Sanctions Regulations

Today, OFSI (part of HM Treasury) posted a new short document (4 pages including the cover image) about what sanctions on Russia will look like after the UK exits the European Union.

There are sections on asset freezes, transferable securities or money-market instruments (listing specific restricted firms), loan and credit arrangements, and Crimea-related investments. (If it cut and pasted better, I would post it, but…).

Link:

OFSI guidance

Publication of Foreign Interference in U.S. Elections Sanctions Regulations

The Office of Foreign Assets Control (OFAC) is issuing regulations to implement Executive Order 13848 of September 12, 2018 (“Imposing Certain Sanctions in the Event of Foreign Interference in a United States Election”).  These regulations are currently available for public inspection with the Federal Register and will take effect upon publication in the Federal Register on April 29, 2019.  OFAC intends to supplement this part 579 with a more comprehensive set of regulations, which may include additional interpretive and definitional guidance and additional general licenses and statements of licensing policy.

Links:

OFAC Notice

Foreign Interference in U.S. Elections Sanctions Regulations

Interesting case: Haverly settled two Apparent Violations of the Ukraine Related Sanctions Regulations (the first under this program) for $75,375, knocked down from a base penalty of $125,000 (and a maximum of $590,282). The violations were not self-reported, but were non-egregious.

The practical upshot is that Haverly invoiced Rosneft (on the SSI List under Directive 2) with terms of 30 and 70 days, under the magic 90 day limit. However, Rosneft asked for additional info and, by the time Haverly came up with it, it was past 90 days, making for a prohibited extension of credit:

From on or about May 31, 2016, to on or about October 27, 2016, Rosneft made four attempts to remit payment related to the second invoice, each of which was rejected by financial institutions after determining the transaction was prohibited by OFAC’s regulations as debt of greater than 90 days maturity of an SSI entity subject to Directive 2. At points during the period associated with these rejected payment attempts, Haverly received information from Rosneft, including copies of Society for Worldwide Interbank Financial Telecommunication messages amongst and between financial institutions regarding the rejected transactions — some of which contained information and instructions stating that the underlying activity may have a nexus to sectoral sanctions.

However, at the time of the payment attempts Haverly did not have a sanctions compliance program and did not recognize that the delayed collection of payment was prohibited. Haverly did not approach OFAC for guidance or authorization, however, and instead explored various options to collect the payment associated with the second invoice from Rosneft. At the suggestion of Rosneft, Haverly re-issued and re-dated the second invoice. Haverly then successfully received payment on the second invoice from Rosneft on January 11, 2017.

And here are the General Factors considered in calculating the final penalty:

OFAC considered the following to be aggravating factors:

(1) With respect to the second apparent violation, Haverly demonstrated reckless disregard for U.S. economic sanctions requirements by repeatedly ignoring warning signs that its conduct constituted or likely constituted a violation of OFAC’s regulations;

(2) Haverly’s management team had actual knowledge of the conduct giving rise to the apparent violations; and

(3) Haverly did not possess a formal OFAC sanctions compliance program at the time the apparent violations occurred.

OFAC found the following to be mitigating factors:

(1) The apparent violations resulted in minimal actual harm to the sanctions program objectives of the URSR, and OFAC would have likely authorized the transactions had Haverly requested a license to receive the payments;

(2) Haverly has not received a Penalty Notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the apparent violations;

(3) Haverly is a small company with a limited number of employees; and

(4) Haverly engaged in remedial efforts that included the creation of a Sanctions Compliance Officer position, and implementation of a risk-based compliance program with screening designed to review all current and future clients of Haverly for OFAC purposes.

OFAC added in Haverly’s commitments to better compliance, including regular risk assessments, a commitment to creating a culture of compliance and ongoing training.

OFAC closes with a warning about SSI violations:

This enforcement action highlights the risks associated with engaging in transactions involving sectors of the Russian economy subject to U.S. economic and trade sanctions. The development and implementation of a risk-based sanctions compliance program would provide such companies with an ability to assess prospective and real-time transactions for potential prohibitions and violations of OFAC’s regulations. An effective sanctions compliance program includes policies, procedures, and controls capable of identifying at-risk transactions and customers or counter-parties for review; escalating such matters to a sanctions compliance officer or point-of-contact for proper analysis; an ability to respond and react to warning signs regarding potential violations, including transactions blocked or rejected by financial institutions in accordance with OFAC’s regulations; and an adequate training program. OFAC encourages companies to exercise enhanced due diligence in business relationships with entities subject to the SSI List and to avoid the use of unorthodox business practices — such as the amendment or alteration of trade documents, or resubmission of payment information without a sanctions- related term, phrase, or location.

