In the first article in this series, we talked about the optimistic outlook toward the U.S.’s diplomatic relationship with Cuba and how slowly but surely, the capacity to “increase travel, commerce, and the flow of information to and from Cuba[,]” and foster “people-to-people engagement” is opening up.

Conversely, the recent changes in Iran sanctions were extremely limited.  What many people do not realize is that the changes that recently took effect, as provided for in the Joint Comprehensive Plan of Action (JCPOA) signed in July, will also be extremely limited for U.S. entities and individuals.

The opening of larger industry sectors for business is not part of the agreement and is not on the horizon at this point.

Implementation action schedule

The Iran timeline is important to understand in order to get a clear picture. Here are a few key dates:

November 24, 2013: Joint Plan of Action (“JPOA”) signed, laying foundation for more comprehensive agreement.

January 20, 2014: Implementation of JPOA.

July 14, 2015: Finalization day of JCPOA.

January 16, 2016: Implementation Day, which occurred automatically upon verification by IAEA of compliance with requirements, of JCPOA.  The IAEA’s confirmation led to certain sets of sanctions being automatically lifted.

Unlike what you may think after all of the media hype, the changes are largely limited to nuclear non-proliferation goals; no changes to sanctions in place for humanitarian or anti-terrorism reasons are expected.

While many are optimistic that this is the first step on a path toward achieving some of these goals, which would allow for the gradual lifting of other sanctions, there is no guarantee or timeline of if or when this will occur.

Implementation Day changes limited to secondary sanctions

The primary changes to take effect on Implementation Day are limited to secondary sanctions.  Secondary sanctions are those imposed on non-U.S. persons who are not otherwise subject to U.S. jurisdiction, and target specific activities.

For non-U.S. entities and persons, this will have a noticeable affect on the following areas:

• Financial and banking transactions;
• Insurance transactions;
• Energy and oil and gas industry activity;
• Shipping and port activity;
• Gold and precious metals;
• Automotive sector, and
• Nuclear related activity.

For U.S. entities and persons, most sanctions will remain in place.  Furthermore, U.S. entities and persons will still be required to comply with SDN (Specially Designated Nationals) restrictions, adding an additional layer to sanctions compliance for any transaction connected to Iran or Iranian entities.

However, non-U.S. entities owned or controlled by U.S. persons, such as a foreign subsidiary, may apply for licenses to engage in certain activities, though they will still be subject to the SDN list.

General License H authorizes U.S. owned or controlled foreign subsidiaries to engage in transactions with Iran subject to the license’s narrow terms.

Most importantly for U.S. businesses, General License H allows a U.S. person or entity to engage in:

Activities related to the establishment or alteration of operating policies and procedures of a United States entity or U.S. owned or controlled foreign entity to engage in transactions with Iran that are authorized by GL H.

For U.S. persons, this means that senior management, board members, outside counsel and other managerial employees are permitted to work to establish the operating policies and procedures of the U.S. parent company and its foreign subsidiary who will be working in Iran.

However, U.S. persons are still blocked from being involved in the day-to-day activities of doing business in Iran, those that occur after the subsidiary is initially set up.

This creates a complex managerial challenge for U.S. businesses that seek to create a foreign subsidiary. It must be carefully addressed in order to maintain the separation of U.S. personnel on an ongoing basis.

The July 2015 Schlumberger OFAC enforcement action for violation of sanctions is instructive in this area.

Schlumberger was found to have provided support for projects in sanctioned countries from the U.S., such as sending emails requesting services in Iran to U.S.-based employees, directing equipment movement to and from sanctioned countries by U.S.-based employees, and similar activity showing Schlumberger directing some aspects of global operations from its U.S. office, in violation of sanctions.

Any business seeking to now set up and operate a foreign subsidiary in accordance to General License H will be well-served by closely reading this action to get tips on what not-to-do.

In connection with Implementation Day, OFAC released several documents to help guide businesses as they consider if Implementation Day has opened up any opportunities, including FAQs, General License H, and a Statement of Licensing Policy for Activities Related to the Export or Re-Export to Iran of Commercial Passenger Aircraft and Related Parts and Services.

OFAC also published removals from the SDN list.  These should also be reviewed and legal counsel sought.

