On April 13, 2009, OFAC issued two new sets of long-awaited regulations: Persons Contributing to the Conflict in Cote d’Ivoire Sanctions Regulations (CISR), 31 C.F.R. 543 and the Weapons of Mass Destruction Proliferators Sanctions Regulations (WMDPSR), 31 C.F.R. 544.[1] These Regulations follow OFAC’s general trend in implementing regulations, but are significant because they codify OFAC’s guidance regarding certain non-listed Specially Designated Nationals (SDNs) and confirm OFAC’s expansive interpretation of its jurisdiction under the International Emergency Economic Powers Act (IEEPA), 50 U.S.C. 1701 et seq.

The WMDPSR implement Executive Order 13382 [2] of June 29, 2005. In relevant part, it blocks the property and interests in property of certain persons found to be engaged in the proliferation of weapons of mass destruction; persons providing financial, material, technological or other support for those persons; and persons determined to be owned or controlled by, or acting for or on behalf of any of the above.

In contrast, CISR is part of a multi-lateral sanctions regime required of Member States under United States Security Council Resolution 1572 of November 2004. As a result, the CISR implement Executive Order 13396 [3] of February 8, 2006 pursuant to the United Nations Participation Act (UNPA), 22 U.S.C. § 287(c)) and IEEPA authorities. The CISR require U.S. persons to block the property and interests in property of persons determined to (1) constitute a threat to the peace and national reconciliation in Cote d’Ivoire; (2) be responsible for serious violations of law in Cote d’Ivoire; (3) have supplied, sold, or transferred to Cote d’Ivoire arms or related materiel or any assistance, advice, or training related to military activities; (4) have materially assisted, sponsored, or provided financial, material, or technological support for or goods or services in support of, the activities described above; or (5) be owned or controlled by, or acting for or on behalf of, directly or indirectly, any person listed above.

OFAC Deputizes U.S. Persons to Identify Non-Designated SDNs

Both sets of Regulations codify OFAC’s February 14, 2008 guidance on blocked property, which states that U.S. persons must block not only the property of a Specially Designated National (SDN) but also the property of other entities in which an SDN has a 50 percent or greater interest—even if this other entity is not on OFAC’s SDN list. [4] The practical implication is that U.S. persons have been effectively deputized in the task of designating “indirect” SDNs. The end result is a de facto decentralization of the SDN list as U.S. entities will maintain, with varied results and accuracy, their own prohibited parties lists based on their conclusions of what foreign entities are controlled by listed SDNs. One would expect that more sophisticated financial institutions with greater resources will block transactions that other entities will process in good faith, simply because the two U.S. persons will have different information available to them. Where financial institutions file the required blocking reports with OFAC, one would expect a greater number of enforcement actions targeting smaller U.S. businesses that are unable to determine who controls the entities with which they do business. This result will be particularly challenging if OFAC truly intends to address its enforcement actions based on a particular entity’s risk-based compliance program. [5] In addition, because OFAC gives a 50 percent mitigation credit where an entity files a voluntary self-disclosure, it appears that the larger entities with greater resources are more likely to receive the benefit of lower penalties. Ultimately, it remains to be seen how OFAC will treat these smaller entities when it comes to carrying out enforcement actions.

OFAC’s Causation Violations

The CISR and WMDPSR also implement the IEEPA Enhancement Act [6] which holds that a civil penalty can be issued where a person violates, attempts to violate, conspires to violate, or causes a violation of any license, order, regulation or prohibition under IEEPA [emphasis added]. [7] This provision is significant because it appears that the District Attorney for New York (DANY) used this or a similar concept, at in least in part, in pursuing Lloyds Bank TSB for violations of the Iranian Transactions Regulations, 31 C.F.R. 560. Various press reports indicate that at least nine other financial institutions are also under investigation for similar off-shore activities. Lloyds Bank entered into a deferred prosecution agreement with the DANY for $350 million in January of 2009. [8]

The Berman Amendment

Finally, the two sets of Regulations differ in one significant respect. The WMDPSR codify the “information and informational materials exemption, ” that was incorporated into IEEPA by the Berman Amendment, 50 U.S.C. 1702(b)(3). [9] The CISR, which are implemented pursuant to both IEEPA and the UNPA, do not contain this provision.

As a result, the importation from any country and exportation to any country, including sanctioned countries, of any information or informational materials is exempt from the prohibitions of the WMDPSA, but not the CISR. As in other unilateral sanctions regulations promulgated pursuant to IEEPA (but not the UNPA), the WMDPSR nonetheless try to limit the Berman Amendment by stating that certain forms of information and informational material is not exempt. [10]

Conclusion

While the WMDPSR and CISR do not provide any surprises, they do signal that OFAC intends to aggressively pursue an expanded scope of jurisdiction over activities that affect the U.S. financial system.