Trump, OFAC and the US Dollar: Navigating US Sanctions Laws

March 6, 2019

Bruce G. Paulsen

CONFIDENTIAL© Seward & Kissel LLP, 2019

All Rights Reserved.

1977 IEEPA Peacetime

Sanctions

1996 Iranian & Libya Sanctions Act

2014Ukraine/Russian

Sanctions

2015/2016JCPOA

2018JCPOA Withdrawal and

Snapback

2010CISADA

2017CAATSA

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Modern U.S. Sanctions Timeline (Selected Statutes)

• Primary• Secondary• Sectoral

Types of Sanctions

Elements and Types of Sanctions

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U.S. Citizens & Permanent Residents

Wherever located.

U.S. Companies

What about foreign subsidiaries?Rules have varied depending on country at issue.

Non U.S. Persons

Some sanctions apply directly to non-U.S.

Who Must Comply With U.S. Sanctions?

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The property and interests in property of

entities directly or indirectly owned 50% or

more in the aggregate by one or more

blocked persons are considered blocked

regardless of whether such entities appear

on OFAC’s Specially Designated Nationals

and Blocked Persons List (SDN List) or the

annex to an Executive order. SSI-Listed

entities are also subject to the 50% rule.

Persons should be cautious in dealings

with such a non-blocked entity to ensure

that they are not, for example, dealing

with a blocked person representing the

non-blocked entity, such as entering into a

contract that is signed by a blocked

person.

OFAC's 50% Rule speaks only to ownership

and not to control.

Non-blocked entities may become the

subject of future designations or

enforcement actions by OFAC.

OFAC’s 50% Rule

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• Rapid developments in the state of US sanctions for: Cuba, Iran, Russia, and Venezuela

• Cuba, Iran, North Korea, Syria & Crimea: Near total “ban” on transactions by US persons

• Facilitation Risk: US persons cannot “facilitate” transactions by foreign persons

• General and Specific Licenses from OFAC

Primary Sanctions

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Subject Persons

Any person, entity or individual

Transactions

Materiality (“significance”) required

Knowledge is required

Discreet, narrowly defined transaction or activity

S e c o n d a r y S a n c t i o n s I n c l u d e A l l P r i m a r y S a n c t i o n s P l u s :

Target

Designated Foreign Country

The principles of Secondary Sanctions were introduced in 1996 through the enactment of the Iran and Libya Sanctions Act (ILSA).

Specially Designated National (individual or entity)

Secondary Sanctions Essential Elements

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Non-U.S. companies who engage in such transactions can be sanctioned under U.S. law

Target sanctioned countries but do so by authorizing the

imposition of sanctions against third-country (e.g., European or

Asian) companies

.

For example: U.S. law declares certain categories

of Iran-related, North Korea-related or Russian-

related transactions “sanctionable”.

U.S. Secondary Sanctions

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Includes persons determined by OFAC to be operating in sectors of the Russian economy identified by the Secretary of the Treasury pursuant to Executive Order 13662

Sectoral Sanctions

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Sectoral Sanctions Identifications List

Financial Services

Energy

Defense & Related Material Sector

Who is a “U.S. Person”

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ü U.S. citizen, domicile or resident

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

ü Any person or entity “in the U.S.”

ü Entity with activity transiting through U.S. or using U.S. financial system such that the activity / conduct subject entity to U.S. jurisdiction

Iran

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Primary Sanctions

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§ All U.S. transactions with Iran in energy products are banned§ The ITSRs do not ban the importation, from foreign refiners, of gasoline or

other energy product mixed with Iranian oil.§ The product of a refinery in any country is considered to be a product of the

country where that refinery is located, even if some Iran-origin crude oil is present.

Oil Transactions

§ U.S. importers are allowed to pay Iranian exporters with funds denominated in dollars, but funds cannot go directly to Iranian banks.

§ Payments must pass through third-country (such as European) banks. § Private letters of credit (from non-Iranian banks) can be used to finance

approved transactions.

Payment MethodsTrade Financing

Financing Guarantees

§ Obtaining shipping insurance is crucial to Iran’s expansion of its oil and other exports.

