Update on U.S. Sanctions: Focus on the Auto Industry

2016 AIAG Customs Town Hall

Andrew Galdes

Latham & Watkins LLP November 15, 2016

• OFAC Sanctions: Overview

• Cuba: New opportunities

• Iran: Implementation of the Nuclear Agreement – opportunities, challenges, and risks

• Russia: Update on U.S. sanctions relating to Russia and against Crimea Region of Ukraine

Agenda

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Overview of U.S. Sanctions

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• Treasury Department’s Office of Foreign Assets Control (“OFAC”)

– U.S. “embargoes” and economic sanctions against countries, governments, organizations, and individuals

• Commerce Department’s Bureau of Industry and Security (“BIS”)

– Commercial “dual-use” products and technology and certain defense items

– Administers and enforces the Export Administration Regulations (“EAR”)

U.S. Trade Controls - Meet the Agencies

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OFAC Sanctions Map

Belarus

Iraq Cuba Sudan

Lebanon

Belarus

Western Balkans

Zimbabwe Congo

Iran Syria

North Korea Iraq

Comprehensive Sanctions: Prohibition against most dealings

List-Based Sanctions: Specially Designated Nationals (SDN) or Sectoral Sanctions (SSI) risk

Yemen

Libya

Russia Ukraine

Central African Republic

Burundi

South Sudan

Somalia

Venezuela

Crimea

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OFAC Sanctions Map

Belarus

Iraq Cuba Sudan

Lebanon

Belarus

Western Balkans

Zimbabwe Congo

Iran Syria

North Korea Iraq

Comprehensive Sanctions: Prohibition against most dealings

List-Based Sanctions: Specially Designated Nationals (SDN) or Sectoral Sanctions (SSI) risk

Yemen

Libya

Russia Ukraine

Central African Republic

Burundi

South Sudan

Somalia

Venezuela

Crimea

Still subject to U.S. embargo, though more travel and export opportunities

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OFAC Sanctions Map

Belarus

Iraq Cuba Sudan

Lebanon

Belarus

Western Balkans

Zimbabwe Congo

Iran Syria

Iraq Yemen

Libya

Russia Ukraine

Central African Republic

Burundi

South Sudan

Somalia

Venezuela

Crimea

Notwithstanding Nuclear Agreement in early 2016, U.S.

embargo remains Some opportunities for foreign

subs of U.S. companies

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Comprehensive Sanctions: Prohibition against most dealings

List-Based Sanctions: Specially Designated Nationals (SDN) or Sectoral Sanctions (SSI) risk

OFAC Sanctions Map

Belarus

Iraq Cuba Sudan

Lebanon

Belarus

Western Balkans

Zimbabwe Congo

Iran Syria

North Korea Iraq

Yemen

Libya

Russia Ukraine

Central African Republic

Burundi

South Sudan

Somalia

Venezuela

Crimea

A number of prominent Russia banks and energy firms are the target or new “sectoral sanctions” that preclude most financing to such parties

Crimea region of Ukraine subject to near-total U.S. embargo since December 2014; Ukraine and Russia dealings higher risk as a result

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Comprehensive Sanctions: Prohibition against most dealings

List-Based Sanctions: Specially Designated Nationals (SDN) or Sectoral Sanctions (SSI) risk

OFAC Sanctions Map

Belarus

Iraq Cuba Sudan

Lebanon

Belarus

Western Balkans

Zimbabwe Congo

Iran Syria

North Korea Iraq

Yemen

Libya

Russia Ukraine

Central African Republic

Burundi

South Sudan

Somalia

Venezuela

Crimea

U.S. sanctions program against Burma terminated in October 2016

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Comprehensive Sanctions: Prohibition against most dealings

List-Based Sanctions: Specially Designated Nationals (SDN) or Sectoral Sanctions (SSI) risk

OFAC Overview

• OFAC is an office within the U.S. Treasury Department

• Administers and enforces two types of economic sanctions programs:

– Comprehensive Sanctions, which are country-wide or territory-wide sanctions (“embargoes”)

– List-Based Sanctions, which target particular individuals and entities

• Separate set of regulations for each sanctions program

• Rules vary widely across different OFAC programs

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Scope of OFAC Jurisdiction: U.S. Persons

• OFAC regulations apply to “U.S. persons” – U.S. citizens and permanent residents

(wherever located) – Anyone physically present in the United

States (regardless of nationality) – Companies legally organized under U.S.

law and their employees (wherever located)

