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11 Common Misconceptions: Compliance & Denied Party Screening

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11 Common Misconceptions: Compliance & Denied Party Screening

With the growth of eCommerce, business integration, and global connectivity showing no sign of abating, compliance and denied party screening (DPS) have been thrust into the spotlight. The era of the mega fine has emerged, with fluid international sanctions policies impacting unsuspecting companies in unwelcome ways. In addition to the potential for reputational damage, penalties for non-compliance can include substantial fines—multimillions of dollars in some instances—, revocation of export privileges, and criminal charges, including prison time. 

The solution? Screening for restricted and denied parties, and due diligence to ensure that goods, technologies, and services are not destined for a sanctioned or embargoed country—not to mention screening every financial transaction—should be an integral component of every organization’s governance, risk, and compliance strategy. 

WHO NEEDS TO SCREEN?

While homeland security-sensitive industries (e.g., aerospace, defense, telecommunications, IT, energy, research, financial institutions) have a high bar when it comes to complying with U.S. and international export, trade, and financial laws, ordinary businesses from across all industries have an obligation to adhere to compliance requirements as well—and the penalties for non-compliance can be severe.

The reality is that companies found in violation of international trade regulations come from a wide spectrum of industries, not just the usual suspects. In fact, many organizations that have received financial, or even criminal, penalties fall outside the realm of the higher-risk industries. 

Unfortunately, many companies hold the erroneous belief that compliance and DPS do not apply to them. By increasing awareness surrounding the following misconceptions about compliance and restricted party screening, organizations can take a proactive and vigilant approach to mitigating risk and avoiding costly penalties.

DPS MYTHS: DON’T LET THEM HAPPEN TO YOU 

Screening doesn’t apply to our business, industry, or country.

All businesses, not just those operating within homeland security-sensitive industries, have an obligation to screen. Companies both in the U.S. and those outside of the country that engage with the United States in any capacity—including selling products or services in the U.S., or even using American banks and financial services for transactions—are subject to U.S. export and financial compliance laws.

We don’t need to screen because we supply services, not products.

Every time money changes hands, there is an obligation to ensure that the good or service is not destined for an individual or entity on a government watch list; services (e.g., travel agencies) are not exempt. 

We rely on a third party (e.g., freight forwarder) to screen for us.

Many companies make the mistake of thinking that the burden of compliance rests with the shipping or freight forwarding company but this is not always the case. The U.S. government can designate the owner or seller of the merchandise being exported (or imported) as the Exporter of Record, shifting the onus of compliance to both organizations. 

Our company operates domestically so screening is not required.

A significant number of individuals found on watch lists are U.S. nationals or citizens located in the United States who have been found guilty of violating export laws. Consequently, organizations are obligated to screen regardless of shipment destination.

Export laws don’t apply to us because we’re located outside the U.S. 

Regardless of where an organization’s headquarters or subsidiaries are based, it is highly likely that some, if not all, transactions flow through the U.S. financial system at one point in the purchasing or supply chain process. As such, these transactions fall under the purview of the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC).

We don’t export to countries under sanctions or embargoes.

Virtually every nation, on every continent, has debarred individuals and entities inside their borders—even Antarctica! Given the dynamic nature of international sanction policies, especially in the current political climate, organizations are at risk of engaging with a denied or restricted person or organization regardless of where they export. 

Our goods are EAR99 so we don’t need to screen.

Although an organization’s goods might be EAR99 (under the jurisdiction of the U.S. Department of Commerce and not listed on the Commerce Control List), selling them to a denied party is still subject to penalty. For reference, the 2017 edition of the Bureau of Industry and Security’s Don’t Let This Happen to You is replete with examples of EAR99 export violations.

We already screened our customers and contacts once.

Denied and restricted party lists change frequently, in many cases daily. To ensure compliance, organizations would be best served by screening all transactions at multiple points throughout the business workflow.

The project we needed to screen for is complete so we’re in the clear.