§ On January 16, 2017, the Obama Administration issued waivers of the relevant regulations to allow numerous U.S. – linked insurers to provide Iranian exporters shipping insurance.

§ This waiver ended on August 6, 2018.

Shipping Insurance

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

Secondary Sanctions

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Iran Sanctions

(ISA)

IranianFinancial 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).

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The P5+1 (China, France, Germany, Russia, the United Kingdom & the United States), the European Union (EU) & Iran reached a Joint Comprehensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program will be exclusively peaceful. July 14, 2015

Marked “Adoption Day” of the JCPOA, the date on which the JCPOA came into effect & participants began taking steps necessary to implement their JCPOA commitments.

October 18, 2015

Marked “Implementation Day” of the JCPOA. The International Atomic Energy Agency (IAEA) had verified that Iran has implemented its key nuclear-related measures described in the JCPOA & the Secretary of State has confirmed the IAEA’s verification. As a result of Iran verifiably meeting its nuclear commitments, the United States & the EU had lifted nuclear-related sanctions on Iran, as described in the JCPOA.

January 16, 2016

Joint Comprehensive Plan of Action (JCPOA)

JCPOA WithdrawlBack to the Future

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On May 8, 2018, President Trump announced his decision to withdraw the United States from the Joint Comprehensive Plan of Action(“JCPOA”) and issued a National Security Presidential Memorandum (“NSPM”) directing the US Treasury Department and other federal

agencies to reinstate sanctions against Iran that were suspended under the JCPOA in January 2016.

Two phased wind-down:

The first phase of the wind-down lasted 90 days, ending on August 6, 2018

The second phase of the wind-down lasted 180 days, ending on November 4, 2018

This action resulted in the re-imposition of unilateral secondary sanctions against Iran by the United States, i.e. sanctions risk for non-US companies that continue to engage in business with Iran after the wind-down period that is otherwise permitted under their local

legislation

Related to purchase or acquisition of US dollar

banknotes by the Government of Iran

Sale, supply or transfer to or from Iran of graphite, raw or

semi-finished metals and software for integrating

industrial processes

Purchase, subscription to or facilitation of the issuance of

Iranian sovereign debt

Trade in gold or precious metals

Transactions related to purchase or sale of Iranian rials

or maintenance of significant funds/accounts outside the

territory of Iran denominated in the Iranian rial

Iran’s automotive sector

Re-imposed Sanctions

Phase 1: August 6, 2018

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Phase 1: August 6, 2018Executive Order 13846

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The new Executive Order EXPANDED US sanctions on Iran by:

• Providing new authority for blocking sanction on person that, provide material support to those involved in the energy, shipping or shipbuilding sectors of Iran (on or after November 5, 2018)

• Providing new authority for correspondent and payable-through account sanctions on foreign financial institutions that are determined to have conducted or facilitated any significant financial transaction with certain Iranian persons (on or after November 5, 2018)

• Expanding the menu of sanctions that can be imposed on persons that knowingly engage in certain significant transactions, including those relating to petroleum, petroleum products or petrochemicals from Iran

• Expanding the scope of transaction by U.S.-owned or controlled companies that are prohibited to include transactions with person blocked for being part of the energy, shipping or shipbuilding sectors or Iran or a port operator in Iran, among other transactions.

Port operators and Iran’s shipping and shipbuilding sectors, including the Islamic

Republic of Iran Shipping Lines, South Shipping Line Iran or their affiliates

Transactions by foreign financial institutions with the Central Bank of Iran and certain designated Iranian financial

institutions

Provision of underwriting services, insurance or reinsurance

Petroleum-related transactions, including the purchase of petroleum, petroleum

products or petrochemical products from Iran

Provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions

(e.g. SWIFT)

Iran’s energy sector

Re-imposed Sanctions

Additionally, the US government will resume efforts to reduce Iran’s crude oil sales using sanctions

authorized by section 1245(d) of the National Defense Authorization Act for FY 2012 (NDAA).

