Articles Posted in OFAC Sanctions

For other sanctions regimes not as active as Burma, Iran, Cuba and Russia.

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On July 22, 2015, the Department of Commerce’s Bureau of Industry and Security (BIS) released amendments to the Export Administration Regulations (EAR) implementing the Secretary of State’s May 29, 2015 decision to rescind the designation of Cuba as a State Sponsor of Terrorism. The removal of Cuba from Country Group E:1 and “AT” controls under the EAR requires a number of highly-technical changes to U.S. regulations. The key practical impacts are:

  •  The de minimis level for Cuba will be 25 percent instead of 10 percent (with some exceptions);
  •  License exception AVS will be expanded somewhat for aircraft on temporary sojourn in Cuba;
  • License exception RPL will be available to replace, on a one-for-one basis, parts, components, accessories or attachments for aircraft and other items controlled for national security reasons that were previously lawfully exported or reexported to Cuba; and
  • License exception BAG generally will allow travelers to Cuba to carry encryption commodities and software.

It is important to emphasize that the change to Cuba’s status as a state sponsor of terrorism does not remove the U.S. embargo on Cuba. Cuba remains in Country Group E:2, and any export, re-export, or transfer of goods, software or technology that are subject to the EAR to Cuba must still be licensed or be eligible for export under a license exception. Also, there have been no further changes to the U.S. sanctions policy administered by the Office of Foreign Assets Control (OFAC).

Increase in De Minimis Amount of U.S. Content Allowed for Cuba

Under the de minimis exception of the EAR, foreign-made products incorporating “controlled” U.S. content – that is, items that would require a license if exported separately to the country of ultimate destination – below certain threshold amounts are not subject to the EAR.

Previously, foreign made products that incorporated more than 10% U.S.-origin content were subject to the EAR when exported to Cuba from third countries. The amendments increase the threshold de minimis level to 25%, consistent with the threshold applied to most other countries.

As a result of this change, non-U.S. companies may find it easier in some cases to export products to Cuba incorporating U.S.-origin content. Nonetheless, companies should be mindful of continuing U.S. sanctions rules when assessing de minimis eligibility. In particular, because all U.S. content is controlled for export to Cuba (even items classified under EAR99), products that satisfy the de minimis test for export to other countries may not qualify for export to Cuba under the de minimis exception. Also, several categories of items are not eligible for the de minimis exception, including items incorporating content classified as a “600 series” item.

Changes to License Exceptions

License Exception Aircraft, Vessels and Spacecraft (AVS)

License exception AVS (“Aircraft, Vessels and Spacecraft”) (EAR § 740.15) previously allowed non-Cuban airlines to operate flights into Cuba. The amended regulations remove some restrictions on the use of AVS for Cuba, but the modifications currently seem likely to have a limited impact until such time as export licensing requirements for sales of aircraft and aircraft parts to Cuba are relaxed.

License Exception Servicing and Replacement of Parts and Equipment (RPL)

Certain exports and re-exports to Cuba may now be eligible for License Exception “Servicing and Replacement of Parts and Equipment” (EAR § 740.10). This would allow one-for-one replacement of parts, components, accessories, and attachments to be exported or re-exported to Cuba for aircraft; as well as for commodities controlled for national security (NS) reasons. Note that this license exception may only be used for items previously lawfully exported or reexported to Cuba.

License Exception Baggage (BAG)

License Exception “Baggage” (BAG) (EAR § 740.14) was previously available for Cuba. The amendments have the effect of now authorizing travellers to carry in their baggage encryption items (e.g., laptops containing encryption software) for their own use.

Before using any of the above license exception, it is important to review all of the specific requirements under EAR Part 740 and § 746.2 (providing information of the permitted use of license exceptions for Cuba) as well as the FAQ’s that accompanied the release of the amendments.

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On 19 June, the European Council extended EU sanctions against Russia pursuant to Council Decision (CFSP 2015/959).  This follows a series of increasingly coordinated actions by the US and EU, such as the joint statement produced at the G7 meeting two weeks ago, to show a united front against continued Russian activity related to Ukraine.  With this extension, EU sanctions will remain in place until January 31, 2016 unless there is a complete implementation of the Minsk Agreements before then.

However, looking forward, US and EU policymakers recently leaked to the media that they are pre-planning a series of coordinated sanctions against Russia should the situation deteriorate. These new measures could include new travel bans on Russian government officials and business leaders, but could escalate significantly to more broad-based sanctions against the Russian energy and financial sectors. In particular, these sanctions could target the sale of petroleum products from Russia and Russia-related financial transactions. Some western leaders are also supportive of utilizing these new sanctions should the status quo remain unchanged for much longer. Continue reading →

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On Tuesday, June 8 in Pillsbury’s London office, Pillsbury and the Eurasia Group hosted the first event in their Sanctions & Market Opportunities Series entitled “Iran Sanctions, Investment and Trade: Preparing for Divergent Outcomes.”

