Trade Sanctions: Navigating Compliance in a Rapidly Changing Landscape

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Trade Sanctions: Navigating Compliance in a Rapidly Changing Landscape

April 8, 2015


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SPEAKING TODAY

Karl LaskasExecutive Director, Global Trade and Compliance, Dell

Tom FirestonePartner, Baker & McKenzie, Washington, DC

Steven HillCounsel, Baker & McKenzie, Washington, DC

Tristan GrimmerSenior Associate, Baker & McKenzie, London

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.© 2015 Baker & McKenzie LLP

8 April 2015

Trade Sanctions: Navigating Compliance in a Rapidly Changing LandscapeKarl Laskas, Executive Director, Global Trade and Compliance, Dell

Tom Firestone, Partner, Washington, D.C.

Tristan Grimmer, Senior Associate, London

Steven F. Hill, Of Counsel, Washington, D.C

http://bakerxchange.com/collect/click.aspx?u=/G1GTPto3VUdqJnlforXH3Z3gHgKieD90WAkDl2DgMnOHdCHyKqw6wQjleyzEOaVh9JpjmVTfTw=&rh=ff0019fa15534c02d0cb748d194eb472d53d93e2

6© 2015 Baker & McKenzie LLP

Agenda• Introduction

• US and EU trade controls: A high-level perspective

• Hypothetical

• Current status:

• Cuba

• Iran

• Conclusion

© 2015 Baker & McKenzie LLP7

Congratulations!!!You have just been hired as the new International Trade Compliance Manager for CommuniCo, a US-headquartered multinational manufacturer and supplier of electronics and telecommunications-related equipment for companies in the manufacturing, energy and extractive industries. CommuniCo has a number of wholly owned subsidiaries around the world.

On your very first day, you receive an email from the company’s US-based project development team. There is a hot opportunity to sell equipment and services to a Russian company. They need a compliance review by COB today. Can we do it?

Export Controls and Sanctions – A High-Level Overview


• Export Administration Regulations (“EAR”) – Enforced by US Bureau of Industry and Security (“BIS”)• Controls dual-use items (having military and civilian applications)• “EAR Items” includes US origin items and foreign produced items with

greater than de minimis US controlled content• Authorization may be required depending upon the product classification,

end destination, end user and end use• International Traffic in Arms Regulations (“ITAR”) – Enforced by Directorate of

Defense Trade Controls (“DDTC”)• US or non-US Persons dealing in US defense articles/services• License generally required to any destination

• Important feature of US export control laws – Control follows the item outside US territory• EAR controls apply to EAR Items located anywhere globally, even in

transactions with no nexus to US territory

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Export Controls – United States


• Dual-use: EU Regime

• Controls export of dual-use items

• Applies mostly to exports to outside the EU (controls for intra-EU transfers only in limited cases)

• Applies directly in all 28 EU Member States

• Military: Member State Regimes

• Control export of military items

• Applies to exports to outside of Member State

• End-use: EU Regime• Controls supply of non-controlled items for WMD and Military End-

use

• Licensing and enforcement dealt with at Member State level

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Export Controls – European Union


Sanctions General Applicability – United States • Apply to “US Persons”

• Entities organized under US laws and their non-US branches• Employees (regardless of nationality) of above entities• Individuals and entities in the United States• US citizens and permanent resident aliens (“Green Card” holders)

wherever located or employed• Non-US Persons may be subject to US jurisdiction if they cause prohibited

transactions to occur in whole or in part in the United States or anywhere by US Persons• Example – Use of US Dollars for sanctioned country transactions

• Separately incorporated foreign subsidiaries of US companies are NOT US Persons• Exception – Cuba and Iran sanctions apply to any entity (including foreign

entities) owned or controlled by a US Person

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Sanctions General Applicability – United States (2) • Comprehensive sanctions target Cuba, Iran, North Korea, Sudan and Syria

• Prohibition extends to dealings with the governments of these counties and certain persons and entities designated under these sanctions programs (Specially Designated Nationals (“SDNs”))