Phase 2: November 4, 2018

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Other Snap-Back Effects

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Re-Listing of Entities Certain Iranian Government

The U.S. government will revoke General License H, which authorizes US-owned or controlled foreign entities to

engage in Iran-related business.

Russia

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CAATSA

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• January 2018, as required by the Countering America’s Adversaries Through Sanctions Act (CAATSA), the U.S. Treasury Department released a list of senior Russian political figures and “oligarchs.” This was NOT a sanctions list.

• March 2018, the U.S. designed additional Russian individuals and entities as Specially Designated Nationals (SDNs)

pursuant to CAATSA.

Ø U.S. persons are prohibited from engaging in transactions with those designated – or those 50 % owned in the

aggregated by a designated person/entity – and must block their property. Ø Non-U.S. persons cannot in engage in “significant transactions” with those designated, or those 50% owned in the

aggregated by a designated person/entity.Ø To blunt the impact of immediate implantation of these sanctions, OFAC released general licenses permitting certain

“wind-down” and “maintenance” activities:

ü General License 13/13D: Authorizing, with conditions, divestment or transfer from U.S. persons to non-U.S.

persons (and facilitation of such transfers) of debt, equity, or other holdings in EN+ Group PLC, GAZ Group and United Company RUSAL PLC through November 12, 2018 (for GAZ Group, October 23, 2018).

ü General License 14/14A: Authorizing certain activities necessary to the maintenance or wind down of pre-

existing operations or contracts involving RUSAL through November 12, 2018.ü General License 16/16A: Authorizing certain activities necessary to the maintenance or wind down of pre-

existing operations or contracts with EN+ Group PLC and JSC EuroSibEnergo through November 12, 2018.

Russian Sectoral Sanctions

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SDN and Designated Person Listings

Various individuals / entities have been listed as US SDNs

Sectoral Sanctions • New type of Sanctions – Sectoral Sanctions Identifications (SSIs)

• Prohibit certain, but not all, activities involving the designated entities (SSIs)

• Primarily restrict dealings in new debt / equity of the SSIs (and their 50% or more, owned or otherwise controlled, subsidiaries) or loans to them

• Bans on provision of goods/services/technology to Russia’s oil & gas industry; prohibitions on trade in military and dual-use goods

Directive 1 Targets Financial Services Sector

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Period When Debt Issued Applicable Tenor of Prohibited Debt

On or after July 16, 2014 and before September 12, 2014

Longer than 90 days maturity

On or after September 12, 2014 and before November 28, 2017

Longer than 30 days maturity

On or after November 28, 2017 Longer than 14 days maturity

U.S. persons prohibited from transacting in, providing financing for, or otherwise dealing in new debt or equity with a maturity of longer than 14 days, if issued by entities designed under Directive 1.

Reduced from 30 days to 14 days on September 29, 2017.

Directive 2 Targets Energy Sector

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Period When Debt Issued Applicable Tenor of Prohibited Debt

On or after July 16, 2014 and before November 28, 2017 Longer than 90 days maturity

On or after November 28, 2017 Longer than 60 days maturity

U.S. persons prohibited from transacting in, providing financing for, or otherwise dealing in debt longer than 60 days, if issued by entities designated under Directive 2.

Reduced from 90 days to 60 days on September 29, 2017.

Russian Defense Industry

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Directive 3

OFAC issued Directive 3, introducing prohibitions on all transactions in, provision of financing for and other dealings in new debt of longer than 30 days maturity of persons determined to be subject to the Directive, their property or their interests in property.

Transactions by US persons or within the US involving derivative products whose value is linked to an underlying asset that constitutes new debt with maturity of longer than 30 days issued by a person subject to Directive 3 are authorized by General License 1B pursuant to Executive Order 13662.

• The GL1B Guidance also applies to Directives 1 and 2.

Directive 4 Targets Energy Sector

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Specifically targets Russian deepwater, Arctic offshore, and shale projects.

Prohibits the provision, exportation, or re-exportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that:

i. have the potential to produce oil in the Russian Federation, or in maritime area claimed by Russia, that involve any person determined to be subject to this Directive, their property, or their interests in property; or

ii. are initiated on or after January 29, 2018, that have the potential to produce oil in any location, and in which any person determined to be subject to this Directive, their property, or their interests in property has (a) a 33% or greater ownership interest, or (b) ownership of a majority of the voting interests.

