The most significant change announced today is the State Department’s decision to add Russia to the International Traffic in Arms Regulations’ (ITAR) list of “proscribed countries,” commonly known as the Section 126.1 list. Countries on this list are subject to a policy of denial for license applications, so the change will effectively subject Russia to a U.S. arms embargo, prohibiting the export of most ITAR-controlled defense articles and defense services to Russia. Limited exceptions to the policy of denial will be made for exports in support of government space cooperation. The State Department will also review licenses related to commercial space launches on a case-by-case basis, but only for six months, after which license requests related to commercial space launches will face a presumption of denial. As noted below, the Commerce Department has announced corresponding changes to its licensing policy regarding exports related to commercial space flight activities in Russia. Additionally, certain transactions with 126.1 countries are subject to mandatory disclosures to the DDTC, instead of the general rule that violations are subject to voluntary disclosures to the agency.

Below is a summary of the actions taken by other key U.S. regulators today, including the Treasury, State, and Commerce Departments:

• New SDNs: OFAC added seven Russian government officials and three entities to the Specially Designated Nationals (SDN) List and imposed new sanctions on existing Russian SDNs;
• Entity List Additions: The Commerce Department added 14 entities in Russia, Switzerland, and Germany to its Entity List due to their connection to WMD and chemical weapons production, barring exports of items subject to the Export Administration Regulations (EAR) to the designated entities.
• Dual Use Export Control License Restrictions: The Commerce Department will limit the availability of certain license exceptions and licenses for exports of NS-controlled items to Russia. Commerce indicated that exports of NS-controlled items to Russia will no longer be eligible for license exceptions Service and Replacement of Parts and Equipment (RPL), Technology and Software Unrestricted (TSU), and Additional Permissive Reexports (APR). Commerce will reverse its existing licensing policy and replace it with a presumption of denial to license requests related to exports of NS-controlled items for commercial end-users related to civil end-uses in Russia. In six months, Commerce will also adopt a policy of denial for license requests involving exports of NS-controlled items to Russia related to commercial space flight activities.
• Secondary Sanctions: The State Department added six scientific institutes to its Section 231 List of persons known to operate for or on behalf of the Russian defense or intelligence sectors. As a result of the designations, non-U.S. persons that conduct significant transactions with these parties could be subject to U.S. secondary sanctions in the future.

The charges related to TransTel causing six different financial institutions to provide unauthorized financial services relating to transactions with Iran. The funds transfers were processed in part in the U.S. and they involved the supply of goods or services handled by a variety of vendors and service providers with connections to Iran. None of the transactions referred to Iran, Iranian parties, or Iranian projects, yet they were still sufficient to trigger a U.S. government investigation and charges. Note that the U.S. financial institutions were not involved in this enforcement matter at this time, but rather a non-U.S. company was accused of “causing” U.S. companies subject to OFAC jurisdiction to violate the Iran sanctions. This “causation” approach creates a broader scope of OFAC jurisdiction and enforcement than many non-U.S. companies expect, and its use is expanding. Moreover, many non-U.S. companies believe they are beyond the reach of U.S. sanctions penalties, but charges and forced settlements involving non-U.S. companies are relatively common for the agency. Companies that are charged with violations, including causation violations, face difficult choices. If they don’t settle the accusations with OFAC, they may well find themselves listed as specially designated nationals (SDN), which would render them virtually unable to conduct business in the U.S., or with most U.S. companies and subsidiaries. In addition to heightened restrictions on dealing with SDN’s many non-U.S. companies use denied party screening programs that include OFAC SDN designations, and those companies will very often refuse to deal with a listed SDN.

Best practices to reduce the risk of an OFAC investigation and associated penalties include very basic steps, such as issuing or updating a company-wide export control and sanctions policy statement and having well-versed specialists provide baseline training. Given very recent bi-partisan legislation to tighten U.S. sanctions on Iran, Russia and North Korean, now is a good time to renew a policy statement with counsel.

Protective compliance measures range from conducting a review and enhancement of the company’s broader export/sanctions compliance program, to a review of company transactions and sales channels to identify potentially risky transactions. Construction of a more robust compliance program based on the results of such a data review is a path selected by many companies, and should be seriously considered by international telecom companies, which will be under a heightened level of review.

Lesson One: Don’t launder money for North Korean SDNs engaged in proliferation schemes. If you want to know more about how North Korea attempts to launder funds, check out this detailed and fascinating report on the topic.

Lesson Two: If you conduct a transaction in U.S. dollars, even if all other aspects of the transaction occur outside of the United States, the U.S. government will likely claim jurisdiction over the transaction.

In the Mingzheng case, the U.S. government asserted jurisdiction because the Chinese companies used U.S. dollars, which triggered indirect dollar clearing transactions in the United States:

Although North Korean financial facilitators engage in U.S. dollar transactions overseas, funds are still cleared through a U.S. correspondent bank account, thereby triggering the U.S. economic sanctions. . . These U.S. dollar payments, which cleared through U.S. correspondent banking accounts, violated U.S. law, because Mingzheng was surreptitiously making them on behalf of FTB, whose designation [as an SDN] precluded such transactions.

In other words, the U.S. government is claiming that the Chinese companies caused U.S. banks to conduct dollar clearing transactions for the ultimate benefit of a blacklisted SDN, an activity that is prohibited under U.S. law. Most international trade transactions denominated in U.S. dollars will generate this type of activity in the United States, potentially triggering U.S. jurisdiction over the underlying transactions.

Conducting transactions denominated in U.S. dollars is only one way that non-U.S. companies can become subject to U.S. sanctions laws. Non-U.S. companies can also get in trouble if they conduct a transaction with an SDN or embargoed territory (currently the Crimea region of Ukraine, Cuba, Iran, North Korea, and Syria) that involves U.S. companies, products, or persons. The classic example here is of a non-U.S. company ordering products from the United States in order to resell them to an SDN or embargoed territory. A similar and common issue arises when a non-U.S. company has employees who are U.S. citizens. Such employees must be fully recused from any business related to SDNs or embargoed territories. ‘Secondary’ sanctions are another way that non-U.S. companies can become subject to U.S. sanctions, but that’s a complex story for another blog post.

The takeaway: If you conduct a transaction that is or may become subject to U.S. law, you need to ensure that all aspects of the transaction complies with U.S. sanctions rules. A basic and important due diligence step is to screen all such transactions against the U.S. SDN List and identify any transactions that might involve sanctioned countries or territories.