Link:

OFAC Enforcement Information

Government of Canada will defend interests of Canadians doing business in Cuba

April 17, 2019 – Ottawa, Ontario – Global Affairs Canada

The Honourable Chrystia Freeland, Minister of Foreign Affairs, today issued the following statement regarding Canadian businesses operating in Cuba and the decision by the United States not to suspend Title III of the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, commonly known as the Helms-Burton Act:

“Canada is deeply disappointed with today’s announcement. We will be reviewing all options in response to this U.S. decision.

“Since the U.S. announced in January it would review Title III, the Government of Canada has been regularly engaged with the U.S. government to raise our concerns about the possible negative consequences for Canadians—concerns that are long-standing and well known to our U.S. partners.

“I have met with U.S. Secretary of State Mike Pompeo to register those concerns. Canadian and U.S. officials have had detailed discussions on the Helms-Burton Act and Canada’s Foreign Extraterritorial Measures Act. I have also discussed this issue with the EU.

“I have been in contact with Canadian businesses to reaffirm we will fully defend the interests of Canadians conducting legitimate trade and investment with Cuba.”

Quick facts

  • The Helms-Burton Act came into force in the United States in 1996. The act aims to prevent foreign countries from engaging in international trade with Cuba by subjecting foreign nationals to travel restrictions and financial liabilities in the United States. Since then, successive U.S. administrations have continuously suspended application of Title III (financial liabilities) in the maximum six-month increments.

  • On January 16, 2019, the U.S. Secretary of State notified Congress that he would be suspending Title III for 45 days, instead of the typical six months, in order to conduct a careful review of the right to bring action under the Title. 

  • In 1996, the Government of Canada amended its Foreign Extraterritorial Measures Act to mitigate the extraterritorial effects of the Helms-Burton Act and to offer explicit legal protections for Canadian businesses.

Link:

Foreign Extraterritorial Measures Act

of the Standard Chartered settlement with OFAC – it’s a roadmap to what real remediation looks like, and the standards for a firm of size and commercial sophistication are:

Specifically, OFAC and Respondent understand that the following compliance commitments have been made:

a. Management Commitment:

i. Respondent commits that Senior Management has reviewed and approved Respondent’s sanctions compliance program.

ii. Respondent commits to ensuring that its senior management. including senior leadership, executives, and/or the board of directors, are committed to supporting Respondent’s sanctions compliance program.

iii. Respondent commits to ensuring that its compliance unit(s) are delegated sufficient authority and autonomy to deploy its policies and procedures in a manner that effectively controls Respondent’s OFAC risk.

iv. Respondent commits to ensuring that its compliance unit(s) receive adequate resources-tncluding in the form of human capital, expertise, information technology, and other resources, as appropriate- that are relative to Respondent’s breadth of operations, target and secondary markets, and other factors affecting its overall risk profile.

v. Respondent commits to ensuring that Senior Management promotes a “culture of compliance” throughout the organization.

vi. Respondent’s Senior Management demonstrates recognition of the seriousness of apparent violations of the laws and regulations administered by OFAC, and acknowledges its understanding of the apparent violations at issue, and commits to implementing necessary measures to reduce the risk of reoccurrence of similar conduct and apparent violations from occurring in the future.

b. Risk Assessment:

i. Respondent conducts an OF AC risk assessment in a manner, and with a frequency, that adequately accounts for potential risks. Such risks could be posed by its clients and customers, products, services, supply chain, intermediaries, counter-parties, transactions, and geographic locations, depending on the nature of the organization. The risk assessment will be updated to account for the root causes of any apparent violations or systemic deficiencies identified by Respondent during the routine course of business.

ii. Respondent has developed a methodology to identify,,analyze, and address the particular risks it identifies. The risk assessment will be updated to account for the conduct and root causes of any apparent violations or systemic deficiencies identified by Respondent during the routine course of business, for example, through a testing or audit function.

c. Internal Controls:

i. Respondent has designed and implemented written policies and procedures outlining its sanctions compliance program. These policies and procedures are relevant to the organization. capture Respondent’s day-to-day operations and procedures, are easy to follow, and prevent employees from engaging in misconduct.

