Right before the holidays, President Trump and his administration took significant steps towards using economic sanctions to tackle international human rights abuses and corruption. The administration's actions underline the ever-growing importance of know-your-customer (KYC) and anti-corruption due diligence and compliance procedures for international business. In particular, companies doing business in high-risk countries and industries (eg, mining and government contracts) should consider expanding KYC to include a review of any public reports of human rights abuses or corruption by customers and vendors alike.
On December 20 2017 Trump signed Executive Order (EO) 13818, which declared that the prevalence and severity of human rights abuse and corruption threatens the stability of international political and economic systems. EO 13818 blocked the assets of the 13 persons, all from different countries, listed in the annex of the order and set out the framework for applying blocking and US visa restrictions on additional persons in future. EO 13818 is based on the authority provided to the president under the International Emergency Economic Powers Act and the Global Magnitsky (GLOMAG) Human Rights Accountability Act (Public Law 114-328), signed into law by former President Obama on December 23 2016 in his last days in office.
On December 21 2017 the Treasury Department's Office of Foreign Assets Control (OFAC) imposed sanctions on an additional 39 individuals and entities affiliated with the 13 designated in the newly issued order, bringing the total sanctioned individuals and entities to 52 under the OFAC specially designated national (SDN) designator 'GLOMAG'.(1) A Treasury Department press release details the reasons why these persons and entities were sanctioned. The OFAC also published frequently asked questions on the executive order. The OFAC has also created a webpage for the global Magnitsky sanctions.
On the same day, the administration issued its fifth annual report on the US government's actions to implement the Sergei Magnitsky Rule of Law Accountability Act(2) and added five names to the list of 49 Russians who have been sanctioned under the Russia-specific law (under the OFAC SDN designator 'MAGNIT').(3)
In addition to adding many names to the OFAC list, the president's signing of EO 13818 authorises future blocking and US visa restrictions by the OFAC (acting in consultation with the secretary of state and attorney general). Pursuant to EO 13818, the OFAC can sanction foreign persons:
- who are responsible for, complicit in or have directly or indirectly engaged in serious human rights abuse;
- who are current or former government officials or acting for or on behalf of an official who is responsible for, complicit in or has directly or indirectly engaged in:
- corruption, including the misappropriation of state assets, the expropriation of private assets for personal gain, corruption relating to government contracts or the extraction of natural resources or bribery; or
- the transfer or facilitation of the transfer of proceeds of corruption.
The activities described in above – that is, human rights abuses, corruption and the transfer or facilitation of the proceeds of corruption by foreign persons – are at the heart of the executive order. However, the executive order reaches beyond those who are responsible for, complicit in or directly or indirectly engaged in the targeted activities. It also authorises the US administration to block the assets of and apply visa restrictions to:
- foreign persons who are part of the same government that conducted the targeted activities,(4) as well as foreign persons who have attempted to commit the targeted activities; and
- any US or foreign citizen who materially assists, sponsors or provides financial, material or technological support(5) for, or goods or services to, the targeted activities or designated persons.(6)
Under the executive order, the US administration can sanction not only those directly involved in human rights abuses and corruption, but also those who materially assist, sponsor or provide financial, material or technological support for, or goods or services to, the targeted activities or designated persons.
The first GLOMAG targets were, understandably, the alleged bad actors themselves. The OFAC press release explaining the actions for which the original 13 persons were added to the annex of the executive order and the OFAC's GLOMAG SDN list is informative, as it shows a wide range of misconduct in many countries.(7) For example, Mukhtar Hamid Shah is a Pakistani surgeon who "Pakistani police believe to be involved in kidnapping, wrongful confinement, and the removal of and trafficking in human organs".
It is hoped that the international business community is not trafficking in human organs. However, other GLOMAG designations relate to key global business sectors, such as Dan Gertler, an international businessman and billionaire who, according to the OFAC, has "amassed his fortune through hundreds of millions of dollars' worth of opaque and corrupt mining and oil deals in the Democratic Republic of the Congo (DRC)". The OFAC designated no fewer than 18 affiliated entities and one individual together with Gertler.
