On July 24, 2011, President Obama issued Executive Order 13581 (EO), “Blocking Property of Transnational Criminal Organizations.” The EO establishes a “blocking regime” that freezes the property or interests in property of designated individuals or entities (i.e. “persons”) within the jurisdiction of the United States, within the control or possession of “U.S. persons”, or that may come into the possession or control of any U.S. person, including any overseas branch. (The EO defines the term “U.S. person” consistent with other blocking regime orders and regulations authorized under the International Emergency Economic Powers Act, namely any: (1) entity incorporated in the United States, including its overseas branches (but not foreign subsidiaries or joint ventures); (2) U.S. citizen or U.S. permanent resident, wherever located; or (3) person physically located in the United States. In addition, the EO prohibits U.S. persons from engaging in any transactions or dealings in which such designated persons, or any entities owned or controlled by them, have an interest. U.S. persons may not transfer, pay, export, withdraw, or otherwise deal in such property.
The basis for the EO is the U.S. Government’s view that such organizations are becoming increasingly sophisticated, and posing a growing danger to the security of the United States. It observes their entrenchment in foreign governments and the international financial system, which it sees as weakening democratic institutions; degrading the rule of law and undermining economic markets. In addition, the EO asserts that these organizations facilitate and aggravate violent civil conflicts and increasingly facilitate the activities of other dangerous persons.
In an annex, the EO names four criminal organizations (along with aliases) whose property is immediately blocked:
- The Yakuza
- The Camorra
- The Brothers’ Circle
- Los Zetas (already designated under the Foreign Narcotics Kingpin Regulations, 31 C.F.R. Part 598 [SDNKT])
The EO authorizes the Secretary of the Treasury, in consultation with the Attorney General and the Secretary of State, to designate additional persons that meet any one of the following criteria:
- A foreign person that “constitutes a significant transnational criminal organization”;
- Any person that has materially assisted or supported any person whose property interests are blocked pursuant to the EO; or
- Any person “owned or controlled” by, or acts on behalf of, a person or entity whose interests in property are blocked pursuant to the EO.
The term “significant transnational criminal organizations is defined as a “group of persons … that includes one or more foreign persons; that engages in an ongoing pattern of serious criminal activity involving the jurisdictions of at least two foreign states; and that threatens the national security, foreign policy, or economy of the United States.” Note that while it appears a significant transnational criminal organization must be a foreign person or group of foreign persons, it is possible that such an organization may involve, or own or control, U.S. persons or property and interests in property located in the United States.
In effect, the EO creates a new category of Specially Designated Nationals (SDNs) who, once designated, will be included on the roster of blocked entities maintained by the Office of Foreign Assets Control, the SDN List. Entities designated pursuant to this EO are identified by the suffix “[TCO]”.
As is standard in such blocking regimes, the EO further proscribes making any contribution or provision of funds, goods, or services (including charitable donations) by, to, or for the benefit of any blocked party. It also prohibits the receipt of such funds, goods, or services from blocked parties. Nor may any U.S. person take any action to evade or avoid the prohibitions set forth in the Order.
We offer the following observations on the new Executive Order:
- The Executive Order May Increase the Need for Due Diligence. The EO does not specifically provide that entities owned by SDNs are deemed to be blocked themselves. However, in accordance with OFAC guidance, U.S. persons are on notice that any entity owned 50 percent or more by any SDN is also considered blocked by OFAC; U.S. persons are encouraged to exercise caution when dealing with entities owned 50 percent or less by SDNs, but where significant control over the person may be held by SDNs. Although the designated entities whose property is blocked and with whom transactions are prohibited will be named on the SDN List, the entities designated are themselves large and amorphous. For instance, according to the SDN List, the Yakuza are located in no less than 17 countries, including Japan, Brazil, Canada, South Korea, the United Kingdom and Singapore. And as a Fact Sheet distributed with the EO observes, the Yakuza has some 80,000 members. The Camorra, based in Italy, also operates internationally, and is described as a “loose collection of allied and competing local clans.” While criminal liability for dealing with such entities will require a U.S. person to have knowledge about the affiliation or ownership of entities with which it transacts and act with criminal intent, a lower knowledge threshold will apply for civil liability (essentially, strict liability), as enforced by OFAC. Thus, as a prudential measure, U.S. persons may consider undertaking additional due diligence to obtain reasonable assurances that one is not dealing or transacting with a member of such an organization.
- Increased Risks May Arise as a Result of Transnational Criminal Organizations’ Involvement in Legitimate Businesses, Both Abroad and In the United States. Relatedly, the Fact Sheet observes that many transnational criminal organizations engage in a variety of legitimate businesses. The Yakuza, for example, have interests in construction, real estate, and finance worldwide. Because ownership structures and affiliations are likely to be highly opaque, U.S. persons may be engaging in restricted business without fully realizing the sanctions compliance risks, or without being able to receive assurances. The involvement of transnational criminal organizations in mainstream commercial activities abroad and in the United States may thus create unforeseeable risks for U.S. Persons conducting business, particularly where reasonable due diligence and safeguards are not undertaken.
- Initiatives to Combat Crime May Also Impact Legitimate Business Activity. The U.S. Government is combatting transnational organized crime on multiple fronts. Although targeting criminal organizations, these efforts may impact legitimate businesses as well. For instance, as described in the administration’s Strategy to Combat Transnational Organized Crime, released concurrently with the EO, the President supports federal legislation to mandate disclosure of corporate beneficial ownership. Such legislation is likely to be similar to the Incorporation Transparency and Law Enforcement Assistance Act introduced in the 111th Congress (S.569), which would have mandated heightened transparency of beneficial ownership information in the company formation process in all states and territories of the United States. This would reduce the ability of such criminal groups to hide criminal beneficial ownership behind front companies and shell entities, but could also affect legitimate organizational strategies of companies and other entities. The Strategy also envisions other initiatives that could impact the private sector, such as providing unspecified “incentives and alternatives” for business to “reduce facilitation” of transnational organized crime and make unclassified data on such activity available to private sector partners. Other efforts to combat transnational crime, such as increasing international law enforcement cooperation, enlisting the private sector to help address cybercrime, targeting the assets of “foreign kleptocrats” and bolstering anti-money laundering activities, may also affect businesses, and potentially increase compliance pressures.
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The Executive Order is likely to result in a set of regulations that will appear in the Code of Federal Regulations, and which may clarify and possibly expand the scope of the Order. We will continue to keep you informed regarding these and related developments