Presenting a live 90-minute webinar with interactive Q&A
Foreign Assets Control Facilitation
Identifying and Mitigating Risks for U.S. Persons and Companies Absent Clear Guidance
TUESDAY, MAY 22, 2012
1pm Eastern
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12pm Central | 11am Mountain
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10am Pacific
Today’s faculty features:
Ronald I. Meltzer, Partner, WilmerHale, Washington, D.C.
Greta Lichtenbaum, Partner, O'Melveny & Myers, Washington, D.C.
Sheryl Cottrell, Global Sanctions Head, UBS AG, Stamford, Conn.
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Prohibited Facilitation Under
OFAC Regulations
Ronald I. Meltzer
Wilmer Cutler Pickering Hale and Dorr, LLP
May 22, 2012
OVERVIEW
1. What is facilitation?
2. Exceptions
3. Recent Executive Orders related to
facilitation
4. Recent enforcement cases
WilmerHale
6
Part One: What is facilitation?
Circumvention of OFAC requirements by
routing or supporting otherwise prohibited
transactions through foreign persons

Aiding or permitting non-US persons to
perform activity that would be prohibited if
undertaken by US persons

Explicit and imputed prohibition across all
OFAC sanctions programs

Broad and elastic: even minor or indirect
actions that support or approve another person’s
transaction with OFAC targets can constitute
prohibited facilitation

WilmerHale
7
Definitions of facilitation: Iran,
Sudan and Burma regulations
Iran: approving, financing, facilitating, or
guaranteeing any transaction by a foreign
person, where the transaction would be
prohibited if performed by US person or within
the United States (31 CFR §560.208)

Sudan: action by a US person that assists or
supports transactions with Sudan by any other
person (31 CFR §538.407)

WilmerHale
8
Definitions of facilitation: Iran,
Sudan and Burma regulations
(continued)
Burma: approving, financing, facilitating, or
guaranteeing a transaction by a foreign person, if
such transaction would be prohibited when performed
by US person or within the United States (31 CFR
§537.205(a))

Exception for certain types of new investment in
Burma (31 CFR §537.205(b)), such as certain
contracts to sell/purchase goods

WilmerHale
9
Cuba: evasion/avoidance
CACR prohibits “[a]ny transaction for the
purpose or which has the effect of evading or
avoiding any part of the [CACR] prohibitions” (31
CFR §515.201(c))


Interpreted to prohibit facilitation
WilmerHale
10
Other examples of facilitation from
OFAC regulations
Altering policies or operating procedures to
enable a foreign affiliate/subsidiary to perform
OFAC-prohibited transactions

Altering a foreign affiliate’s/subsidiary’s
operating policies and procedures to facilitate
OFAC-prohibited transactions

Referring purchase orders, requests for bids,
or other business opportunities involving OFAC
targets to a foreign person

WilmerHale
11
Penalties
For Iran, Sudan and Burma (under IEEPA):
Civil: $250,000 per violation or twice
transactional value


Criminal: $1 million per violation and 20 years
For Cuba (under TWEA):

Civil: $65,000 per violation

Criminal: $1 million per violation and 10 years
WilmerHale
12
Part Two: Exceptions
1. Authorized transactions
2. General inventory rule
WilmerHale
13
Authorized transactions
Prohibited facilitation requires that the underlying
transaction be unauthorized
If the transaction is permitted (either by general
authorization or a specific license), then taking
action to approve, facilitate or support that
transaction is not prohibited
Examples:

Information and informational materials

Transactions covered by OFAC licenses
WilmerHale
14
General Inventory Rule
What if a US person sells goods to a foreign
person in a third country that does business in
Iran? Does that activity constitute prohibited
facilitation?

