This is the fifth post in this year’s series examining important trends in white collar law and investigations. Our previous post discussed trends in State AG enforcement. Up next: SEC Enforcement in 2022: A Look Ahead.
- Russia and China will continue to be the focus of country-specific sanctions and export controls, but hotspots around the world persist;
- The Biden Administration will continue to focus on human rights, multi-lateral sanctions and export controls coordinated with allies, and the growing compliance threat posed by virtual currencies;
- Strong enforcement of sanctions and export control laws is expected to continue in 2022.
The first year of the Biden Administration featured a perhaps surprising degree of continuity with the Trump Administration’s international trade policies, although with an expected change in tone and emphasis on multilateral export controls and sanctions. We expect many of the same priorities from 2021 to continue in 2022, but with Russia overtaking China in the near term as the focus of U.S. concern.
A. Countries to Watch:
1. Russian Federation
Days before the end of the Trump Administration, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) imposed sanctions on a number of individuals and entities associated with election interference. The Biden Administration continued actively targeting Russia with new rounds of sanctions actions in response to a wide range of political disagreements and provocations. In March 2021, the Department of Commerce’s Bureau of Industry and Security (“BIS”) announced expanded export restrictions pursuant to the determination that the Russian Government had used a prohibited weapon in the poisoning of opposition leader Alexei Navalny. BIS implemented new export restrictions prohibiting exports to certain military-intelligence end uses and end users (“MIEUs,” and such restrictions, the “MIEU Rule”). The MIEU Rule places significant restrictions on exports to MIEUs in Russia and numerous other countries. In addition, the MIEU Rule prohibits U.S. persons from providing “support” to MIEUs, even if such support does not involve the export of items subject to the Export Administration Regulations (“EAR”). These actions were followed, in April 2021, by the issuance of Executive Order 14024, which authorized sanctions on Russia in response to a range of “harmful foreign activities” by the Russian Government, including interference in U.S. elections, cyber-attacks against the U.S. and its allies, the use of transnational corruption to influence foreign governments, targeting of dissidents and journalists, and violation of international law. Under this new Executive Order, the OFAC quickly targeted a number of individuals and entities, including the SolarWinds cyber-attack, Russia’s continued military occupation of Crimea, and interference in U.S. elections. Controversially, in May 2021, the Biden Administration chose not to impose sanctions on Nord Stream 2 AG, a Russian-controlled company developing the Nord Stream 2 gas pipeline between Russia and Germany.
The final months of 2021 were dominated by Russia’s increasingly aggressive actions towards Ukraine. On February 21, 2022, following Russia’s recognition of the so-called Donetsk People’s Republic and Luhansk People’s Republic as independent from Ukraine, President Biden issued Executive Order 14065 imposing comprehensive sanctions on these regions, similar to the ones imposed on the Crimea region following its annexation by Russia. OFAC also issued several general licenses in tandem, including to allow a wind-down of operations and contracts involving the two regions by March 23, 2022, and to authorize the continued export of agricultural commodities, medicine and medical devices to the regions. The next day, on February 22, 2022, President Biden described Russia’s actions as “the beginning of a Russian invasion of Ukraine” and announced a second wave of sanctions, which OFAC swiftly implemented, along with issuing new FAQs and two general licenses to allow certain winding-down transactions. As a result of these actions, two Russian banks with ties to the defense industry (Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank and Promsvyazbank Public Joint Stock Company) and their many subsidiaries, as well as several individuals associated with Putin’s “inner circle” and their family members were added to the SDN List. Additionally, OFAC published Directive 1A, which supersedes the prior Directive 1 and restricts U.S. participation in the secondary market for ruble or non-ruble denominated bonds issued by certain Russian financial institutions.
For a detailed analysis of potential sanctions and export controls that may be imposed in response to a further invasion of Ukraine by Russia, please see our client alert here. As this is a rapidly developing situation, Foley Hoag will be providing updates regarding any forthcoming Ukraine-related actions in future client alerts.
The Biden Administration has so far maintained a high degree of continuity with the Trump Administration’s approach to China, continuing to sanction China for undermining democracy in Hong Kong, imposing sanctions on Chinese military-industrial complex and Chinese surveillance technology companies, and taking action to promote human rights in China’s Xinjiang Uyghur Autonomous Region (“XUAR”).
