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© 2009 Foley Hoag LLP. All Rights Reserved. November 3, 2011 Denied Party Screening and Compliance Automation Compliance Alliance Network Briefing Gwendolyn Wilber Jaramillo
© 2009 Foley Hoag LLP. All Rights Reserved. | 2 Recent Enforcement Actions September 16, 2011 – Salvage Scrap Metal to Entity List Party –Missouri-based freight forwarder Ram International Inc. (Ram) of St. Louis agreed to pay a $40,000 civil penalty to settle allegations that it aided and abetted the unlicensed export of salvage scrap electrolytic tin plate steel to Allied Trading Company in Karachi, Pakistan. Allied Trading Company is on the Entity List. August 30, 2011 – Financial Transactions in Violation of OFAC Regulations –JPMorgan Chase agreed to pay OFAC $88.3 million to settle charges that it violated numerous OFAC regulations, including the Cuba, Sudan, and Iranian Transactions Regulations. The item that ultimately led to JPMC’s voluntary disclosure was the issuance of a loan to a bank issuing a letter of credit for a transaction for goods being shipped on a blocked vessel of the Islamic Republic of Iran Shipping Lines (IRISL). However, JPMC waited four months to make the disclosure after discovering the violation. August, 2011 – Letters of Credit to Iran Shippers –Societe Generale New York (SGNY) agreed to pay $111,359 to OFAC to settle charges that it facilitated a transaction that would be illegal if undertaken by U.S. persons by issuing two letters of credit to nonsanctioned parties in connection with transactions shipped on IRISL vessels. July, 2011 – Shipments to Entity List Parties –Toll Global Forwarding (USA) Inc. agreed to pay $200,000 to settle charges that it had aided and abetted nine unlicensed exports of EAR99 items to companies on the Entity List. The violations were committed by a subsidiary prior to its acquisition by Toll, and were made to government-owned entities in India. This was actually the second instance of violations in five years by the subsidiary.
© 2009 Foley Hoag LLP. All Rights Reserved. | 3 Denied Party Screening Compliance: Key Export Control Regimes U.S. Sanctions Regime Legislation and Regulations –Department of Treasury/Office of Foreign Assets Control (OFAC) –Transactions of all kinds with persons and entities sanctioned by U.S. government Export Administration Regulations (EAR) –Department of Commerce/Bureau of Industry and Security (BIS) –Dual Use Items International Traffic in Arms Regulations (ITAR) –Department of State/Directorate of Defense Trade Controls (DDTC) –Transactions in and brokering of items on U.S. Munitions List (USML) The Rest of the World –European Union –Canada –United Nations
© 2009 Foley Hoag LLP. All Rights Reserved. | 4 Lists to Check Denied Persons List (BIS) –Individuals and entities that have been denied export privileges. Any dealings with a party on this list that would violate the terms of its denial order are prohibited. Unverified List (BIS) –End-users who BIS has been unable to verify in prior transactions. The presence of a party on this list in a transaction is a “Red Flag” that should be resolved before proceeding with the transaction. Entity List (BIS) – Parties whose presence in a transaction can trigger a license requirement supplemental to those elsewhere in the Export Administration Regulations (EAR). The list specifies the license requirements and policy that apply to each listed party. Specially Designated Nationals List (OFAC) –Parties prohibited from certain export transactions under OFAC sanctions regulations. The EAR require a license for exports or reexports to parties based on suffix pertaining to the reason for placement on the list. Nonproliferation Sanctions (State Department) –Parties that have been sanctioned under various statutes – for example, the Iran Sanctions Act Debarred List (State Department – DDTC) –Entities and individuals prohibited from participating directly or indirectly in the export of defense articles, including technical data and defense services as a result of violations of the Arms Export Control Act (AECA).
© 2009 Foley Hoag LLP. All Rights Reserved. | 5 Finding the Lists Three Options: Check each list individually –Note – lists are not always up to date with Federal Register notices. –In special cases, lists will not provide complete information regarding restricted parties; also don’t cover other national sanctions regimes Utilize Consolidated Screening List –User beware: List is not yet automated for updates. Only for U.S sanctions –“If one of the agency lists noted above has been updated and this downloadable consolidated list file has not yet been updated, the date on the top row in these files will not match the date of last update on the appropriate agency website. If this occurs, the user must check the appropriate agency webpage for the most current party information.” Utilize third party screening solution provider –Not free –Important to tailor to your needs and have internal mechanism for addressing scope of information received
© 2009 Foley Hoag LLP. All Rights Reserved. | 6 Finding the Right Solution Factors to Balance: Scope of need Time Accuracy Completeness of information Human error Cost False positives
© 2009 Foley Hoag LLP. All Rights Reserved. | 7 Tailoring the Process Never One Size Fits All: Who screens? Whom do they screen? What information is utilized? Who collects the information? When is screening performed? Who resolves red flags, clears ambiguous results? When are updates performed? When is rescreening performed? Who owns the records?
© 2009 Foley Hoag LLP. All Rights Reserved. | 8 Department of the Treasury, Office of Foreign Assets Control (OFAC) OFAC administers and enforces economic and trade sanctions against targeted foreign countries, terrorism sponsoring organizations, and international narcotics traffickers. OFAC Web site provides overview information on these sanctions programs, links to legislation and implementing regulations, and the complete list of Specially Designated Nationals and Blocked Persons (the "SDN list").
© 2009 Foley Hoag LLP. All Rights Reserved. | 9 What Else Should You Ask About? What is the product’s intended end-use? Is the customer government or non-government? Is the end-user military? Are there any red flags? Could a deemed export occur? Are sanctioned countries involved? –Cuba –Iran –Syria –Libya –Sudan –Burma (Myanmar) –North Korea
© 2009 Foley Hoag LLP. All Rights Reserved. | 10 Why It Matters: OFAC/EAR Penalties Criminal penalties –Up to $1,000,000 per violation –Up to 20 years imprisonment per violation Civil penalties –Up to the greater of $250,000 per violation –Or twice the amount of the transaction that is the basis of the violation
© 2009 Foley Hoag LLP. All Rights Reserved. | 11 Areas to Integrate into Compliance Program Upper Management/Corporate Sales R&D/Engineering Distributers/Partners Human Resources Compliance/Legal Shipping/Fulfillment
© 2009 Foley Hoag LLP. All Rights Reserved. | 12 Common Pitfalls No established policy/central point of contact for export queries or compliance responsibility Failure to update existing policies and procedures to accord with changes in regulations Failure to update existing policies and procedures to accord with company practice and growth Failure to train new employees regarding policies and procedures Reliance on freight forwarder or other service provider Reliance on vendor or distributor/partner representations or advice Failure to audit compliance with existing policies and procedures
© 2009 Foley Hoag LLP. All Rights Reserved. | 13 Impact of Export Control Reform Primary Goals – The “Four Singles” –Single Control List –Single Licensing Agency –Single Enforcement Agency –Single IT System Major Result to Date for Denied Parties Screening: Consolidated Screening List
© 2009 Foley Hoag LLP. All Rights Reserved. | 14 Gwendolyn Wilber Jaramillo Counsel Questions? Gwendolyn Jaramillo’s diversified international practice encompasses transactional, trade, general corporate and public advocacy concerns. She advises clients on mergers and acquisitions, with a focus on cross-border acquisitions and establishment of international operations. Along with this transactional work, Gwendolyn assists investment advisers with the formation of onshore and offshore hedge funds and related regulatory compliance. She assists clients in a range of industries on compliance with the export controls regulations, including sanctions regimes, of the United States.
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