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May 15, 2020
By: Anna Sayre, CSS, Director of Content, ACSS

No matter how large or influential, any company that violates sanctions runs the risk of being placed on the U.S. Treasury Office of Foreign Assets Control (OFAC)’s Specially Designated Nationals (SDN) List. Once a company is considered an SDN, all U.S. persons and entities are generally prohibited from dealing with that company and all of the company’s U.S. assets are immediately frozen.

In the first quarter of 2020, sanctions compliance professionals have seen the U.S. government designate more than one major global company. Recent designations include big companies such as Swiss subsidiaries of Russian-based Rosneft and Hong Kong based Triliance, just to name a few; proving once again that there is no company too big for U.S. sanctions.

In this article, we examine three recent major corporate designations (and one removal) and discuss the implications of these designations for corporate compliance.

Designation 1: Rosneft subsidiaries targeted for trade in Venezuelan oil

On March 12, 2020, OFAC designated TNK Trading International S.A. (TTI), pursuant to Executive Order (E.O.) 13850, for operating in the oil sector of the Venezuelan economy. TTI, an exporter of unrefined petroleum and petroleum products incorporated in Switzerland, is a subsidiary of Russian state-controlled Rosneft Oil Company (ROC), which gained control in December 2017.

Three weeks earlier, on February 18, 2020 OFAC designated Rosneft Trading SA (RTSA) (another Switzerland-based subsidiary of ROC), due to its operations within the oil sector of the Venezuelan economy. Its President, Didier Casimiro, has also been designated as an SDN for having acted or purported to act for or on behalf of RTSA.

As it turned out, cargoes of Venezuelan oil allocated to RTSA were changed to TTI in order to evade U.S. sanctions. Together, TTI and RTSA handled a large percentage of Venezuela’s oil exports in 2019. In January 2020, TTI purchased nearly 14 million barrels of crude oil from Petroleos de Venezuela (PdVSA).

Concurrent with these actions, OFAC issued General License 36A to authorize certain transactions and activities that are ordinarily incident and necessary to the wind down of transactions involving RTSA or TTI through 12:01 a.m. eastern daylight time, May 20, 2020.

According to Treasury Secretary Steven T. Mnuchin: “TTI Trading International S.A. is another Rosneft subsidiary brokering the sale and transport of Venezuelan crude oil, which is subject to sanctions.”

These recent designations follow the U.S. and other countries implementing sanctions against the mother company, ROC, in 2014, after Russia’s intervention in Ukraine. The oil company was placed on the Sectoral Sanctions Identifications (SSI) List as subject to Directives 2 and 4 under Executive Order 13662 of March 20, 2014. Entities on the SSI List do not face asset freezes and U.S. persons are not strictly prohibited from dealing with them. Rather, they are subject to restrictions regarding access to certain types of financing and, in some cases, access to U.S. exports.

It is important to note that ROC is not currently on the SDN list, and as such, blocking sanctions like those placed on TTI and RTSA do not apply to ROC.

In addition to being designated as SDNs, sectoral sanctions also apply to TTI and RTSA. Lastly, the General License only covers wind down activities related to EO 13850, but not in relation to SSI related sanctions.

Lastly, the General License wind down activities only covers activities related to EO 13850, not for SSI related sanctions

Compliance Considerations:

  • The U.S. intends to continue to encourage democratic order in Venezuela
  • This is not the first time Rosneft has tried to avoid sanctions, and it is not likely to be the last
  • Watch out for OFAC’s 50% rule!

ROC and its subsidiaries have long been in the headlines for their attempts to circumvent U.S. sanctions, and it is likely that they will continue to do so in the future.

According to Eric Rudolph, Senior Director at FTI Consulting, “[ROC] will continue taking actions to minimize and challenge the impact of U.S. sanctions on any ally of Russia through shifting business to new entities, under complex ownership structures.”

In addition, Max Lerner, Global Head of Sanctions Compliance at State Street, reminds us that, “Parties subject to sanctions have incentive to evade those sanctions to achieve economic profit”. He adds that, “it is important for compliance officers to ‘put your self in a sanctions evader’s shoes’ and work to develop compliance countermeasures to detect and prevent such circumvention of sanctions.”

Under OFAC’s 50 Percent Guidance: any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons, is itself considered to be a blocked person. Accordingly, a U.S. person may not engage in any transactions with such an entity, unless authorized by OFAC. Non-US persons are also prohibited from dealing with the designated companies or entities owned 50 percent or more by them if the transactions involve U.S. persons or the U.S. financial system, including payments that clear through U.S. correspondent accounts.

