Even despite reported progress on “Phase One” of a comprehensive trade deal between the two countries, this quarter saw new congressional sanctions in response to China’s perceived human rights abuses. Simultaneously, OFAC took action to mitigate the fallout from previously announced sanctions against Chinese shipping firms. OFAC Extends Wind-Down Period for Dealing with Sanctioned Chinese Shipping Firms In September, global freight costs skyrocketed in response to the U.S.’s announcement of blocking sanctions on a number of major Chinese shipping firms for transporting oil from Iran, including COSCO Shipping Tanker (Dalian) Co., a unit of China’s largest shipping company that owns or operates dozens of tank vessels. In October, OFAC issued General License K, authorizing transactions and activities that are ordinarily incident and necessary to the maintenance or wind-down of transactions involving COSCO Dalian Tanker, through December 20, 2019. OFAC expressly noted that GL K does not apply to any transactions or activities with COSCO Shipping Tanker (Dalian) Seaman and Ship Management Co., Ltd. In December, OFAC amended GL K to further extend the wind-down period through February 4, 2020. In subsequent guidance, OFAC explained in its Frequently Asked Questions that the authorization for the “maintenance” of business generally includes “all transactions and activities ordinarily incident to obtaining goods or services from, or providing goods or services to” COSCO Dalian Tanker, even despite the absence of any pre-existing contract, so long as the business is consistent with past practices that existed between the parties prior to the announcement of the sanctions. Additionally, OFAC emphasized that the sanctions do not apply to the Dalian entities’ ultimate parent, COSCO Shipping Corporation Ltd., or it other subsidiaries and affiliates (provided that such entities are not owned 50 5 percent or more in the aggregate by one or more blocked persons). Importantly, OFAC also clarified that, because COSCO Shipping Tanker (Dalian) Co. and the other shipping entities were sanctioned under section three of E.O. 13846, non-U.S. persons are generally not exposed to secondary sanctions for dealing with them unless their transactions with the designated COSCO entities fall within the scope of the Iranian secondary sanctions themselves. See FAQ 804-805. US Congress Passes New Sanctions in Response to Human Rights Concerns In November, President Trump signed into to law the “Hong Kong Human Rights and Democracy Act of 2019” in response to reported human rights abuses carried out by the Chinese government relating to the recent democratic protests in Hong Kong. The bi-partisan legislation addresses the U.S.’s special recognition of Hong Kong’s legal and economic independence and requires the President to impose property and visa-blocking sanctions on any foreign persons determined to have carried out human rights violations there. In December, the U.S. House passed its amended “Uighur Human Rights Policy Act” in response to China’s reported mass surveillance and internment of more than one million Uighurs and other minorities in the Xinjian region. If passed by the Senate and signed into law, the bill would require the U.S. State Department to apply sanctions, such as asset freezes and visa bans, on high-level Chinese government officials determined to have played a role in the mistreatment of ethnic minority Muslims. The bill also permits a prohibition on the sale or provision of any U.S.-origin goods or services to “any state agent in Xinjiang.” 6 RUSSIA The U.S. struck a mixed posture toward Russia this quarter. Congress passed bi-partisan sanctions to curb construction of the controversial Nord Stream 2 and TurkStream pipelines. Other legislation contemplating additional sanctions on Russia for its 2016 election meddling advanced through Congress, but President Trump expressed resistance to the additional measures. The Trump Administration flexed its muscle elsewhere, including imposing sanctions on malicious Russian cyber-actors and publicly warning allies against purchasing Russian defense equipment. New Congressional Sanctions Likely Too Late to Derail Nord Stream 2 and TurkStream On December 20, President Trump signed bi-partisan legislation that imposes sanctions on the development of two pipelines that will carry Russian natural gas to Europe: TurkStream and Nord Stream 2. Nord Stream 2 , the long-planned pipeline project designed to deliver Russian natural gas to Germany and the EU, has long been criticized by President Trump, who has remarked that it will make “Germany hostage to Russia,” while flattening Europe’s demand for liquefied natural gas from U.S. suppliers. The sanctions measures, introduced as part of a larger defense authorization bill, contemplated sanctions not against Nord Stream 2’s owners or investors, but rather against the engineering firms, construction companies, and vessels involved in installing the pipeline under the Baltic Sea, as well as executives of those companies. In response, a key pipeline layer, Swiss-Dutch company Allseas, immediately suspended