• Significant sanctions:• Burma/Myanmar (largely suspended through OFAC general licenses)• Russia (more on this later)

• Persons and entities (SDNs) associated with certain repressive regimes (e.g., Belarus, Venezuela, Zimbabwe)

• Persons and entities (SDNs) associated with activities not tied to specific countries or regimes (e.g., terrorists, WMD proliferators, narcotics traffickers)

• US Persons comprehensively prohibited from engaging directly or indirectly in transactions with sanctions targets without government authorization• Prohibition extends to “facilitation” (generally, support of another person’s

transaction with a sanctions target that the US Person could not engage in directly), as well as “evasion”

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Sanctions General Applicability – United States (3) • US sanctions on SDNs:

• Prohibition on US Person dealings with SDNs, or the property and interests in property of SDNs, whether directly or indirectly

• SDN prohibition extends to any entity owned directly or indirectly 50% or more by one or more SDNs even if such entity is not itself designated as an SDN• Same principle applies for Russian entities designated under “sectoral”

sanctions – their 50%+ owned entities must be treated as subject to the same sectoral sanctions restriction

• Requirement to block/freeze SDN property and interests in property and to report such blocking to OFAC

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Sanctions General Applicability – European Union• EU sanctions measures typically apply to:

• Any entity incorporated in an EU Member State and its EU and non-EU branches

• Any entity incorporated outside the EU, but only in respect of any business conducted in the EU

• Any directors, officers, employees, agents, etc. located in the EU (irrespective of nationality)

• Any directors, officers, employees, agents, etc. that are nationals of an EU Member State (even if located outside the EU)

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Sanctions General Applicability – European Union (2)• EU restrictions on transactions with Designated Persons (“DPs”)

• Prohibition on “making available” “funds” or “economic resources”, directly or indirectly, to or for the benefit of DPs

• Freeze on funds and economic resources belonging to, owned, held or controlled by DPs

• Administered and enforced by each EU Member State

• Other EU sanctions measures include

• Arms embargoes

• Prohibition on the supply of certain goods and technology

• Prohibition on the provision of related services, including financing and brokering activities

• Prohibition on the purchase of certain goods

• Prohibition on investment in certain sectors

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Russia Sanctions Measures


Russia – US Sanctions (Executive Order 13662)

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• Jurisdiction: applies to US Persons, which does not include separately incorporated non-US subsidiaries

• SDNs: approximately 117 individuals and entities explicitly listed

• Sectoral Sanctions: target entities in Russia’s financial services, energy, and defense sectors; specific restrictions apply depending on the applicable directive

• Directive 1 (financial services): “new debt” of longer than 30 days maturity or “new equity”

• Directive 2 (energy): “new debt” of longer than 90 days maturity

• Directive 3 (defense): “new debt” of longer than 30 days maturity

• Directive 4 (energy): targeted energy projects (deepwater, Arctic offshore, shale) that have the potential to produce oil in Russia (excludes financial services)


US sectoral sanctions targeting Russia

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Sectoral Sanctions Identifications List Directives

Entity Name Date Sanctioned Directive No.

AK Transneft 9/12/14 2

Bank of Moscow 7/29/14 1

Gazprom 9/12/14 4

Gazprom Neft 9/12/14 2 & 4

Gazprombank 7/16/14 1

Lukoil 9/12/14 4

Novatek 7/16/14 2

Rosneft 7/16/14 2 & 4

Rostec 9/12/14 3

Russian Agricultural Bank 7/29/14 1

Sberbank of Russia 9/12/14 1

Surgutneftegas 9/12/14 4

Vnesheconombank 7/16/14 1

VTB Bank 7/29/14 1

An entity 50% or more owned by one or more of the above sanctioned parties is subject to the same directives.