The Trump Administration’s move to terminate preferential treatment of Hong Kong vis-à-vis the rest of China under the EAR and International Traffic in Arms Regulations (“ITAR”) was left in place by the Biden Administration. In January 2021, OFAC issued regulations to implement Executive Order 13936 of July 14, 2020, “The President’s Executive Order on Hong Kong Normalization,” which eliminated Hong Kong’s preferential treatment in a number of different areas, including sanctions, export controls, immigration, and academic exchanges. In March and December 2021, the State Department issued reports pursuant to the 2020 Hong Kong Autonomy Act, identifying several PRC and Hong Kong officials whose actions it deemed to have contributed to undermining Hong Kong’s autonomy. The identification of these individuals in the reports means that foreign financial institutions that knowingly conduct significant transactions with these individuals can now be subject to U.S. sanctions. In March 2021, China was included in the list of countries subject to BIS’s MIEU Rule. On July 16, 2021, OFAC also designated several PRC officials to the Specially Designated Nationals and Blocked Persons List (“SDN List”) pursuant to the Hong Kong Autonomy Act. On the same day, the U.S. Departments of State, Treasury, Commerce and Homeland Security also issued a business advisory to highlight growing risks that could adversely impact U.S. companies that operate in Hong Kong, including data privacy risks, risks regarding transparency and access to critical business information, and risks for businesses with exposure to sanctioned Hong Kong or PRC entities or individuals.
Further, in June 2021, President Biden issued Executive Order (“EO”) 14032, “Addressing the Threat From Securities Investments That Finance Certain Companies of the People’s Republic of China,” which prohibits U.S. persons from purchasing or selling publicly‑traded securities of any entities identified as Communist Chinese Military-Industrial Companies (“CMIC”), or any publicly traded securities that are derivative of such securities, or are designed to provide investment exposure to such securities. The new EO amends prior EO 13959 issued by President Trump, including by, amongst other things, expanding the scope of entities that may be subject to CMIC sanctions to include those operating in the surveillance technology sector of China. On February 15, 2022, OFAC issued regulations implementing EO 14032.
The Biden Administration also took various steps to punish and counter reported human rights abuses in China. In March and December 2021, OFAC sanctioned several PRC officials in connection with human rights abuses against ethnic minorities in XUAR. In December 2021, OFAC also added nine Chinese surveillance technology companies to the Non-SDN CMIC List for their role in developing and enabling technology that assist in tracking and identifying religious and ethnic minorities in XUAR. As explained below, U.S. Customs and Border Protection (“CBP”) also issued various Withhold Release Orders (“WRO”) targeting China and the XUAR in specific. The Biden Administration also passed the Uyghur Forced Labor Prevention Act on December 23, 2021, which essentially blocks the import of goods from the XUAR into the U.S.
These actions by the Biden Administration have generally been met with bipartisan approval. In light of the continued tension between China and the United States, we expect a steady rollout of sanctions and other trade restrictions targeting China to continue during the second year of the Biden Administration.
2021 saw the return of Taliban control of Afghanistan after the withdrawal of U.S. coalition forces in August and the resulting swift collapse of the Afghan government. Although the Taliban has been designated as a Specially Designated Global Terrorist organization since 2001, in a much awaited FAQ released at the end of 2021, OFAC clarified that Afghanistan is not currently subject to comprehensive sanctions in the way that Iran, Syria, Cuba, North Korea, and the Crimea region of Ukraine are. As a result, sanctions on the Taliban and Haqqani Network (a semi-autonomous branch of the Taliban) generally do not prohibit U.S. persons from exporting or re-exporting goods or services to Afghanistan as long as the transactions do not involve persons on the SDN List. Further, in response to the uncertainty regarding how the Taliban designations impact interactions with the Afghan government, OFAC has issued multiple General Licenses (allowing certain humanitarian-related transactions), related FAQs, and a fact sheet, “Provision of Humanitarian Assistance to Afghanistan and Support for the Afghan People,” which provides an overview of the relevant exemptions and guidance.
We expect that the Afghan sanctions program will remain a priority for OFAC in 2022. Given that the Afghan government is now run by an organization designated on the SDN List, persons operating in Afghanistan are advised by OFAC to “use all information at their disposal when assessing their risk for sanctions exposure,” including by “supplementing internal due diligence information with an array of open-source material” to identify any potentially risky counterparties involved in a transaction.
