Thursday, October 22, 2015

#TBT: US Trade Sanctions Are a Trap for the Unwary



This post is part of an occasional series highlighting a project finance article or news item from the past. It is often interesting and thought provoking to look back on these items with the perspective of months, years or decades of further experience. 

With this installment, we turn to a transcript that was published in the April 2007 issue of the Project Finance NewsWire featuring Christopher Man, counsel in Chadbourne's Litigation group and Keith Martin, a partner in Chadbourne's Project Finance group. 


US Trade Sanctions Are a Trap for the Unwary


The United States maintains trade sanctions of varying severity against dozens of countries. Anyone doing business with sanctioned countries must be careful not to violate them.The sanctions not only vary from country to country, but they also change periodically.


They can have extra-territorial reach.

For example, sanctions usually apply to US citizens working abroad, even if they work for foreign companies over which the United States has no direct legal jurisdiction. Many of the sanctions also either expressly cover foreign subsidiaries of US companies or apply in any situation where a US company is found to have provided “approval or other facilitation” to a foreign company. Even where foreign subsidiaries are not expressly covered, a US parent can be charged with a violation if it is found to have conspired with or otherwise helped its subsidiary circumvent the sanctions.

The extra-territorial reach can put companies in an awkward position. Some countries have enacted “blocking” legislation designed to thwart compliance with controversial US measures, like the continuing US embargo against Cuba.

The most stringent US measures are import-export restrictions against seven countries: Cuba, Iran, Iraq,Myanmar, North Korea, Sudan and Syria. US presidents have issued executive orders blocking property and other transactions with persons affiliated with the governments of another six countries or regions: the Balkans, Belarus, Ivory Coast, Democratic Republic of the Congo, Liberia and Zimbabwe.


Import-Export Restrictions

Import-export restrictions bar US persons from exporting US goods to a sanctioned country absent a license or other authorization and, in some cases, they also bar re-exports of US goods by persons or entities in foreign countries. There is no single definition of “US person”; it varies by sanction.

Cuba:Virtually all exports and imports between the United States and Cuba are banned. Transactions between Cuba or Cuban nationals by US citizens, wherever located, are prohibited, including “dealing in or assisting the sale of goods or commodities to or from Cuba, even if done entirely offshore.” Some exemptions apply — for example, goods licensed for export or re-export by the US Department of Commerce, like medicine, food and agricultural commodities. Criminal penalties for violating the sanctions range up to 10 years in prison, $1 million in corporate fines and $250,000 in individual fines. Civil penalties of up to $55,000 per violation also may be imposed. Persons who traffic in property confiscated by the Cuban government that is subject to a legal claim by a US person can be denied admission into the United States. The Helms-Burton Act also provides for a private civil right of action against persons who traffic in such property, but Presidents Clinton and Bush have exercised their authority under the statute to suspend this private cause of action.

Iran: No goods, technology or services may be exported to Iran or sold to the Iranian government by US persons wherever located, unless licensed by the office of foreign assets control, called “OFAC,” in the US Treasury Department. The prohibition extends to re-exports to Iran by intermediaries in foreign countries and it also blocks offshore transactions by US persons that benefit Iran or the Iranian government. US persons are restricted from exporting goods that are “intended specifically for use in the production of, for commingling with, or for incorporation into goods, technology or services to be directly or indirectly supplied, transshipped or re-exported exclusively or predominantly to Iran or the Government of Iran.”Certain exemptions apply. In addition, the sanctions bar “[n]ew investments by US persons, including commitments of funds or other assets, loans or any other extensions of credit, in Iran or in property (including entities) owned or controlled by the Government of Iran.” With only minor exceptions, imports from Iran are also prohibited. Criminal penalties are up to $500,000 for corporations and $250,000 for individuals, up to 20 years in jail, or both. Civil penalties of up to $50,000 may also be imposed. The United States is trying to broaden the reach of US sanctions in the face of deteriorating relations with Iran over its nuclear ambitions. (See related article in this issue.)

Iraq: All exports or reexports to Iraq must be licensed by the office of foreign assets control in the US Treasury Department or otherwise authorized by the US Department of Commerce. All financial transactions with Iraq are allowed except for those involving individuals and entities appearing on a “specially designated nationals” list maintained by the office of foreign assets control. Criminal penalties range up to 12 years in jail and $1 million in fines. Civil penalties of up to $325,000 per violation may also be imposed.Violation of Iraq-related presidential orders can also result in 10 years in prison, $500,000 in corporate fines and $250,000 in individual fines. Civil penalties are up to $11,000 per violation.

Myanmar: No US person may make a “new investment” in Myanmar or “facilitate” such an investment by a foreign person. Nearly all imports fromMyanmar are banned. Exports to Myanmar are generally permitted, but not exports of financial services. Criminal penalties for willful violations can be up to $500,000 in fines for a corporation or up to $250,000 for an individual, or up to 10 years in jail. Civil penalties of up to $11,000 per violation also may be imposed administratively.

