INTRODUCTION TO ECONOMIC SANCTIONS Scott Nance/Compliance Consulting

Economic Sanctions Economic sanctions are laws that restrict or prohibit dealings with countries, companies, or individuals Many countries and international organizations impose economic sanctions, including United Nations United States European Union Economic sanctions typically target Terrorists Narcotics dealers Government officials suppressing democracy in their home country The spread of weapons of mass destruction U.S. sanctions are generally consistent with actions by the UN, but frequently go beyond UN sanctions.

U.N. Sanctions The United Nations has frequently imposed economic sanctions against countries, groups, and individuals to Preserve peace Prevent nuclear proliferation Combat terrorism Examples of UN sanctions include Iran Somalia North Korea Al Qaida To be effective, UN sanctions must be imposed by individual countries Many countries, including the United States the EU, and Switzerland, generally implement UN sanction programs fairly quickly

U.S. Economic Sanctions The United States (and other countries) have two types of economic sanctions, country-based sanctions and list-based sanctions Country-based sanctions restrict or prohibit transactions involving goods, services, companies, or individuals of certain countries The United States restricts or prohibits transactions with a number of different countries The precise nature of the sanctions varies by country

Countries Subject to U.S. Sanctions The United States prohibits “U.S. persons” from engaging in practically any transactions involving Cuba Iran Syria North Korea More limited sanctions apply to certain entities and persons in Russia and Ukraine Burma/Myanmar and Sudan were previously subject to extensive sanctions, but these have been largely removed Sanctions can be applied directly by the President, as well as by legislation, so new countries can be added, and new sanctions imposed, quite quickly. This also means that sanctions can be modified by the President without prior notice. Sanctions are sometimes removed, as happened recently with Libya.

List-Based Sanctions List-based sanctions prohibit transactions with specified individuals, companies, and other organizations The United States prohibits any transactions with anyone on its list of “Specially Designated Nationals,” (“SDNs”), including specified SDNs include individuals, companies, associations (including some “charities”), and even ships Examples of SDNs include Osama Bin Laden Hezbollah President Aleksandr Lukashenka of Belarus Many of these same persons and organizations are on the sanctions lists of the United Nations, the European Union, and a number of other countries

Why We Must Comply Violating U.S. sanctions laws can expose a company and its employees to Criminal penalties, including imprisonment Civil penalties, including fines Loss of export privileges Increased scrutiny of future actions from the U.S. government Violations can cause serious reputational damage

Who Is Covered by U.S. Sanctions? U.S. sanctions apply to “U.S. persons”, which include U.S. citizens and permanent residents, wherever they are located All individuals physically present in the United States, regardless of their citizenship Companies, partnerships, associations, etc. organized under the laws of any U.S. state Branches of U.S. companies overseas

Subsidiaries Subsidiaries of U.S. companies incorporated under the laws of a foreign country are not U.S. persons However, the Cuba sanctions also apply to foreign subsidiaries of U.S. companies Independent foreign subsidiaries may be able to engage in transactions involving Iran that their U.S. parent cannot Sanctions restrictions still apply to U.S. citizens working for the subsidiaries U.S. citizens can provide overall management to foreign subsidiaries but cannot participate directly in transactions involving sanctioned countries Because foreign subsidiaries can do things that the US parent cannot, but often have US management, involvement of US nationals in subsidiaries’ activities can be tricky. As a general rule, US nationals can be involved in overall management, and they can see information regarding transactions involving sanctioned countries, but they cannot be involved in those transactions in any way. For this reason, it is a good idea to have formal guidelines and procedures for ensuring that US persons are not involved in such transactions.

