On July 1, 2011, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued the new Libyan Sanctions Regulations (“LSR”), 31 C.F.R. Part 570. See Libyan Sanctions Regulations, 76 Fed. Reg. 38,562 (July 1, 2011). The regulations implement Executive Order 13566 (the “Executive Order”), which was issued by the President on February 25, 2011, in response to the ongoing conflict in Libya and human rights violations committed by the Government of Libya.
As a preliminary note, the LSR which OFAC released on July 1 are an initial set of regulations, issued to provide immediate guidance on the Libyan sanctions. OFAC has stated that it intends to issue a more comprehensive set of regulations at a later time, with additional interpretive detail and guidance.
LSR’s Codification of the Executive Order
First and foremost, the LSR codify the Executive Order, prohibiting all transactions prohibited under the Executive Order. See 31 C.F.R. § 570.201. The Executive Order prohibited any transactions by U.S. persons involving persons listed in that order and any person determined by the U.S. government to be a senior Libyan government official, a child of Colonel Qadhafi, others identified as having committed human rights abuses or political repression in Libya, and the spouses and children of any of these prohibited individuals. See Executive Order 13566, Feb. 25, 2011, at § 1. The individuals subject to sanctions under the Executive Order (and now the LSR) are listed on OFAC’s Specially Designated Nationals List (“SDN List”) with the identifier [LIBYA2]. The Executive Order also prohibited transactions by U.S. persons with the Government of Libya and any of its branches and instrumentalities, as well as the Central Bank of Libya. Id. at § 2.
Property and interests in property of individuals and entities sanctioned under the LSR are “blocked,” or frozen, by the LSR and Executive Order. A U.S. person, such as a bank, holding blocked property cannot transfer or even return that property to its owner without OFAC authorization. The LSR also formalize OFAC’s general guidance that entities owned or controlled by sanctioned Libyan parties are themselves subject to the LSR’s sanctions.
The LSR specify that entities that are 50 percent or more owned by sanctioned parties, or “blocked parties,” under the Executive Order and LSR are themselves subject to the LSR’s sanctions. See 31 C.F.R. § 570.406. This is true whether or not the owned or controlled entity itself appears on the SDN List. U.S. persons cannot engage in transactions with such entities without OFAC license or authorization. Property owned by such entities is also “blocked,” or frozen, under the LSR. (Note also that U.S. persons should act with caution in dealing with an entity in which a Libyan person or entity has a significant minority interest. See OFAC’s Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked.”)
The LSR require U.S. financial institutions to block any transfers of funds or credit that come through those institutions in which sanctioned parties have an interest. See 31 C.F.R. § 570.504. Therefore, U.S. financial institutions must screen their transactions carefully for any ties to the Libyan government, Libyan officials, or other sanctioned Libyan parties. Note that the LSR broadly define the term “U.S. financial institution,” which includes U.S. banks, depository institutions, securities brokers and dealers, investment companies, employee benefit plans, commodity futures and options brokers and dealers, and U.S. holding companies that own such entities. See 31 C.F.R. § 570.312.
U.S. financial institutions are expressly permitted to undertake certain activities under the LSR. They are permitted to transfer blocked funds between separate blocked accounts that they hold, so long as the blocked accounts are both in the name of the same party and the funds remain within the U.S. See 31 C.F.R. § 570.504. They are also permitted to charge owners of the blocked accounts “normal service charges” for maintaining these accounts. “Normal service charges” include cable, Internet, or phone charges, postage costs, and other related administrative costs. See 31 C.F.R. § 570.505.
The LSR provide more detailed definitions of key terms used in the Executive Order. For example, the term “Government of Libya,” which is not defined in the Executive Order, is defined in the LSR as including:
- the state and Government of Libya, as well as any political subdivision, agency, or instrumentality thereof;
- the Central Bank of Libya;
- any entity owned or controlled, directly or indirectly, by the foregoing;
- any person to the extent that such person is or has been, or to the extent that there is reasonable cause to believe that such person is or has been, since February 25, 2011, acting or purporting to act directly or indirectly on behalf of any of the foregoing; and
- any other person determined by OFAC to fall into one of the above categories.
See 31 C.F.R. § 570.304. The LSR note that some, but not all, of the persons that fall under the definition of the “Government of Libya” are listed on the SDN List. It is possible that a Libyan government official does not appear on the SDN List but is sanctioned under the LSR. Similarly, as noted previously, it is possible that an entity is owned or controlled by a sanctioned party but is not itself on the SDN List. Id. at Note 1. Accordingly, in addition to screening against the SDN List, one should scrutinize all potential transactions with Libyan nationals and entities carefully to determine whether the counterparties involved are part of, or owned or controlled by, the “Government of Libya.” Parties should review the individual’s professional position or the entity’s ownership. Moreover, the transaction itself should be carefully scrutinized to determine whether it will benefit, directly or indirectly, any Libyan government individual or entity.
An “interest” in property is any interest of any nature – whether direct or indirect. See 31 C.F.R. § 570.306. “Property” is defined very broadly. “Property” under the LSR that may be of particular interest to financial service providers includes money, checks, bank deposits, savings accounts, debts, obligations, notes, guarantees, stocks, bonds, coupons, and other financial instruments. “Property” can also include merchandise, real estate, land contracts, and intellectual property (patents, copyrights, and trademarks). Property interests can be present interests, future interests, or contingent interests. See 31 C.F.R. § 570.309. Under the LSR, any such property or interests in property are frozen and cannot be returned to the owner from a U.S. person without specific OFAC authorization.