Another change that may benefit some in the U.S. is allowing the sale of goods and services related to commercial passenger aircraft, an effort by regulators to support safe commercial air travel. This is similar to the changes that have been implemented for Cuba and Iranian-origin carpets and foodstuffs.

EU planning much bigger changes for Iran

Perhaps more interesting than the U.S. changes to Iran-based sanctions are expected European Union sanctions changes.

The EU has committed to ending restrictions on a much wider range of activity, including financial transactions, shipping and port activity, oil and gas industry activity, and gold and precious metals activity.

Comparing sanctions regime changes

While the changes to these two sanctions regimes are both historic, implemented and expected changes to the U.S.’s Cuba sanctions program are much broader and more in-depth than what we will see with Iran for the foreseeable future.

When examining the diplomatic underpinnings of these changes, this should come as no surprise.

Iran presents continuing political challenges that go far beyond nuclear non-proliferation.

Tension in the Iran-U.S. diplomatic relationship stems from human rights and anti-terrorism concerns that have been building since the 1970s. Some issues date as far back as 1953, when the U.S. led an Iranian coup.

Aggressive, harsh words are often exchanged between the two countries, with very little in terms of diplomatic unity.

In fact, a phone call in September 2013 between President Obama and then-newly elected Iranian President Hassan Rouhani was the first direct communication between the leaders of the two countries since 1979.

On the other hand, the disagreements between the U.S. and Cuba over the past several decades have not risen to the same level of aggression or promised violence.

While diplomatic disagreements have still arisen – such as the arrest of the Cuban 5 in 1998 or the Eliá González incident in 1999 – the relationship between the U.S. and Cuba has generally been less volatile.

It will be interesting to follow these sanctions regimes develop as the diplomatic relationships with Cuba and Iran are slowly built.

For U.S. businesses, Cuba presents more immediate opportunities, while we may wait years to see Iran develop into a promising market.

Does the Iranian market offer opportunities for your business? Will you be watching for changes to the sanctions as the situation develops?

Cuba and Iran are two of the most talked about topics in export compliance lately, and for good reason: both sanctions regimes are undergoing significant changes that have made headlines all over the world.

But that is about where the similarities end. In this two-part series, we will be comparing how each sanctions regime is changing, providing insight into the impact and underlying politics of sanctions.

Obama throws the door open wide for Cuba, but only a crack for Iran

Rarely do we see a diplomatic shift of the magnitude we saw last year, when President Obama announced his intent to re-establish diplomatic relations with Cuba.

The decision came as a surprise to nearly everyone, including the Office of Foreign Assets Control (OFAC). Since then, we have witnessed changes to this sanctions regime at a nearly unprecedented pace and scope.

While Obama and OFAC can only do so much (congressional action is needed to lift the underlying embargo), the changes made so far have created a range of opportunities for U.S. businesses.

On the other end of the spectrum, we have the Iran sanctions program. Unlike what we’ve seen with Cuba, very little has changed.

The tremendous volume of reporting surrounding the Joint Comprehensive Plan of Action (“JCPOA”), reached July 14, 2015, seems to suggest that the sanctions regime will soon be lifted and Iran will be open for business. In reality, that expectation is far from accurate.

Even if Iran adheres to its JCPOA commitments, as verified by the International Atomic Energy Agency (IAEA), only a very small subset of U.S. sanctions on Iran will be lifted. These will be largely secondary sanctions that only target non-U.S. persons. The majority of the sanctions, in place to achieve humanitarian and anti-terrorism goals, will remain in place.

When considering these two sanctions regimes and recent changes, it is critical to keep in mind that U.S. export policies are based on broad diplomatic goals – mainly anti-terrorism, humanitarian, pro-democracy, and nuclear non-proliferation.

OFAC’s goal is to further these diplomatic goals; of course, in the process they add a thick layer of complexity to conducting business in the U.S.

Understanding the underlying diplomatic goals makes interpreting regulations for sanctions compliance easier, and accepting the additional complexity more bearable.

Cuban sanctions relief reflects 3 main goals

On December 17, 2014, President Obama announced that he was taking steps to “increase travel, commerce, and the flow of information to and from Cuba[,]” to foster “people-to-people engagement.”

