This is the sixth in our start-of-year series examining important trends in white collar law and investigations in the coming year. Our previous entry discussed enforcement by the Massachusetts Attorney General’s Office in 2020. Up next, our final entry in the 2020 preview series: a white-collar look at the Mueller investigation and the impeachment inquiryLook for additional posts throughout the month of January.

Export controls and sanctions were a whirlwind of activity in 2019, and 2020 shows no signs of slowing down. In 2019, the Office of Foreign Assets Control (OFAC) issued approximately 2,000 new designations of specific people or organizations subject to sanctions.  And the Bureau of Industry and Security (BIS) increased its use of its Entity List to address corruption and human rights violations, with 185 new Entity List designations in 2019. Looking ahead, here is what we expect to see:

OFAC to Continue to Focus on Key Sanctions Programs

Iran. While 2019 was marked by heightened Iran-related sanctions activity, there is no indication so far that this activity will slow down in 2020. At the beginning of this year, President Trump signed a new Executive Order blocking the property of any person who operates in or engages in transactions with the construction, mining, manufacturing, or textiles sectors of the Iranian economy. This follows on the heels of prior Executive Orders issued in 2019, targeting the energy, shipping, shipbuilding, petroleum, and metal production sectors. OFAC also designated numerous Iran-related entities and individuals in 2019, and as reported on here, in October 2019, the Treasury and State Departments also announced a new humanitarian mechanism to ensure that funds intended to support the Iranian people are not diverted by the Government of Iran to develop ballistic missiles, support terrorism, or finance other malign activities. Given these developments and the recent military strike killing a senior Iranian military commander, tensions will undoubtedly remain high and we expect Iran to remain a focus for OFAC in 2020. Further, with Iran announcing that it will be reducing its commitments under the Joint Comprehensive Plan of Action, there may also be a potential “snap-back” of certain EU and UN sanctions.

Russia. In August 2019, OFAC and the State Department issued new sanctions on Russia pursuant to the Chemical and Biological Weapons Control Act. The sanctions, which were imposed after Russia’s use of a prohibited nerve agent in the UK, include (1) prohibiting U.S. banks from participating in the primary market for Russian non-ruble bonds and from lending non-ruble funds to the Russian Federation; (2) the U.S. voting to oppose the extension of any loan or financial or technical assistance to Russia by international financial institutions; and (3) adding export licensing restrictions on Department of Commerce-controlled goods and technology. In December 2019, the U.S. Congress authorized sanctions on entities financing or assisting the construction of the Nord Stream II pipeline by Russian state-owned natural gas company Gazprom. The sanctions reflect U.S. concerns that Europe will become too dependent on Russia for energy after completion of the pipeline, which pipes gas from Russia to Europe across the Baltic Sea. Attention on the Russian energy sector is likely to remain strong in 2020.

Turkey and Syria. A new Executive Order targeted individuals threatening the peace and stability of Syria. 2019 also saw several Turkish government ministries and officials added to the Specially Designated Nationals and Blocked Persons (SDN) List in response to Turkish activities in Syria— and then quickly removed. As long as the political situation in Syria remains tumultuous, sanctions on Turkey will likewise be in flux.

Cuba. In 2019, the U.S. suspended all commercial air service between U.S. and Cuban airports, with the exception of flights to José Martí International Airport to prevent “revenue from reaching the Cuban regime that has been used to finance its ongoing repression of the Cuban people and its support for Nicolas Maduro in Venezuela.” OFAC also placed a cap on family remittances to Cuba, eliminated the authorization for donative remittances, and removed the authorization for banking institutions subject to U.S. jurisdiction to process certain funds transfers originating and terminating outside the U.S., commonly known as “U-turn” transactions. With the State Department targeting Cuba for funneling money to the Maduro regime in Venezuela, we may see even more Cuba-related sanctions and restrictions in 2020.

Venezuela. 2019 was a hefty year for Venezuelan sanctions: a new Executive Order blocked all property and interests in the property in the broadly defined Government of Venezuela. OFAC also amended its existing Venezuela Sanctions Regulations to incorporate new Executive Orders and add interpretive provisions regarding the enforcement of settlement agreements and judgments. With the ongoing power-struggle in the Venezuelan government, more sanctions are expected in 2020, at least as long as President Maduro remains in power.

Human Rights. 2019 saw an increase in sanctions being used to defend against or punish human rights violations, and we expect that this will continue in 2020. China was a particular focus for sanctions used in this way: the Hong Kong Human Rights and Democracy Act of 2019 addressed state violence against pro-democracy protestors, and in groundbreaking use of the BIS Entity List, 28 Chinese companies, mostly in the surveillance technology field, were added to the list explicitly for violating the human rights of Chinese ethnic minorities. Beyond China, we are now seeing Customs and Border Protection enforce their first “Withhold Release Orders (WROs),” which detain materials at ports of entry into the U.S. and targets goods made, in whole or in part, by forced labor, including convict labor, forced child labor, and indentured labor. Further, the Global Magnitsky Act remains an active tool for targeting corruption and human rights abusers worldwide, with OFAC designating 68 individuals pursuant to the Act  on a single day last year (which, not coincidentally, was International Anticorruption Day and International Human Rights Day). Expect to see further use of the Entity List, Global Magnitsky Act, and WROs for targeting human rights abuses in 2020.

