INTRODUCTION TO ECONOMIC SANCTIONS Scott NanceCompliance Consulting Economic

INTRODUCTION TO ECONOMIC SANCTIONS Scott Nance/Compliance Consulting

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 2

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 3

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 4

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 5

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 6

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 7

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 8

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 9

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 10

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 11

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 12

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 13

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 14

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 15

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) 16

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 17

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 18

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 19