Just over one year later, the changes to the Cuba sanction program reflect that goal.

The new, more relaxed regulatory policies rotate around those three areas: travel, commerce, and information.

Travel restrictions were lifted – quickly. Travel within twelve defined categories is now allowed under a general license, whereas before all travel had required a specific license. These twelve categories are:

1. Family visits (§515.561);
2. Official business of the U.S. government, foreign governments, and certain intergovernmental organizations (§515.562);
3. Journalistic activity (§515.563);
4. Professional research and professional meetings (§515.564);
5. Educational activities (§515.565);
6. Religious activities (§515.566);
7. Public performances, clinics, workshops, athletic and other competitions, and exhibitions (§515.567);
8. Support for the Cuban people (§515.574);
9. Humanitarian projects (§515.575);
10. Activities of private foundations, or research or educational institutes (§515.576);
11. Exportation, importation, or transmission of information or informational materials (§515.545);
12. Certain export transactions that may be considered for authorization under existing Department of Commerce regulations and guidelines with respect to Cuba or engaged in by U.S.-owned or -controlled foreign firms (§§515.533 and 515.559).

Travel restrictions loosened to aid trade

As you can see, despite what some travel agents may say, this does not allow for open tourism to Cuba. Of particular interest to U.S. businesses are categories 4, professional research and meetings, and 12, “certain export transactions” related travel. These two allow for travel in pursuit of commercial transactions with Cuba.

In combination with the loosening of travel restrictions, regulations were also eased in areas related to allowing this type of travel. Examples include goods and services that keep air travel safe, consumer communication devices, telecommunications, and certain financial transactions. Most activity connected with these areas do not require a license.

Several months later, OFAC continued to adjust regulations relating to these areas, including expanded eligibility for certain license exceptions, such as for private aircraft on temporary sojourn.

Around the same time, the U.S. also removed Cuba from Country Group E:1, designated state sponsors of terrorism. This provided for the loosening of many arms control and dual-use item regulations.

In September 2015, OFAC announced more changes to ease restrictions, all primarily extending from the same general categories.

For travel, it allowed for the opening and closing of related accounts. Business carrier services were also granted more leeway for export-related travel to allow necessary products and services for safe air travel, including travel directly to or from the U.S.

Things are getting easier for US-Cuban business

Changes were also made to regulations regarding business conduct. A physical presence and operations in Cuba are now permitted for certain categories of U.S. businesses, most related to communications, such as news bureaus, mail transmission services, and internet based services.

To accomplish these activities, U.S. businesses are permitted to send U.S. employees to Cuba and open bank accounts. In the reverse direction, limited hiring of Cuban nationals is also permitted.

U.S. businesses that provide goods or services related to these general categories should explore the opportunity to begin conducting business. However, companies should remain cautious and diligently review remaining sanctions to make sure they do not inadvertently run afoul of them.

Despite the significant opening of commerce, travel, and information flow with Cuba, the underlying boycott remains law and OFAC continues to enforce it.

OFAC has stated that it is “optimistic” about the continued relaxation of the relationship between the two countries. However, since significant further changes will require Congressional action, and 2016 is an election year, there are no guarantees.

Is your business considering venturing into the opening Cuban market? What are some of the best import export opportunities in the Cuban market?

We have all seen the email, the “If we don’t get this item to this country NOW it is going to throw the whole project off!”

Then comes the slew of emails back and forth, and back again, regarding how the company is going to actually get the equipment moved, often including input from lawyers, about the steps needed to put the proper licenses in place.

Frequently, government export authorizations or licenses, taking weeks or months to secure, are the hold-up.

It doesn’t need to be this way.

Too often, companies train employees on trade compliance as if it is an annoying bundle of red tape that will inevitably hold up operations. Employees are taught that trade compliance is a hurdle they are forced to jump through once they are ready to get a job done.

This viewpoint is enforced by complicated policies replete with legal language that offer no hint to the reader about why he or she should care.

In reality, trade compliance does not have to hold up operations. The following steps will help you integrate trade compliance into everyday operational decisions. Trade compliance cannot be an afterthought that no one thinks about until it is too late.

By then, you will have people and equipment sitting around unused, costing you time and money.