In response to what the U.S. deemed a fraudulent presidential election in Belarus on August 9, 2020, and the violent political repression that followed, the U.S. has launched five rounds of sanctions against the country in coordination with Canada, the EU, and the UK. Sanctions have targeted government officials and businesspeople as well as major petrochemical, potash (fertilizer), and tobacco product companies. Of particular note was the imposition of restrictions on dealings in new issuances of Belarusian sovereign debt in both the primary and secondary markets, which may serve as a model for future sanctions against Russia, which is currently subject only to restrictions on certain sovereign debt dealings in the primary market.
Although major industries in Belarus have already been heavily sanctioned, the risk of further sanctions against the country in 2022 remains very high, especially with the possibility that Belarus may assist Russia in a potential invasion of Ukraine.
Following the military coup d’état in Burma in early 2021, rather than re-activating the prior Burma sanctions regime, President Biden issued Executive Order 14014, “Blocking Property with Respect to the Situation in Burma,” authorizing sanctions on several categories of persons, including military personnel involved in the coup, as well as persons operating in the Burmese defense sector more broadly, or engaged in actions or policies that undermine democratic processes or institutions in Burma.
Since then, OFAC has designated various Burmese officials and entities to the SDN List pursuant to the EO, including most notably the State Administrative Council (“SAC”), which is the government body formed by the Burmese military to govern Burma. The most recent designations occurred on January 31, 2022, on the one-year anniversary of the military takeover in Burma, with OFAC adding to the SDN List seven individuals and two entities connected to Burma’s military regime. These designations were part of a joint action with the United Kingdom and Canada, who each also designated two Burmese government officials.
In March 2021, the Department of Commerce added Burma to the list of countries subject to Military End User controls as well as the MIEU Rule. In addition, on March 8, 2021, BIS downgraded Burma from Country Group B to Country Group D:1, which makes unavailable several license exceptions that previously could have been used to export certain items to Burma, and subjects the country to the more restrictive export licensing policy. The Departments of State, Commerce, Treasury, Labor, and Homeland Security and the Office of the U.S. Trade Representative also issued an advisory in January 2021 to inform entities and individuals of the heightened risks associated with doing business in the Burma, and in particular with the military regime.
We expect sanctions on Burma to continue in 2022, and for the U.S. to work alongside international allies to demonstrate the international community’s support for the people of Burma and to further promote accountability for the coup and the violence perpetrated by the regime.
The U.S. government has applied a number of sanctions in response to the suspicious activity, corrupt business schemes, and human rights violations that persist in Cambodia. In November 2021, the U.S. Commerce and Treasury Departments released a joint Cambodia Business Advisory on High-Risk Investment and Interactions where they publicized these issues and warned that companies engaging in business within particular sectors of this country’s economy need to perform proper due diligence to avoid the legal challenges presented by various sanction regimes.
Later, in December 2021, BIS added Cambodia to Country Group D:5, leading to a restrictive review of Cambodian license applications concerning items controlled for national security reasons. This addition to the list also meant that Cambodia is now part of the group of countries that are subject to military end use/user (“MEU”) export controls. BIS also added Cambodia to the list of countries subject to the MIEU Rule and the State Department amended Section 126.1 of the ITAR to add Cambodia to the list of countries subject to an arms embargo.
At the start of the year, expectations were that the Biden Administration would likely try to return to the thaw in U.S.‑Cuba relations, as seen under the Obama Administration. However, in March 2021, Cuba was included in the list of countries subject to BIS’s MIEU Rule. Additionally, popular protests in Cuba in July 2021 resulted in the Biden Administration taking a tough line with the Cuban government, and there has been no material relaxation of sanctions on Cuba. We do not expect this to change in 2022—a federal election year.