Russia – US Export Controls

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• Jurisdiction: items subject to the EAR

• Russian Oil Industry Sanctions program

• License requirement for items subject to the EAR described in Supplement No. 2 to EAR Part 746 or selected ECCNs for deepwater, Arctic offshore, or shale formation projects in Russia that have potential to produce oil or gas

• Policy of denial for projects with potential to produce oil

• Additional Export Controls

• Entity List designations (specific energy and defense companies)

• EAR licensing requirement for certain items intended for military end use or end-users in Russia

• Policy of denial for export/reexport of “high technology” items that may contribute to Russian military capabilities (ITAR & EAR)


Russia – US Trade Embargo on Crimea

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• Executive Order 13685 (Dec. 19, 2014):

• Crimea region of Ukraine

• US Persons prohibited from new investment, export/supply of services

• Import ban

• General License No. 4: agricultural commodities, medicine, medical supplies, and associated replacement parts

• General License No. 5: wind-down activities; expired Feb. 1

• Export Ban (Jan. 29, 2015):

• License requirement for all items subject to EAR, with policy of denial

• Exclusions for EAR99 food or medicine


Russia – European Union Restrictions

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• Designated Party Controls: 173 individuals and 37 entities (including one bank)

• Financial Controls:

• Dealings in certain financial instruments issued by, and provision of new debt/credit to listed financial, oil and military parties

• Energy Sector:

• Certain oil and gas equipment and technology

• Provision of drilling, well testing, logging and completion services, and supply of specialised floating vessels

• Focused on deep water, arctic and shale projects

• Export Controls:

• Any dual-use items to military end-user/end-use or to 9 listed entities

• Arms embargo


• Import prohibition

• Prohibition on import into the EU of “goods originating” in Crimea/Sevastopol

• Provision of related financing or financial assistance or (re)insurance

• Export/supply prohibition

• Prohibition on export to or supply to Crimea/Sevastopol of items used in targeted sectors and beyond (!)

• Transport

• Telecommunications

• Energy

• Oil & gas and minerals

• Prohibition on provision of related services

• Investment prohibition

• Extends to all sectors

• Includes investment in real estate

• Tourism activities

• Ban on “directly” related services

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Crimea and Sevastopol – EU Restrictions

Analyzing the Hypothetical










US Rules• You – US Person wherever located or employed globally• CommuniCo – US Person including branch offices

• Separately organized foreign subsidiaries not subject to US sanctions (except Cuba and Iran)

• US parent must avoid facilitation concerns with respect to foreign subsidiaries’ transactions with sanctions targets

• Facilitation may include approvals, technical assistance, logistical assistance, sales support, back-office support

• Watch out for EU and other sanctions jurisdiction



On your very first day, you haven’t even located the coffee maker when you sit down at your desk, open your email, and find this urgent inquiry waiting for you from the company’s US-based project development team:

EU Rules• EU incorporated companies are subject to EU sanctions wherever they

do business (includes overseas branch offices)• Employees that are nationals of EU Member States are subject to EU

sanctions wherever they are located• Non-EU companies and non-EU nationals are caught in relation to acts

within EU territory




• Indicates US Persons (company and individuals) heavily involved in the transaction

• If a US sanctions roadblock arises, the company may not be able to transfer further development of the deal to non-US Persons (facilitation issues)

• Don't forget about EU nationals: treat them in a manner comparable to US nationals located overseas


CommuniCo has the chance to bid on a USD 10 MM sale of equipment to RussCorp, a Russian company specializing in oil and gas prospecting and extraction. RussCorp is 60% owned by Rosneft, a major Russian oil and gas company, with 40% owned by an obscure foundation established in Liechtenstein. CommuniCo’s equipment will be for use in RussCorp’s new O&G operations in the Sea of Azov, a shallow (< 50 foot depth) arm of the Black Sea situated between Russia, Ukraine, and Crimea. RussCorp supports

both its Sea of Azov as well as deep-water Black Sea operations from Russian supply bases, but is looking at establishing additional supply bases in Crimea.