1. Focus on why export control laws are in place.

Too often, export control laws are explained in legalese, citing regulation numbers and government agency definitions. While the law itself is important, it is also important to understand the big picture.

Are these laws in place just to make doing business more difficult for your company? Despite what some people might think, the answer is no.

These laws serve important purposes in national and international security.

Don’t lose sight of that and don’t let your operational personnel lose sight of it.

Policies that people believe in, where they can see the purpose behind them, are most likely to be followed instead of ignored.

2. Make export compliance part of the first steps in a project instead of the last.

Trade compliance should be part of a project discussion at the initial stages. It should be an item on the meeting minutes when projects are first being organized. While it is not always possible to anticipate export control issues, most of the time it is.

If the person responsible for exporting or re-exporting equipment is involved in project discussions early on, your company is less likely to be stuck with items sitting in a warehouse, waiting for the right licenses while operational personnel at the receiving end sit idle.

This saves your company time and money.

You can achieve this easily by training all of your operational personnel in the basics of trade compliance. This does not have to be an in-depth training program. It is as simple as making operational personnel aware of the questions they should be asking:

What is being shipped to where, and do we have the proper license in place?

Consider how much more efficient your operations would be if all personnel involved in a project knew to ask those questions. While those ultimately responsible for compliance will need to have a bigger window into the process, getting everyone on board goes a long way to improving your operational efficiency.

The thing is, everyone knows that they will have to manage trade compliance issues eventually. Make it something people are used to considering up front.

3. Make compliance with export control restrictions simple.

Above I boiled down export compliance into a sentence that operational personnel should be asking: what is being shipped to where and do we have the proper license in place? The truth behind this idea is that not everyone needs to know all the details.

If you are able to identify what is important to your audience and then remove the extraneous information, you are more likely to hold listeners’ attention. The chances are then better that the information that is being provided will stick.

Of course, it is easier to have everyone go through the same trade compliance course that includes the same information, relevant or not to that individual. It takes time to identify who needs to know what, but, once you do, the reward is that your training is actually effective.

4. Encourage communication between export compliance personnel and operational personnel.

No matter how hard you try to make it simple (there is always a catch!), the fact is that export control laws are complex and can be fraught with nuance. When you create “general” rules to make things simple, you must pair it with an open line of communication to raise questions when something complicated or out of the ordinary comes up.

You can facilitate two-way communication by starting the conversation. A monthly or quarterly email containing a few tips or updates from you to operational personnel goes far.

People will associate your name with export compliance so that when a question pops into their head, the thought “I should email …” accompanies it.

If you start getting more questions than you have time to answer (a good problem to have), designate someone to respond to questions when you are unable to. Questions are often repeated, and concern matters that can often be resolved with a simple records search.

Employing an individual, besides yourself – or whatever busy trade compliance officer is in charge of the program – who can quickly answer questions from operational personnel goes far in a world where business is often being done 24-hours a day.

You can also create a unique email address (e.g. tradecompliance@) that multiple people can access.

If someone in your company was asked about trade compliance, would your name pop into his or her head as the go-to-person?

5. Don’t shoot the messenger

No one likes to be the bearer of bad news. “Don’t shoot the messenger” is a phrase because it is a common instinct. You should strive for the opposite in your trade compliance program. Don’t be the last to know.

An “open door” policy that rewards people for coming forward with information, even if it is a kindly worded thank-you email, helps you to make sure that you know what is going on.

Yes, the consequences for trade and export law violations are severe and can amount to very bad news, but unless you are aware of mistakes being made, it is impossible to fix the gaps or misunderstandings within your compliance program.

Encourage people to report on every suspected violation, and follow up with the person who reported on the outcome. You will often find that operational personnel are overly careful, that they see potential violations where there are none.

By encouraging people to double-check with you, via reporting suspected violations, you are educating your personnel on what is and is not a violation and gaining a clearer picture of how trade compliance actually works within your company.

Which of these steps could save your business the most time and money? Anything else that would be worth mentioning?

Sanctions compliance is more important than ever. As a result, companies need to spend more time to review, assess and enhance their sanctions compliance programs.

Most companies know how to screen potential customers, business partners, vendors and suppliers against Office of Foreign Assets Control (OFAC) lists of prohibited persons and entities.