OFAC’s 50 percent rule applies to entities on both the SDN List and SSI List, however, it is important to note that the 50 Percent Rule only works “downhill”. As such, if either TTI or RTSA (both SDNs) own 50 percent or more of any company, that company would also be considered designated by OFAC. Similarly, because ROC has been placed on the SSI List, its subsidiaries TTI and RTSA will also be considered SSIs according to the 50 Percent Rule. However, because the 50 Percent Rule only works “downhill”, the fact that TTI and RTSA are designated as SDNs does not automatically make their parent, ROC, an SDN.

This illustrates the importance of conducting thorough due diligence on all entities that are connected with the transaction. This also would include entities and individuals with whom account relationships are maintained in order to determine relevant ownership stakes.

With regard to compliance with Venezuelan sanctions, Max Lerner of State Street, says that, “going back to basics is always key – strong due diligence on customers, risk assessment on products/services offered and jurisdictions covered, and technological frameworks for screening and transaction monitoring to detect and prevent future illegal activity.”

Matt Bell, Senior Managing Director at FTI Consulting recommends that, “if you are doing business in Venezuela, proceed with extreme caution and only with the advice of competent legal counsel. Also, make sure you know who your counterparties are and their ownership structure all the way up the chain as the government of Venezuela has their hands in nearly every industry and that is growing more and more as they nationalize private companies.”

Designation 2: Triliance and other Chinese Companies Targeted for Iranian Oil

On January 23, 2020, OFAC added five Chinese-based companies and one Iranian company to its SDN List under Executive Order (E.O.) 13846 for engaging in transactions involving Iran’s petroleum sector and the National Iranian Oil Company (NIOC).

OFAC’s designations target three Hong Kong-based trading companies: Jiaxiang Industry Hong Kong Ltd (Jiaxiang), Triliance Petrochemical Co. Ltd. (Triliance) and Sage Energy HK Limited (Sage); Shanghai-based Peakview Industry Co. Limited (Peakview); as well as Shandong Quiwangwa Petrochemical, Co. Ltd (Shandong). These companies are accused of knowingly engaging in having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, NIOC, which has been previously designated as an SDN. The designations also included two senior executive officers of Triliance and Shandong.

Though each of these companies is not necessarily a giant, their network created a large impact.

According to the US. Treasury press release, these companies “have collectively transferred the equivalent of hundreds of millions of dollars’ worth of exports from the National Iranian Oil Company (NIOC), an entity instrumental in Iran’s petroleum and petrochemical industries, which helps to finance Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) and its terrorist proxies… in contravention of U.S. economic sanctions.”

Triliance, a Hong Kong-based broker with branches in Iran, United Arab Emirates, China, and Germany, ordered the transfer of the equivalent of millions of dollars to NIOC as payment for Iranian petrochemicals, crude oil, and petroleum products shipped to the United Arab Emirates and China after the expiration of any applicable significant reduction exceptions. In facilitating these shipments, Triliance worked to conceal the Iranian origin of these products. Triliance has also facilitated the sale of millions of dollars’ worth of petroleum products involving Naftiran Intertrade Company, a subsidiary of NIOC, to companies in China.

Peakview and Sage carried out similar transactions, assisted by the UAE based company Beneathco DMCC who hid the origin of the Iranian products destined for the UAE.

Non-US persons are also prohibited from dealing with the designated companies or entities owned 50% or more by them if the transactions involve US persons or the US financial system, including payments that clear through US-correspondent accounts.

Designation 3: UAE Companies Targeted for Facilitating Iran Petroleum Trade

On 19 March 2020, OFAC added five UAE-based companies to its SDN List, pursuant to Executive Order 13846, for facilitating Iran’s sale of petroleum and petrochemicals by purchasing hundreds of thousands of metric tons of petroleum products from the National Iranian Oil Company (NIOC).

The following UAE-based companies were designated: (1) AlamAlthrwa General Trading LLC, (2) Alphabet International DMCC, (3) Alwaneo LLC CO, (4) Petro Grand FZE, and (5) Swissol Trade DMCC.

According to the U.S. Treasury press release, “these five companies collectively purchased hundreds of thousands of metric tons of petroleum products from the NIOC” and “at least three of these companies have falsified documents to conceal the Iranian origin of these shipments.”

Compliance Implications:

  • The U.S. fully intends to continue to enforce sanctions against Iran
  • ‘Facilitation’ is a violation
  • Watch out for U.S. Secondary Sanctions

Just like its earlier action against Triliance and other Chinese companies in January 2020, this recent action demonstrates that the U.S. Government continues to focus maximum economic pressure on Iran and limit its ability trade within global markets. This includes sanctioning parties, such as the above Chinese and UAE companies, even if they only facilitate these transactions.

Amber Vitale, Managing Director at FTI Consulting, states that, “the U.S. will continue to use every possible legal theory or tool in its arsenal, including, pursuing those that would facilitate significant transactions with SDNs and designating parties as SDNs.