ii. Respondent has implemented internal controls that adequately address the results of its OF AC risk assessment and profile. These internal controls should enable Respondent to clearly and effectively identify, interdict, escalate, and report to appropriate personnel within the organization transactions and activity that may be prohibited by OF AC. To the extent information technology solutions factor into Respondent•s internal controls, Respondent has selected and calibrated the solutions in a manner that is appropriate to address Respondent’s risk profile and compliance needs, and Respondent routinely tests the solutions to ensure effectiveness.

iii. Respondent commits to enforcing the policies and procedures it implements as part of its sanctions compliance internal controls through internal and/or external audits.

iv. Respondent commits to ensuring that its OF AC-related recordkeeping policies and procedures adequately account for its requirements pursuant to the sanctions programs administered by OF AC.

v. Respondent commits to ensuring that, upon learning of a weakness in its internal controls pertaining to sanctions compliance, it will take immediate and effective action, to the extent possible, to identify and implement compensating controls until the root cause of the weakness can be determined and remediated.

vi. Respondent has clearly communicated the sanctions compliance program’s policies and procedures to all relevant staff, including personnel within the sanctions compliance function, as well as relevant gatekeepers and business units operating in high-risk areas (e.g., customer acquisition, payments, sales, etc.) and to external parties performing sanctions compliance responsibilities on behalf of Respondent.

vii. Respondent has appointed personnel to integrate the sanctions compliance program’s policies and procedures into Respondent’s daily operations. This process includes consultations with relevant business units, and ensures that Respondent’s employees understand the policies and procedures.

d. Testing and Audit:

i. Respondent commits to ensuring that the testing or audit function is accountable to senior management, is independent of the audited activities and functions, and has sufficient authority, skills, expertise, and resources within the organization.

ii. Respondent commits to ensuring that it employs testing or audit procedures appropriate to the level and sophistication of its sanctions compliance program and that this function, whether deployed internally or by an external party, reflects a comprehensive and objective assessment of Respondent’s OFAC-related risks and internal controls.

iii. Respondent commits to ensuring that, upon learning of a confirmed negative testing or audit result pertaining to its sanctions compliance program, it will take immediate and effective action to identify and implement compensating controls until the root cause of the weakness can be detennined and remediated.

e. Training:

i. Respondent commits to ensuring that its OF AC-related training program provides adequate information and instruction to employees and, as appropriate, stakeholders (for example, clients, suppliers, business partners, and counterparties) in order to support Respondenes sanctions compliance efforts.

ii. Respondent commits to providing OF AC-related training with a scope that is appropriate for the products and services it offers; the customers, clients, and partner relationships it maintains; and the geographic regions in which it operates.

m. Respondent commits to providing OF AC-related training with a frequency that is appropriate based on its OFAC risk assessment and risk profile and, at a minimum, at least once a year to all relevant employees.

iv. Respondent commits to ensuring that, upon learning of a confirmed negative testing result or audit finding, or other deficiency pertaining to its sanctions compliance program, it will take immediate and effective action to provide training to relevant personnel.

v. Respondent’s training program includes easily accessible resources and materials that are available to all applicable personnel.

In addition, the agreed to annual certifications to OFAC for 5 years attesting to the implementation and maintenance of the compliance measures.

Mr. Watchlist is impressed.

Link:

OFAC Settlement with Standard Chartered Bank

The Stock Exchange of Hong Kong issued a 6-page sanctions risks guidance document. Skipping over definition of terms, the purpose of the document is:

1. Purpose

1.1 Certain overseas jurisdictions may from time to time impose trade or economic sanctions on specific countries, governments, entities or persons by restricting their nationals from making assets or services available, directly or indirectly, to them, dealing with their assets or otherwise conducting commercial transactions with them. Some sanctions may even have (i) extra-jurisdictional effect, i.e. are imposed on persons who are not nationals of the relevant jurisdiction or entities which are not incorporated or located in the relevant jurisdiction, and do not otherwise have any nexus with that jurisdiction; and/or (ii) implications on activities or investments which may be regarded as financing, facilitating or contributing to the enhancement of the ability of a sanctioned country, government, entity or person to develop certain specific products or industries.