Cuba and Iran: Prohibited Parties The governments of these countries Companies controlled by these governments, wherever located Companies incorporated in these countries Persons physically located in these countries, regardless of citizenship Cuban nationals, wherever located

Cuba, Iran and Sudan: Prohibited Transactions Exports from the United States, including exports from third countries of products manufactured in the United States Imports into the United States Purchases of services provided by sanctioned parties, including transportation and insurance Financial transactions, including loans and investments Facilitating a prohibited transaction The exact scope of sanctions varies by country. Practically all imports from Cuba are prohibited, for example, while imports of pistachios and carpets from Iran are legal without a license. Similarly, Sudanese private individuals (but not companies) are actually allowed to have accounts in US banks. Most significantly, there is an exception that allows some Iranian financial transactions to be cleared through US banks (the so-called U-turn), although the utility of this exception has been greatly restricted by recent changes to US regulations. US sanctions apply to individuals in Iran and Sudan, regardless of citizenship. On the other hand, Iranian and Sudanese citizens who reside outside the country are not subject to sanctions (assuming they are not SDNs). Cuban nationals, on the other hand, are subject to sanctions regardless of where they live – even Canada.

Syria The United States prohibits exports of U.S. goods or services to Syria without a license There is a general exception for agricultural products and medicine Because Syria’s largest bank has been identified as a prime center of money laundering, many other transactions with Syria are effectively prohibited Imports of goods and services into the United States from Syria are allowed But imports of petroleum products from Syria are prohibited Sanctions are very sensitive to ongoing political developments. There have been discussions about additional sanctions against Burma in particular as a consequence of the suppression by the Burmese government of pro-democracy demonstrations by Buddhist monks. As noted earlier, the President can proclaim additional sanctions without action by Congress, so new sanctions can be put into place very quickly. There have also been discussions of additional sanctions against Syria. Syria’s participation at the Annapolis Peace Conference, however, seems to have quieted these discussions. This is another example of how political events can affect sanctions directly.

North Korea Most U.S. exports to North Korea require a license from the U.S. Department of Commerce Exports of food do not require a license, but as a practical matter, even these exports are very difficult Imports from North Korea require prior authorization by the U.S. government

General Exceptions to Sanctions Informational materials (books, music, movies, etc.) Travel (except for Cuba) Personal remittances to family members Humanitarian relief U.S. products incorporated into products manufactured in other countries before being re-exported, so long as U.S. content is less than 10 percent of the total value Exceptions vary by country, and the exceptions for Cuba are more narrowly drawn than for the other countries.

Licenses The U.S. government can issue a license to permit a transaction that would otherwise be prohibited The license must be obtained before the transaction begins The license specifies exactly what transaction is permitted A license can permit continuing transactions for up to one year Lately, it has been taking Kraft Foods around six months to obtain even routine licenses for food exports to Iran and Sudan

Sanctions Against Individuals The United States has designated hundreds of individuals, companies, groups, and even vessels as “Specially Designated Nationals” (“SDNs”) The United Nations and many countries have similar lists, containing many of the same names Categories of SDNs include Terrorists Drug traffickers Persons and entities trafficking in weapons of mass destruction Government officials of countries suppressing democracy (Belarus, Zimbabwe) OFAC constantly updates its SDN list, which is available online at OFAC’s web site.

Sanctions Against Individuals The U.S. government does not generally grant licenses for transactions with SDNs Occasionally it will grant very limited licenses for such transactions If a U.S. person gains control of any property belonging to an SDN, the U.S. person must “Block” (i.e., freeze) the property by, for example, placing the funds in a special account which the SDN cannot access Inform the U.S. government within 10 days Maintain control over the property until the government tells them what to do with it

EU Sanctions Like the United States, the EU maintains a list of “restricted persons” with whom EU citizens and companies cannot do business As with the U.S. sanctions, EU persons must freeze funds or other property belonging to restricted persons if they come into possession of them The EU restricts or prohibits certain types of transactions with a number of countries, including Iran, North Korea, and Russia EU country sanctions are generally less restrictive than the U.S. sanctions

Screening for Sanctions Concerns To identify parties to a transaction who might be SDNs or connected to a sanctioned country, it is necessary to have in place a process to screen current customer and vendor files against the SDN list Parties that must be reviewed include Purchasers Sellers Financial institutions (including banks) Insurers and reinsurers Shippers and freight forwarders Depending on whether the transaction involves a sanctioned person or country, you may be required to either Freeze the property Reject the transaction Report the transaction to the appropriate authorities