– Foreign branches of U.S. entities (i.e., entities abroad that are not separately incorporated)

• Cuba and Iran: Foreign entities that are “owned or controlled” by U.S. entities

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Elements of an Embargo

• No direct U.S. export or import trade in goods or services with target country or area

• With limited exceptions, no indirect third-country export or import trade that involves: – Any U.S. person in any way

– With narrow exceptions, exports or reexports of any product or technology of U.S. origin

• No investment by U.S. persons in target country / area

• No dealings by U.S. persons in property of target country / area (e.g., Iranian or Sudanese crude)

• Significantly, U.S. persons cannot facilitate, approve, support, etc., most activities by third parties that the U.S. person could not undertake directly

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List-Based Sanctions: OFAC’s SDN List

• OFAC maintains a long list of Specially Designated Nationals and Blocked Persons (“SDN List”)

– SDN List has over 7,000 entries, and includes individuals, companies, banks, hotels, vessels, and others that are effectively off-limits to U.S. persons

– Property and property interests of certain SDNs must be blocked (i.e., frozen)

– SDN List is updated frequently (new names are added and some names are removed)

– OFAC takes the position that any party that is owned 50% or more by one or more SDNs is itself an SDN (even if not on the SDN List): http://www.treasury.gov/resource-center/sanctions/Documents/licensing_guidance.pdf

– OFAC makes available an SDN Search tool with “fuzzy logic”: http://sdnsearch.ofac.treas.gov/

Al Shabaab (Somalia)

Iranian Revolutionary Guard Corps

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OFAC Authorization

• Transactions by or involving U.S. persons related to a sanctioned country, area, or person require some form of OFAC authorization: – OFAC Exception: Certain transactions are

carved out of the regulations (e.g., informational materials)

– “General License”: an OFAC permission found in the OFAC regulations that can be relied upon by any U.S. person without notifying OFAC, provided the general license’s restrictions are observed

– “Specific License”: a permission applied for in writing from OFAC, issued by OFAC, which generally can only be relied upon by the U.S. person that applied for the specific license

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Penalties

• Penalties per OFAC or BIS violation:

– Criminal penalties: Up to $1 million and/or up to 20 years imprisonment

– Civil fines: $284,582 or twice the value of the transaction, whichever is higher

• Multiple violations often charged even for single transactions

• Damage to an organization’s reputation can be significant: – Press reports – Agency releases – SEC disclosure pressure

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Special Focus: Cuba, Iran, Russia / Ukraine

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Cuba

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• President Obama announced easing of embargo in December 2014 – President cannot on his own lift the embargo – Agencies issue amended regulations

• Congress likely needed to lift embargo – Trading with the Enemy Act – Foreign Assistance Act – Cuban Democracy Act – Cuban Liberty and Democratic Solidarity Act

(a.k.a., “Helms-Burton”) – Trade Sanctions Reform and Export Enhancement

Act

• Election casts doubt on future easing

Cuba: Easing Sanctions, Embargo Remains

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• Commercial export opportunities – Provided conditions are met, export license “exemptions”

available to export certain types of items to the Cuban private sector – equipment, tools, supplies, and instruments

• 200 private-sector activities under Cuban law – Favorable export licensing policy for items necessary for

“environmental protection,” including items related to energy efficiency (e.g., electric cars)

– Case-by-case export licensing available for items to “meet the needs of the Cuban people”

• Including items for “wholesale and retail distribution for domestic consumption by the Cuban people”

• Cuban Government can receive and distribute items

• Eligible U.S. persons and firms may establish and maintain a physical presence in Cuba

Cuba: Export Opportunities

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• Practical hurdles to export activity – Cuban import policies – Market in Cuba

Cuba: Export Opportunities and Challenges

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• New authorization for “contingent contracts” – OFAC has authorized U.S. persons to negotiate and enter into

contracts for transactions prohibited by the regulations – Performance must be expressly contingent on receiving OFAC

authorization (and any other necessary federal authorization), or authorization no longer being required

– Includes executory contracts, agreements in principle, binding memoranda of understanding, or any other similar agreement

Cuba: Contingent Contracts

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• Travel to Cuba – Tourist travel to Cuba remains prohibited – Travel related to 12 categories of activities is

permitted under “general licenses”

Cuba: Travel

1. Family Visits 2. Government Business 3. Journalism 4. Professional Research and

Meetings 5. Educational Activities 6. Religious Activities 7. Public Performances, Clinics,

