On 16 October, the Foreign Affairs Council adopted new EU autonomous measures reinforcing the sanctions on North Korea imposed by the UN Security Council, effective immediately. They include a total ban on EU investment in North Korea across all sectors, whereas previously the ban related to certain sectors, such as the arms industry and chemical industries. Also, there is a total ban on the sale of refined petroleum products and crude oil. The amount of personal remittances to North Korea has been lowered from €15,000 to €5,000 in light of suspicions that they are being used in support of nuclear and ballistic missile programmes. In addition, three persons and six entities were added to the list of those subject to an asset freeze and travel restrictions.
Sec. Alarm Fin. Enters., L.P. v. Alarm Protection Tech., LLC, No. 3:13-cv-00102-SLG, 2016 WL 7115911 (D. Alaska Dec. 6, 2016)
In this case, Plaintiff was sanctioned pursuant to Rule 37(e), as amended on December 1, 2015, for its failure to preserve relevant customer call recordings.
Plaintiff alleged that Defendant had “illegally ‘poached’” its customers and defamed the plaintiff. Defendant, in turn, alleged tortious interference with its contractual relationships and defamation by the plaintiff. In the course of discovery, Plaintiff produced approximately 150 customer call recordings (out of “thousands”) that were “generally favorable” to it but, when asked, was unable to produce any others and claimed that the recordings were lost, apparently as the result of the “normal operation of a data retention policy.” Defendant sought sanctions pursuant to amended Rule 37(e).
Taking up the motion, the Court first addressed whether the “newly revised or the former version of Federal Rule of Civil Procedure 37” applied. Concluding that the revised version was appropriate, the Court reasoned that it was “clearly not impracticable to apply the new rule” and that while it would be “unjust to apply a new rule retroactively when that rule governs a party’s conduct,” Rule 37(e) “does not govern conduct” but rather limits the Court’s discretion to impose particular sanctions, without changing the parties’ duty to preserve as it existed prior to the amendments.
Turning to whether Plaintiff had a duty to preserve, the Court noted that the recordings were destroyed after litigation was ongoing and reasoned that Plaintiff should have known and in fact knew of the calls’ potential relevance, citing its memorandum to employees asking them not to use certain words on calls with Alaskan customers (circulated around the time of the complaint and close in time to being accused by Defendant of defamation during contact with Alaskan customers) and—more importantly—the fact that Plaintiff “flagged the existence of the recordings” in its initial disclosures.
Regarding the threshold question of whether Plaintiff took reasonable steps to preserve, the Court rejected Plaintiff’s argument that its “general litigation hold” was sufficient, despite not encompassing the recordings. Moreover, the Court noted that “reasonable steps [to preserve] were available,” citing Plaintiff’s admission that the calls could have been extracted to avoid being overwritten and the fact that some recordings were saved. Recognizing that sanctions are precluded when the information can be restored or replaced through additional discovery, the Court indicated that there was no suggestion that the calls were available elsewhere and thus turned to the question of appropriate sanctions.
First, the Court took up the question of whether the recordings were destroyed with the intent to deprive the other party of the information’s use in the litigation and indicated that based on the “relatively murky record before the Court” regarding the nature of the parties’ discussions surrounding the recordings and their treatment in discovery, it could not conclude that Plaintiff overwrote the recordings with the requisite intent to deprive. Turning next to the question of prejudice, the Court considered whether the information was available through other means, but reasoned that the call notes and depositions of Plaintiff’s employees were “likely to be far inferior” compared to the calls themselves. Thus, the Court concluded that Defendant was entitled to a remedy “no greater than necessary to cure the prejudice” as allowed by Rule 37(e)(1).
To address the prejudice suffered by Defendant, the Court ordered that Plaintiff pay Defendant’s reasonable attorneys fees incurred in bringing the motion, that neither party would be allowed to introduce recordings made to or from Plaintiff’s call center absent stipulation or a subsequent order, and that the parties may present evidence related to the lost recordings at trial (although Defendant was barred from arguing that the jury may or should presume that evidence would have been favorable to it). The Court also indicted that it would instruct the jury that Plaintiff was under a duty to preserve the calls, but failed to do so.
Copyright 2017 K & L Gates
Originally, EO 13964 focused on cyber-enabled malicious activities that harmed or significantly compromised the provision of services by entities in a critical infrastructure sector. This included significant disruptions to the availability of a computer or network of computers, or causing a significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.
In light of Russia’s recent use of cyber means to undermine democratic processes, the president has amended the EO to cover additional activities, authorizing sanctions on individuals/entities who tamper with, alter, or cause misappropriation of information with the purpose or effect of interfering with or undermining election processes or institutions. Under this authority, the president has sanctioned nine entities and individuals, including two Russian intelligence services (the GRU and the FSB), four individual officers of the GRU and three companies that provided material support to GRU’s cyber operations.
These new sanctions highlight the importance of regular and diligent screening of transactions, as well as the need to periodically review existing screening practices to ensure that they are up to date. It is critical to remember that an individual who may have been an acceptable business partner one day may be on a sanctions list the next.