On September 17, 2021, President Biden issued Executive Order 14046, “Imposing Sanctions on Certain Persons With Respect to the Humanitarian and Human Rights Crisis in Ethiopia” in response to humanitarian conflict on the northern border of Ethiopia and Eritrea. The EO authorizes sanctions on persons who are found (directly or indirectly) to be responsible for, or complicit in activities that threaten the peace, security or stability of Ethiopia, and actions that obstruct the peace process in northern Ethiopia. All Eritrean military and security forces that operate in Ethiopia after November 1, 2020 are also subject to sanctions. Unlike many other OFAC sanctions regimes, the sanctions do not extend to entities which are owned 50% or more by an SDN designated pursuant to EO 14046. Following the issuance of the EO, OFAC issued general licenses for humanitarian purposes.
Several officials in the Eritrean government, along with the Eritrean military, have already been designated on the SDN List pursuant to EO 14046 for their destabilizing role in the conflict in Ethiopia. On February 9, 2022, OFAC also issued new Ethiopia Sanctions Regulations that implement the restrictions imposed in EO 14046. Additional guidance, FAQs, and general licenses will likely be forthcoming from OFAC in 2022 as OFAC intends to supplement the current regulations with more comprehensive regulations. We expect further sanctions on Eritrean officials and government agencies in 2022 if Eritrean military forces remain in Ethiopia.
In addition to the imposition of sanctions, on November 1, 2021, Ethiopia was added to Section 126.1 of ITAR, which subjects the country to an arms embargo. Eritrea was already listed in Section 126.1, which includes countries such as Afghanistan, Iraq, Libya, Russia, and Sudan, but its country policy was amended to remove a policy of granting licenses for certain non-lethal military equipment. Now, both Ethiopia and Eritrea are subject to a broad policy of denial for all export license applications under the ITAR.
On February 18, 2021, the Biden Administration rescinded the Trump Administration’s re-imposition of UN sanctions on Iran and formally offered to restart nuclear talks, which resumed later in the year. This raised the prospect of a thaw in relations with Iran. By all accounts, however, talks are not going well despite the Biden Administration’s stated intent to rejoin the Joint Comprehensive Plan of Action (“JCPOA”). Instead, the Biden Administration imposed new sanctions on numerous Iranian persons throughout the year. In March 2021, Iran was also included in the list of countries subject to BIS’s MIEU Rule. We do not anticipate any material reduction in the scope of sanctions against Iran in 2022.
In 2021, OFAC added multiple Nicaraguan government officials, government agencies, and state-owned entities to the SDN List for various human rights violations, including repression of civil society, supporting the fraudulent presidential and parliamentary elections, and undermining democracy and the rule of law.
In November 2021, OFAC added the Public Ministry of Nicaragua and nine Nicaraguan government officials to the SDN List following the fraudulent national elections held by the Ortega regime in that same month. Earlier this year, on January 10, 2022, OFAC added another six Nicaraguan government officials to the SDN List ahead of the inauguration of President Daniel Ortega and Vice President Rosario Murillo later that same day.
U.S. sanctions on Nicaragua have generally been met with international approval and support. Canada, the EU and UK have each also imposed sanctions on various entities and individuals in Nicaragua in the past year. We expect sanctions on Nicaragua to continue, and likely escalate, in 2022 in light of the Ortega regime’s continued human rights abuses and actions to undermine democratic processes.
At the end of 2020, the Trump Administration removed Sudan from the list of state sponsors of terrorism, citing a return to democratic principles following a popular protest movement that led to the removal of long-time dictator, Omar al-Bashir, as well as the normalization of relations with Israel. Sudan was subsequently moved by BIS from Country Group E:1 to Country B, a much less restrictive designation from an export licensing standpoint, although it remains listed in Country Group D:5, which results in continued limitations on exports of arms to Sudan.
Sudan’s return to democracy was short-lived, as a military coup removed the civilian government in October 2021. The Prime Minister, Abdalla Hamdok, was restored to power in November after reaching a deal with Sudan’s military, but has since resigned again on January 2, 2022 in response to further violence by security forces against pro-democracy protesters. To date, there has been no move to impose sanctions on Sudan or to re-designate the country as a state sponsor of terrorism, but the situation is fluid and it is unclear who will lead the country in 2022, though the military will certainly remain a powerful force for the foreseeable future.