Russia – Not comprehensive sanctions, but requires heightened diligence

Oil and gas – Be on the lookout for business sectors of higher risk (energy and extractive, defense, banking, health care)

Think about other potential risk areas, such as anti-corruption and money laundering







Rosneft• Designated on OFAC’s SSI List (“sectoral” sanctions) • Subject to OFAC Directive 2 (new debt restrictions) and Directive 4

(deepwater, Arctic offshore and shale oil development and production restrictions)

• Targeted under EU capital markets and loan/financing measures

OFAC designations (SDNs and SSI) • Include any entity owned 50% or more by one or more designees• RussCorp therefore must be treated as subject to the same SSI

designations as Rosneft

EU capital markets/financing measures:• Entities (such as RussCorp) owned more than 50% by targeted entities

also caught (contrast with DP test) • Also apply to entities "acting on behalf of or at the direction of" targeted

entities







What is this foundation? Who owns or controls it?• Many Russian investors hide their ownership interests behind off-shore

entities or front men• May need to conduct further diligence to discover persons behind

foundation• If person is an SDN or DP, this could create problems if they benefit from

CommuniCo’s transactions with RussCorp or if funds are transferred directly or indirectly to them

• Potential money laundering concerns if their investment represents the proceeds of crime

• Note: EU DP test not only concerned with majority ownership; also applies to entities controlled by DPs







Sea of Azov• Part of maritime area claimed by Russia• Not deepwater (i.e., over 500 foot or 150 meter depth)• Should not trigger US Russia sanctions targeting oil and gas drilling

and production activities in deepwater depths• EU sanctions apply irrespective of oil and gas application; distinction

is the ability to get a license to supply







• RussCorp is subject to OFAC Directive 4, which prohibits the export or reexport of goods, technology or services for, inter alia, deepwater production in maritime areas claimed by Russia

• What controls are in place to ensure that CommuniCo products are not diverted to RussCorp’s deepwater operations in the Black Sea?

• CommuniCo could be held liable for turning a blind eye to these risks




• EU sanctions controls on supply of certain oil sector equipment apply irrespective of customer/end-user

• EU License required for supply of targeted equipment irrespective of whether being used in unconventional segment

• License may not be granted where EU Member State has "reasonable grounds to determine" that items are destined for a deepwater (or Arctic or shale) project

• Breach to supply without duly granted license







• The Crimea region of Ukraine is now subject to comprehensive US sanctions, broadly prohibiting the export of most goods directly or indirectly there

• What controls are in place to ensure that RussCorp does not transfer or stage CommuniCo’s equipment there?

• CommuniCo could be held liable for turning a blind eye to these risks• Any US goods shipped there in violation of the EAR would be “tainted,”

which would prohibit CommuniCo’s future servicing of them without a BIS license




• EU imposed comprehensive embargo on import of products from Crimea and investment into Crimea

• Additionally, extensive list of products prohibited from being supplied to Crimea; prohibition relates to supplies to, or for use in, Crimea

• Supplies to Russia not caught where there are "no reasonable grounds to determine" that the items are for use in Crimea


CommuniCo prides itself on its ability to supply customers from a seamless global production platform, and will structure its bid assuming the supply of a mix of equipment from facilities in both the United States and European Union. It is expected that supply of the equipment will occur in tranches over the next 24 months, with RussCorp placing orders on an as-needed basis.

As part of its standard sales package, CommuniCo technicians from both the US and EU will be supplied to commission the equipment once it is installed by RussCorp. There is also a standard 60 month warranty for repair and replacement of any defective equipment.