its work to avoid US sanctions, despite the fact that the sanctions are accompanied by a thirty-day “wind-down” period for companies to cease sanctionable activities. Despite the new U.S. sanctions, the near-finished pipeline is expected to be completed by 2020, even if it requires reassigning the final installation tasks to Russian companies. European leaders criticized the new U.S. measures, with Germany noting that it strongly opposes the “extraterritorial sanctions,” which it views as interference in domestic European affairs. The sanctions were also targeted at the development of the TurkSteam pipeline, designed to carry natural gas from Russia to Turkey. Reports suggested that work on TurkStream’s first pipe were already completed and operable in early 2020, so the sanctions likely came too late. U.S. officials noted that sanctions could apply, however, to the construction of any additional lines built in the future. 7 Despite Resistance from Trump Administration, “Crushing” Sanctions Bill Advances in US Senate This quarter, amid suspicions that Russia will again seek to interfere in the 2020 U.S. election, the U.S. Senate advanced a long-pending bill that would impose additional significant sanctions on Russia for its previous meddling in the 2016 U.S. election. The legislation, tentatively titled “Defending American Security from Kremlin Aggression Act” or “DAKSA,” would authorize a host of sanctions measures, including against Russian individuals, cyber-operators, and liquid natural gas export facilities, as well as impose harsh restrictions on dealings in Russian sovereign debt. DAKSA was first proposed in early 2019, but until now had failed to advance out of congressional committee. The Trump Administration has expressed resistance to the measure, citing collateral economic damage that might result from its passage. DAKSA faces an uncertain future, as it is yet unclear whether the measure will be brought before the full Senate for a vote or, if it passes, that it will receive President Trump’s signature. Russian Arms Sales Expose US Allies to Threat of CAATSA Secondary Sanctions This quarter, U.S. Congressional leaders urged the Trump Administration to impose additional sanctions on Turkey following its testing of the S-400 missile-defense system, purchased from Russia in early 2019. The U.S. initially threatened to refuse to sell U.S.-made F-35 fighter jets unless Turkey reversed course and later threatened to impose sanctions pursuant to the 2017 Countering America’s Adversaries Through Sanctions Act, which mandates sanctions on any country that “engages in a significant transaction” with the Russian defense and intelligence sector. Despite Congressional prodding, the Trump Administration has thus far been reluctant to take the unprecedented step of imposing sanctions against a NATO ally. Turkey’s President, Tayyip Erdogan, reiterated his country’s refusal to abandon the S-400 system and threatened to evict U.S. forces from two military bases in Turkey if the U.S. were to follow through on its sanctions threat. The risk of CAATSA-related sanctions implicated two other countries for arms deals with Russia. The U.S. issued warnings to Serbia, which recently purchased and received Russia-made helicopters and also purchased antiaircraft launchers, delivery of which is expected in early 2020. Following a visit by a U.S. State Department envoy, Serbian President Aleksandar Vucic announced in December that Serbia would stop buying weapons from Russia. Meanwhile, in November, the U.S. warned Egypt’s government of possible sanctions over its decision to move forward with a planned purchase of Russian fighter jets. Rostec’s CEO has stated that U.S. sanctions have not affected Russian military exports. OFAC Targets Malicious Russian Cyber-Actors Following last quarter’s designation of state-sponsored North Korean hacking groups, OFAC focused its attention this quarter on malicious cyber-actors in Russia. Pursuant to E.O. 13694, OFAC designated on December 5, 2019 Evil Corp., a Russia-based cybercriminal organization allegedly responsible for the development and distribution of the malware commonly known as Dridex. According to OFAC, Evil Corp. is alleged to have deployed its Dridex malware globally to infect computers and harvest login credentials from hundreds of banks and financial institutions, causing more than $100 million in theft. Concurrently, the U.S. Department of Justice charged two of Evil Corp.’s members with criminal violations, and the Department of State announced that it would award up to five million dollars for information that would lead to the capture or conviction of the organization’s leader. In total, OFAC designated seventeen individuals and seven entities, including Evil Corp., its core cyber operators, multiple associated businesses, and its financial facilitators. 