European Export Controls & Sanctions: Enforcement and Disclosures


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Overview of EU export controls and sanctions and self disclosure principles

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  • Under the EAR Not limited to exports/reexports to sanctioned countries Whether a license is required depends on combination of: - classification - destination - restricted end-user - restricted end-uses Cf. EU – if on list license requirement exists
  • - Last in time rule e.g. Iranian national with UK permanent residency - Office of Inspector General Proposal to change to country of birth met huge resistance and dropped. - Possible modified rule.
  • European Export Controls & Sanctions: Enforcement and Disclosures

    1. 1. European Export Control and Sanctions: Enforcement and Disclosures Threats and Controls Affecting International Trade and Cooperation Overseas Security Advisory Council, The Hague, September 1st 2010 Jasper Helder, Baker & McKenzie, Amsterdam [email_address]
    2. 2. Agenda <ul><li>When are US Trade Controls relevant to non-US transactions? </li></ul><ul><li>How do EU Trade Controls interact with US Rules? </li></ul><ul><li>Enforcement of US and EU Rules </li></ul><ul><li>Voluntary Self Disclosures </li></ul>
    3. 3. Trade Controls <ul><li>Controls on proliferation of goods/technology which can be used for civil as well as or only for military purposes (“ Export Controls ”) </li></ul><ul><ul><li>“ Dual Use” vs. Military </li></ul></ul><ul><li>Controls on transactions with specific countries, persons and/or entities (“ Sanctions ”, “ Designated Persons ”) </li></ul><ul><ul><li>Goods/technology </li></ul></ul><ul><ul><li>Finance/investment </li></ul></ul>
    4. 4. <ul><li>Summary US and EU Rules </li></ul>
    5. 5. When are US Trade Controls Relevant to Non-US Transactions? <ul><li>Whenever the transaction involves either : </li></ul><ul><ul><li>“ US origin”/“US content” goods, software or technology </li></ul></ul><ul><ul><li>OR </li></ul></ul><ul><ul><li>“ US persons” </li></ul></ul>
    6. 6. Restrictions on US Origin/Content Items <ul><li>Exports from the US </li></ul><ul><li>Reexports from third countries of 100% US origin items (e.g. NL to Iran) </li></ul><ul><li>Exports/reexports of non-US items with more than de minimis controlled US content </li></ul><ul><li>In some limited cases, exports/reexports of certain non-US items with no US content but based on US technology </li></ul>
    7. 7. Deemed Exports/Reexports <ul><li>Any release of technology/software to a foreign national is a deemed export/reexport to that foreign national’s home country (e.g. to Chinese or Indian engineer based in NL) </li></ul><ul><li>Releases: </li></ul><ul><ul><li>Visual inspection of US origin equipment/facilities </li></ul></ul><ul><ul><li>Oral exchanges of information in US or abroad </li></ul></ul><ul><ul><li>Application to situations abroad of personal knowledge/technical expertise acquired in US </li></ul></ul>
    8. 8. Who is a “US Person”? <ul><li>US companies and foreign branches </li></ul><ul><li>US citizens and permanent resident aliens (Greencard holders), wherever located or employed </li></ul><ul><li>All persons within the United States </li></ul><ul><li>For Cuba only , separately incorporated owned or controlled non-US subsidiaries </li></ul>
    9. 9. The EU export controls regime <ul><li>Regulation 428/2009 – applies directly in all 27 EU Member States </li></ul><ul><li>EU-wide rules (including establishment of common dual-use list) </li></ul><ul><li>Military items dealt with under separate national regimes </li></ul><ul><li>National implementation by EU Member States, particularly in respect of licensing and enforcement </li></ul><ul><li>Outcome: common regime with 27 flavours </li></ul>