During the event, panelists discussed the likelihood for a final agreement related to Iran’s nuclear program and the eventual easing of international sanctions.  Panel members also discussed the current U.S. and EU sanctions regime and what may change in the event of an agreement or if talks fall apart.  As part of these discussions, the panel detailed the U.S. congressional review process that will occur in event of an agreement and how this process is impacting the negotiations and may hinder sanctions relief.

The audience of senior European business leaders received several key takeaways, including: Continue reading →

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On May 13, 2015 Senator Lisa Murkowski, Chair of the Senate Committee on Environment and Natural Resources, introduced the Energy Supply and Distribution Act of 2015 (S.1312), which if enacted would lift the crude oil export ban.

Co-sponsored with Sen. Heidi Heitkamp (D-ND) and twelve Republicans, the bill would permit exports of domestically produced crude oil without a Federal license “notwithstanding any other provision of law” (other than crude oil stored in the Strategic Petroleum Reserve), except to countries subject to U.S. sanctions. The bill would direct the Secretary of Energy to develop a standard definition of the term “condensate” and would express the sense of the Congress that processed condensate is a petroleum product.

S.1312 follows the bill introduced in the House of Representatives by Rep. Joe Barton (R-TX) last February, which would prohibit any official of the Federal Government from imposing or enforcing any restriction on the export of crude oil.

Both bills seek to cut through the layers of legislation and regulation implementing statutes enacted in the 1970’s that have prohibited exports of domestically produced crude oil except in limited circumstances, such as section 103 of the Energy Policy and Conservation Act, section 28(u) of the Mineral Leasing Act of 1920 and section 28 of the Outer Continental Shelf Lands Act.

Although these statutes give the President authority to lift export restrictions by means of specific authorizations or national interest determinations, the Administration has chosen not to expand the types of permitted transactions but has allowed the Commerce Department (which implements the Export Administration Regulations) to continue to license transactions such as swaps and exchanges in accordance with previously established policy. Preempting Sen. Murkowski’s focus on condensates, the Commerce Department late last year issued FAQ’s clarifying the circumstances under which processed condensate would be considered a refined product not subject to definition of crude oil and therefore not subject to the ban. A number of companies have since received commodity jurisdiction determinations for condensates. Continue reading →

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On August 13, 2014, the Office of Foreign Assets Control (OFAC) issued new guidance on ownership/control for determining blocked parties. This represented the first significant update on this topic since February 14, 2008, and may have important practical implications for how companies conduct due diligence, assess whether potential business associates or customers are blocked under U.S. law, and determine when it is safe to deal in or transfer the property of such persons.

OFAC previously has implemented guidance that an entity that is owned 50 percent or greater by a blocked party would itself be considered blocked, even if the entity was not expressly identified on the List of Specially Designated Nationals (SDNs). Until the latest guidance, OFAC’s policy was not to combine ownership shares of different entities in applying the 50 percent test.

On August 13, OFAC stated that it will now “aggregate” the ownership shares of all SDNs that may own part of an entity. Any entity owned 50 percent or greater by SDNs is now considered blocked by operation of law.
The new guidance also clarifies that ownership of less than 50 percent or control by other means does not automatically lead to blocking However, OFAC may determine to specifically designate an entity that has a significant minority ownership interest or is controlled by an SDN.

For entities that have had over 50 percent ownership by SDNs, divestment by those SDNs of their ownership would eliminate the automatic blocking. However, such divestment must take place outside of the United States or otherwise be authorized by the U.S. government. There also are certain limitations—for example, blocked property in the possession of U.S. persons remains blocked even if there is subsequent divestment outside of the United States.

The guidance applies for purposes of application of the Sectoral Sanctions Identification List (“SSI List”). Thus, ownership interests of entities on the SSI List should be aggregated to determine if additional entities are subject to the SSI List restrictions. Importantly, ownership interests of SDNs and SSI list entities are not combined when determining an entity’s ownership. OFAC only will aggregate within the distinct programs.

This technical change in OFAC’s “counting” for ownership may have an impact on due diligence evaluations. It may be necessary to review past due diligence on key business partners, vendors and customers, particularly where there was any indication of minority SDN ownership. Looking ahead, it will be important for companies to update their internal compliance and due diligence policies to reflect the ownership and control guidance.