2018 was an eventful year from an international sanctions perspective, both in terms of new U.S. policy measures and enforcement, capped with the landmark $1.34 billion settlement between Société Générale and federal and state regulators.
The Trump administration’s reliance on economic sanctions as a foreign policy tool and the Office of Foreign Assets Control’s continued emphasis on pursuing sanctions against violators suggests that 2019 will be just as active.
The U.S. unveiled a host of new measures, including:
- secondary sanctions targeting Iran that had been suspended pursuant to the Joint Comprehensive Plan of Action (JCPOA);
- sanctions targeting North Korea, as well as Russian oligarchs and government officials;
- sectoral sanctions aimed at the Government of Venezuela; and
- novel sanctions directed at individuals engaged in corruption and human rights abuses.
The U.S. Withdrawal from JCPOA. In May, President Donald Trump announced that the United States would withdraw from the Joint Comprehensive Plan of Action. Following wind-down periods, the Office of Foreign Assets Control (OFAC) and the State Department re-imposed nuclear sanctions that had been suspended since January 2016. The sanctions came back into effect in two tranches in August and November.
The re-imposition of these sanctions affected the United States’ primary sanctions regime. OFAC revoked General License H, which had authorized foreign entities owned or controlled by U.S. persons to engage in business with Iran, provided that certain conditions were met. OFAC also terminated general licenses that permitted the importation of Iranian-origin carpets and foodstuffs into the United States.
U.S. persons can no longer enter into contingent contracts for activities that had been eligible for authorization under the Statement of Licensing Policy for Activities Related to the Export or Re-export to Iran of Commercial Passenger Aircraft and Related Parts and Services. Furthermore, OFAC re-designated the persons who had been removed from the Specially Designated Nationals and Blocked Persons List (SDN List) in January 2016.
In addition, the United States re-imposed various Iran-related secondary sanctions that had been suspended pursuant to the JCPOA. These sanctions authorize the U.S. government to impose penalties on non-U.S. persons who engage in certain dealings with Iran, even if the non-U.S. persons are not subject to OFAC’s jurisdiction.
The European Union (EU) responded by expanding its blocking statute—which prohibits EU operators from complying with specified foreign laws that apply extraterritorially—to include certain U.S. sanctions targeting Iran. Many European companies, including EU-based subsidiaries of U.S. companies, must now navigate between the potentially conflicting requirements of the U.S. secondary sanctions and the EU blocking statute.
New Russian Sanctions. The Trump administration also took a series of sanctions-related actions concerning Russia as well. On Jan. 29, the Department of Treasury published the Report on Senior Foreign Political Figures and Oligarchs in the Russian Federation (the Report) in accordance with Section 241 of the Countering America’s Adversaries Through Sanctions Act (CAATSA).
The Report identified three categories of persons:
- Senior Foreign Political Figures,
- Oligarchs, and
- Russian Parastatal Entities.
The listed persons were not targeted by sanctions or subject to other punitive measures solely based on their inclusion in the Report.
In April, OFAC imposed list-based sanctions against 17 Russian government officials, seven oligarchs, and 12 entities owned or controlled by such persons. Notably, the targeted oligarchs included Oleg Deripaska and Viktor Vekselberg, who each maintain wide-ranging business interests throughout the world. OFAC also designated EN+ Group and United Company RUSAL PLC because they were owned and controlled by Deripaska.
However, on Dec. 19, OFAC notified Congress that it intends to delist both entities in January 2019 because the companies agreed to undertake restructuring and corporate governance measures such that Deripaska will no longer own or control either entity.
The April sanctions have implications for non-U.S. persons who are not subject to OFAC’s jurisdiction. Pursuant to CAATSA, OFAC is required to sanction foreign persons who knowingly facilitate significant transactions for, or on behalf of, any person subject to U.S. sanctions with respect to the Russian Federation, or their child, spouse, parent, or sibling. Similarly, foreign financial institutions face mandatory correspondent account or payable through account sanctions for knowingly facilitating significant financial transactions on behalf of certain Russians on the SDN List.
Finally, the State Department in conjunction with OFAC utilized sanctions pursuant to Section 231 of CAATSA for the first time in August. Section 231 requires the imposition of so-called “menu-based” sanctions on entities that knowingly engage in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of Russia.
In August, OFAC added China’s Equipment Development Department and its director to the SDN List because it purchased Su-35 combat aircraft and S-400 surface-to-air missile systems-related equipment from Rosoboronexport, a Russian defense company.
New North Korean Designations. Throughout 2018, OFAC sanctioned a number of foreign persons pursuant to North Korean sanctions authorities. In January, OFAC imposed list-based sanctions on over 30 individuals, entities, and vessels for providing financial or other support to North Korea’s WMD programs and other illicit businesses. Shortly thereafter, OFAC designated another 56 individuals, entities, and vessels because of their links to North Korea. OFAC designated other persons pursuant to North Korean sanctions authorities throughout the year.
New Venezuela Sanctions. During 2018, President Trump issued a trio of executive orders that levied sanctions on Venezuela.
The first prohibits U.S. persons from participating in transactions related to any digital currency, digital coin, or digital token issued by the Government of Venezuela.
The second prohibits U.S. persons from participating in transactions involving:
- the purchase of any debt owed to the government of Venezuela
- certain debt owed to the Government of Venezuela, an
- the sale of any entity in which the government of Venezuela has a 50 percent or greater ownership interest.
The third provides OFAC with authorization to sanction persons that operate in any sector of the Venezuela economy and persons who engage in corrupt and deceptive transactions.
Collectively, these executives orders are designed to place financial pressure on the cash-strapped Venezuelan government by limiting its ability to raise capital by issuing new digital currencies or selling existing debts and assets.