    10. 10. EU sanctions policy <ul><li>EU follows so-called “smart” sanctions policy </li></ul><ul><li>Mostly follows UN multilateral regime </li></ul><ul><li>Some unilateral regimes (e.g. Myanmar, Zimbabwe or extended Iran regime) </li></ul><ul><li>EU sanctions regulations directly applicable in all 27 EU Member States </li></ul><ul><li>Licensing, penalties and enforcement left to Member States </li></ul>
    11. 11. Whom do EU sanctions apply to? <ul><li>Within the territory of EU (including transit and airspace) </li></ul><ul><li>On board aircraft or vessels under EU Member State jurisdiction </li></ul><ul><li>Nationals of EU Member States, wherever located </li></ul><ul><li>Any legal person, entity or body incorporated or constituted under laws of EU Member State </li></ul><ul><li>Any legal person, entity or body in respect of any business done in EU </li></ul>
    12. 12. Preferred EU sanctions measures <ul><li>Freeze of funds and economic resources of Designated Persons (DPs) </li></ul><ul><li>Prohibition on making funds and economic resources available directly/indirectly to or for the benefit of DPs </li></ul><ul><li>Investment ban against DPs or certain sectors (e.g. granting credit or purchasing shares) </li></ul><ul><li>Arms embargo (including arms-related financial or technical assistance) </li></ul><ul><li>Other country-specific measures (e.g. for Iran, Myanmar, DPRK covering supply of specific items) </li></ul><ul><li>Also covers acts intended to circumvent prohibitions or to promote prohibited activities </li></ul>
    13. 13. US vs. EU comparison <ul><li>Key differences between EU and US systems </li></ul><ul><ul><li>Extraterritorial impact of US controls </li></ul></ul><ul><ul><li>More US unilateral controls (controlled product lists and sanctions) </li></ul></ul><ul><ul><li>No deemed export rules in EU </li></ul></ul><ul><ul><li>No re-export rules in EU </li></ul></ul><ul><ul><li>Enforcement and penalties </li></ul></ul><ul><ul><li>US compliance does not mean EU compliance and vice-versa! </li></ul></ul>
    14. 14. <ul><li>Enforcement </li></ul>
    15. 15. US Regulators <ul><li>US Sanctions: Office of Foreign Assets Controls (“ OFAC ”) </li></ul><ul><ul><li>Dept. of the Treasury </li></ul></ul><ul><li>US Dual Use Export Controls: Bureau of Industry and Security (“ BIS ”) </li></ul><ul><ul><li>Dept. of Commerce </li></ul></ul><ul><li>US Military Export Controls: Dept. Of Defense Trade Controls (“ DDTC ”) </li></ul><ul><ul><li>State Dept. </li></ul></ul>
    16. 16. US extraterritorial enforcement (1) <ul><li>Aircraft Components to Iran (2009) </li></ul><ul><li>On September 24, 2009, Aviation Services International BV (ASI), an aircraft supply company in the Netherlands, Robert Kraaipoel, Director of ASI, Neils Kraaipoel, sales manager of ASI, and Delta Logistics pled guilty in U.S. District Court in Washington, DC to charges related to a conspiracy to illegally export aircraft components and other U.S.-origin commodities to entities in Iran, via the Netherlands, the United Arab Emirates and Cyprus. </li></ul><ul><li>Settlement Thermon Europe BV (2009) </li></ul><ul><li>Reexported U.S.-origin heat tracing equipment from the Netherlands to Libya without the required licenses and with knowledge that violations would occur. </li></ul>
    17. 17. US extraterritorial enforcement (2) <ul><li>Lloyds TSB Bank, plc (2009) </li></ul><ul><li>Settles allegations of violations of the Iranian Transactions Regulations, the Sudanese Sanctions Regulations and the now-repealed Libyan Sanctions Regulations. Lloyds has taken remedial measures, agreeing to have its internal audit department conduct, on an annual basis, for a period of two years, a review of the bank’s policies, procedures and a statistically significant sampling of USD payments to determine whether any payments subject to OFAC regulations were processed through, or on behalf of, any U.S. individual or entity. Lloyds agreed to use a qualified independent third party to oversee and certify the