Understanding Economic Sanctions: Implications and Compliance

1. INTRODUCTION TO ECONOMIC SANCTIONS Scott Nance/Compliance Consulting

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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)

17. 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

18. 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

19. 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