International Economic Sanctions Law – Update on ...

International Economic Sanctions Law: Update on Developments

from a U.S. Biden Administration and EU Perspective

October 14, 2021

Bruce G. Paulsen and Andrew S. Jacobson (Seward & Kissel LLP)

Cherie Spinks and Alexandra Webster (Simmons & Simmons)

• Overview of U.S. Sanctions

• Overview of EU and UK Sanctions

• Recent Developments: Hong Kong, China, Iran, and Russia

• Perspectives on the Biden Administration and changing UK sanctions landscape

• Enforcement Trends

• Practical steps to ensure compliance

What We Will Cover

• Types of Sanctions:

• Primary

• Secondary

• Sectoral

• Comprehensive Sanctions Regimes: Crimea, Cuba, Iran, North Korea, Syria

• Other Notable Sanctions Regimes: Venezuela, Russia, Hong Kong

U.S. Sanctions Overview

• “U.S. Person”:

• U.S. citizen, domicile or resident

• Entities organized under the laws of the U.S. or any jurisdiction within the U.S. (including foreign branches)

• Any person or entity “in the U.S.”

• U.S. Financial System: U.S. regulators will also assert jurisdiction over activities and transactions that transit the U.S. financial system, including USD or other financial transactions.

• 50% Rule: Property and interests in property of entities directly or indirectly owned 50% or more, in the aggregate, by one or more blocked persons or sanctioned persons are considered blocked regardless of whether such entities appear on OFAC’s SDN List or the annex to an Executive order. SSI-Listed entities are also subject to the 50% rule.

• 50% Rule speaks to ownership, and not control.

U.S. Jurisdiction and 50% Rule

EU Sanctions Overview

• EU Common Positions and Regulations (directly applicable to Member States)

• Negotiated between Member States

• Designations based on evidence collated by intelligence agencies of leading States

• Comprehensive v. “targeted” (including sectoral) restrictions: individuals, organizations, countries or industries – e.g., banning the supply of petroleum

• Local sanctions

• Competent Authority responsible for implementing, administering and enforcing compliance with the financial sanctions regime

• Designated persons: EU consolidated list (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/international-relations/restrictive-measures-sanctions_en#list)

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/international-relations/restrictive-measures-sanctions_en#list

Who Must Comply With EU Sanctions?

• Individuals:

• EU nationals acting inside or outside the EU;

• Anyone inside the jurisdiction

• Corporates:

• Any legal person, entity or body incorporated / organised under the laws of the EU operating inside or outside the EU;

• Any legal person, entity or body in respect of any business done in whole or in part within the EU

EU Sanctions: Key Elements

• Asset freeze restrictions:

• Prohibition on dealing with funds and economic resources belonging to, owned, held or controlled by Designated Persons;

• Prohibition on making funds or economic resources available, directly or indirectly, or for the benefit of Designated Persons.

• “Ownership”:

• more than 50% of the designated entity.

• “Control” - for example:

• hold a majority of the voting rights; or

• be a member and have the right to appoint or remove a majority of the board; or

• have the right to exercise dominant influence by virtue of provisions contained in the subsidiary undertaking's articles of association or a control contract.

UK Sanctions Overview

• UK sanctions regime previously implemented EU sanctions

• Post BREXIT – autonomous regime:• Sanctions and Anti-Money Laundering Act 2018 creates framework for UK to

impose and update sanctions

• Regime specific Regulations are in place – broadly similar to EU sanctions, but with some key differences:

• Asset freezes automatically apply to owned or controlled entities

• UK has greater discretion to grant specific and general licences

• Differences in scope in the context of individual measures

• Limited to activities within the UK and to the actions of UK natural and legal persons wherever they are

• Thematic sanctions regimes:• The Global Human Rights Sanctions Regulations 2020

• The Global Anti-Corruption Sanctions Regulations 2021

• The Chemical Weapons (Sanctions) (EU Exit) Regulations 2019

• The Cyber (Sanctions) (EU Exit) Regulations 2020

• The future?