2020: A Year of New Technology Export Regulations

2020 is starting off with a focus on technology. In January, BIS added geospatial artificial intelligence technology to the Export Administration Regulations (EAR), which requires a license for the export of certain geospatial imagery software to all countries but Canada. Looking forward, we expect the publication of the final rule on Securing the Information and Communications Technology and Services (ICTS) Supply Chain in 2020. Based on the proposed rules, the final rules would create a review process for transactions in ICTS industries that pose national security risks, with the potential for unwinding. In 2020, we also expect to see new regulations on the export of emerging and foundational technologies, which are new or developed technologies essential to U.S. national security.

China was a focus in 2019 export controls with the addition of the Chinese telecom giant Huawei to the BIS Entity List in May 2019, although a temporary general license was extended until February 2020 to allow certain transactions with Huawei to continue. In January 2020, Huawei and affiliated entities were charged with conspiracy, bank fraud, money laundering, wire fraud, and sanctions violations after a Huawei subsidiary engaged in illegal U.S. dollar financial transactions in Iran, which were concealed by Huawei. With ongoing concerns about U.S. technology reaching Iran through sales to Chinese companies, we expect that exports of sensitive technologies – especially exports to China – will continue to be the focus of export controls in 2020.

Emerging technologies, artificial technology, and encryption were all areas of attention in the past year, and we expect that regulations will continue to change in 2020 to keep up (or try to keep up) with our quickly-shifting cyber future.

Regulators to Continue Efforts to Provide Guidance on Compliance and Voluntary Disclosure of Violations

In 2019, both OFAC and DOJ released guidance aimed at providing greater clarity and transparency around the factors they deem significant in assessing compliance efforts and voluntary disclosures of export controls and sanctions violations. In 2020, we expect regulators to continue to assess adherence to this guidance in assessing penalties for violations.

OFAC’s Guidance on Effective Compliance Programs

In May 2019, OFAC released “A Framework for OFAC Compliance Commitments” (the Framework) providing guidance for the creation of effective sanctions compliance programs (SCP) for both U.S. organizations and foreign entities doing business in the U.S. or using U.S. goods or services. The Framework highlights five essential components to a successful SCP: (1) commitment to compliance by company management; (2) conducting periodic risks assessments regarding clients, products, services, and geographic locations in order to determine the likelihood of potential OFAC sanctions violation; (3) having effective internal controls that allow for the identification, record-keeping, and reporting on activities regulated by OFAC; (4) routine testing and auditing of an SCP to ensure that it is effective; and (5) engaging in frequent training of employees on SCP policies and procedures.

The Framework also identifies the root causes of many sanctions violations that have led to enforcement actions to allow companies to take proactive steps to eliminate them or mitigate their risk. A more detailed report of the Framework can be found here.

DOJ’s New Policy Regarding Voluntary Self-Disclosures of Sanctions and Export Controls Violations

At the end of 2019, DOJ announced the release of a new policy for business organizations regarding voluntary self-disclosures of export control and sanctions violations. The new Policy makes explicit that when a company (1) voluntarily self-discloses export control or sanctions violations to the Counterintelligence and Export Control Section (CES) of DOJ’s National Security Division (NSD), (2) fully cooperates, and (3) timely and appropriately remediates its conduct, there is now a presumption that, absent aggravating factors, the company will receive a non-prosecution agreement and will not be fined. Additional key features of the Policy include:

  • Clarifying that a voluntary self-disclosure must be made to CES in order for a company to receive any benefits under the Policy; reporting to a regulatory agency – such as the Directorate of Defense Trade Controls, BIS, or OFAC – will not suffice;
  • Abolishing the carve-out for financial institutions that existed under the guidance released in 2016 on voluntary self-disclosures, by expanding the Policy’s reach to cover all business organizations, including financial institutions;
  • Conforming to other voluntary disclosure policies issued by the DOJ, including the Criminal Division’s FCPA Corporate Enforcement Policy by adopting similar definitions of several key terms in the Policy;
  • Emphasizing the importance of disclosure of facts relevant to individuals involved in the violations, consistent with the DOJ’s continued emphasis on prosecuting and holding individuals accountable for wrongdoing.

Additional reporting on and details regarding the Policy can be found here.