On January 19, 2021, the last day of the Trump Administration, OFAC designated three individuals, fourteen entities, and six vessels for sanctions evasion related to Venezuelan state-owned oil company Petroleos de Venezuela, S.A. (“PdVSA”). On March 11, 2021, the State Department issued additional blocking sanctions against President Nicolas Maduro pursuant to Executive Order 13949, “Blocking Property of Certain Persons with Respect to the Conventional Arms Activities of Iran” for assisting Iran with the acquisition of conventional arms and associated parts. As Maduro has been designated on the SDN List since 2017 pursuant to Executive Order 13692, this new action does not alter existing prohibitions but indicates that Venezuela’s economic ties with Iran remain an area of State Department focus. Also in March 2021, Venezuela was included in the list of countries subject to BIS’s MIEU Rule. During 2021, OFAC also extended several general licenses, including extending the authorization for certain transactions with PdVSA, and issued a new general license on June 17, 2021 related to humanitarian assistance for the Covid-19 pandemic. While sanctions activity in 2021 was substantially lower than in preceding years, the Biden Administration has not significantly altered the Venezuela sanctions program, and continues to reject the regime of President Maduro, who has been in power since 2013. We expect to see the Venezuela sanctions program continue as long as the Maduro regime remains in power.
B. Other Areas to Watch:
1. International Criminal Court Sanctions
In June 2020, President Trump signed Executive Order 13928 authorizing the imposition of sanctions on foreign persons determined to have engaged in or assisted efforts by the International Criminal Court (“ICC”) to investigate or prosecute international crimes allegedly committed by Americans or personnel of certain United States allies, or to have materially assisted persons designated pursuant to EO 13928. On September 2, 2020, the Trump administration designated the ICC’s Chief Prosecutor, Fatou Bensouda, and the ICC’s Head of Jurisdiction, Complementarity, and Cooperation Division, Phakiso Mochochoko to the SDN List. On September 30, 2020, OFAC issued regulations to implement EO 13928.
The EO was the subject of a lawsuit filed by Foley Hoag in October 2020 in the U.S. District Court for the Southern District of New York on behalf of several plaintiffs, including Open Society Justice Initiative and four law professors, arguing that EO 13928 violates constitutional rights, including the plaintiffs’ freedom of speech. To read more about the lawsuit, see here and here.
The Biden Administration issued Executive Order 14022 on April 1, 2021, terminating the sanctions related to the ICC and OFAC issued a final rule removing the ICC Sanctions Program on July 6, 2021.
2. The Treasury 2021 Sanctions Review (the “Review”)
On October 18, 2021, the U.S. Department of the Treasury released a review of its economic sanctions programs administered by OFAC. The Review highlighted successes of the OFAC sanctions programs, including restricting Iran’s ability to fund its nuclear program and terrorist activities, and safeguarding tens of billions dollars’ worth of Libyan assets from misappropriation by former government officials. It also described considerations used by OFAC during the process of issuing sanctions, including whether a potential action: (1) has been sufficiently evaluated and approved as the most effective tool for the situation; (2) is part of a broader policy objective; (3) can cause potential unintended consequences on third parties; and (4) can be coordinated multilaterally with allies, stakeholders, or other interest groups.
However, the Review did not provide an examination of the impact of specific sanctions programs, or provide any new changes to existing OFAC guidance. Looking ahead, the Review indicates that we can expect to see a continued use of multilateral sanctions which, in addition to amplifying these sanctions programs’ political and economic impact, allows for greater information-sharing and collaboration, as well as a focus on tailoring sanctions programs to avoid interfering with humanitarian needs.
3. Virtual Currency
2021 saw a pronounced rise in scrutiny of virtual currencies by a range of U.S. regulators, including OFAC.
In November 2021, OFAC released its first ever guidance directed at members of the virtual currency industry regarding complying with OFAC sanctions requirements. Beyond putting the virtual currency industry on notice that OFAC is paying close attention to it, the guidance contained some specific best practices, including novel guidance on software tools that can enhance sanctions compliance. As in the past, OFAC recommended the use of geolocation tools, including Internet Protocol (“IP”) address blocking controls, for any platform dealing with virtual currency, as a safeguard to avoid contact with sanctioned jurisdictions. However, for what appears to be the first time, the guidance acknowledged that a simple geography-based IP screen may be insufficient, recommending that companies also monitor for known virtual private network (“VPN”) addresses to prevent users from masking their location. OFAC also recommended use of transaction monitoring and investigation software by making use of identifying information associated with virtual currency transactions. OFAC noted that it has been including certain known virtual currency addresses as identifying information for sanctioned persons on the SDN List. For more on OFAC’s guidance for the virtual currency industry, see our November 2021 client alert here.