EU Blocking Regulation

• Regulation (EC) No 2271/96

• Prohibits EU persons from complying with specified extra-territorial sanctions (set out in the Annex to the Regulation):

Prohibition on complying whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly from the foreign laws specified in the Annex, or from actions based thereon or resulting therefrom.

• Following U.S. withdrawal from JCPOA, on 6 June 2018, the European Commission adopted the Commission Delegated Regulation (EU) 2018/1100 to update the Annex to include certain U.S. measures on Iran

• EU amendments proposals (2021)

• Impact and enforcement risk – EU report (September 2021)

Hong Kong-Related Sanctions

• Hong Kong Autonomy Act (HKAA): provides broad authority to sanction non-U.S. persons involved in activities that undermine Hong Kong’s autonomy, including secondary sanctions against foreign financial institutions.

• Executive Order 13936: also authorizes sanctions against those undermining democratic processes or institutions in Hong Kong, including “material” assistance.

• Numerous PRC and Hong Kong officials have been sanctioned.

• Hong Kong Business Advisory (July 16, 2021): U.S. publishes advisory focusing on the regulatory challenges facing U.S. companies operating in Hong Kong.

Hong Kong – Timeline

• July 14, 2020: Hong Kong Autonomy Act is signed into law and E.O. 13936 is signed.

• August 7, 2020: OFAC sanctions Hong Kong and PRC officials for actions undermining Hong Kong’s autonomy pursuant to E.O. 13936.

• October 14, 2020: HKAA Section 5(a) Report and additional designations, including Carrie Lam.

• Designation of Additional Hong Kong and PRC Officials: from November through January.

• December 11, 2020: HKAA Section 5(b) Report.

• January 15, 2021: Publication of Hong Kong-Related Sanctions Regulations.

• March 16, 2021: State Department publishes updated HKAA Section 5(a) Report.

• May 18, 2021: Publication of updated HKAA Section 5(b) Report.

• July 16, 2021: Hong Kong business Advisory and OFAC sanctions numerous government officials at the PRC’s Hong Kong liaison office.

Chinese Military Company Sanctions

• Original Sanctions: E.O. 13959, as amended by E.O. 13974

• Biden Amendments: E.O. 14032 amended and repealed much of E.O. 13959.

• General Rule: U.S. persons cannot transact in any publicly-traded securities (or securities that are derivative of or designed to provide investment exposure to such securities) of any entities determined to be a Chinese Military-Industrial Complex Company (CMIC).

• Implementation Periods:

• January 11, 2021: was the initial implementation period for E.O. 13959.

• August 2, 2021: was the initial implementation period for E.O. 14032, as it amended E.O. 13959.

• 60 days after Treasury determination

• Divest by June 3, 2022 or 365 days after Treasury’s determination.

• Key Guidance:

• Facilitation Risk for Investment Managers

• Passive Investment Risk: ETFs, Mutual Funds, and other investment vehicles

• China’s Counter-Sanctions Measures: A potential challenge facing companies that engage in cross-border business.

Iran: Primary Sanctions

• Iranian Transactions and Sanctions Regulations (ITSR – 31 CFR Part 500): prohibits virtually all direct or indirect transactions involving Iran or the Government of Iran by U.S. persons or with a nexus to the U.S., unless otherwise authorized.

• § 560.203 (Evasion/Causing/Conspiracy): prohibits transactions that evade or

avoid (or have the purpose of doing so), cause a violation of, or attempt to

violate any prohibition in the ITSR. Also prohibits conspiracies to violate.

• § 560.208 (Facilitation): prohibits U.S. persons from approving, financing,

facilitating, or guaranteeing certain transactions by a foreign person if a U.S.

person would be prohibited.

• Applies to U.S. persons and transactions subject to U.S. jurisdiction, including non-U.S. persons “owned or controlled” by a U.S. person.