Workshops, Athletic and other competitions

8. Support for the Cuban People 9. Humanitarian Projects 10. Activities of Private Foundations, Research, and

Educational Institutions 11. Travel relating to export, import, or transmission of

information or informational materials 12. Travel in Support of Licensable Business (e.g., travel

related to marketing research, commercial marketing, sales negotiation, accompanied delivery, or servicing of items)

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Iran

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Iran: Overview of U.S. Sanctions Program

• Background on Iran Sanctions Program • Introduction of “secondary” sanctions

– Apply to non-U.S. persons, even those with no connections to the United States

– Most activities relating to Iran’s energy sector as well as purchases of petroleum-related products

– Significant transactions involving various sectors of the Iranian economy, including its automotive sector

• Sanctions target the sale, supply, or transfer to Iran of significant goods and services connected to the “automotive sector in Iran”

• Automotive Sector of Iran: Manufacturing or assembling in Iran of light and heavy vehicles including passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles and original equipment manufacturing and after-market parts manufacturing relating to such vehicles

– “Penalties” include denial of certain U.S. benefits

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• Joint Plan of Action (“JPOA”) in November 2013 – Limited sanctions relief for non-U.S. firms and individuals

provided during period of negotiations – Included suspension of secondary sanctions relating to Iran’s

automotive industry

• Joint Comprehensive Plan of Action (“JCPOA”) in January 2016 – Prohibitions affecting U.S. persons generally remain – Changes mainly affect non-U.S. firms and individuals – Limited changes affecting U.S. persons

Iran: Nuclear Agreement

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Iran: General License H

• Entities outside the U.S. that are “owned or controlled” by a U.S. person can trade with Iran pursuant to “General License H” • Effectively turns back the clock to pre-fall 2012

• Conditions and limitations, including: • No U.S. person support, approval, facilitation, or

referral (except certain policy changes and reliance on IT infrastructure)

• No sourcing of goods from the U.S. or U.S. persons if order placed with knowledge or reason to know items are intended specifically or predominantly to Iran

• No use of U.S. banks or U.S. dollars

• No dealings with SDNs 26

Russia / Ukraine

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• Beginning in March 2014, the United States imposed sanctions on certain designated parties in Russia and Ukraine

• So far, more than 200 individuals and entities have been added to the SDN List – Russian and Ukrainian political figures and

rebel leaders – Russian business figures (“oligarchs”) – Russian businesses – e.g., banks, military

manufacturers, natural resource companies • In December 2014, OFAC imposed a unique

“regional embargo” on the Crimea region of Ukraine

Russia-Related Sanctions

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OFAC issues Crimea Sanctions Advisory

• OFAC has learned of evasive practices, such as the omission or obfuscation of references to Crimea and locations within Crimea in documentation underlying transactions

• OFAC is aware that certain parties have repeatedly omitted originator or beneficiary address information from SWIFT messages involving parties in Crimea

• U.S. persons urged to be cautious when processing payment instructions lacking complete address information when such transactions involve an individual or entity that has previously omitted partial or complete address information of Crimean individuals or entities

• In trade transactions, certain parties list Russia rather than Ukraine for parties in Crimea, and OFAC notes to be mindful of distribution agreements covering Russia

• Ensure that transaction monitoring systems include major cities and ports in Crimea, not just searches for “Crimea”

• Request additional information from parties that previously have attempted to violate U.S. sanctions on Crimea

• Communicate sanctions obligations clearly to international parties

OFAC Advisory on Crimea (July 30, 2015)

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• In 2014, OFAC created a Sectoral Sanctions Identifications List (“SSI List”), adding to it certain Russian banks, energy firms, and defense firms

• SSI-Listed entitles are not SDNs – most transactions are permitted

• U.S. persons cannot transact in, provide financing for, or deal in: – New debt of longer than 30 days maturity or new equity

for designated banks and defense firms – New debt of longer than 90 days maturity for designated

energy firms • Certain payment terms could create problems

Russia-Related Sanctions

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Questions?

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• Although this presentation may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel.

• The presentation is not created or designed to address the unique facts or circumstances that may arise in any specific instance, and you should not and are not authorized to rely on this content as a source of legal advice and this seminar material does not create any attorney-client relationship between you and Latham & Watkins.

• © Copyright 2016 Latham & Watkins LLP. All Rights Reserved.

Disclaimer & Contact Information

Andrew P. Galdes

Associate, Washington, D.C. T +1.202.637.2155 E andrew.galdes@lw.com

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