The new guidance followed a number of other virtual currency-related enforcement actions by OFAC, including the designation of cryptocurrency exchange SUEX OTC, S.R.O. as an SDN on September 21, 2021 for facilitating financial transactions connected to ransomware operations. In addition, as covered below, OFAC also brought an enforcement action against BitPay, an Atlanta-based digital currency payment processor, for failing to conduct proper sanctions screens and due diligence on parties making digital currency payments on BitPay’s platform.
In light of the recent Senate testimony by Deputy Treasury Secretary Wally Adeyemo stating that the growth of digital currencies is one of the primary challenges to the continued effectiveness of U.S. sanctions regimes, we expect OFAC to continue to focus on the digital currency industry in 2022.
C. CFIUS Updates
The Committee on Foreign Investment in the United States (“CFIUS”) remains active and continues to focus primarily on transactions involving investors from China and Russia, though filings involving investors from China continued their precipitous decline from previous years. Although statistics for 2021 have not yet been released, on July 26, 2021, CFIUS released its annual report to Congress for calendar year 2020. The report showed that CFIUS assessed or reviewed 313 transaction-related filings (187 full notices and 126 short-form declarations), down slightly from 2019, when 325 filings were reviewed. CFIUS entered into mitigation agreements in connection with 16 notices filed in 2020. Of the 313 filings, only 22 (17 notices and 5 declarations) involved China. CFIUS notices related to China are down nearly 75% from 2018 levels. Although some of the decline is likely pandemic-related, it is also clear that Chinese investors are increasingly avoiding transactions that require, or could invite, CFIUS scrutiny.
The most significant CFIUS enforcement action of 2021 involved a SPAC transaction between Stable Road Acquisition Corp. and Momentus Inc., a U.S. commercial space company offering transportation and other in-space infrastructure services, whose co-founders were Russian. In order to address CFIUS’s concerns, on June 9, 2021, Momentus entered into a National Security Agreement (“NSA”) with the Department of Defense and Department of the Treasury as lead agencies on behalf of CFIUS. As part of the NSA, Momentus’s Russian co-founders divested from the company, and Momentus engaged a third-party monitor, hired key positions to provide additional oversight, and appointed a CFIUS-approved director to its board to oversee compliance with the NSA’s stipulations.
For 2022, we expect CFIUS to continue to focus on transactions involving Chinese and Russian investors (including those that are not notified to CFIUS), as geopolitical tensions with both countries continue to rise. In addition, Congress is considering the U.S. Innovation and Competition Act (“USICA”), which includes the Strategic Competition Act that, if enacted, will expand CFIUS’s jurisdiction to include certain foreign gifts and contracts to institutions of higher education that equal or exceed $1 million in a single year, or aggregate gifts or contracts from the same foreign source valued over $1 million during a two-year period. USICA has bipartisan support and passed the Senate in June 2021, and is now with the House of Representatives. President Biden urged its passage as recently as January 21, 2022.
D. Withhold Release Orders
Through the issuance of WROs, CBP continues to use its enhanced authority under the Trade Facilitation Act of 2015 to block the import of goods made in whole or in part with forced labor.
In fiscal year 2021, there were seven WROs and two findings issued, as well as 1,469 shipments detained. There was also movement regarding modifying or revoking existing WROs. Four WROs and one finding of forced labor were modified or revoked in 2021, which indicates that CBP is working closely with importers and evaluating new evidence during their investigation process.
The WROs issued in 2021 focused primarily on China –in particular, the Xinjiang region, where Uyghurs and other minority groups have been subject to forced labor and other human rights violations – as well as on palm oil and rubber gloves from Malaysia and seafood from deep sea fishing vessels. With the signing of the Uyghur Forced Labor Prevention Act (the “Act”) on December 23, 2021, there now is a rebuttable presumption that all goods from Xinjiang are made with forced labor and, as a result, will be blocked from import into the U.S. unless the importer can present evidence overcoming this presumption. CBP will be providing guidance regarding what due diligence is necessary to determine that products do not originate from Xinjiang. The Act will take effect on June 21, 2022, so we expect to see a flurry of activity in the upcoming months related to imports from China.