• § 560.215: prohibits foreign entities owned or controlled by U.S. persons from

knowingly engaging in any transaction (directly or indirectly) with the

Government of Iran, or any person subject to the jurisdiction of the Government

of Iran, that would be prohibited if engaged in by a U.S. person.

There are two major pieces of Regulations that address Secondary Sanctions (not the only ones):

Iran Sanctions Act

(ISA)

Iranian Financial Sanctions

Regulations (IFSR)

• Main set of sanctions addressing Iran’s energy sector• Primarily enforced and monitored by the Dept. of State - not OFAC• ISA was the first major “extra-territorial sanction” on Iran• Enacted as The Iran and Libya Sanctions Act (ILSA), (1996) but was later

retitled the Iran Sanctions Act after it terminated with respect to Libya in 2006.

• Enforced and administered by OFAC• Includes the Comprehensive Iran Sanction,

Accountability and Divestment Act of 2010 (CISADA).

Iran: Secondary Sanctions

• JCPOA Status: President Trump announced U.S. withdrawal from the JCPOA on May 8, 2018 and secondary sanctions against Iran “snapped back” following wind-down periods that concluded in November 2018.

• Recurring Question: will the U.S. re-join or will there be a new deal?

• Guidance to Address Illicit Shipping and Sanctions Evasion Practices (May 14, 2020): not exclusive to Iran, but addresses the risks within the shipping industry.

• Oil Smuggling Network: OFAC used counter-terrorism sanctions to target an alleged oil smuggling network.

• Intelligence Network: OFAC designated four Iranian intelligence operatives who attempted to kidnap a dissident living in the U.S.

• Academic Institutions: OFAC issues GL M-1 and FAQ 853 addressing whether U.S. academic institutions can provide online learning services to Iranian students not present in the U.S. due to COVID-19.

• Travel to Iran: State Department issues a Level Four Travel Advisory cautioning U.S. persons not to travel to Iran and OFAC issues FAQ 932 addressing the sanctions risk to U.S. persons traveling to Iran.

Iran: Recent Developments

• Crimea Region of Ukraine: is still the subject of comprehensive sanctions, meaning that most transactions involving Crimea are prohibited.

• Sectoral Sanctions: the U.S. has targeted numerous sectors of the Russian economy, including the energy and financial services sectors. These sanctions largely target a narrow subset of activities and typically do not represent full transaction bans.

• Sectoral Sanctions Identification List (SSI List) and Directives 1-4

• CBW Act and CBW Act Directive: prohibits U.S. banks from participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign and lending non-ruble denominated funds to the Russian sovereign.

• E.O. 14024 (April 15, 2021): provides the U.S. with broad authority to sanction varying degrees of misconduct, including efforts to undermine free and fair elections, malicious cyber activities, and the targeting of journalists and dissidents.

• Directive 1 under E.O. 14024: prohibits U.S. financial institutions from participating in the primary market for certain bond and loan offerings.

• Nord Stream 2: the U.S. had granted a sanctions waiver to Nord Stream 2 AG, but additional sanctions were imposed against service providers in August 2021 under a new E.O. and PEESA.

Russia: Recent Developments

Other Recent Sanctions Developments

• Belarus: U.S. has escalated sanctions against Belarus.

• Issuance of new GL 2H, which previously had permitted U.S. persons to transact with Belneftekhim (state-owned oil company).

• E.O. 14038: new E.O. issued on August 9, 2021 authorizing sanctions against numerous sectors of the Belarus economy, including the potash sector.

• Ethiopia: OFAC announces new sanctions program via E.O. 14046 (Sept. 17, 2021), authorizing sanctions for human rights and other abuses.

• Burma-Related Sanctions: Burma sanctions are re-activated through E.O. 14014 (Feb. 10, 2021) and OFAC has sanctioned several state-owned entities and military personnel.

• (Updated) Ransomware Advisory: OFAC issues an updated Ransomware Advisory and sanctions a cryptocurrency exchange for the first time ever.