findings of its internal audit department. The United Kingdom’s Financial Services Authority, Lloyds’ primary regulator in the U.K., is to approve the independent third party as well as the scope of the review. Lloyds has agreed to a settlement with OFAC of USD 217,000,000. </li></ul><ul><li>Credit Suisse AG (2009) </li></ul><ul><li>Has terminated the alleged illegal activities, has cooperated fully with OFAC, has undertaken substantial remedial steps and will be implementing an enhanced global regulatory compliance program. OFAC mitigated the total potential penalty based on Credit Suisse’s extensive and substantial cooperation, its remediation, the fact that OFAC had not issued a penalty notice or finding of violation against Credit Suisse in the five years preceding the transactions at issue, and Credit Suisse’s willingness to enter into tolling agreements with OFAC. Credit Suisse substantially cooperated with OFAC by engaging an independent consulting firm to conduct an extensive review of all applicable incoming and outgoing payment messages during the review period and providing that information to OFAC in a comprehensive and well organized manner. Mitigation was also extended because Credit Suisse agreed to settle the allegations of violations. As part of this global settlement, Credit Suisse has agreed to pay an aggregate amount of USD 536,000,000. </li></ul>
    18. 18. Enforcement in Europe (1) <ul><li>Takes place on national level, in accordance with national laws (but may be prompted by EU or US-EU exchange of information) </li></ul><ul><li>Common denominators between EU member states, but also substantial differences </li></ul><ul><li>Different cultures: from Informed compliance to Enforced compliance </li></ul>
    19. 19. Enforcement in Europe (2) <ul><li>General awareness of trade control compliance requirements </li></ul><ul><ul><li>Defense industry </li></ul></ul><ul><ul><li>Financial institutions </li></ul></ul><ul><li>In many EU countries: Less awareness industry re. trade control compliance requirements </li></ul><ul><ul><li>No systematic or insufficient compliance program </li></ul></ul><ul><ul><li>No dedicated trade compliance expertise/resources </li></ul></ul><ul><ul><li>Many EU countries do not have a long enforcement tradition/history </li></ul></ul><ul><ul><li>EU subsidiairies of US companies often have higher awareness levels </li></ul></ul>
    20. 20. Enforcement in Europe (3) <ul><li>Administrative enforcement </li></ul><ul><ul><li>Audits </li></ul></ul><ul><ul><li>Withdrawal/suspension of licenses </li></ul></ul><ul><li>Criminal enforcement </li></ul><ul><ul><li>Investigations (commonly by Customs, who mostly are authorised to conduct criminal investigations) </li></ul></ul><ul><ul><li>Prosecution (often by general prosecution authorities) </li></ul></ul><ul><ul><li>Settlement (in some EU member states) with prosecutor/Customs </li></ul></ul>
    21. 21. Enforcement in Europe (4) <ul><li>National administrations may have duty to report violations </li></ul><ul><li>Prosecuting authorities may not have discretion to prosecute or not </li></ul><ul><ul><li>Guidelines for prosecution not commonly established or publicly available </li></ul></ul><ul><ul><li>No public reporting on concrete cases in most EU countries </li></ul></ul><ul><ul><li>Where settlements occur, these are not commonly published </li></ul></ul><ul><ul><li>Where settlement is possible, no published guidelines for amounts/measures </li></ul></ul>
    22. 22. <ul><li>Voluntary Self Disclosures (“VSD”) </li></ul>
    23. 23. EU vs. US <ul><li>US: regulated process, fines/penalties are subject to guidelines </li></ul><ul><li>EU: national rules vary between EU countries. Mostly not regulated process </li></ul><ul><li>Common factor: VSD does not prevent prosecution and/or enforcement action, but can mitigate </li></ul>