Sanctions and Export Control Enforcement to Remain a Top Priority For Regulators in 2020

2019 was an active year for sanctions and export controls enforcement, with OFAC bringing 22 sanctions-related corporate enforcement actions to conclusion in 2019, and collecting over $1 billion in penalties and settlements. BIS’s Office of Export Enforcement also investigated multiple individuals and entities for export-related violations, resulting in DOJ bringing criminal charges against more than 15 individuals. 2020 so far has brought no signs of a slowdown; in fact, DOJ has already brought charges against five individuals in 2020 for their role in causing goods to be illegally exported from the U.S. to Pakistan. These enforcement actions highlight two key trends companies should be alert to in 2020:

Increased Scrutiny of M&A Transactions to Continue

2019 was a very active year for enforcement actions arising out of M&A transactions. OFAC entered into multiple settlements related to violations of economic sanctions by foreign subsidiaries of U.S. entities, highlighting the importance for companies of not only engaging in proper pre-acquisition due diligence, but also of properly integrating the newly-acquired subsidiary into its compliance structure and monitoring compliance post-acquisition. In February 2019, OFAC entered into a settlement with AppliChem GmbH, a foreign subsidiary of a U.S. company, Illinois Tool Works, Inc. (ITK), assessing a civil monetary penalty of approximately $5.5 million for violations of Cuban sanctions by AppliChem’s Spanish branch, occurring over four years after AppliChem’s acquisition by ITK. Even though ITK engaged in pre-acquisition due diligence and required that AppliChem cease its Cuba business as a prerequisite to closing, its integration efforts were ineffective, allowing the violations to continue for years post-acquisition.

OFAC’s 2019 settlement with Kollmorgen Corporation (Kollmorgen) for violations of the Iran sanctions program by its subsidiary provides an even more cautionary example. Kollmorgen, a U.S. company, acquired Elsim Elektroteknik (Elsim), a Turkish entity, and undertook “extensive efforts” (as OFAC recognized) even post-acquisition to ensure that its new affiliate complied with U.S. sanctions laws, including by identifying Elsim’s Iran-related customers and applying controls to block those customers from making future orders; conducting in-person trainings for Elsim’s employees regarding Kollmorgen’s trade compliance policies (specifically with respect to Iran); and requiring Elsim’s senior management to certify that no Elsim products or services were being sent or provided to Iran. Despite these efforts, Elsim knowingly continued to provide products, parts, and services to Iranian end-users post-acquisition. However, due to Kollmorgen’s extensive post-acquisition compliance efforts and its voluntary self-reporting of misconduct and remedial actions, the penalty was reduced to $13,381 (from a statutory maximum civil monetary penalty of $1,500,000).

We expect OFAC to continue to focus on M&A transactions, and impose penalties for sanctions violations engaged in by foreign subsidiaries post-acquisition.

Companies Must Continue to Engage in Proper Diligence on their Suppliers and Customers and Heed Red Flags in the Sales Process (and Iran Draws Scrutiny)

Multiple 2019 enforcement actions highlighted the importance of engaging in proper due diligence on supply chains and customers. In January 2019, OFAC announced a settlement with e.l.f. Cosmetics, Inc. (ELF), a U.S. cosmetics company, for violations of the North Korean Sanctions Regulations after ELF was found to have imported false eyelash kits from two suppliers in China, which sourced their materials from North Korea. ELF was unaware of the origins of these products because it did not conduct proper sanctions due diligence on its supply chain, even though it was sourcing products from China, a country to which North Korea, as well as other comprehensively sanctioned countries, are known to export goods. Similarly, in August 2019, PACCAR Inc., a U.S. truck manufacturer, agreed to pay $1,709,325 to settle potential civil liability for violations of the Iran sanctions program by its wholly-owned Dutch subsidiary DAF Trucks N.V. (DAF), after DAF sold trucks to customers in Europe on multiple occasions that were ultimately intended for buyers in Iran. DAF should have known that the end users were in Iran, including because one of the buyers previously placed an order with DAF’s German subsidiary for the same trucks for an Iranian company.

DOJ also brought criminal charges against multiple individuals in 2019 that engaged in schemes to divert items intended for authorized destinations to Iran. In August 2019, following an investigation by BIS’s Office of Export Enforcement, DOJ brought criminal charges against an Iranian resident who purchased computer numerical control machines from suppliers in the United States and Canada, made arrangements to ship the machines to the UAE using false documents, and then arranged to forward the machines from the UAE to Iran. Similarly, in July 2019, the President and Managing Director of ETCO-FZC (ETCO), an export company with an office in Dubai, pled guilty to violating U.S. sanctions against Iran by having more than $3 million dollars’ worth of turbine parts shipped from distributors in New York to companies in Germany and Canada and then re-shipped to Iran.

We expect regulators to continue to focus on similar enforcement actions in 2020, highlighting the need for companies to ensure that their goods and services are not supplied from, and do not end up in, prohibited destinations or with prohibited end-users.