Changing Sanctions Landscape: US, UK, EU

• Perspectives from the Biden Administration: the U.S. still has bi-partisan support for strong economic sanctions programs, despite the change in presidential administration.

• Actions already taken: Russia, Burma, Yemen

• New areas of potential focus: human rights, cryptocurrency, cyber/ransomware

• Other areas to consider: Iran (JCPOA), Venezuela, Cuba, China/Hong Kong

• Changing UK and EU sanctions landscape:

• Actions already taken: human rights, cyber, Belarus

• New areas of potential focus: China and Hong Kong, cryptoassets, corruption

• Other areas to consider: Iran (JCPOA), Blocking Regulation

Enforcement Trends

U.S. Enforcement Priorities:

• “Causing” Violations: Essentra FZE + PT Bukit Muria Jaya + Alfa Laval

• Foreign Subsidiaries: Keysight Technologies + Berkshire Hathaway

• Screening Deficiencies: Bank of China + Payoneer

• Cryptocurrency: Virgil Griffith + Suex Designation.

UK/EU Enforcement Priorities:

• OFSI civil actions: TransferGo (fintech sector)

• UK criminal enforcement: Limited investigations

• EU enforcement generally: Limited enforcement activity

• OFAC Framework for Compliance Commitments

• Sanctions Compliance Program Framework:

o Management Commitment

o Risk Assessment

o Internal Controls

o Testing and Auditing

o Training

• Remediation and Root Cause Analyses

• Voluntary Self-Disclosure: Pros and Cons

Practical Steps for Compliance

Partner | Seward & Kissel LLP | +1.212.574.1533 | [email protected]

Bruce G. Paulsen is co-chair of Seward & Kissel’s Litigation Group and has been a partner since 2002. Chambers USA 2018 reported that Bruce “has a knack for distilling things into practical advice.”

Bruce specializes in handling complex commercial and maritime disputes. He recently won or settled a series of securities litigations against publicly-held companies. He has achieved landmark victories in trial and appellate courts in a variety of business litigations. He has scored a series of recent litigation victories in the wake of the global collapse of the world's second largest seller of marine fuels. He obtained the largest sanctions award in New York history. Bruce has no fear of taking cases to trial when a reasonable settlement cannot be obtained, and is comfortable before judges, juries, and arbitrators. Commercial disputes handled by Bruce have included contract disputes, fraud, trade claims, securities, commodities, derivatives, international disputes (including international arbitration), banking, investment funds, bankruptcy, regulatory disputes, and others. He has substantial expertise in the area of international trade sanctions and has been deeply involved in handling piracy issues before U.S. government agencies. He is an expert in the recognition and enforcement of arbitration awards.

Bruce also handles finance and securities-related disputes in the shipping industry. Bruce has successfully defended significant securities claims brought against publicly-financed shipping ventures, including claims brought in offshore jurisdictions. He has represented bondholders, bond issuers, secured lenders and other creditors in matters arising from some of the most significant financing defaults in the shipping business. Further, he has acted for shipowners, charterers, lenders, borrowers, marine insurers, shipyards and others in litigations and arbitrations involving more traditional maritime disputes, lien claims and environmental matters.

Bruce is a member of the Committees on Commercial Litigation and Business Litigation of the American Bar Association and the Transportation Law Committee of the International Bar Association. He is a Proctor member of the Maritime Law Association. He is chair of the board of trustees of the Seamen's Church Institute and he is a faculty member of the Practicing Law Institute, the Regulatory Compliance Association and the Tulane Admiralty Law Institute.

Chambers USA 2018 reported that Bruce “brings very deep knowledge of maritime issues,” and described him as someone who “understands the industry well and how business works, and how to communicate issues that reflect business.”