General inventory rule: US persons may
sell/transfer goods to a third-country party, even
if a small/unidentifiable portion of such goods is
destined for or ends up in OFAC targets

Not in the OFAC regulations—established by
longstanding agency practice

WilmerHale
15
General Inventory Rule (continued)
Two key limitations:
Items when shipped from the United States or
by a US person to the third-country party must
not be specifically intended for eventual sale to
or use in OFAC targets

Third-country party’s inventory must not be
predominantly used for selling/sourcing such
items to OFAC targets

WilmerHale
16
Part Three: Recent Executive
Orders related to facilitation
Two new EOs related Iran and Syria:

Executive Order 13608 (Foreign Sanctions
Evaders/”FSEs”)

Executive Order 13606 (Grave Human Rights
Abuses by Governments of Iran and Syria)
WilmerHale
17
EO 13608
(Foreign Sanctions Evaders)
 Targets foreign individuals/entities who:
 Violate/attempt to violate/cause a violation of sanctions
on Iran/Syria; or
 Facilitate “deceptive transactions” on or behalf of
persons subject to Iranian/Syrian sanctions.
– “Deceptive transactions”: identity of an Iranian or Syrian
sanctions target is withheld or obscured from other parties
or relevant regulatory authorities (e.g., non-U.S. export
licensing officials)
EO 13608 (FSEs) (continued)
Allows OFAC to impose sanctions on non-U.S.
persons for facilitation
Consequences of being listed under EO 13608:
 U.S. persons may not provide goods,
services, or technology to listed FSEs, or
entities owned/controlled by, or acting on
behalf of, such FSEs
 Effectively, listed FSEs are cut off from access
to the U.S. market and financial system
 However, no blocking requirements under this
EO
EO 13606 (Grave Human Rights
Abuses Via IT)
 Targets parties that operate/direct the
operation of computer or network disruption,
monitoring, or tracking that could facilitate
serious human rights abuses by the
governments of Iran/Syria
 Also targets parties that provide
goods/services/technology likely to facilitate
such activities
 Targeted individuals/entities put on SDN list
with the tag [HRIT]
Part Four: Recent Enforcement
Cases
Norton Lilly International (Aug. 2011)

Société Générale New York (Aug. 2011)

Trans Pacific National Bank (Jan. 2011)


Aon Energy (Jan. 2011)
WilmerHale
21
Norton Lilly International
(Aug. 2011)
 Norton (Mobile, AL) acted as a paying agent
for a foreign entity paying port charges of
$14,936, incurred at an Iranian port
 OFAC: Norton engaged in a dealing related to
services of Iranian origin, and facilitated a
transaction by a foreign person involving
Iranian-origin services
 Assessed a penalty of $18,750
Société Générale (Aug. 2011)
 Société Générale New York issued two letters
of credit between non-sanctioned parties
 Pursuant to those letters of credit, SGNY
processed two payments (valued at $329,954)
involving the shipment of cargo on vessels
owned/operated by IRISL
 SGNY voluntarily self-disclosed
 OFAC: SGNY dealt in Iranian-origin services,
and/or engaged in prohibited facilitation
 Case settled for $111,359
Trans Pacific National Bank
(Jan. 2011)
Trans Pacific (a San Francisco bank)
processed two wire transactions to transfer
$35,600 to a foreign person in September 2007

The two wire transfer requests referenced
“Iranian material” and “Iran material”


No voluntary disclosure

Case settled for $12,500
WilmerHale
24
Aon Energy (Jan. 2011)
Aon Energy (a Houston-based subsidiary of
Aon Corporation) brokered reinsurance
retrocession deals (i.e., reinsurance for
reinsurers) on behalf of European reinsurer and
retrocessionaires (policy sellers) in October 2005

The premium was $62,883 and covered
construction risks associated with petroleum
project in Iran