While exports are commonly associated with the shipment of goods, export controls also encompass the transfer of technology, software, or technical data, even when the transfer occurs in the United States. Case in point: although a project may have concluded, the release of controlled technologies (a.k.a. deemed exports) to foreign nationals is subject to U.S. export laws.

We only need to screen the person to whom we’re shipping.

One of the most misunderstood areas of export compliance is the requirements surrounding end-use. End-use compliance involves requesting documentation from the purchaser to confirm they are the ultimate destination of the goods and that they will use the product as intended. While obtaining an end-user statement doesn’t guarantee the veracity of the purchaser’s claim, this process demonstrates that a company has taken additional measures to ensure adherence to export and trade compliance laws and will stand them in good stead if issues arise. 

We’ll just pay the fine.

Fines incurred as a result of an export of OFAC violation should not be treated as a business expense. In fact, criminal penalties can include jail time and organizations can have their export privileges revoked. Moreover, negative media attention is an increasing concern for risk-adverse organizations attempting to protect their reputation by avoiding conducting business with non-law-abiding people or companies. 

FINAL THOUGHTS

Penalties from any export, trade, or OFAC compliance violation can negatively impact an organization’s bottom line, or ultimately cripple a company’s trade. Implementing a comprehensive screening program that encompasses restricted and denied parties and sanctioned and embargoed countries, coupled with cultivating a culture of compliance within the organization, will help keep goods flowing while minimizing the risk of penalties. 

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Marc Roy is Vice President & General Manager, Compliance Solutions at Descartes Systems Group, the global leader in providing on-demand, software-as-a-service solutions focused on improving the productivity, performance, and security of logistics-intensive businesses. 

U.S. Strengthens Sanctions Targeting the Government of Venezuela

On August 5, 2019, the Trump Administration intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with Venezuela’s supporters, Russia and China.  In a late-night Executive Order, President Trump announced that all property, and interests in property, of the Government of Venezuela, including its agencies, instrumentalities, and any entity owned or controlled by the foregoing, that are within the jurisdiction of the United States would be blocked.

The Order further suspended entry into the United States of sanctioned persons absent a determination from the Secretary of State. The Order also authorizes the Secretary of the Treasury to impose additional secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Government of Venezuela.

Background

In January 2019, after months of economic turmoil and political unrest under Venezuelan President Nicolás Maduro, the United States formally recognized Juan Guaidó, the leader of the Venezuelan National Assembly, as the country’s legitimate head of state.  More than fifty nations followed suit, asserting that President Maduro’s 2017 reelection was illegitimate and that Guaidó was the rightful interim president under the Venezuelan constitution.

The Trump Administration followed its recognition of Mr. Guaidó as interim president with sweeping sanctions on the Venezuelan government. The measures included designating Venezuela’s state-run oil company, Petróleos de Venezuela, S.A. (“PdVSA”), as a Specially Designated National (“SDN”), thereby prohibiting U.S. persons from engaging in transactions with PdVSA, as well as transactions by non-U.S. persons conducted in U.S. dollars, unless otherwise authorized by the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”).  (We previously summarized the PdVSA SDN designation here.)

Despite the increasing U.S. pressure, President Maduro has refused to cede power.  He retains the support of the Venezuelan military, and Russia, China, Iran, Cuba, and Turkey have continued their economic and diplomatic relationships with the regime.

Sanctions Overview

Through this new Executive Order, the Trump Administration has ratcheted up its efforts against the Maduro regime, asserting that further measures are necessary to combat “human rights abuses,” “interference with freedom of expression,” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

However, contrary to initial press reports, the action does not create a comprehensive embargo against Venezuela (on the model of the U.S. sanctions against Iran) that would prevent U.S. persons from engaging in almost all transactions. Instead, the new measures focus on the Venezuelan government by blocking all property and interests in property of the government that are currently in the United States, will be brought into the United States, or come into the possession or control of a U.S. person. There is, however, an exception for humanitarian goods, such as food, clothing, and medicine.  The Order applies regardless of contracts entered into, or licenses or permits granted, prior to the Order.