Bruce G. Paulsen

Senior Associate | Seward & Kissel LLP | +1.212.574.1477 | [email protected]

Andrew Jacobson is an attorney in Seward & Kissel’s Litigation Group and regularly advises on matters relating to economic sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), as well as anti-money laundering (AML), anti-corruption, export control, and anti-boycott laws. Andrew also regularly advises on regulatory issues relating to cryptocurrency and blockchain technology as a member of the Firm’s Blockchain and Cryptocurrency Group.

According to The Legal 500, Andrew “leverages his extensive experience as an enforcement attorney to provide critical insights into the application of the law” and “has carved out an excellent sanctions practice in the U.S.”

Prior to joining Seward & Kissel, Andrew served as an enforcement attorney in the Financial Frauds & Consumer Protection Division at the New York State Department of Financial Services (DFS). In that capacity, he managed and led complex investigations into the banking and insurance industries, including investigations into widespread manipulation in the foreign exchange market, high-frequency trading abuses, anti-money laundering violations, predatory lending practices, and illegal insurance practices. During his time at DFS, Andrew also brought some of the most significant enforcement actions for violations of U.S. economic sanctions, resulting in hundreds of millions of dollars in monetary fines and widespread industry reforms.

Andrew currently serves as Chair of the Export Controls, Sanctions, and Anti-Corruption Subcommittee of the International Bar Association. He also serves on the BSA/AML and Enforcement Committees of the Virtual Commodity Association (VCA) and is a member of the Digital Chamber of Commerce’s AML Task Force. Andrew was selected to participate in (and won) DFS’s first-ever TechSprint on the virtual currency industry.

In addition, Andrew co-authored a chapter in Global Investigation Review’s inaugural and groundbreaking practitioners’ guide for economic sanctions titled “Navigating Conflicting Sanctions Regimes.” Andrew has lectured on economic sanctions laws for Practising Law Institute (PLI), Regulatory Compliance Association (RCA), IHS Markit, International Institute of Banking Law and Practice, and the International Bar Association, and is regularly quoted on legal matters in publications that include the Wall Street Journal, Reuters, Politico Pro, Law360, CoinDesk, The Block, and Cointelegraph, among many others. Andrew is also a contributor to Seward & Kissel’s Cryptocurrency and Blockchain blog, SKrypto.

Andrew S. Jacobson

Counsel | Simmons & Simmons | +44 20 7825 4509 | [email protected]

Cherie Spinks is Of Counsel in Simmons & Simmons’ Criminal Law group in London specializing in corporate crime and contentious regulatory investigations.

She has significant experience in advising individuals, financial institutions and corporates on bribery and fraud investigations in both the UK and internationally. Cherie is a lead member of Simmons & Simmons’ Sanctions team advising on compliance with UK and EU sanctions regimes. She also has extensive experience of advising on technical money laundering issues, including disclosure obligations, and on implementation of anti-money laundering policies and procedures.

Cherie has spent time on secondment to the legal department of an international energy company advising on anti-corruption and anti-money laundering compliance issues.

She is listed in Who’s Who Legal: Investigations 2020 – Future Leaders and has been recognised as a ‘Rising Star’ by Legal 500 2020 in the category ‘Regulatory Investigations and Corporate Crime’ and ‘Fraud: White Collar Crime’.

Cherie co-authored a chapter on ‘Navigating Conflicting Sanctions Regimes’ with Bruce Paulsen and Andrew Jacobson in the first edition of The Guide to Sanctions published by Global Investigations Review (September 2020).

Cherie Spinks

Managing Associate | Simmons & Simmons | +44 20 7825 3602 | [email protected]

Alexandra Webster is a managing associate in Simmons & Simmons’ Criminal Law group in London. She advises corporates and individuals on complex criminal investigations and proceedings and has particular expertise in managing the strategic, legal and procedural issues that arise in high-value, high-profile cases involving parallel civil litigation.

Alexandra also regularly advises on the application of key financial crime legislation and has particular expertise in bribery, sanctions and money laundering compliance.

Alexandra Webster

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If you have any questions, please contact your primary attorney at Seward & Kissel or Simmons & Simmons, or one of the presenters listed.

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