No voluntary disclosure

Case settled for $36,000
WilmerHale
25
Ronald I. Meltzer
WilmerHale
(202) 663-6389
ronald.meltzer@wilmerhale.com
WilmerHale
26
Greta L.H. Lichtenbaum
(202) 383-5249
glichtenbaum@omm.com
U.S. Economic Sanctions Laws:
How Risks of Facilitation Violations Typically Arise
Facilitation – General
 Basic principle: A U.S. person may not facilitate
activities of a non-U.S. person that the U.S. person
could not engage in directly
 A risk for ALL sanctions programs
 This provision refers to facilitating the activities of any
foreign person (including an affiliate), and can create
many challenges
 It can prevent U.S. companies and persons from
supporting transactions with sanctioned countries initiated
outside the United States, even where the U.S. company’s
role is limited
28
Facilitation – Non-U.S. Affiliate Risks
• How do you manage risks when a foreign affiliate has business
with a Sanctions Target?
• Risks arise with foreign subsidiaries that are not independent
– Divergence of functional structure from legal structure
– Interlocking officers, directors or employees
– Lack of maintenance of separate corporate formalities
– significant involvement by U.S. parent in foreign sub’s business
• Key to risk mitigation: Identify all areas where U.S.-based entity
or U.S. persons may support non-U.S. affiliates, and assess
facilitation risk
29
Facilitation – Non-U.S. Affiliate Risks
•
Transaction-specific facilitation of non-U.S. affiliates’ activities with a
Sanctions Target can arise in many ways, including:
– Providing various types of financial assistance
– Exercising mandatory approval for contracts
– Changing a subsidiary’s processes and procedures to permit a transaction
to occur without U.S. participation is facilitation
– Brokering, financing, guaranteeing a contract
– Assisting on exportation or re-exportation of goods and services
– Insuring a subsidiary’s trading activities with Iran
– Referral of purchase orders, requests for bids, or similar business
opportunities to which the U.S. person would not directly respond
– Transporting or warranting the quality of goods sold by a subsidiary to Iran
– Business or legal planning relating to the trade in goods, technology, or
services between Iran and any other location
30
Facilitation – Non-U.S. Affiliate Risks
 Shared Support Services – Human
Resources/Personnel
 U.S. involvement in hiring process or requirements
for personnel responsible for sanctioned country
business
 Multiple employment contracts for individuals
 Secondment of staff to foreign subsidiaries of U.S.
company with sanctioned activities
 Employment of foreign nationals resident in Sudan
or Iran
31
Facilitation Risk – Ongoing Business with
Unrelated Non-U.S. Business Partner
• How do you manage risk if an unrelated nonU.S. business partner has business with
Sanctions Target?
• This can arise in a variety of contexts
– Joint venture relationships
– Production sharing arrangements in exploration
and production context
– Agents, freight forwarders, transport companies,
distributors
– Clients (law firms)
32
Facilitation – Ongoing Business with
Unrelated Parties
• Level of risk depends on how much business
there is with Sanctions Target, and what U.S.
company’s role is in the shared activities
• Risk should be assessed on a case-by-case
basis
• Key to Risk Mitigation: Expectations vis-à-vis
sanctioned countries should be set at the
beginning of the relationship
– Due diligence and advance planning are critical
– Contractual protections are a must
33
Facilitation – Non-U.S. Affiliate Risks
 U.S.-based Enterprise Resource Planning (“ERP”)
systems
 ERP systems are designed to integrate all data and processes
of multinational companies into a unified system, using various
components of computer software and hardware to achieve the
integration.
 Can A U.S. parent be deemed to facilitate a foreign subsidiary’s
transactions with sanctioned countries if those transactions are
effected through an ERP system based in the United States?
 OFAC precedent is limited on questions of U.S.-based,
automated support. Cuba travel service provider precedent
from 2002 (020416-FACRL-EU-10) is somewhat on point,
suggesting that there is some risk of facilitation from U.S.-based
ERP systems that provide operational support.
34
Facilitation Risk: Unrelated Parties
 Facilitation risk exists with relationships with
unrelated non-U.S. parties (e.g., joint development
projects, joint ventures, agents, clients and
customers)
 Includes the referral of business to non-U.S. persons
 Level of risk depends on how much business there is in
sanctioned countries, and what U.S. company’s role is in the
shared activities
 Risk should be assessed on a case-by-case basis
 Expectations vis-à-vis sanctioned countries should be set at