Think about the jurisdictional issues that will apply:• Equipment shipped from the US subject to the EAR and OFAC rules• Equipment shipped from the EU subject to EU sanctions and export

controls• Product controls under EU sanctions are not limited to items exported

from EU territory, but also apply to the supply and transfer of items from outside of EU where undertaken by EU incorporated company (includes transfers inside sanctioned country)

• US-origin equipment shipped from the EU, and EU equipment produced with over 25% controlled US content also subject to the EAR

• Any US support of EU shipments (technology assistance, logistics, sales support, approvals) raises facilitation issued under OFAC rules

• EU sanctions do not contain as extensive a facilitation prohibition (but note controls on "brokering“)







Each new shipment will require heightened diligence:• Has the scope of sanctions changed?• Destination of individual shipments (note the risks related to Crimea and

deepwater production)• Will require careful management of shipments to determine what is subject

to US versus EU jurisdiction• Consider contractual protections upfront







• Supply of technical service from the US and EU will trigger US and EU sanctions, respectively

• Any equipment that was shipped in violation of the EAR (e.g., stored in or supplied from Crimea) is “tainted” and cannot be serviced by any person without BIS authorization

• Ongoing servicing will require diligence every time there is a servicing or warranty claim


Finally, for tax and liability reasons CommuniCo has decided that the company’s wholly owned subsidiary in France will be the entity to contract with RussCorp. Payment will be by Letter of Credit, with payments denominated in US Dollars to an account in France.


Finally, for tax and liability reasons CommuniCo has decided that the company’s wholly owned subsidiary in France will be the entity to contract with RussCorp. Payment will be by Letter of Credit, with payments denominated in US Dollars to an account in France.


Finally, for tax and liability reasons CommuniCo has decided that the company’s wholly owned subsidiary in France will be the entity to contract with RussCorp. Payment will be by Letter of Credit, with payments denominated in US Dollars to an account in France.• Letter of Credit is considered a “debt” instrument subject to OFAC

Directives under the Russia sanctions• Likely also caught by EU measures relating to new loans or credit; contrast

with payment terms• US Dollar payments can trigger US sanctions liability, even with no other

US jurisdictional nexus, under the theory that such payments are cleared through US banks, causing those banks (which are US Persons) to support sanctioned transactions in violation of US laws

• Non-US banks initiating US Dollar payments for sanctioned country transactions have incurred hundreds of millions of dollars in OFAC liability under this causation enforcement theory

Current Status – Cuba and Iran

© 2015 Baker & McKenzie LLP 55

Cuba Sanctions – What Has Changed?

• Travel (12 specific categories)

• Authorized by general license vs. specific license

• Non-charter flights between United States and Cuba

• Payments by US credit/debit cards

• Private sector support

• Exports/reexports to private sector or telecommunications sector in Cuba

• Imports of Cuban private entrepreneur goods/services into US

• Consumer communications services/items; telecommunications

• Banking

• Authorized travelers in Cuba may use US credit/debit cards

• US banks may establish correspondent accounts at Cuban banks

• US banks may acquire Cuban merchants

• Dealings with Cuban nationals in third countries


• The embargo remains in place

• No investments – e.g., JVs, local companies, banking, infrastructure, utilities, hotels, farms, restaurants, manufacturers

• No establishing or operating an entity or affiliate in Cuba

• No entering into franchise or licensing agreements with Cuban parties

• Import ban on various Cuban goods into United States (limited exceptions) or of Cuban goods/services to other countries

• Foreign owned/controlled subsidiaries still covered

• No tourist travel

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Cuba Sanctions – What Has NOT Changed?


Iran – Potential Thaw in Sanctions Front?

• Joint Plan of Action process resulted in agreement on key parameters on April 2, 2015

• Joint Comprehensive Plan of Action to be agreed by June 30, 2015

• No immediate impact on UN, US or EU sanctions

• Roll-back of sanctions depends on Iran fulfilling its obligations

• UN Resolutions will be revoked and replaced with a Resolution addressing “sensitive technologies” (defined procurement channel)

• US and EU nuclear sanctions will be terminated/suspended, with snap-back if Iran fails to fulfil its obligations

• Other EU sanctions may also be terminated in whole or in part

• Other US sanctions on Iran under other sanctions measures (terrorism, human rights abuses, ballistic missile proliferation) will remain in place

• Timetable remains unclear


Thank You

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Thomas FirestoneSpeaker – WashingtonT +1 202 835 [email protected]

SpeakersKarl LaskasSpeaker – Dell

Karl Laskas serves as Executive Director, Global Trade Compliance for Dell, a $60B private company which is one of the world’s largest manufacturers of computers. In that role, he advises it on trade compliance matters, develops its system of internal controls, designs the strategy for crossing borders, and leads its worldwide organization of trade personnel.

