Trade Sanctions Enforcement in the Era of America First
On December 1, 2018, Meng Wanzhou, one of China’s leading tech executives, was arrested during an airport layover in Vancouver, Canada, for extradition to the United States. Ms. Meng’s arrest released a flood of outrage and anxiety among the Chinese, who characterized it as a human rights violation. Meng is the Chief Financial Officer of Huawei, one of the largest smartphone manufacturers in the world. Her arrest has been linked to a U.S. Department of Justice (DOJ) investigation into Huawei’s possible violations of U.S. sanctions against Iran. Specifically, Meng is believed to have helped Huawei cover up violations of U.S. sanctions by misrepresenting Huawei’s relationship to a subsidiary in its disclosures to U.S. financial institutions.
Meng’s arrest highlights the broad reach of U.S. sanctions and the increasing boldness with which the U.S. government is acting to control the conduct of foreign actors. The U.S. export rules and regulations not only prohibit U.S. residents from exporting goods and technology to embargoed countries such as Iran, they also prohibit anyone—anywhere in the world—from supplying goods and services to U.S. embargoed locations if the goods and services originated in the U.S. or contain certain levels of U.S.-origin content. And the United States’ massive global footprint gives it the leverage it needs to impose its will on foreign actors. By blocking access to transactions with U.S.-based suppliers, financial institutions and consumers, the U.S. government can cripple a foreign company’s ability to manufacture and sell goods globally.
This is what happened in the case against Zhongxing Telecommunications Equipment Corporation (ZTE), one of China’s largest telecommunications companies. In March 2017, ZTE reached a combined settlement agreement with the DOJ, the Bureau of Industry and Security (BIS) and the Office of Foreign Assets Control (OFAC), under which it agreed to pay penalties of $1.19 billion and submit to a corporate compliance monitor for violating U.S. trade sanctions against Iran. More recently, on November 19, 2018, Société Générale S.A. (SocGen), a French financial institution, agreed to pay a combined settlement of $1.4 billion to resolve alleged violations of anti-money laundering regulations and U.S. sanctions against Cuba and other countries.
Eye-popping settlements such as these have led some commentators to argue that the Trump administration is disproportionately weaponizing U.S. criminal laws on trade sanctions and corruption against foreign actors as part of its “America First” agenda. But while the notion that the DOJ may have increased its focus on foreign targets is entirely plausible, these settlements should be viewed in a broader context. The ZTE investigation was not a Trump initiative, but rather, it began and was nearly completed during the Obama administration. And these cases also may be viewed as evidence that, if anything, the U.S. government is simply becoming more aggressive in its enforcement of U.S. trade sanctions—regardless of who the alleged violator might be.
Recent cases demonstrate the need for U.S. businesses to remain vigilant against participating in prohibited transactions. On October 5, 2018, JPMorgan Chase reached a civil settlement with OFAC under which it agreed to pay over $5 million for processing transactions for participants in the airline industry in violation of sanctions against Cuba, Iran and others. At the same time, JPMorgan Chase also received a separate Finding of Violation, a non-monetary penalty, for processing transactions that were prohibited under sanctions against Syria and certain specially designated narcotics traffickers. On November 27, 2018, Cobham Holdings, a Virginia-based provider of technology, agreed to pay over $87,000 to OFAC for just three shipments involving the sale of silicon diode switches and switch limiters in violation of the Ukraine Related Sanctions Regulations.
While these payments are paltry compared to the ZTE and SocGen settlements, they involved voluntary disclosures and the transactions at issue were substantially smaller in magnitude. And these settlements are noteworthy in that they involved companies that had already implemented fairly sophisticated trade compliance programs, including the appointment of personnel dedicated to compliance and the implementation of software designed to screen and prevent transactions involving embargoed territories or restricted parties. But in each case, the screening processes failed. JPMorgan Chase paid over $5 million because its screening procedures from 2008 to 2012 did not include a way to independently screen the separate participating members of an entity for which it processed transactions. In the other matter, JPMorgan Chase was found to have used a vendor screening system with logic capabilities that failed to identify customer names with hyphens, initials or additional middle names as matches to similar names on the OFAC list of Specially Designated Nationals. Cobham was penalized because its third-party screening software used criteria that would only return matches containing all of the words searched, despite the fact that Cobham had set the search criteria to “fuzzy” so that it would detect partial matches.
As these cases demonstrate, screening every transaction with the tools available may not sufficiently minimize the risk of liability. In addition, the screening processes used should be vigorously tested for gaps and inconsistencies. Clearly, no solution will be perfect, but all companies engaged in global trade should be aware of the U.S. regulations involving trade sanctions and take precautions to avoid tripping over the lines.