8 IRAN This quarter, the Trump Administration continued to escalate its “maximum pressure” campaign against Iran, announcing new industry-wide sanctions on the country’s construction and metals sectors, and continuing to designate Iranian government officials. Moreover, OFAC imposed additional sanctions on Iran’s key transportation entities, Islamic Republic Shipping Lines and Mahan Air. The year ended with a sharp escalation of military conflict following the assassination of IRGC-QF commander Qassem Soleimani, in response to which Iran announced it would abandon limits on uranium enrichment set by the JCPOA. US Announces Secondary Sanctions Targeting Iran’s Construction & Metals Sectors On October 31, the U.S. State Department issued two findings pursuant to the Iran Freedom and CounterProliferation Act of 2012 that will impose new secondary sanctions on Iran’s construction sector, after finding it to be under the effective control of the Iranian Revolutionary Guard Corp. In conjunction, the State Department sought to impose restrictions on Iran’s acquisition of strategic materials after finding that those materials can be used in connection with Iran’s missile development program. Because the State Department deemed the Iran’s construction sector under IRGC control, under IFCA section 1245 the President is now required to impose five or more “menu based” restrictive measures against any person determined to have knowingly engaged in the sale, supply, or transfer to or from Iran of raw or semi-finished metals, graphite, coal, and software for industrial purposes if those materials are intended for use in Iran’s construction sector or in connection with Iran’s nuclear, military, or ballistic missile programs. Importantly, these sanctions measures apply to non-U.S. persons and include, among others, the possibility of SDN designation, U.S. export restrictions, and a prohibition on U.S.-dollar transactions and payments through U.S. banks. OFAC Imposes WMD-Related Sanctions on Iran’s Largest Airline and Shipping Group On December 11, the U.S. State Department expanded sanctions against three entities allegedly linked to Iran’s development of weapons of mass destruction. Specifically, the State Department acted pursuant to E.O. 13382 to target the Islamic Republic of Iran Shipping Lines, its China-based subsidiary, E-Sail Shipping Company Ltd., and Iranian airline Mahan Air. Among other facilitative conduct, the State Department alleges that all three 9 entities engage in the shipment of materials necessary to the development of ballistic missiles. Although both IRISL and Mahan Air are already designated pursuant to E.O. 13599 as property of the Government of Iran, OFAC noted that their designation under its WMD authorities will subject dealings with those companies to the prohibitions under the Weapons of Mass Destruction Proliferators Sanctions Regulations and, notably, expose non-U.S. persons who transact with the companies to the risk of secondary sanctions. State Department officials noted that the heightened risk of WMD-related sanctions are designed to cut off IRISL, E-Sail, and Mahan Air’s access to particular ports, access routes, and conduits of delivery, as well as increase pressure on other countries to cease business activities with these entities. The U.S. provided a 180-day wind-down period before the sanctions against IRISL and E-Sail take effect so that customers with existing contracts are not affected. OFAC has for months warned General Sales Agents against transacting with designated Iranian airlines and on December 11 designated three GSAs for providing ticketing, freight, and cargo services to Mahan Air. The GSAs include Dubai-based Gatewick LLC and Jahan Destination Travel and Tourism, as well as Hong Kong-based Gomei Air Services Co., Ltd. US Targets Senior Iranian Officials for Alleged Censorship Activities This quarter, OFAC took action pursuant to E.O. 13846 to target a number of Iranian officials for acts of censorship that restricted Iranian citizens’ access to the internet, social media, and other forms of free expression and assembly. First, on November 22, OFAC designated Mohammad Javad Azari Jahromi, Iran’s Minister of Information and Communications Technology. Jahromi is allegedly involved in widespread internet censorship in Iran, including “black outs” of internet connectivity in response to rising anti-regime protests throughout Iran. In addition to internet connectivity disruptions, OFAC alleges that the Ministry of Information and Communications Technology has taken other restrictive measures, including bans on the use of certain social media platforms. Similarly, on December 19, OFAC designated Abolghassem Salavati and Mohammad Moghisseh, two judges presiding over branches of Iran’s Revolutionary Court. According to OFAC, the judges conducted “show trials” in which journalists, attorneys, political activists, and members of other minority groups were penalized for engaging in acts of free expression and assembly. The accused were sentenced to a variety of harsh punishments, including lengthy prison terms, physical violence, and, in some cases, to death In addition to punishing abusive official practices, OFAC also targeted Iranian officials tied to Iran’s Supreme Leader, Ayatollah Ali Khamenei. On November 4, pursuant to E.O. 13876, which authorizes sanctions on associates of Iran’s Supreme Leader, OFAC designated, Iran’s Armed Forces General Staff and nine associated individuals. Among those targeted were appointees in the Office of the Supreme Leader, the Expediency Council, the Armed Forces General Staff, as well as members of the Judiciary. According to OFAC, these individuals are linked to malign behaviors of Iran, including the 1993 bombings of U.S. marine barracks in Beirut and other activities designed to oppress the Iranian people. 