Karl is an attorney, licensed in the Ohio and DC bars, with extensive experience in regulatory law. He holds a JD from the University of Virginia, an MA in International Relations from Yale, and a BA in political science and philosophy from the University of Pittsburgh. Karl also is a licensed US Customs broker.

Prior to joining Dell, Karl led the Trade function for a diversified manufacturing group, Honeywell Automation & Control Solutions. In that role, he oversaw trade operations in 135 countries; supported more than 80 acquisitions; and contributed to the division’s notable growth and margin expansion during a period in which the business tripled in size. Prior to his time in Honeywell, Karl was an export compliance manager for Smiths Aerospace (now part of GE Aviation) and practiced international trade law with the firm of Thompson Hine.

Karl is married to novelist Gretchen Moran Laskas, and has two children, Brennan and Katja.

Thomas Firestone is a Partner resident in the Washignton office of Baker & McKenzie, and also is a member of the the Risk and Compliance Group in the Firm’s London office. His practice focuses on corruption risks and compliance, including transactional due diligence and internal investigations. He frequently moderates and speaks at legal and business conferences and intergovernmental meetings on crime, corruption and compliance. He also designed and taught special courses at a local law school on white-collar crime and on the US Foreign Corrupt Practices Act (FCPA).

Prior to joining the Firm in 2012, Mr. Firestone worked at the US Department of Justice, first as an Assistant US Attorney in the Eastern District of New York and then as Resident Legal Adviser at the US Embassy in Moscow.


Tristan J. GrimmerSpeaker – LondonT + 44 20 7919 1476F + 44 20 7919 [email protected]

Tristan Grimmer is a Senior Associate in the EU, Competition and Trade Department of Baker & McKenzie's London office. He specialises in advising clients on export controls, sanctions, and anti-bribery and corruption, with a particular focus on providing clients from a wide range of sectors (including energy, technology, manufacturing and financial services) with advice on compliance programmes and dealing with government authorities. He has advised clients on the drafting and submission of voluntary disclosures to government authorities, and more generally upon the handling of investigations.

Speakers

Steven F. Hill is Counsel in the International Trade Compliance practice in Baker & McKenzie’s Washington DC office. He has over 17 years of experience in a broad array of international trade regulation compliance and enforcement matters, particularly US export controls and sanctions laws and anti-corruption laws including the Foreign Corrupt Practices Act (FCPA). Mr. Hill regularly advises multinational businesses on strategies for responding to government enforcement actions and submission to government authorities of voluntary disclosures of presumed violations of international trade laws. He also regularly assists businesses in conducting international trade due diligence on proposed mergers and acquisitions, formation of joint ventures and retention of business partners and intermediaries. Mr. Hill likewise advises clients on national security reviews of foreign investments under the procedures administered by the Committee on Foreign Investment in the United States (CFIUS).

Steven F. HillSpeaker – WashingtonT + 1 202 835 6121F + 1 202 416 [email protected]

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.© 2015 Baker & McKenzie LLP

8 April 2015

Trade Sanctions: Navigating Compliance in a Rapidly Changing LandscapeKarl Laskas, Executive Director, Global Trade and Compliance, Dell

Tom Firestone, Of Counsel, Washington, D.C.

Tristan Grimmer, Senior Associate, London

Steven F. Hill, Of Counsel, Washington, D.C

http://bakerxchange.com/collect/click.aspx?u=/G1GTPto3VUdqJnlforXH3Z3gHgKieD90WAkDl2DgMnOHdCHyKqw6wQjleyzEOaVh9JpjmVTfTw=&rh=ff0019fa15534c02d0cb748d194eb472d53d93e2


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