North Korea: A ban on exports to North Korea was lifted in 2000; however, in April 2006, the office of foreign assets control issued an order prohibiting US persons from owning, leasing, operating or insuring any vessel that operates under a North Korean flag. Imports from North Korea must be approved by OFAC, and exports to North Korea must still clear a number of regulatory hurdles. Criminal penalties range up to 10 years in prison, $1 million in corporate fines, and $250,000 in individual fines. Civil penalties of up to $65,000 per violation also may be imposed.

Sudan: Exports of “any goods” to Sudan by US persons “wherever located” are prohibited. The sanctions also block transfers of property of certain persons connected with the conflict in Darfur and restrict US persons from transacting business with these individuals and entities. In addition, the sanctions prohibit US persons from “facilitating” the direct or indirect export or re-export of goods, technology or services to or from Sudan. Financial dealings with Sudan are generally prohibited,“including the performance by any US person of any contract, including a finance contract, in support of an industrial, commercial, public utility or governmental project in Sudan.” Imports from Sudan, with few exceptions, are banned. Criminal penalties range from up to 20 years in prison, up to a $50,000 penalty, or both. In addition, civil penalties of up to $50,000 per violation may be imposed.

Syria: Goods on a US munitions list and a separate list of controlled products maintained by the US Department of Commerce, as well as certain other items, may not be exported or re-exported to Syria. Criminal penalties range up to 10 years in prison, $500,000 in corporate fines and $250,000 in individual fines. In addition, civil penalties of up to $11,000 per violation may be imposed.


Executive Orders

Presidents have issued executive orders freezing bank accounts and other property and prohibiting transactions with persons considered threats to US interests.

Balkans: One order blocks property of, and prohibits transactions by, US persons with certain persons believed to be or to have been destabilizing forces in the Balkan region.

Belarus: A separate order blocks property of, and prohibits transactions by, US persons with certain persons affiliated with the Belarus government.

Democratic Republic of the Congo: A similar order applies to property and transactions with certain persons affiliated with the conflict in the Democratic Republic of the Congo.

Ivory Coast:Property of persons linked to the conflict in the Ivory Coast has been frozen, and US person are barred from engaging in financial transactions with persons named in the order.

Liberia: The sanctions block property and transactions with restricted persons affiliated with conflict in Liberia. It also prohibits dealing in rough diamonds not controlled by “Kimberley process certification scheme.”

Zimbabwe: US persons, wherever located, are barred from engaging in transactions with certain persons who are believed to have undermined the democratic process in Zimbabwe.


Additional Sanctions

The United States has imposed other sanctions that limit the sale of arms, nuclear technology and other equipment with military uses.These apply to the following countries: Albania, Bulgaria,Cambodia, the Czech Republic, Estonia, Latvia, Lithuania,North Korea, Mongolia, China, Poland,Romania, the Slovak Republic,Vietnam and all former Soviet Republics.An additional executive order prohibits transactions with certain persons or entities believed to be involved in the proliferation of weapons of mass destruction. There also are significant limits on importing diamonds into the US that have not complied with the Kimberley process to prevent trade in “conflict diamonds.”

The United States also blocks property and transactions with a long list of persons or entities suspected of being involved with illicit trafficking of narcotics and terrorism.Many of the named persons or entities may sound and even appear to be legitimate businesses or even charities, and persons involved with terrorism or narcotics trafficking may even have otherwise legitimate business interests. US companies should not assume their business partners cannot be on such a list simply because they do not fit the image of a terrorist or drug dealer.


Tax Penalties

Separate tax penalties apply to US taxpayers doing business in Middle Eastern countries that participate in the Arab boycott against Israel. These are Bahrain, Iraq, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.The US taxes American companies on their worldwide incomes. However, US multinationals often find ways to structure foreign business operations so that US taxes can be deferred until income is repatriated to the United States.

A US multinational doing business in an Arab boycott country may find itself unable to defer US taxes on a portion of its income from foreign operations, and not necessarily solely from operations in the Middle East. For example, it may lose the ability to defer US taxes on a portion of its income from a project in Peru. In addition, it will suffer a haircut on foreign tax credits. This has the potential to reduce returns from foreign operations after taxes.However, US multinationals are only subject to these penalties if they “cooperate with or participate in the boycott.”

The key to avoiding penalties is to avoid signing any document that says the US multinational or a member of its “controlled group”will participate in the boycott. For example, the US Treasury Department said in a notice in 1978 that it is not cooperation with or participation in the boycott merely to acknowledge in incorporation papers when setting up a local subsidiary to conduct business that the subsidiary is subject to local laws and regulations.However, one goes too far if one signs a contract that requires the subsidiary to comply with local law.