10 VENEZUELA This quarter saw continued efforts by the U.S. to cut off the Maduro regime’s ability to export oil from Venezuela. Additionally, OFAC continued to designate Venezuelan government officials, partially in conjunction with new sanctions announced by the European Union and Canada. Meanwhile, the Trump Administration issued a general license extending Chevron Corp.’s waiver to operate in Venezuela until Jan. 22, 2020. OFAC also extended waivers for U.S. oil services providers Baker Hughes Co., Halliburton Co., Schlumberger Ltd. and Weatherford International Ltd. OFAC Continues Efforts to Disrupt Venezuelan Oil Exports As in previous quarters, OFAC sought to disrupt the reciprocal oil-related relationship between Venezuela and Cuba, which OFAC believes provides a lifeline to each regime. According to OFAC, Cuba provides to Venezuela security and intelligence assistance in exchange for Venezuelan oil. Specifically, OFAC took two actions to sever ties between the two countries pursuant its Venezuela-related authorities. First, on November 26, OFAC designated Cuba’s Corporacion Panamericana S.A. for being owned or controlled by, or having acted for or on behalf of, Cuban state-run oil import and export company, Cubametales, an entity designated in July 2019 for operating in the oil sector of the Venezuelan economy. In announcing the designation, OFAC alleged that Cubametales, struggling to continue operations following its own designation, repeatedly substituted Corporacion Panamericana as a party to various energy deals and commercial dealings with several countries and even moved certain Cubametales employees to work for Corporacion Panamericana. OFAC further noted that the designation demonstrates its commitment to target entities that facilitate the activities of companies who refuse to end their support for the Maduro regime. Second, on December 3, OFAC targeted the physical transport of oil by identifying six vessels as blocked property of Venezuelan state-owned oil company Petróleos de Venezuela, S.A. for delivering Venezuelan oil to Cuba. In announcing the identifications, OFAC highlighted the evasive conduct Venezuela and Cuba take to avoid OFAC scrutiny, including by frequently changing the name of the vessels. Additionally, OFAC identified the vessel Esperanza as blocked property owned by Caroil Transport Ltd., an entity designated in September 2019 for operating in the oil sector of the Venezuelan economy. Pursuant to E.O. 13884, OFAC identified the 11 following six vessels: Icaro, Lusia Caceres de Arsimendi, Manuela Saenz, Paramaconi, Terepaima, and the Yare. OFAC Targets Venezuelan Government Officials for Corruption On December 9, OFAC designated Gustavo Adolfo Vizcaino Gil and Juan Carlos Dugarte Padron pursuant to E.O. 13692, which authorizes sanctions on current and former officials of the Government of Venezuela. Vizcaino and Dugarte are both associated with Venezuela’s Administrative Service of Identification, Migration, and Immigration, or “SAIME.” OFAC alleges that Dugarte, the former Director General of SAIME, and Vizcaino, the current Director General of SAIME, both engaged in acts of corruption during their directorships, including corrupt dealings in the overpriced sale of passports for personal gain. President Trump “Harmonizes” US Sanctions with Global Partners On November 5, OFAC designated five current Government of Venezuela officials in an effort to “harmonize” U.S. sanctions with those of the European Union and Canada, which recently imposed sanctions on these same individuals. The designations signal the U.S.’s commitment to a unified effort to punish the Maduro regime. The designated officials, who are alleged to have engaged in “rampant violence” against protesters, included: Remigio Ceballos Ichaso, an Admiral in the Venezuelan Navy and Commander of the Strategic Operational Command of the National Armed Forces. Nestor Neptali Blanco Hurtado, a Major in the Bolivarian National Guard. Jose Adelino Ornelas Ferreira, the Secretary General of the National Defense Council. Pedro Miguel Carreno Escobar, a Deputy of the illegitimate Venezuelan National Constituent Assembly. Carlos Alberto Calderon Chirinos, a senior official in Bolivarian National Intelligence Service. 