Max Lerner of State Street agrees that, “so long as Iran continues to threaten the U.S.’ (and other countries’) national security, sanctions will be a key tool to address that threat. He adds that: “As the reach of sanctions evolve and enforcement actions tally, it is natural for the focus to shift from parties blatantly and directly violating sanctions to parties further removed from the direct violation where those secondary or tertiary actions are supporting the violating action.”

Non-US companies that are or may be considering becoming involved in activities or transactions involving Iran should carefully consider the U.S. sanctions and export controls that could apply, including those sanctions authorities that target the activities of non-US Persons.

Matt Bell of FTI Consulting warns us that, “secondary sanctions are real, they have teeth, and this administration is not afraid to use them regularly. Amber Vitale of FTI Consulting adds that there has been a “rise in the cases targeting foreign companies for “causing” someone to violate sanctions against Iran and that “the elasticity of U.S. sanctions jurisdiction is continuing to be stretched by the U.S. Government.”

Removal: Sanctions Lifted on China-based COSCO

On January 31, 2020, OFAC lifted sanctions on Chinese shipping giant COSCO Shipping Tanker (Dalian) Co. Ltd. (COSCO Dalian) as well as five affiliates. COSCO and its affiliates were previously named as SDNs in September 2019 for knowingly engaging in a significant transaction for the transport of Iranian oil.

COSCO Dalian knowingly engaged in a significant transaction for the transport of oil from Iran, in violation of E.O. 13846 following the expiration of China’s Significant Reduction Exception (SRE) on May 2, 2019. In addition to (1) COSCO Dalian, OFAC designated (2) COSCO Shipping Tanker (Dalian) Seaman & Ship Management Co, Ltd. (COSCO Seaman); as well as four of the companies’ affiliates- (3) China Concord Petroleum, (4) Kunlun Holding Company, Ltd, (5) Kunlun Shipping Company, Ltd, (6) Pegasus 88 Ltd; and five of its executives as SDNs for involvement in the transactions.

Though COSCO Dalian’s parent – COSCO (or China Ocean Shipping Company)  – was not designated, the designation of COSCO Dalian had a significant impact on the global shipping market. As COSCO is the world’s third-largest shipping company, the designation of COSCO Dalian caused immediate disruptions to global shipping markets.

Due diligence tasks also become more onerous. When a large ship-owner like COSCO is designated, there is a high degree of complexity due to mosaic ownership structure of that designated entity. The blocking sanctions apply to the listed entities plus any entities that they own, individually or in the aggregate, at 50 percent or greater interest.

Further, operations of designated shipping companies have consequences for unwitting partners such as bunker suppliers, insurers and financial institutions who finance the cargo.

Even though some of the COSCO designations were lifted in January, the U.S. Government has made clear that it will not hesitate to designate large corporates in the future. In an April 2020 interview, David Peyman from the State Department Office of Threat Finance Measures, while referring to the COSCO designation in 2019 stated: “[A] very, very clear message that this designation sent was that we are focused on strategic sanctions, sanctions that have an impact beyond the designated target itself, that has an impact across industries and across sectors. (…) No company is too big to fail when it comes to protecting U.S. national security.”

Compliance Implications:

  • No such thing as “too big to impose sanctions”
  • There is hope for a speedy removal from OFAC’s SDN List
  • Delisting is always decided by OFAC on a case-by-case basis

It is not yet clear why OFAC has decided to remove COSCO and its affiliates from the SDN List, but it can be assumed that its speedy removal came due to current trade talks between the U.S. and China.

“According to sources familiar with U.S.-China trade talks”, says to Elika Eftekhari, International Trade Attorney and President of Alamut Trade Partners, “COSCO was specifically raised by the Chinese delegation” and “delisting one Dalian entity, but not the other, preserves some U.S. leverage as broader U.S.-China trade talks continue.” She adds that, “in this case, broader takeaways for other shipping companies [may be] limited, particularly those that are privately owned and do not have the benefit of a state-backed voice at the negotiating table.”

“Delisting remains difficult,” says Eric Rudolph of FTI Consulting. Delistings are “fact-specific determinations and the sanctioned party has to persuade OFAC that there has been a change in either behavior or the facts to support a removal.”

Nevertheless, OFAC has shown a willingness to limit or remove sanctions after a relatively short period of time and this may provide a light at the end of the tunnel for any major multinational companies who have been targeted by the Treasury’s sanctions watchdog.

Max Lerner of State Street, reminds us that: “Whether the basis for the removal of COSCO was more due to political tactics … [w] hat is clear is that firms can maximize their chances of being removed from a sanctions list by engaging strong external legal counsel and adopting internal practices that promote compliance with the applicable sanctions.” He adds that: “The ultimate goal of sanctions is to promote compliance with a government’s foreign policy agenda, and so reforming behavior to be in compliance with that agenda is a key step in being delisted.”