1.2 This letter provides guidance on actions required to be taken by a listing applicant if its activities expose the Relevant Persons (as defined below) to any risk as a result of sanctions under any law or regulation of any Relevant Jurisdiction (as defined below) and how such risk may affect its suitability for listing and should be dealt with.

And the scenarios given are:

Three scenarios

3.2 This Guidance Letter considers three different scenarios:

(a) a listing applicant has engaged in Primary Sanctioned Activity;

(B) a listing applicant has engaged in Secondary Sanctionable Activity; and

(C) a listing applicant is a Sanctioned Target, is located, incorporated, organised or resident in a Sanctioned Country, or is a Sanctioned Trader.

It also sets out certain circumstances under which the Exchange may find an applicant not suitable for listing.

Primary Sanctioned Activity

3.3 The listing applicant must obtain a reasoned analysis from its legal adviser on whether each Primary Sanctioned Activity conducted by the listing applicant (i) violates any applicable law or regulation in the Relevant Jurisdiction(s); and/or (ii) results in any material sanctions risk1 to the Relevant Persons. The listing applicant must also assess the impact of any cessation of Primary Sanctioned Activity on its financial position and business operations. The listing applicant must cease all Primary Sanctioned Activities prior to listing if its legal adviser has confirmed that such activities violate applicable law or regulation.

Depending on the facts and circumstances, the listing applicant should adopt appropriate measures to deal with any material sanctions risk identified (see paragraphs 3.6 and 3.7 below).

Secondary Sanctionable Activity

3.4 The listing applicant must obtain a reasoned analysis from its legal adviser on whether each Secondary Sanctionable Activity conducted by the listing applicant would likely result in the imposition of any sanctions against the Relevant Persons (including designation as a Sanctioned Target and/or the penalties which might be imposed).

Depending on the facts and circumstances, the listing applicant should adopt appropriate measures to deal with any material sanctions risk identified (see paragraphs 3.6 and 3.7 below).

Applicant is a Sanctioned Target, is located, incorporated, organised or resident in a Sanctioned Country or is a Sanctions Trader

3.5 Depending on the facts and circumstances, the Exchange may determine that such a listing applicant is not suitable for listing due to reputational risk or impose other restrictions (e.g. the listing applicant might be required to ensure that its shares are not offered to nationals of the Relevant Jurisdictions).

And the handling of these cases:

Measures to be adopted

Listing applicant subject to material sanctions risk

3.6 The listing applicant which is subject to material sanctions risk should implement effective and adequate internal control measures before listing to control and monitor its and other Relevant Persons’ exposure to sanctions risks. Depending on the specific nature of the sanctions risk involved and the materiality of the Sanctioned Activity to the listing applicant’s business, these measures might include an undertaking from the listing applicant and/or its shareholders to the Exchange:

(a) not to directly or indirectly apply the IPO proceeds and any other funds raised through the Exchange to (i) finance or facilitate any Sanctioned Activity; or (ii) pay any damages for terminating or transferring the relevant contracts that constitute Sanctioned Activity;

(b) to terminate before listing all obligations under the relevant contracts that constitute the Sanctioned Activity and have measures in place to ensure compliance with the Undertakings; and/ or

(c) to disclose in its annual, interim and quarterly reports (if any) (i) details of any new and/ or existing Sanctioned Activity; (ii) its efforts in monitoring its business exposure to sanctions risks; and (iii) the current status of, and the anticipated plans for, any new and/ or existing Sanctioned Activity.

Any breach of such undertaking may lead to a possible delisting of the listing applicant’s securities from the Exchange.

3.7 Depending on the specific nature of the sanctions risk involved and the materiality of the Sanctioned Activity to the listing applicant’s business, the listing applicant may be required to prominently disclose the following in the “Summary”, “Risk Factors” and “Business” sections of its listing document:

(a) details of the Sanctioned Activities, including but not limited to (i) the nature and size of the listing applicant’s projects/ businesses involved in the Sanctioned Activities; (ii) whether the listing applicant and/ or its counterparties were or have reasons to believe they will be deemed to be Sanctioned Targets; and (iii) background of the counterparties, the revenue recognized from Sanctioned Activities during the track record period and the current status of such activities;

(b) the legal adviser’s reasoned analyses under paragraphs 3.3 and 3.4 above;

(c) a description of any known material contingent liabilities in relation to the Sanctioned Activities in accordance with the applicable accounting and legal standards;