the beginning of the relationship
 Due diligence and advance planning are critical
35
Facilitation: Mergers & Acquisitions
 If there is a revenue stream from a sanctioned
country, can change terms of the deal
 Significant revenue from sanctioned countries can be
problematic
 If business is Cuba-related, may need an OFAC license prior
to closing, and business may need to cease if interest of
U.S. person is controlling
 If asset purchase, may need license prior to closing
 If stock purchase of non-U.S. entity, may have to choose
between: (1) retaining revenue stream and allowing new sub
to operate independently; and (2) foregoing revenue stream
 consider post-closing compliance audit
36
Facilitation: Mergers & Acquisitions
 If there is a revenue stream from an
embargoed country, planning about the
following issues is essential:
 Placement of U.S. persons in management
positions of foreign subsidiary, including the Board
 Modifications to operating procedures
 Delegations of authority from new parent
 Integration, especially IT, business support
functionality and finance/treasury
37
Facilitation Risk: New Iran and Syria Sanctions
• Implications of CISADA and progeny
• Implications of new “Foreign Sanctions
Evaders” and new IT-related Executive
Orders
38
Facilitation:
Compliance Program
Considerations
Sheryl Cottrell
sheryl.cottrell@ubs.com
Global Sanctions Head, UBS
May 2012
Scope
The broad scope of the US prohibition against “facilitation”
poses challenges for companies managing compliance
programs for worldwide operations.
Examples of potential issues:
A US company is asked to insure a Canadian company that ships goods to
Cuba.
A US company performs a contract to support a mining project, having
reason to know that a sanctioned country will receive production sharing
revenue from the project.
40
Scope
For foreign parents with operations in the US, a decision to
voluntarily apply US sanctions restrictions its operations worldwide
involves considerations:
Diminishes the risk of a violation of US law
and reputation risk
Might create competitive disadvantage in
a location where activity is lawful
Provides consistent compliance
restrictions throughout the organization
Requires reinforcement for operations
worldwide
Removes the need to segregate
transaction flows from US persons and US
systems
Might create conflicts of law
Requires sustained commitment
Removes the need for resource intensive
recusal/employee tracking policies
41
Facilitation Controls
Procedures can be designed to maximize escalation of facilitation
issues to compliance for review on a case-by-case basis:
1) Identify product and transaction types that could pose a risk of
“facilitation”
Examples for a financial institution might include
•
•
•
investment banking advisory services
Commercial loans, credit, trade finance and other financing
Product distribution arrangements
2) Build risk-based procedures at choke points for those activities
Example:
For each commercial financing transaction, a financial institution’s compliance might
require business teams to determine and document whether customers or connected
parties conduct business in sanctioned countries.
42
Analysis
Facilitation doesn’t mean that US persons are automatically barred
from any dealing with companies conducting business in
sanctioned countries.
Ring-fenced Activity
Sometimes a service might be sufficiently ring-fenced or
segregated from a customer’s business in a sanctioned country
so as not to support it.
Example: lending a global manufacturer funds to develop a factory in Australia,
even though a fraction of the company’s sales involve Cuba.
43
Analysis
When evaluating a proposed financing transaction for a foreign
customer that conducts business in sanctioned countries, a
financial institution’s compliance department might consider a
variety of factors, including:
• the extent of the customer’s present and future involvement in sanctioned
countries, often as a percentage of overall value, annual revenue or capital
expenditure
• the nature of customer’s business (is it diverse or focused in one area?)
• whether the proposed activity might support projects in sanctioned countries
(if financing, what are the intended uses of the proceeds?)
• whether the customer’s activities in sanctioned countries are separately
financed
44
Analysis
The nature of the proposed activity might provide an obstacle to
ring-fencing.
Example:
A customer wants to acquire a company and asks a US financial institution to give
a valuation of the acquisition target. A portion of the target’s revenue is derived
from operations in Sudan. The risk of facilitation might still exist even though the
Sudan operation contributes less than 50% of the target’s overall revenues.
45