Several others on the GLOMAG list are there for international corruption, one (Slobodan Tesic) is there for dealing arms and munitions in the Balkans, while Maung Maung Soe "oversaw the military operation in Burma's Rakhine State responsible for widespread human rights abuse against Rohingya civilians".
US persons (including US companies, US citizens, permanent residents and anyone in the United States) are prohibited from engaging in transactions with a GLOMAG SDN and with entities of which GLOMAG SDNs own 50% or more. Additionally, non-US persons who engage in transactions with a GLOMAG SDN risk being designated as an SDN. This underlines the need to perform due diligence on all customers, vendors and business partners, as well as their beneficial owners, internationally. This alone is not new, as other laws and executive orders allow the imposition of blocking sanctions on those providing material assistance to SDNs.
That said, the executive order in question also authorises blocking sanctions on those who materially assist, sponsor or provide financial, material or technological support for, or goods or services to, the targeted activities, even in the absence of an SDN. This means that companies or individuals involved with parties that may be engaged in human rights violations or corrupt activities – even if not designated as an SDN – run the risk of potentially being designated under this broad authorisation. In order to mitigate this risk, in addition to checking for SDNs, KYC procedures, as well as vendor and other business partner diligence procedures should, in appropriate cases, check public records for evidence of:
- human rights abuses; and
- corruption, including the misappropriation of state assets, the expropriation of private assets for personal gain, corruption relating to government contracts or the extraction of natural resources, or bribery.
This is particularly paramount in high-risk countries and industries, such as mining and government contracts. The more involved the business relationship, the greater the level of diligence is needed.(8) Multinational publicly traded companies with best practice KYC and supply chain and business partner due diligence programmes were already doing this, but GLOMAG reinforces the need for this to become standard practice.
For further information on this topic please contact Kay C Georgi or Regan K Alberda at Arent Fox LLP by telephone (+1 202 857 6000) or email (email@example.com or firstname.lastname@example.org). The Arent Fox LLP website can be accessed at www.arentfox.com.
(1) See www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20171221.aspx for a complete list of the designations.
(2) The Sergei Magnitsky Rule of Law Accountability Act 2012 (Public Law 112-208) is a prior law which targets persons for gross violations of internationally recognised human rights in Russia. The Global Magnitsky Act targets persons for violations of human rights and corruption globally.
- an entity, including any government entity, that has engaged in, or whose members have engaged in, any of the above activities relating to the leader's or official's tenure; or
- an entity whose property and interests in property are blocked pursuant to this order as a result of activities related to the leader's or official's tenure.
(5) While the use of the phrase 'materially assists' would tend to mean that it would require assistance or significant support to result in sanctioning of secondary or supporting actors, neither the Global Magnitsky Human Rights Accountability Act nor EO 13818 provide guidance on what degree of assistance or support would trigger sanctions. To date, the OFAC has not published guidance on this topic in its frequently asked questions.
- anyone who has materially assisted, sponsored or provided financial, material or technological support for, or goods or services to or in support of:
- any of the above activities; or
- anyone whose property and interests in property are blocked pursuant to this order;
- any entity, including any government entity, that has engaged in, or whose members have engaged in, any of the above activities, where the activity is conducted by a foreign person;
- any entity owned or controlled by, or believed to have acted or purported to act for or on behalf of, directly or indirectly, anyone whose property and interests in property are blocked pursuant to this order; or
- anyone who has attempted to engage in any of the targeted activities.
(8) On the reverse, it may be impractical or even impossible for some companies to conduct the necessary level of due diligence on their customers (eg, internet-based companies). Other industries (eg, sales of consumer household products or office supplies) may have such a low risk of designation that the high cost of the added due diligence into the ultimate consumer purchasers is simply not worth the benefit.
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