Further, the Order could have a broad impact outside of the United States by authorizing secondary sanctions against any party determined by OFAC to “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” the Government of Venezuela.  U.S. National Security Advisor John Bolton warned the day after the Order, “We are sending a signal to third parties that want to do business with the Maduro regime: proceed with extreme caution.  There is no need to risk your business interests with the United States for the purposes of profiting from a corrupt and dying regime.”

In conjunction with the Order, OFAC also revised twelve existing general licenses (“GLs”) and issued thirteen new GLs.  Notably, GL 28 authorizes through 12:01 a.m. on September 4, 2019, transactions necessary to wind-down contracts with the Government of Venezuela.  GL 31 also authorizes transactions with the Venezuelan National Assembly and the shadow government of Interim President Juan Guaidó, underscoring that the target of the action is the administration of Nicolás Maduro.

The GLs and related guidance make clear that the people of Venezuela are not the target of the sanctions.  Specifically, OFAC released a document entitled “Guidance Related to the Provision of Humanitarian Assistance and Support to the Venezuelan People,” which emphasized that “humanitarian assistance and activities to promote democracy are not the target of U.S. sanctions and are generally excepted from sanctions . . . ”  OFAC simultaneously issued four new Frequently Asked Questions (FAQs).  FAQ 680 stresses that “U.S. persons are not prohibited from engaging in transactions involving the country or people of Venezuela, provided blocked persons or any conduct prohibited by any other Executive order imposing sanctions measures related to the situation in Venezuela, are not involved.”

OFAC also issued a number of GLs to authorize humanitarian transactions and transactions necessary for communications involving Venezuela, including new GLs 24 (telecommunications and common carriers), 25 (Internet communications), 26(medical services), and 29 (broadly authorizing certain non-governmental organizations).

Further, U.S. persons in Venezuela are not targeted by the sanctions.  Section 6(d) of the Order exempts from the definition of Government of Venezuela “any United States citizen, any permanent resident alien of the United States, any alien lawfully admitted to the United States, or any alien holding a valid United States visa.”  Further, GL 32authorizes U.S. persons resident in Venezuela to engage in ordinary and necessary personal “maintenance” transactions, including “payment of housing expenses, acquisition of goods or services for personal use, payment of taxes or fees, and purchase or receipt of permits, licenses, or public utility services.”

Such measures targeting an entire government have rarely been used by the United States, and there are many questions about how the restrictions and related authorizations will be interpreted and applied.  As Bolton observed, “This is the first time in 30 years that [the U.S. is] imposing an asset freeze against a government in this hemisphere.”

Effect of the Sanctions

There has been some confusion in the media over the breadth of the measures.  Some reports have mischaracterized the Order as a “total embargo;” however, the scope of the Order is limited to property, and interests in property, of the Venezuelan government, its agencies, instrumentalities, and entities owned or controlled by these.  Because many major Venezuelan government entities have already been designated as SDNs in earlier actions, including PdVSA and the Central Bank of Venezuela, the measures appear to be only an incremental expansion of the existing sanctions program.

More significantly, the Order creates a secondary sanctions regime for OFAC to designate non-U.S. parties who continue to do business with the Maduro government.  While these secondary sanctions are most likely to target Cuban, Russian, and Chinese entities that continue to provide aid to the ailing regime, all non-U.S. persons engaging in transactions in the country should carefully assess whether those transactions could benefit the government.  In particular, companies trading with Venezuela should conduct due diligence sufficient to ensure that their counterparties are not owned fifty percent or more by the Government of Venezuela, or are not otherwise controlled by the government.

In addition, from a practical standpoint, although the sanctions only apply to Government of Venezuelan and related entities, the measures may cause financial institutions, insurers, freight forwarders and other companies – who often apply a heighted level of compliance going beyond the minimum required by OFAC – to avoid dealing with Venezuelan entities altogether.