However, while such a process is important to a compliance program, much more is needed to ensure compliance throughout a company’s operations.

“Check-the-box” type programs are a thing of the past

Gone are the days when a sales clerk ran a customer’s name on a purchase order through a trade compliance database to ensure that the customer was not a prohibited sanctions list.

Companies are required to do much more than that if they want to get full credit from the government for its sanctions compliance strategies.

Under OFAC rules and Department of Justice guidelines, a company has to design and implement an effective sanctions compliance program.

This cannot be a mere check-the-box type of program – it requires a full complement of compliance program elements, most of which are already known to the business community.

I do not intend to list here the elements of an effective program as required under the U.S. Sentencing Guidelines and the DOJ/SEC FCPA Guidance. We all are familiar with those requirements.

Instead, I want to suggest some helpful practical steps.

There are many lessons from recent OFAC enforcement actions. Perhaps the most significant and consistent theme is the fact that many companies have little to no commitment to OFAC compliance other than a basic screening protocol.

Beyond that, companies have focused on anti-corruption, third-party payments and other “more” significant risks.

Here’s where that mindset has to change:

1. Company Culture:

Everyone’s favorite compliance-related topic these days is promoting a “culture of compliance”. That is a welcome development, but there needs to be more to it than just saying culture is important.

Culture is created by actions and communications surrounding conduct and accountability.

When it comes to sanctions compliance, companies have to add the importance of sanctions to the “culture of compliance” message.

2. Risk Assessment:

In many situations, I urge companies not to expend significant resources on a risk assessment. However, in the sanctions area, a risk assessment could be critical, depending on the business’ global operations and potential risks.

For global companies, it is important to examine closely its operations and identify situations where sanctions risks exist.

3. Policies and Procedures:

Too often, companies relegate sanctions enforcement to lower-level managers or employees. A Chief Compliance Officer has to take responsibility for this substantive area and work closely with trade compliance staff to ensure standards are being met.

As part of this effort, a company has to adopt specific policies and procedures for its sanctions compliance program.

The government requires companies to develop trade compliance “manuals,” which need not be exhaustively detailed, but should be drafted to provide procedural guidance for compliance with sanctions.

A sanctions compliance program must name a specific individual, the CCO in most cases, as the person responsible for sanctions compliance.

4. OFAC Database Screening:

Companies rely on database services to conduct OFAC checks. That is all well and good. However, your program is only as strong as your data, and not all data services are infallible.

Companies need to double-check these services, conduct random audits of the checks, and make sure there are adequate reviews of the screening process.

5. Training:

Recent OFAC enforcement actions have highlighted the failure of a company to ensure appropriate training of managers and employees.

This is a requirement that has to be satisfied and documented to demonstrate to the government, if necessary, that training has been conducted.

6. Documentation and Advice of Counsel:

I tend to repeat myself (just ask my wife), but here is a mantra that I say all the time,

A compliance program by definition is ineffective if it is not documented.

Further, to provide additional legal protection, a written “advice of counsel” memo, letter or email should be obtained in any situation where there is a significant question as to the legality of going forward with a transaction.

7. Internal Audit:

A company should audit its sanctions compliance program in accordance with appropriate auditing risk formulas.

If deficiencies are identified, managers should be held accountable for completing any remediation as directed by the internal audit staff.

8. Investigation and Remediation:

A company has to promote a “speak-up culture” and investigate complaints relating to sanctions compliance, remedying any violations that are discovered.

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9. Contract Management System:

A company has to maintain a robust contract management system so that it can review contracts in order to ensure compliance with sanctions restrictions.

Once approved, the contract has to be managed to protect against sanctions violations and any attempt by a customer to evade sanctions requirements, either by facilitating a violation for the benefit of an otherwise prohibited person, or by failing to confirm end user identities and requirements.

Is your sanctions compliance program up to date? Does your company’s “culture of compliance” cover sanctions?

Want to read more about ethics and compliance?

“My hope is that my contribution can lend some weight to an already significant revolution in corporate governance — the rise of the compliance professional and the dedication of corporate leaders and organizations to ethics and compliance.” Michael Volkov

The Revolution in Ethics and Compliance includes a collection of recent essays and blog posts aimed at encouraging corporate leaders to understand how a culture of compliance is not only the best best protection against code of conduct and legal violations, but also how such a culture creates sustainable financial benefits to a company and its employees.

