U.S. Regulations Compliance: Transactions with Sanctioned Entities
U.S. economic and trade sanctions are global, ferocious, evolving and adopted in real time, without approval of the U.S. Congress and reliance on court decisions. These sanctions are based on federal regulations, directives, statutes, and U.S. president’s executive orders.
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The U.S. Treasury's Office of Foreign Assets Control (“OFAC”), and other U.S. Agencies, use their regulatory authority to sanction (“designate”) foreign individuals and entities for systemic corruption and gross violation of human rights in foreign countries pursuant to the Global Magnitsky Human Rights Accountability Act (“The Magnitsky Act”).
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Trade-related sanctions are imposed on target countries’ economic sectors, private and state-owned or controlled entities, and individuals. Each tranche of sanctions also increases the number of companies and institutions which may become subject to the sanctions because they provide services and conduct business transactions with blocked entities and persons. OFAC constantly updates its Specially Designated Nationals and Blocked Persons List (“SDN” List) but it still does not identify all of the blocked entities.
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Assets of individuals and companies listed in "Specially Designated Nationals" ("SDNs.") are blocked. U.S. persons are generally prohibited from dealing with the SDNs. “SDN list" includes thousands of names of companies and individuals who are connected with the sanctions’ targets. Entities that a person on the SDN List owns (a direct or indirect ownership interest of 50% or more) are also blocked, regardless of whether that entity is separately named on the SDN List.
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The SDN list does not specifically identify the entities that are owned 50 percent or more, directly or indirectly, by one or more SDNs. Therefore, U.S. persons engaged in any transactions with the SDNs, and such SDN-derivative entities will be blocked pursuant to the OFAC's 50% ownership regulation barring transactions with these entities.
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Lack of the disclosure of all blocked SDN persons/entities and their “connected” companies necessitates practically each U.S. person to find out the identities of owners and their percentage of ownership (whether owned directly or indirectly through other parties) in the companies they are dealing with and take appropriate actions to comply with the respective sanctions’ regulations.
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The OFAC administers and enforces economic and trade sanctions (by blocking of assets and imposing trade restrictions) based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, and other threats to the national security, foreign policy, or economy of the United States. OFAC also publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries, as well as lists of terrorists and narcotics traffickers designated under programs that are not country specific.
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OFAC Regulations cover many industries, such as credit reporting, exporters, and importers (of agricultural commodities, medicine and medical devices, etc.), securities/investments, financial institutions /community, insurance, virtual currency, anti-money laundering, and so on.
U.S. persons (individuals and organizations), responsible for ensuring that they do not undertake a business dealing with an individual or entity on the SDN list, comprise:
Þ All U.S. citizens and permanent residents (green card holders),
Þ All persons located in the United States,
Þ Overseas branches of U.S. companies, and
Þ Non-U.S. subsidiaries of U.S. companies for Cuba and North Korea programs
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OFAC Regulations require U.S. persons to:
Þ Block / freeze any property or interests in property belonging to SDNs that are or come in U.S. possession.
Þ Conduct due diligence into foreign counterparties to ensure they are not owned 50 percent or more by SDNs.
Þ Refrain from sharing / shipping non-public information with SDNs,
Þ Paying restricted foreign persons or entities for purchases, travel, reimbursement, etc.
Þ Entering into Agreements with foreign SDN entities.
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Blocking / "freezing" of the targeted property means that the property title remains with the “target” owner who is prohibited to transfer or have any privileges or dealings as to that property. Where a transaction or transfer is "Rejected", the property is returned to the provider if the transactions with non-SDN listed businesses are rejected by a bank processing a wire transfer or other “rejector”.
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U.S. persons may provide and continue to provide the services as to U.S. sanctions laws to covered persons regardless of whether the U.S. person is self-employed, employed by a U.S. entity or a non-U.S. entity, and is either "in-house" or is an external attorney, consultant, or other person providing such services. Covered persons are U.S. persons and foreign persons other than any person whose property and interests in property are blocked or to whom a U.S. person is prohibited from exporting services or from whom a U.S. person is prohibited from importing services per OFAC Sanctions Regulations.
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OFAC's Reporting, Procedures and Penalties Regulations require U.S. persons/businesses to report to OFAC within 10 days any transaction which is “blocked” or “rejected.” 31 C.F.R. § 501.604. The main reason for reporting requirements is to prevent violations of sanctions covering transactions "related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services." This reporting requirement applies to "rejected funds transfers", any transaction rejected, U.S. financial institutions; and any U.S. person - U.S. citizen, green card holder, protected individual, or entity incorporated or registered in the U.S. (and foreign branches).