Global Magnitsky Act Sanctions. The Trump administration designated individuals throughout the world pursuant to the Global Magnitsky Act. Enacted in 2016, the Global Magnitsky Act authorizes the President to sanctions foreign government officials responsible for significant corruption, as well as foreign persons who engage in human rights abuses and other related activities.
President Trump initiated a new sanctions program pursuant to the Global Magnitsky Act in late 2017, and concurrently designated thirteen individuals. Throughout 2018, OFAC published Global Magnitsky Act sanctions regulations and designated 24 individuals and 14 entities through five rounds of sanctions.
Société Générale’s Sanctions Settlement. In November, the French bank Société Générale agreed to pay $1.34 billion to U.S. federal and state regulators to resolve its potential liability for allegedly processing and concealing billions of dollars in transactions with sanctioned countries over a multi-year period. In particular, Société Générale appeared to facilitate U.S. dollar transactions on behalf of a wide range of customers based in Cuba, Sudan, Iran, Libya, Myanmar, and North Korea.
This settlement is important for a number of reasons. Société Générale’s paid the second-highest monetary penalty ever in a sanctions enforcement action, trailing only BNP Paribas’ $8.9 billion settlement. After an apparent shift away from enforcement actions directed at banks, this matter illustrates that OFAC and other government agencies continue to prioritize bringing big-dollar, high-profile cases against financial institutions.
In addition, this settlement is consistent with past precedent in that a non-U.S. financial institution paid a massive fine for violating U.S. sanctions. The U.S. government has targeted foreign banks and entities in most of its significant sanctions enforcement actions. Another notable feature of this case is that multiple federal and state agencies played a role in the investigation. A total of five different authorities collected fines or penalties from Société Générale.
ZTE’s Settlement Agreement. OFAC did not participate in ZTE’s 2018 settlement agreement. OFAC played a key role in ZTE’s March 2017 settlement with U.S. government authorities pursuant to which ZTE resolved its liability for purportedly circumventing U.S. sanctions and export control laws by building, operating, and servicing telecommunications in Iran using U.S.-origin equipment and software. OFAC collected over $100 million of the $892 million that ZTE paid in penalties in connection with the 2017 settlement.
In June 2018, ZTE entered into a superseding settlement agreement with BIS. Pursuant to that settlement, ZTE agreed to pay $1 billion in penalties (and put another $400 million in escrow), replace its directors and senior personnel, and be subject to enhanced oversight for ten years. Interestingly, OFAC does not appear to have played a role in this latter investigation and was not a party to the settlement agreement.
OFAC Enforcement Action Trends
Flurry of Year-End Enforcement Actions. The year got off to a slow start from an OFAC enforcement perspective. The agency only announced a single, low-dollar settlement in the first eight months of the year. But OFAC closed the year aggressively, announcing seven settlements against six parties and collecting over $71 million in civil penalties during the fourth quarter.
Aggressive Enforcement Posture. The announced settlements illustrate that OFAC continues to take aggressive positions in enforcement matters. For instance, OFAC issued a finding of violation against JPMorgan Chase & Co. (JPMorgan) and levied a modest civil penalty on Cobham Holdings, Inc. (Cobham) for non-egregious violations of the sanctions regulations that the parties voluntarily self-disclosed.
OFAC’s decision to pursue enforcement in these scenarios, instead of merely issuing warning letters, is somewhat surprising. While Cobham’s fine was small and JPMorgan’s did not pay any monetary penalty, the public nature of the settlement agreements could harm the companies’ reputations. In addition, OFAC imposed multi-million dollar civil penalties on JPMorgan Chase Bank, N.A. (JPMorgan Chase Bank) and Zoltek Companies, Inc. after each party self-reported its potential violations. OFAC’s decision to pursue enforcement actions against these companies may dissuade companies from voluntarily disclosing their misconduct to OFAC in the future.
Penalties for Screening Problems. Several enforcement actions from the past year feature companies with sanctions screening deficiencies. Cobham faced liability for violating the sanctions regulations in part because its third-party screening software did not function as Cobham directed.
JPMorgan Chase Bank paid over $5 million in civil sanctions penalties because its restricted party screening did not extend to certain parties that participated in a net settlement payment mechanism for which it acted a clearing bank. JPMorgan Chase Bank also was found to have committed a sanctions violation because it relied on a vendor’s restricted party screening software that “failed to identify customer names with hyphens, initials, or additional middle or last names as potential matches similar or identical names on the SDN List.”
Historically, OFAC has focused its enforcement efforts on parties that did not conduct restricted party screening at all. These settlements suggest that merely using software screening is not sufficient to protect against liability; parties must also ensure that its software works properly.
Michael S. Casey is a partner in the Government, Regulatory & Internal Investigations group in the London office of Kirkland & Ellis International LLP. His practice focuses on representing clients in investigations, transactions, and regulatory matters related to economic sanctions, export controls, money laundering, international corruption, customs, and the CFIUS review process.
Zachary S. Brez is a partner in the Government, Regulatory & Internal Investigations group at Kirkland & Ellis in New York. He works with companies and their senior officers and directors to investigate, mitigate, defend and advise on complex enforcement and regulatory matters in two primary areas: (1) international risk, such as anti-bribery and corruption, sanctions, anti-money laundering; and (2) securities, futures, and derivative financial products.
Marcus Thompson is a partner in the Government, Regulatory & Internal Investigations group in the London office of Kirkland & Ellis International LLP. He assists clients with a variety of business-related criminal matters such as anti-money laundering, anti-bribery and corruption, international sanctions and corporate investigations.