Departments Of Commerce, Treasury, And Justice Warn Foreign-Based Persons Of Increased Enforcement To Ensure Compliance With U.S. Sanctions And Export Control Laws

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Lewis Brisbois Bisgaard & Smith LLP

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Houston, Tex. (March 27, 2024) - Following up on its Tri-Seal Compliance Note last year cracking down on third-party intermediaries' evasion of Russia-related sanctions and export controls...
United States International Law
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Houston, Tex. (March 27, 2024) - Following up on its Tri-Seal Compliance Note last year cracking down on third-party intermediaries' evasion of Russia-related sanctions and export controls, the U.S. Departments of Commerce, Treasury, and Justice have issued a new Tri-Seal Compliance Note ("Note") detailing the obligations of foreign-based persons to comply with U.S. sanctions and export control laws. The Note describes the applicability of U.S. sanctions and export control laws to foreign-based persons as well as significant enforcement actions against foreign persons over the last two years. The Note also details compliance considerations for foreign-based persons.

Applicability of U.S. Sanctions and Export Laws to Foreign-Based Persons

The International Economic Powers Act, 50 U.S.C. §§ 1701 et seq., authorizes the President to "declare[] a national emergency with respect to" an "unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States." 50 U.S.C. § 1701(a). Under such a declaration, the Government may "block...or prohibit any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in" the "property" or "interests of the property" of an entity or individual listed on the OFAC-managed Specially Designated Nationals and Blocked Persons list (SDN List). 50 U.S.C. § 1702(a)(1)(B).

The Export Control Reform Act of 2018 ("ECRA"), 50 U.S.C. §§ 4811, et seq., grants the President the authority to "control . . . the export, reexport, and in-country transfer of items subject to the jurisdiction of the United States, whether by United States persons or by foreign persons ... relating to" specific categories of items and information. 50 U.S.C. § 4812(a). The Commerce Department's Bureau of Industry and Security ("BIS") administers the export licensing and enforcement functions of the dual-use export control system through the Export Administration Regulations ("EAR"). 15 CFR Subchapter C, parts 730–774. 15 C.F.R. § 730.1.

Significant Compliance Enforcement Actions Detailed

U.S. sanctions and export control laws are enforced against any foreign entity whose actions "risk undermining U.S. national security and foreign policy that challenge global peace and prosperity."

In June 2023, Swedbank Latvia AS ("Swedbank Latvia"), a subsidiary of a Sweden-based international financial institution, agreed to pay $3,430,900 to settle its potential civil liability for 386 apparent violations of OFAC sanctions on Crimea (see Lewis Brisbois' previous alert). Executive Order 13,685 (Dec. 19, 2014) blocked certain property and persons from engaging in dollar-based transactions. In 2016 and 2017, a customer of Swedbank Latvia used the bank's e-banking platform from an internet protocol address in a sanctioned jurisdiction to send payments to persons also located in a sanctioned jurisdiction through U.S. correspondent banks.

The reach of U.S. export control laws means that parties to an export transaction cannot bypass
the EAR by shipping items through a third country. A foreign party that has placed an EAR item into inventory that otherwise requires a license to a third country destination if directly exported from the U.S. generally still must obtain a BIS reexport license prior to shipping to that third country destination.

After the Russian Federation began military operations in Ukraine, BIS implemented further sanctions against Russia under the EAR. 87 Fed. Reg. 12,226 (Mar. 3, 2022). BIS imposed "broad transfer (in-country) requirements on an entire country, reflecting the significance of the U.S. national security and foreign policy concerns, resulting from the Russian further invasion of Ukraine." Id. BIS extended the "EAR license requirements to many items that did not previously require a license to Russia on the basis of their CCL [Commerce Control List] classification alone, such as the parts and components used in civil aircraft controlled under ECCN 9A991.d." Id. On April 11, 2022, BIS further amended 15 C.F.R. § 746.8(a)(1) to include all items on the CCL. 87 Fed. Reg. 22,130 (Apr. 14, 2022).

As a result, any U.S.-origin aircraft or foreign aircraft is subject to a license requirement to fly into Russia if it includes more than 25% controlled U.S.-origin content and is registered in, owned by, controlled by, or under charter or lease by Russia or a national of Russia. BIS has issued multiple total denial orders against Russia-based airlines including, Nordwind Airlines, Siberian Airlines, and Ural Airlines. As of the date of the Compliance Note, BIS has determined that 184 specific aircraft have violated Russia controls. The full list can be found here.

In November 2023, with cooperation from the Financial Crimes Enforcement Network (FinCEN) and OFAC, DOJ announced a guilty plea by Binance Holdings Limited, an entity that operated the world's largest cryptocurrency exchange, for various offenses, including violations of U.S. sanctions laws and the Bank Secrecy Act. Fines and penalties amounted to a staggering amount of $4.3 billion and an additional almost $1 billion to settle its potential civil liability for over 1.6 million apparent violations of multiple sanctions programs.

Based on the new authority given to the Treasury Secretary, in consultation with the Secretaries of State and Commerce, foreign financial institutions can now be subjected to the jurisdictions of U.S. regulators to enforce sanctions against Russia. Utilizing this authority, it has been reported that U.S. regulators have been successful in negotiating with financial institutions in Turkey and the United Arab Emirates to cease providing financial assistance to entities doing business with Russia in support of its military-industrial base.

As Russia's use of foreign financial institutions to support its military effort diminishes, it could depend on cryptocurrency to finance its operations. The sanctioning of Binance is a lesson to all that financial institution compliance programs must contain a significant element to track the use of cryptocurrency.

Compliance Considerations for Foreign-Based Persons

The Departments of Commerce, Treasury, and Justice recommend foreign-based persons maintain robust compliance measures including the following:

  • Maintain current and comprehensive sanctions compliance program.
  • Establish strong internal and central controls governing payments and movement of goods involving subsidiaries, affiliates, and other related parties.
  • Maintain robust and integrated systems with know-your-customer information to ensure information and specific customer risk rating is widely available within the organization
  • Establish vigorous training protocols to ensure that subsidiaries and affiliates can effectively identify red flags and report such to management.
  • Immediately act upon compliance failures to implement compensating controls to remediate any weaknesses in compliance program.
  • In completing acquisitions of other enterprises, ensure compatibility of compliance systems prior to effectuating any merger.
  • Take advantage of voluntary self-disclosure program (see Lewis Brisbois' previous alert) should any sanctions or export control violation be encountered.

Conclusion

Businesses, financial institutions, or other entities that engage in international transactions involving products or services should have a robust sanctions compliance program. An important component of that program should be a policy that guides its next steps when it becomes aware of sanctions violations, to mitigate or eliminate

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Departments Of Commerce, Treasury, And Justice Warn Foreign-Based Persons Of Increased Enforcement To Ensure Compliance With U.S. Sanctions And Export Control Laws

United States International Law

Contributor

Founded in 1979 by seven lawyers from a premier Los Angeles firm, Lewis Brisbois has grown to include nearly 1,400 attorneys in 50 offices in 27 states, and dedicates itself to more than 40 legal practice areas for clients of all sizes in every major industry.
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