The palm oil and fishing industries will likely remain a focus for CBP, but we also expect to see attention on other high-risk areas, such as cacao farming and the extractive industries. Five WROs and two findings have already been issued in fiscal year 2022, which shows that forced labor enforcement actions will remain a highly active area in the upcoming year.
E. Enforcement Trends
In 2021, OFAC brought enforcement actions against 19 different companies and one individual. These actions highlight several different enforcement trends that we expect will continue in 2022.
1. Non-U.S. companies continue to face enforcement risk for non-compliance with OFAC sanctions.
OFAC has brought enforcement actions against several different non-U.S. companies over the past year, highlighting the broad reach of OFAC’s sanctions programs and the importance of OFAC sanctions compliance for non-U.S. companies engaged in international trade and commerce.
In January 2021, OFAC entered into a $1,016,000 settlement with PT Bukit Muria Jaya (“BMJ”), an Indonesian paper products manufacturer, for violations of the North Korea sanctions program arising from BMJ’s exportation of cigarette paper to intermediary entities located in, or doing business on behalf of, North Korean entities. BMJ directed payments for its DPRK-related exports to its U.S. dollar bank account at a non-U.S. bank, which in turn caused wire transfers related to such exports to clear through U.S. banks. Even though the payments originated from, and were directed to, a non-U.S. bank, OFAC found that these transactions violated U.S. sanctions because they caused U.S. financial institutions to engage in the prohibited exportation of services to North Korea, a comprehensively sanctioned jurisdiction.
Similarly, in March 2021, OFAC entered into a $950,000 settlement with Italian company Nordgas s.r.l. (“Nordgas”) for apparent violations of the Iranian Transactions and Sanctions Regulations (“ITSR”) that occurred when Nordgas reexported shipments of air pressure switches procured from a U.S. company to customers in Iran. OFAC found that Nordgas had taken several steps to conceal from the U.S. supplier that the shipments were intended for customers in Iran, causing the U.S. company to indirectly export its goods to Iran in violation of U.S. sanctions.
More recently, at the beginning of this year on January 11, 2022, OFAC entered into a $5,228,298 settlement with Sojitz (Hong Kong) Limited (“Sojitz HK”), a Hong Kong, China-based offshore trading and cross-border trade financing company for apparent violations of the ITSR. The violations occurred when Sojitz HK made U.S. dollar payments from its Hong Kong bank to purchase Iranian-origin high density polyethylene resin from a supplier in Thailand for resale to buyers in China. These U.S. dollar payments were processed and settled through multiple U.S. financial institutions, including the U.S. correspondent banks of Sojitz HK’s Hong Kong bank and the supplier’s Thai banks, resulting in violations of OFAC’s Iran sanctions program.
As these enforcement actions show, non-U.S. companies should remain vigilant regarding the U.S. sanctions prohibitions that could apply to their activities, particularly where those activities involve U.S. persons, U.S.-origin goods, or the U.S. financial system. Even where a non-U.S. company does not itself engage in a violation of U.S. sanctions, it may nonetheless face liability for U.S. sanctions violations when it causes a U.S. person to engage in a prohibited transaction.
2. Companies may be liable for sanctions violations engaged in by their business partners or customers.
Continuing a trend from prior years, in 2021, OFAC brought several enforcement actions against companies for violations engaged in by their business partners or customers, highlighting the importance for companies to engage in proper diligence on parties with whom they transact.
For example, in April 2021, OFAC announced a settlement with SAP SE (“SAP”), a software company headquartered in Germany, to resolve an investigation into apparent violations by SAP of the Iran sanctions program. The violations occurred when third-party resellers of SAP’s software licenses and related maintenance services sold those licenses and services to entities that provided the SAP software to users in Iran. OFAC faulted SAP for, amongst other things, failing to conduct proper due diligence on its third-party resellers, especially given that some of them publicized their business ties with Iranian companies on their websites. A more detailed overview of SAP’s settlement with OFAC, along with concurrent settlements entered into between SAP and the U.S. Department of Justice and BIS can be found here.