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Penalties for noncompliance with OFAC administered statutes range from $50,000 to $10,000,000 and/or up to 30 years imprisonment and civil penalties of up to $1,075,000 per each violation.
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The U.S. sanctioned oligarchs make futile attempts to circumvent the imposed sanctions and hide their blocked assets. The blocked persons / entities utilize sanction evasion methods, such as relinquishing or “layering” (using shell companies, intermediaries or proxies, and cryptocurrency transactions -virtual currency using cryptography) their stock ownership in companies and in purchase of real estate; turning off their ship/yacht transponders and keeping vessels in international waters to avoid their vessel location; have dual citizenship; moving assets to the United Arab Emirates or Serbia (which did not join the imposed EC or U.S. sanctions); registering assets under the names of friends, family members and unrelated managing directors of shell companies; or setting up trusts (involved attorneys, accountants, grantors, trustees, settlors, beneficiaries and trust facilitators may become the sanction evasion “enablers”). Example of designation / penalty for a sanction evasion to obscure ownership and source of funds and the use of third parties to shield the identify of sanctioned persons:
Russia-based financial services firm T established its subsidiary I which acquired Russia-based holding company R, a holder of the blocked person’s frozen shares in a European company. R tried to sell these frozen shares and therefore was designated pursuant to the Executive Order E.O. 14024 for being owned or controlled by, or having acted or purported to act for or on behalf of, directly or indirectly, company I.
Unpaid asset loans and wharfing fees, tax evasion, money laundering, corruption, RICO (participation in a criminal enterprise) racketeering and human rights law violations provide legal avenues for asset confiscation by national authorities.
Sanctions’ ramifications for US businesses, which do not comply with the OFAC sanctions’ regulations and do not conduct sufficient due diligence to determine that the transfer of ownership interests was not merely a sham transaction, include the following prohibitions:
Þ All property and interests in property of the designated persons that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC by U.S. persons.
Þ Any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.
Þ All transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt.
Þ The making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person and the receipt of any contribution or provision of funds, goods, or services from any such person.
A prohibited transaction may be exempted by OFAC issued authorizations as per OFAC’s general or specific license, or otherwise exempted, to wind down the company’s business activity or other reasons.
Executives of every U.S. company are responsible for rejecting all business or financial transactions within or transiting the United States that involve any property or interests in property of blocked persons. Also, U.S. companies must report to the OFAC such property and interests in property of the blocked persons and any entities that are owned, directly or indirectly, 50% or more by one or more blocked persons, which are also blocked by operation of law.
A spiraling trade/economic sanctions’ legal turmoil affects U.S. and non-U.S. persons who should take precautions against possible direct or indirect violations of sanctions’ regulations.
The Tekapult tPrimers’ conceptualized and summarized the key points of U.S. regulations on economic sanctions navigate and orient companies and persons in the labyrinths of legal requirements. Tekapult tPrimers’ digests the government’s published answers to frequent questions so to give guidance to all entities and persons in numerous industries for prompt mandatory compliance with the OFAC sanctions regulations.
REFERENCES
Office of Foreign Asset Control - A Part of U.S. Treasury's Office of Terrorism and Financial Intelligence. https://home.treasury.gov/policy-issues/financial-sanctions/faqs/topic/1501
Lists of U.S / Federal government sanctioned, debarred, or restricted persons and entities are published on the U.S. Department of Treasury, Commerce, and State websites: Ø Specially Designated Nationals and Blocked Persons List https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked-persons-list-sdn-human-readable-lists
Ø Statutorily Debarred Parties https://www.pmddtc.state.gov/ddtc_public?id=ddtc_kb_article_page&sys_id=7188dac6db3cd30044f9ff621f961914
Ø Administratively Debarred Parties https://www.pmddtc.state.gov/ddtc_public?id=ddtc_kb_article_page&sys_id=8a89528adb3cd30044f9ff621f961931 Ø Consolidated Screening List https://2016.export.gov/ecr/eg_main_023148.asp Ø The Unverified List https://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/unverified-list Ø The Nonproliferation Sanctions List Ø The AECA Debarred List Ø The Foreign Sanctions Evaders List Ø The Entity List Ø The Denied Persons List
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