12 EXXON WINS RARE COURT VICTORY CHALLENING SANCTIONS PENALTY FOR RUSSIA SDN DEALINGS In a rare loss for OFAC, on December 31, 2019 a U.S. district court in Dallas ruled in favor of Exxon Mobil Corp. in its challenge to a $2 million civil penalty levied against it for alleged violations of Ukraine-related sanctions. While chiding Exxon for its “risky” conduct and failure to seek guidance, the court found that the sanctions regulations, coupled with official executive branch statements, failed to give Exxon “fair notice” that its conduct was prohibited and therefore vacated the penalty. The predicate facts date to 2014, in the aftermath of Russia’s invasion and annexation of Crimea. In response, President Obama issued two executive orders, the first authorizing sanctions on persons determined to have been responsible for Russia’s Ukraine-related conduct and a second order finding that Russia’s actions posed a threat to U.S. national security. The regulations promulgated to implement the orders called for OFAC to designate individuals and entities as SDNs, blocking their property and interests in property, and further prohibiting U.S. persons from receiving services from those designated. Pursuant to the regulations, OFAC designated Igor Sechin, the President and Chairman of the Management Board of Russian petroleum giant Rosneft. The 2014 designation targeted Sechin in his individual capacity, and OFAC chose not to, and specifically noted, that Rosneft had not been sanctioned. In spite of Sechin’s designation, and as it had for over twenty years, Exxon continued to do business with Rosneft by executing eight contracts, each of which was signed by Sechin in his capacity as a representative of Rosneft. OFAC later determined that those contracts violated the relevant regulations prohibiting the receipt of services 13 from a SDN. In 2017, OFAC imposed a $2 million civil penalty against Exxon for alleged violations of the Ukraine Sanctions Regulations. Exxon immediately filed suit challenging the penalty. Although Exxon challenged the penalty on three independent grounds, the court focused only on whether the regulations provided Exxon with “ascertainable certainty” that its conduct was forbidden. The court reasoned that the text of the regulations failed to provide fair notice. In particular, the text of the regulations did not provide fair notice that a U.S. person was prohibited from signing business contracts with a non-blocked entity that are also signed by a SDN. Because Rosneft was not designated, and Sechin did not own or control Rosneft, the court found in favor of Exxon. The decision is noteworthy also for the additional factors that influenced the court’s fair notice determination. First, the court found that a regulated party, such as Exxon, may be justified in relying, in good faith, on “extraregulatory” sources such as contemporaneous statements made by OFAC and executive branch officials. In Exxon’s case, OFAC and administration officials made explicit that the designation targeted Sechin in his individual capacity, and more explicitly that U.S. persons would not be prohibited from transacting with Rosneft. Those statements suggested that OFAC’s focus was on the “cronies of the Russian government” and their personal assets, and not “on companies that they manage or oversee.” Second, the court considered OFAC’s subsequent guidance – issued in the form of FAQs three months after Exxon signed the Rosneft contracts – that cautioned U,S. persons against dealing with non-blocked entities when a SDN is involved, even if the dealing involved a SDN in a representative capacity. The court found that the clarifications issued in the FAQs provided at least some indicia that the regulations lacked initial clarity at the time of Exxon’s alleged violation. Further, the court found unpersuasive OFAC’s argument that Exxon was on notice that its conduct was prohibited because similar guidance had been issued with respect to a different sanctions regime, in this case OFAC’s Burmese sanctions. Prior guidance in a separate sanctions regime was insufficient, held the court, particularly in light the Ukraine regulations disclaimer that “differing foreign policy and national security circumstances may result in different interpretations” from other sanctions regimes. Lastly, the court considered whether Exxon should have sought OFAC’s guidance before executing its contracts. Despite having not sought such guidance, and deeming that failure as relevant in a fair notice analysis, the court determined that the “burden of providing fair notice remains with the agency—not the regulated party.” While representing a rare loss for OFAC, the decision was carefully crafted based on the unique circumstances of the case. However, the decision could have implications for U.S. persons and OFAC alike. On one hand, the ruling could encourage compliance-focused companies to challenge OFAC penalties in the face of unclear regulations. On the other, the exceptional circumstances of the case could prompt U.S. companies to exercise caution to avoid the appearance of using unclear regulations to obtain a business advantage. As the Exxon court dryly noted, it was tasked with determining which party “receives the benefit of having its cake and eating it, too.” As to OFAC, the decision should prompt it issue explicit interpretive guidance soon after issuing regulations so that regulated parties are on immediate notice as to the scope of OFAC’s prohibitions. Had OFAC’s clarification been issued three months earlier, the court would likely have reached a different conclusion.