Similarly, in March 2021, OFAC entered into a settlement with UniControl, Inc. (“UniControl”), a Cleveland, Ohio-based entity that manufactures process controls, airflow pressure switches, boiler controls, and other instrumentation, for exporting multiple shipments of its goods to two European companies that then reexported the goods to Iran in violation of the ITSR. OFAC found that UniControl had ignored several red flags based on which it had reason to know that the goods would be reexported to Iran by its European trade partners. Those red flags included obfuscated end-user requests, an expressed interest in supplying UniControl’s goods to Iranian customers, and requests to remove “Made in USA” labels from UniControl’s products, by UniControl’s European trade partners.
3. Continued focus on digital currency companies.
In April 2021, OFAC announced the settlement of its enforcement action against BitPay, an Atlanta-based digital currency payment processor, for violations of various sanctions programs. BitPay conducted due diligence on its direct customers – i.e. the merchants on its platform – including by screening them against OFAC’s SDN List; however, BitPay failed to screen the merchant’s buyers, even though BitPay had access to the buyers’ names, addresses, email addresses, and phone numbers, and eventually also obtained access to their IP addresses. As a result of BitPay’s compliance failures, buyers in Crimea, North Korea, Iran, Sudan, and Syria were able to enter into digital currency transactions with U.S. merchants on BitPay’s platform.
This is OFAC’s second enforcement action involving a company in the digital currency space (the first enforcement action was brought at the end of 2020 against BitGo, Inc., a technology company that provides digital asset custody, trading, and finance services). As set forth above, we expect that digital currency companies will continue to face increased scrutiny by OFAC going forward.
The Department of Justice’s National Security Division (“NSD”) was also very active in 2021, bringing 50 cases with the majority involving violations of Iranian sanctions or unauthorized transactions with Chinese persons (including violations of export control laws). NSD also reported an uptick in voluntary disclosures to the division and highlighted the benefits of disclosing willful conduct including the reduced penalties given to SAP. We expect NDS will continue to focus on unauthorized activity involving Iran, China, Russia, and North Korea in 2022. In addition, we expect there to be a focus on human rights violations and the use of cryptocurrency transactions as a means to evade sanctions and engage in money laundering.
The State Department’s Directorate of Defense Trade Controls (“DDTC”) entered into two consent agreements in 2021 with companies who violated the ITAR. In April 2021, DDTC announced a consent agreement with Honeywell International, Inc. (“Honeywell”) for alleged violations of the Arms Export Control Act and the ITAR including unauthorized exports and retransfers of ITAR-controlled technical data to China. DDTC found that the exports of technical data to China threatened U.S. national security by including drawings for certain parts and components of the F-35, F-22, and B1-B aircraft platforms and the CTS800 engine platform. The consent agreement requires Honeywell to engage an external “Special Compliance Officer” to oversee the consent agreement for at least 18 months and imposed a civil penalty of $13 million with $5 million suspended if the money is used toward DDTC-approved corrective actions to strengthen Honeywell’s compliance program. Aggravating factors included the recurrence of violations previously disclosed in 2016, harm to national security, and the involvement of an ITAR Section 126.1 country (China) and Significant Military Equipment.
In August 2021, DDTC announced a consent agreement with Keysight Technologies, Inc. (“Keysight”). In November 2017, DDTC expressed concerns to Keysight that its Multi-Emitter Scenario Generation software may be subject to the ITAR and recommended the submission of a commodity jurisdiction request (“CJ”) to resolve those concerns. Keysight had self-determined that software as subject to the EAR and controlled it as EAR99. In January 2018, Keysight submitted the CJ, but continued to export the software as EAR99 (including to China) while the commodity jurisdiction was pending. In April 2018, DDTC responded to the CJ by determining that the software is subject to the ITAR. The consent agreement, the result of unauthorized exports to China during the pendency of the CJ request, requires Keysight to engage an external Special Compliance Officer to oversee the consent agreement and imposed a civil penalty of $6.6 million with $2.5 million suspended if the money is used toward DDTC-approved corrective actions to strengthen Keysight’s compliance program.
The Department of Commerce’s Office of Export Enforcement announced 19 public settlements in 2021 focusing on cases involving concealment of violations (i.e. failing to voluntarily disclose violations), non-US companies who use U.S. persons to conduct illegal exports, and cases involving emerging technologies and the use of virtual currencies.
Overall, strong enforcement of sanctions and export control laws is expected to continue in 2022.