It may sound simple, but Fitzgerald said companies must know their customers and ascertain that they are not on a U.S. government banned (SDN) list. Make this check regularly, he said, because a lot can change. He cited an example of an insurer issuing a workers’ compensation policy that covers international workers. If a name check is only run at the time the policy is issued, the insurer may not know later that one of the beneficiaries being paid on a claim is on a government list of Specially Designated Nationals (SDN).
Fitzgerald said interdiction software is available for checking names, and he recommends running it at least every 10 days to allow time to report to OFAC within its required 10 days.
Remember, OFAC is available to help, Fitzgerald said. “It is important to recognize that the federal government is there to work with you on this. They’re not simply anti-business. This is a very important initiative on behalf of the government. At the end of the day, certain things just need to be done, and there can be resolution of those things that make sense from a business standpoint while maintaining the full compliance you need.”
“It’s easier to do it on the front end than to come back and say, ‘Oops, we paid a claim to an SDN,’” Fitzgerald said.
Making sure employees are properly and consistently trained in economic sanctions requirements is key to keeping abreast of rapid changes in the law, Husisian said. OFAC regularly amends its regulations, and implements new sanctions regulations, so failure to keep abreast of changes can lead to inadvertent violations.
Fitzgerald also urged companies to give employees incentives to report suspected conduct to their supervisors, and that management take these reports seriously. Studies show whistleblowers often go to the government, not for money, but because they didn’t feel their company took them seriously.
M&A and OFAC compliance
Another common trip-up for companies occurs during mergers and acquisitions, Husisian said. If a company is buying a business with OFAC risks, it may be necessary to sever those business risks before the transaction is completed, or to put in place a licensing strategy. You can’t do the transaction and assume you subsequently will be able to unload the OFAC problems, he said.
“OFAC is judge, jury and executioner on this,” Husisian said. “Staying on the good side of OFAC and trying to divine what they are thinking is very important.”