(d) if it has engaged in Primary Sanctioned Activities that violate any applicable law or regulation, (i) when such activities ceased; (ii) details of the financial and operational impact; (iii) any disclosure made to the relevant governments and responses to, and the status of, any such disclosure; and (iv) the legal consequences (including maximum penalties (if any)) on the Relevant Persons as a result of such cessation;

(e) if it intends to undertake any new Sanctioned Activity after listing, details of such intention and the parameters or criteria that the listing applicant will consider when determining whether to undertake such venture; and

(f) (i) the internal control measures and the views of its sponsor(s) and directors on the adequacy and effectiveness of the internal control measures to protect the interests of the Relevant Persons; (ii) the Undertakings; and (iii) a risk factor on the possible delisting of the listing applicant’s securities if any undertaking to the Exchange as described in paragraph 3.6 is breached.

Circumstances which may render an applicant not suitable for listing

3.8 The Exchange is unlikely to approve the listing if (a) any sanctions risks to or sanctions imposed on the applicant materially undermine its ability to continue its operations; (b) an applicant states that the funds are raised to finance Sanctioned Activities; or (c) its listing would cause a significant risk to the Relevant Persons or reputational risk to the Exchange (see also paragraph 3.5 above). Whether a listing would cause a significant risk to the Relevant Persons depends on the specific facts and circumstances.

No current Sanctioned Activity or no material sanctions risk

3.9 If there is no apparent or material sanctions risk, no specific risk mitigating measures need to be adopted and no disclosure on sanctions is required.

Suitability for continued listing

3.10 Please refer to paragraphs 25-28 of GL96-18 regarding the Exchange’s guidance on listed issuer’s suitability for continued listing due to trade or economic sanctions.

And it ends by reminding everyone that laws and refs change, and that one should consult counsel to be make sure they are up to date on the latest requirements.

Link:

HKEX Guidance Letter

Circular to Licensed Corporations and Associated Entities

Anti-Money Laundering / Counter-Financing of Terrorism

Frequently Asked Questions

The Securities and Futures Commission (“SFC”) today published a new set of Frequently Asked Questions (“FAQs”) in relation to anti-money laundering and counter-financing of terrorism (“AML/CFT”). The FAQs superseded the FAQs published in March 2012. A copy of the FAQs is attached in the Appendix to this circular1.

The FAQs, which should be read in conjunction with the latest AML/CFT guidelines2, address often asked questions by the industry about the implementation of some guideline provisions. They provide elaboration or illustration to provisions in the AML/CFT guidelines in order to promote greater understanding. The SFC will keep the FAQs for the AML/CFT guidelines under review and update them where necessary.

Licensed corporations (“LCs”) and associated entities (“AEs”)3 should have regard to the FAQs in meeting applicable AML/CFT statutory and regulatory requirements.

Should you have any queries regarding the contents of this circular, please contact Ms Remy Cheung at 2231 1186.

Intermediaries Supervision Department
Intermediaries Division
Securities and Futures Commission

Enclosure

End

SFO/IS/005/2019

1 The FAQs is also available on the SFC’s website at http://www.sfc.hk, under the section “Regulatory functions – Intermediaries – Supervision – FAQs”.
2
 This refers to the revised Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations) (“AML/CFT Guideline”) and the Prevention of Money Laundering and Terrorist Financing Guideline issued by the Securities and Futures Commission for Associated Entities (“Guideline for AEs”), which have come into effect on 1 November 2018.
3 Under paragraph 6 of the Guideline for AEs, AEs that are not authorized financial institutions are expected to have regard to the provisions of the AML/CFT Guideline as if they were themselves LCs.

It’s a 6+ page PDF document consisting of 17 questions on the following topics:

  • Overseas subsidiaries
  • Non-Hong Kong residents
  • Acceptable travel documents
  • Retention of a copy of travel documents
  • Principal place of business
  • Address of registered office
  • Presence of directors or beneficial owners for the purpose of account opening
  • Electronic documents
  • Document in foreign language
  • Expired documents
  • Source of wealth
  • Jurisdictions subject to a call by the Financial Action Task Force (“FATF”)
  • Using intermediaries for ongoing monitoring
  • Independent validation of transaction monitoring systems
  • Certification
  • Sanctions screening of parties involved in payments
  • Record-keeping of unsuccessful applicants

Links:

HK SFC Notice

HK SFC Circular

Frequently Asked Questions (Appendix)