In the years to come, we will look back on these days as the beginning of a new era of sanctions enforcement.

It all began with the banks

For the last few years, the financial industry has been the focus of aggressive sanctions enforcement, particularly foreign-based financial institutions.

These international banks regularly evaded United States sanctions by stripping and masking financial transactions for the financial benefit of their business operations. These were relatively easy cases to develop and brought the government huge fines.

The risk of criminal sanctions enforcement against global banks took a new twist with the BNP Paribas case, in which BNP Paribas was required to plead guilty to a criminal offense and pay total fines and penalties nearing $8.9 billion.

Justice Department officials subsequently explained that BNP Paribas’ failure to cooperate constituted obstruction of justice because the Justice Department was barred by the statute of limitations from prosecuting otherwise culpable individuals.

Cooperate or face the consequences

The consequences of failing to cooperate was underscored again when Commerzbank was forced to pay fines and penalties totaling $1.4 billion for evading sanctions in conducting numerous financial transactions.

Commerzbank has to report every quarter to the DOJ and OFAC on its progress in implementing enhanced compliance procedures.

The BNP Paribas and Commerzbank cases underscore this new era of sanctions enforcement, and demonstrate that the Justice Department and OFAC will use all the tools available, if necessary, to resolve an investigation.

The significance for international businesses

Perhaps more important for global businesses, however, was the recent resolution involving Schlumberger Oilfield in which the company paid $232 million in fines and penalties for violating applicable sanctions.

The implications of the case are significant for all international businesses. U.S. sanctions apply to U.S. entities and persons.

In certain circumstances, some companies will seek to continue business operations with prohibited countries or individuals by conducting business outside the United States. This requires careful consideration of legal and compliance issues.

A company, at least theoretically, can provide otherwise prohibited products or services, so long as the activities do not involve any United States entities or persons. In theory, it may sound doable, but in practice it is extremely difficult to ensure that no aspect of a business touches a United States entity or person.

Get familiar with the prohibition against facilitation

Another way to explain the law is to focus on the prohibition against facilitation of a sanctions violation. Not all sanction regimes are the same with regard to prohibiting facilitation conduct – the Iran sanctions seek to enforce this prohibition to the maximum extent permitted under Due Process requirements of our Constitution.

The Iran, Syria, Cuba and Sudan-related programs prohibit U.S. persons from “facilitating” prohibited transactions.

In other words, sanctions programs prohibit U.S. persons from doing indirectly what they cannot do directly.

In announcing its settlement with Schlumberger, the DOJ embraced the facilitation prosecution theory and charged Schlumberger with failing to segregate foreign operations from U.S. operations.

Specifically, Schlumberger’s U.S. operations routinely approved capital expenditure requests, provided strategic direction, and supplied technical support for Schlumberger’s operations in Iran and Sudan. Schlumberger’s U.S. employees sought to conceal the locations of the sanctioned countries to which they provided support.

Review your sanctions compliance program

Global companies that seek to conduct business in prohibited countries have to re-examine their sanctions compliance program to ensure they do not run afoul of the facilitation limitation.

A specific review of various functions should be conducted to ensure that U.S. officers, supervisors and employees do not:

• Approve, finance, insure or guarantee any transaction they themselves could not conduct directly;
• Provide services in support of a prohibited activity
• Provide merchandise as part of a prohibited transaction
• Refer business to a foreign person that would involve a prohibited transaction

The DOJ has sent an important message to global companies subject to U.S. sanctions.

Global companies that want to conduct business with U.S-sanctioned entities have to ensure that no part of its U.S. operations is used to provide goods or services to a prohibited business.

Want to read more about ethics and compliance?

“My hope is that my contribution can lend some weight to an already significant revolution in corporate governance — the rise of the compliance professional and the dedication of corporate leaders and organizations to ethics and compliance.” Michael Volkov

The Revolution in Ethics and Compliance includes a collection of recent essays and blog posts aimed at encouraging corporate leaders to understand how a culture of compliance is not only the best best protection against code of conduct and legal violations, but also how such a culture creates sustainable financial benefits to a company and its employees.