Venezuela

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Venezuela Sanctions Recent Developments

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• January 28, 2019: OFAC adds state-owned oil company Petroleosde Venezuela, S.A. (PdVSA) to SDN List

• General licenses permit:

• Certain transactions involving PDV Holding, Inc. (PDVH) and CITGO Holding, Inc. through April 26, 2019 (GL 7)

• Dealing in PdVSA debt issued prior to August 25, 2017 (GL 9)

• Winding down operations involving PdVSA until March 28, 2019 (GL 11)

• Purchase of petroleum from PdVSA through April 27, 2019 (GL 12)

• Further developments are possible as tensions in Venezuela continue, with the US supporting the opposition to President Nicolas Maduro.

North Korea

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Venezuela Sanctions Primary Sanctions

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Prohibitions

Prohibits essentially all commercial activity, including:• All exports• All imports• Financing• Trade brokering• Facilitation

Exemptions/General or Specific License

New General Licenses authorize transactions relating to: • Investment, reinvestment of certain funds• Payments for legal services from funds originating outside the US• Official business of the US federal government• Official activities of international organizations• Closing a correspondent or payable-through account

Customer Relationships (Indiv.) ProhibitedCustomer Relationships (Corp.) Prohibited

Block

SDNs• Government • Entities owned 50% or more by SDNs or government or persons

controlled by or acting for or on behalf of any of the foregoing

Reject Non-SDN transactions not subject to General License

Summary of Recent Advisories on North Korea

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1. North Korea Sanctions & Enforcement Actions Advisory

Issued: July 23, 2018

Title: Risks for Businesses with Supply Chain Links to North Korea

• To highlight the sanctions evasion tactics used by North Korea that could expose businesses –including manufacturers, buyers and service providers – to sanctions compliance risks under US or UN sanctions authorities.

1. North Korea Sanctions Advisory

Issued: February 23, 2018

Title: Sanctions Risks Related to North Korea’s Shipping Practices

• To alert persons globally to deceptive shipping practices used by North Korea to evade sanctions. These practices may create significant sanctions risk for parties involved in the shipping industry, including insurers, flag registries, shipping companies and financial institutions. Parties subject to US and/or UN sanctions should be aware of these practices in order to implement appropriate controls to ensure compliance with their legal requirements.

Cuba

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Recent Regulatory Events

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December 2014: The Obama Administration initiated a major Cuba policy shift – a Policy of engagement and normalization of relations:

• Restoration of diplomatic relations (July 2015)

• Rescission of Cuba’s designation as a State Sponsor of International Terrorism (May 2015)

• An increase in travel, commerce and the flow of information to Cuba

Recent Regulatory Events

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June 2017: President Trump issues National Security Presidential Memorandum – “Strengthening the Policy of the US Towards Cuba” – Codified in the CACR on November 2017

• Partially rolls back some of the Obama administration efforts

• Includes new restrictions on transactions with companies controlled by the Cuban military (“Grupo GAESA”)

• Creation of a new list: Cuba Restricted List

o Prohibits persons subject to US jurisdiction from all direct financial transactions with entities and sub-entities listed on the list.

Scope of Sanctions What Do They Apply To?

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Cuban assets and financial dealings with

Cuba

• Embargo remains in place

• Assets are frozen; property of Cuban Government and Cuban nationals is blocked

• Financial dealings with Cuba are still broadly restricted

Prohibition on transactions involving property in which

Cuba or Cuban national has an interest

• Broadly construed to bar nearly any kind of transaction, e.g., products and services, unless authorized

• 2014 – Generalized exemption that allows financial institutions to provide financial services to Cuban nationals NOT “ordinarily residents” of Cuba

Imports of Cuban-origin goods or services

• Broadly restricted; authorized travelers may import some items for personal use

Exports of goods and services to Cuba

• Broadly prohibited except for limited items, e.g., publications, certain donated items

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. PaulsenSeward & Kissel LLP

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