The LSR’s Elaboration of the Libya Sanctions beyond the Executive Order
In addition to codifying the sanctions of Executive Order 13566 in Title 31, Part 570 of the Code of Federal Regulations, the LSR provide an elaboration of the sanctions provided in the Executive Order, fleshing out the Libyan sanctions provisions and giving greater guidance as to OFAC’s intent.
Section 570.203 of the LSR describes how a U.S. person, such as a U.S. bank or investment fund, holding blocked funds is required to treat those funds. A person holding blocked funds must place those funds in an interest-bearing account in the U.S. That account can be at a federally-insured bank, credit union, or thrift institution and the account must receive interest at a commercially reasonable rate. Alternatively, funds can be invested in a money market fund or U.S. Treasury bills by a broker or dealer registered with the U.S. Securities and Exchange Commission. Any instruments in which such blocked funds are invested may not have a maturity date of greater than 180 days. If the funds are invested in instruments with a maturity date greater than 180 days at the time they are blocked, they may remain invested in the instrument so long as interest or other proceeds are invested in a blocked account of the type described above.
The LSR also make any prohibited transfer after the February 25, 2011 effective date of the sanctions on Libya (imposed by the Executive Order) null and void. See 31 C.F.R. § 570.202(a). It is possible to seek from OFAC a specific license to authorize a transaction, either before, during, or after a transfer. See 31 C.F.R. § 570.202(c). This appears to make it possible for a party that participated in an unauthorized transaction to obtain an after-the-fact authorization of the transaction. Moreover, the LSR also provide a procedure for making effective transactions that would otherwise be null and void under LSR section 570.202. The procedure involves demonstrating to OFAC that (1) the transfer was not a willful violation of the LSR by the person who does or did hold the property that was the subject of the transfer; (2) the person who does or did hold the property did not have “reasonable cause” to suspect, based on the circumstances, that the transfer required OFAC authorization and no license was obtained; and (3) the person who does or did hold the property in question promptly files a report with OFAC setting forth the circumstances of the transfer after discovering that the transfer did not have a required OFAC authorization. See 31 C.F.R. § 570.202(d).
As noted previously, OFAC issued the LSR to provide immediate guidance regarding the Libya sanctions. OFAC expects to release a more detailed and comprehensive set of Libyan sanctions regulations in the future, with additional guidance on the scope of the prohibited and permitted activities under the sanctions. According to the Federal Register announcement, the more detailed LSR will contain additional general licenses and statements of licensing policy. See Libyan Sanctions Regulations, 76 Fed. Reg. at 38,562.
General Licenses Nos. 1B, 4, and 5
General Licenses Nos. 1B, 4, and 5, previously issued by OFAC to authorize certain transactions related to Libya, remain in effect. (General Licenses Nos. 2 and 3 have been superseded by the LSR.)
General License No. 1B, dated June 21, 2011, permits U.S. persons, including banks and investment funds, to engage in transactions involving banks that are owned or controlled by the Libyan government but organized under the laws of a third country, so long as those transactions do not involve sanctioned individuals or entities or the government of Libya. (General License 1B superseded General License 1A, which was issued on March 4, 2011.)
General License No. 4 was the subject of a previous Fried Frank client memorandum titled “OFAC Provides Guidance to Investment Funds Regarding Blocked Interests of the Government of Libya and Sanctioned Libyan Parties.” This general license provides particular guidance to investment funds in which the Libyan government or sanctioned Libyan individuals or entities held a blocked, non-controlling minority interest. The general license permits such investment funds to operate normally. They can continue to purchase and sell portfolio investments, make payments to fund managers, service providers and government authorities, and make payments to investors other than the blocked Libyan investors. The funds can also continue to receive funds from any party other than sanctioned parties. No transfers may be made to sanctioned parties. Payments owed to sanctioned Libyan entities may only be paid into a blocked account at a U.S. financial institution held in the name of the sanctioned investor.
General License No. 5 permits U.S. persons to engage in transactions with two companies, Qatar Petroleum and Vitol, related to oil, gas, or petroleum products exported from Libya by the Transitional National Council of Libya (the opposition to the Qadhafi government). No Libyan government entity or other sanctioned individual or entity may benefit from these transactions.
Any bank, investment fund, or other party holding funds or other property interests blocked by the LSR is subject to certain reporting requirements under the LSR. These reporting requirements must be strictly followed.
In general, U.S. persons holding property that becomes blocked must report the blocking within 10 business days from the date the property is blocked. See 31 C.F.R. § 501.603(b)(1). Thereafter, U.S. persons holding blocked property must file an annual report with OFAC on a special form (called a TD F 90-22.50 Form) available at OFAC’s website. See 31 C.F.R. § 501.603(b)(2). The report requires the holder of the blocked property to provide the name of the owner of the blocked property, a description of the blocked property, the value of the blocked property, the location of the blocked property, and the sanctions regime under which the property is blocked. The reporting party must retain a copy of the filed report.
Investment funds must make monthly reports to OFAC providing an accounting of the value of the fund held by a sanctioned Libyan individual or entity, and must provide an explanation of any change from the previous report. See General Order No. 4 at paragraph 4(b).
OFAC’s issuance of the LSR has primarily served to add to the Code of Federal Regulations the sanctions first imposed in the Executive Order, and has not changed the substance of the sanctions. The LSR have, however, added some clarity and detail to the basic sanctions imposed by the Executive Order in the ways described above. Banks, investment funds and other U.S. financial institutions affected by these regulations should be aware that OFAC plans to issue a more comprehensive set of Libyan sanctions regulations, which will include additional general licenses and guidance.
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This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its contents.