Andrew Shoyer And Robert Torresen 2016-07-29 04:40:47
EQUIPMENT LEASING AND FINANCE COMPANIES are increasingly impacted by U.S. economic sanctions, particularly recent changes affecting Cuba, Iran and Ukraine, as well as entities targeted for money laundering associated with drug trafficking. This article provides a basic understanding of sanctions and common compliance pitfalls.
Regardless of where U.S. citizens or green-card holders are located, they must comply with U.S. economic sanctions. For example, a U.S. national employed by an equipment leasing company in Mexico is subject to U.S. sanctions. Conversely, U.S. sanctions apply to all persons physically present in the United States, regardless of their citizenship.
What Are Sanctions?
U. S. economic sanctions come in two flavors: primary sanctions and secondary sanctions. Primary sanctions apply in situations where there is some nexus to the United States, such as transactions that involve either “U.S. persons” (see below) or goods, services or technology of U.S. origin or that are denominated in U.S. dollars. By contrast, secondary sanctions apply with broad extraterritorial effect to transactions by non-U.S. persons where there is no other nexus to the United States. Some sanctions programs are applied geographically, affecting conduct in entire countries (e.g., Cuba, Iran, North Korea, Sudan, Syria) or regions (e.g., Crimea), while others are more focused, targeting particular individuals, companies, groups and vessels listed as “Specially Designated Nationals and Blocked Persons” (SDNs).
Primary sanctions are administered by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury, and are of two types: trade sanctions and financial sanctions. Trade sanctions prohibit exports to and imports from sanctioned countries or blocked persons, as well as a wide range of other trade-related transactions. Financial sanctions prohibit U.S. persons from engaging in an extremely broad range of financial transactions, including new investment, accepting funds from or sending funds to blocked persons or otherwise dealing in their property.
To address the unique challenges presented in Ukraine, the U.S. Government created sectoral sanctions that prohibit only certain types of transactions with entities in three sectors of the Russian economy (financial services, energy and defense) that have been designated on OFAC’s “Sectoral Sanctions Identification” (SSI) List. For example, a U.S. company is prohibited from financing or leasing equipment to SSI parties if the maturity of those debt instruments exceeds 30 days (or 90 days for energy sector companies). The same prohibitions apply with respect to any entity that is 50% or more owned by listed parties, even if that entity is not itself on the SSI List.
Who Must Comply?
As indicated previously, primary sanctions apply to activities by “U.S. persons,” which are defined to include U.S. citizens and permanent residents (green-card holders), companies organized under U.S. law (including their foreign branch offices) and any persons physically in the United States. Under some sanctions programs (Cuba and Iran), foreignorganized companies that are owned or controlled by U.S. persons are subject to the same prohibitions.
Regardless of where U.S. citizens or green-card holders are located, they must comply with U.S. economic sanctions. For example, a U.S. national employed by an equipment leasing company in Mexico is subject to U.S. sanctions. Conversely, U. S. sanctions apply to all persons physically present in the United States, regardless of their citizenship.
OFAC will occasionally publish a general license that authorizes a certain type of transaction that would otherwise violate sanctions. In addition, OFAC will consider applications to authorize particular transactions, which it will do by issuing a specific license applicable only to the applicant.
What Do You Have to Do?
OFAC does not prescribe certain compliance practices. It operates a strict liability system—meaning that you are required simply to not violate sanctions. But there are steps that equipment leasing and finance companies can and should take to address these obligations.
The most important step is to screen suppliers, lessees and any other counterparties against OFAC lists of blocked persons. The scope of screening depends on the company’s sophistication and the complexity of its operations. Like all good compliance programs, a sanctions screening program should be risk-based. A U.S. person should implement policies and procedures to prevent “facilitating” non-U.S. parties engaging in trade or financing with blocked entities. Companies should include clauses in contracts that prohibit the lessee of equipment from subleasing or otherwise using the equipment in any way that would violate U.S. sanctions. In transactions where subleasing is permitted, it would be prudent to consider whether the company’s sanctions screening program should include sublessees. Finally, it is important to train employees how to deal with these obligations.
What Are the Penalties for Non-Compliance?
Penalties can be severe. Criminal penalties (for willful violations) can include fines of up to $10 million, imprisonment for up to 20 years or both. Under most sanctions programs, OFAC may impose civil (administrative) penalties of up to the greater of two times the value of the transaction or $250,000, per transaction. Under the Cuba sanctions program, the maximum civil penalty per transaction is $65,000.
What Are Common Traps for the Unwary?
It is not enough to screen against entities identified on OFAC lists. As previously noted, in addition to listed parties, entities that are at least 50% owned, directly or indirectly by listed parties, are also blocked. Moreover, OFAC may prohibit dealings with entities (e.g., the government of Iran) that are not listed at all, but, rather, are described in Executive Orders or OFAC regulations.
Many U.S. companies do not understand the structure of the sectoral sanctions designed to encourage the Russian Federation to alter its policies in Ukraine. These companies assume that entities “listed” by OFAC are blocked for all purposes. To assess the impact of sectoral sanctions, it is critical that a U.S. company take into account not only the identity of the counterparty, but also the sector and type of economic activity covered by the proposed transaction. Accordingly, equipment leasing and financing companies need to be particularly sensitive to the sectoral sanctions that prohibit dealings in debt or extensions of credit to parties on the SSI List (or to entities 50% or more owned by such parties).
Finally, some companies fail to implement risk-based policies or procedures. Prudent companies will take a hard look at their operations and design compliance measures that are tailored to related risks, for example, in Central America and the Middle East.
Andrew Shoyer and Robert Torresen are Partners in the Washington, D.C., office of Sidley Austin LLP. The views expressed in this article are exclusively those of the authors and do not necessarily reflect those of Sidley Austin LLP and its partners. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.
©Equipment Leasing and Finance Association. View All Articles.
Leasing Law
https://www.mydigitalpublication.com/article/Leasing+Law/2547827/325655/article.html