    24. 24. VSD Benefits <ul><li>Regulatory credit for voluntarily bringing violations to attention of authorities </li></ul><ul><li>Greater expectation by authorities that disclosures should be made </li></ul><ul><li>Potential for reduced or no penalty/enforcement </li></ul><ul><li>Greater ability to influence proceedings </li></ul><ul><li>“ Cleanse” target company in M&A transactions </li></ul>
    25. 25. To disclose or not to disclose? (1) <ul><li>Is there a duty to disclose? </li></ul><ul><li>What is the risk of the conduct being discovered? </li></ul><ul><li>If the business is sold, will a buyer’s due diligence lead to discovery? </li></ul><ul><li>External auditors and their reporting obligations? </li></ul><ul><li>What if a disaffected employee blows the whistle? </li></ul><ul><li>What if a trading party discloses or submits report to authorities? </li></ul>
    26. 26. To disclose or not to disclose? (2) <ul><li>If a decision is made to disclose, what will be the attitude of the authorities, and what guidance/assurance will they provide? </li></ul><ul><li>Was the Board involved/aware, and is this Board still in place? </li></ul><ul><li>Can new management clean up the business if issue is endemic? </li></ul><ul><li>Risk for individual company officers/employees? </li></ul><ul><li>Risks in other countries? </li></ul>
    27. 27. Preparation (1) <ul><li>Ensure a VSD is well prepared – a poor VSD will make your position worse </li></ul><ul><li>Authorities are setting increasingly high benchmark for VSDs </li></ul><ul><li>High US standards are creeping into Europe </li></ul>
    28. 28. Preparation (2) <ul><li>Thoroughly investigate the facts </li></ul><ul><li>Suspend data/document destruction policies </li></ul><ul><li>Elicit full co-operation from employees (tension with possible disciplinary action) </li></ul><ul><li>Thorough review of all relevant data/documents (correspondence, shipping documents, licenses and conditions, third party/authorities advice) </li></ul><ul><li>Interview appropriate personnel </li></ul><ul><li>Ensure report is privileged </li></ul>
    29. 29. Preparation (3) <ul><li>Carefully consider legal situation </li></ul><ul><ul><li>Are transactions violations or not? </li></ul></ul><ul><ul><li>Who had licensing responsability? </li></ul></ul><ul><ul><li>Isolated incident? </li></ul></ul><ul><ul><li>Good faith misinterpretation? </li></ul></ul><ul><ul><li>Would license have been granted? </li></ul></ul><ul><ul><li>No harm to national security? </li></ul></ul><ul><ul><li>No prior violations? </li></ul></ul>
    30. 30. Content (1) <ul><li>Full, frank and honest </li></ul><ul><li>What happened? </li></ul><ul><li>When? </li></ul><ul><li>Where? </li></ul><ul><li>Why? </li></ul><ul><li>Why will violations not happen again? </li></ul><ul><ul><li>Remedial action </li></ul></ul><ul><ul><li>Compliance programme/resources </li></ul></ul>
    31. 31. Content (2) <ul><li>Disclose any “ancillary” offences that need disclosing (AML, record keeping offenses, incorrect customs declarations) </li></ul><ul><li>Ensure senior management is aware of disclosure </li></ul><ul><li>Trading partners? </li></ul>
    32. 32. US Considerations <ul><li>Regulated penalties (guidance) </li></ul><ul><li>Complexity of overlapping competences of regulators (BIS, OFAC, DDTC etc.) </li></ul><ul><li>Certain disclosures are filed simultaneously with more regulators </li></ul><ul><li>VSDs are strongly encouraged by regulators </li></ul><ul><li>Greater ability (than in many EU countries) to engage in settlement negotiations </li></ul><ul><li>US authorities more likely to impose future compliance obligations (independent compliance monitor/auditing/ reporting) </li></ul>
    33. 33. European Export Control and Sanctions: Enforcement and Disclosures Threats and Controls Affecting International Trade and Cooperation Overseas Security Advisory Council, The Hague, September 1st 2010 Jasper Helder, Baker & McKenzie, Amsterdam [email_address]