The measures against Venezuela could also escalate existing tensions with Russia and China if the sanctions further restrict the countries’ access to Venezuelan oil.  Russia and China, which have continued to back the Maduro regime, currently import Venezuelan oil as part of a debt relief program.  China is slated to continue receiving oil from Venezuela until 2021, so it stands to suffer substantial losses if it is unable to continue the shipments.  This uncertainty comes in the midst of deteriorating relations between the United States and China due to the ongoing trade war, relations which suffered another blow this week when the Trump Administration labeled China a “currency manipulator.”

U.S. Issues Second Round of Chemical Weapons Sanctions Against Russia

On August 2, 2019, the Trump Administration imposed a second round of sanctions on Russia in response to Russia’s 2018 use of chemical weapons in the United Kingdom to poison a former Russian spy.  The sanctions could exacerbate tensions between the United States and Russia, as they add to a sanctions regime that has already significantly burdened Russia’s economy.

Background 

In March 2018, former Russian double agent Sergei Skripal (a British national) and his daughter were poisoned with Novichok, a military-grade nerve agent developed in the Soviet Union, at their home in Salisbury, England.  The United Kingdom determined that the Russian government was responsible for the attacks.  In response, the United States, along with Canada and a number of European countries, expelled dozens of Russian officials, and also closed the Russian consulate in Seattle.  In retaliation for the attacks, the United States announced a first round of sanctions on Russia in August 2018. Those sanctions impacted, inter alia, arms sales and foreign assistance to Russia (aside from urgent humanitarian assistance and food and other agricultural products).

Overview of Sanctions 

Administration officials stated that a second round of sanctions in response to the chemical attacks was necessary after Russia failed to provide adequate assurances, in accordance with the requirements of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (“the Act”),  that it would halt the use of chemical and biological weapons.  The State Department and Treasury Department announced these sanctions after the Trump Administration issued a late-night Executive Order on August 1, 2019, granting the two agencies the power to impose sanctions on countries that violate the Act.  According to the State Department, these new measures will include:

Sanctions preventing the extension of any loans or financial assistance to Russia by international financial institutions, such as the World Bank Group or International Monetary Fund;

-Sanctions prohibiting U.S. banks from participating in the primary market for non-ruble denominated Russian sovereign debt and lending non-ruble denominated funds to the Russian sovereign; and

-Additional export licensing restrictions on Department of Commerce-controlled goods and technology.

The measures will go into place after a 15-day Congressional notification period and will remain in place for at least one year.

On August 2, 2019, the Treasury Department Office of Foreign Assets Control (“OFAC”) issued a Russia-Related Directive implementing the second measure announced by the State Department.

The measures go into effect after August 26, 2019, and they apply to U.S. banks, which are defined to include “any entity organized under the laws of the United States or any jurisdiction within the United States (including its foreign branches), or any entity in the United States, that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures, or options, or procuring purchasers and sellers thereof, as principal or agent.”  The term “Russian sovereign” includes any ministry, agency, or sovereign fund of the Russian Federation, but the term excludes Russian state-owned enterprises.

According to recently-published OFAC FAQs, the measure prevents U.S. banks from participating in the primary market for Russian sovereign debt, but the prohibition does not extend to the secondary market. Additionally, the prohibition does not apply to loans or bonds denominated in rubles.  While the OFAC Directive is limited to the activities of U.S. banks as defined in the Directive, it is not clear if the secondary sanctions provisions of the Countering America’s Adversaries Through Sanctions Act of 2017 (“CAATSA”) could reach non-U.S. actors.  Persons dealing in Russian sovereign debt that are not U.S. banks should also be alert to future changes in these rules that could affect their activities.

Written by: Ryan Fayhee, Roy (Ruoweng) Liu, Alan Kashdan, Tyler Grove and Sydney Stringer at Hughes Hubbard & Reed LLP