©2016 Drinker Biddle & Reath LLP. All Rights Reserved
Last week, President Obama significantly increased sanctions on North Korea through Executive Order 13722, which implements the North Korea Sanctions and Policy Enhancement Act of 2016 (H.R. 757). The Executive Order’s prohibitions and blocking provisions, and designation criteria are substantially more expansive than that Act. Concurrently with the issuance of the Executive Order, OFAC announced the designations of 17 North Korean government officials and organizations, 15 entities, two individuals, and identified 40 blocked vessels under various sanctions authorities.
While neither Congress nor the President imposed secondary sanctions per se, China and Russia should interpret the Executive Order as a clear warning about their economic ties with North Korea. In the Iran sanctions program, secondary sanctions require that a foreign financial institution “knowingly facilitate or conduct a significant financial transaction” for a particular individual or entity. This evidentiary standard greatly limited the use of those sanctions authorities. The new sanctions against North Korea are clearly aimed at foreign business interests, but unlike secondary sanctions, this new authority does not have an evidentiary impediment to its implementation.
Transportation, Mining, Energy, and Financial Services
Subsection 2(a)(i) of the Executive Order authorizes the Secretary of the Treasury to identify industries in the North Korean economy, the participants of which may be designated solely based on their operating within that industry. The Secretary of the Treasury determined that entities within the transportation, mining, energy, and financial services industries are subject to designation. The Treasury Department’s Office of Foreign Assets Control (OFAC) then designated Ilsim International Bank and Korea United Development Bank for operating in the financial services industry.
OFAC’s authority to derivatively designate any bank that provides services to any identified North Korean bank creates de facto secondary sanctions. Executive Order 13722 authorizes OFAC to designate any individual or entity that provides services to any identified Korean bank. Therefore, any financial institution that provides an identified North Korean bank with an account, serves as an intermediary, confirms or advises a letter of credit, or provides any other service can be designated. The most likely targets of these derivative actions are Russian and Chinese financial institutions.
North Korean Slave Labor and Coal
The Executive Order authorizes OFAC to designate businesses that “have engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea.” According to open source reporting, North Korea has between 50,000 and 100,000 “state-sponsored slaves” predominantly located in China and Russia. The North Korean regime earns between $1.2 and $2.3 billion annually in foreign currency through these slave laborers. Apart from the appalling human rights violations, this practice finances the North Korean nuclear and missile development programs.
In addition to companies that utilize North Korean slave labor, entities that deal in metal, graphite, coal, or software to or from North Korea are now subject to designation, “where any revenue or goods received may benefit the Government of North Korea.” United Nations Security Council Resolution 2270 of March 2, 2016 address the sale of coal and iron from North Korea, but in a very limited manner. Unlike the United States sanctions program, the prohibitions do not apply to transactions “exclusively for livelihood purposes and unrelated to generating revenue for the DPRK’s nuclear or ballistic missile programs.” As a result of these substantial limitations, any application of the sanctions on coal and iron are likely to be enforced unilaterally by the United States.
Chinese companies are clearly the most susceptible to this designation criteria. According to the press release announcing the Executive Order and designations, “coal generates over $1 billion in revenue per year for North Korea.” Open source reporting also indicates that in 2015, North Korea supplied China with 19.63 metric tons of coal.
Return to a Comprehensive Sanctions Program
In addition to the designation criteria highlighted above, Executive Order 13722 also transitions U.S. sanctions against North Korea back into a comprehensive sanctions program. All property and interests in property of the North Korean government are now blocked, and the Department of Commerce licensing requirements are now supplemented with a prohibition on the exportation of goods and services.
OFAC released a series of 9 General Licenses to address issues that commonly arise from comprehensive programs. These include authorization of certain legal services, certain services in support of nongovernmental organizations, transactions related to intellectual property, and noncommercial personal remittances.
Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.
Following up on the historic changes in 2014 and 2015 to the five-decade U.S. trade embargo on Cuba, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) have announced new amendments to the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR), effective January 27, 2016.
What U.S. Companies Need to Know About the Easing of Restrictions
Payment Terms for Authorized Exports to Cuba No Longer Restricted
OFAC restrictions have been lifted on payment and financing terms for authorized exports and reexports to Cuba, except for agricultural commodities and items. U.S. banks will be authorized to provide financing by third-country or U.S. financial institutions (e.g., letters of credit, payment of cash in advance, sales on an open account). Payment for agricultural exports will still be limited to cash in advance or financing by third-country banks only. “Authorized exports and reexports” include those authorized under a BIS license exception (e.g., products and materials exported to private sector entrepreneurs under License Exception “SCP” – Support for the Cuban People), as well as export transactions permitted by BIS under a specific license.
Most Cuban Embargo Restrictions Remain in Place
Although the amendments to the CACR and EAR signify further relaxing of Cuba sanctions, the U.S. embargo on Cuba remains largely in place; most transactions between the U.S. and Cuba continue to be prohibited.
In addition, a general policy of denial will still apply to exports and reexports of items for use by state-owned enterprises, agencies, or other organizations of the Cuban government that primarily generate revenue for the state. Additionally, applications to export or reexport items destined to the Cuban military, police, intelligence and security services remain subject to a general policy of denial.
More Favorable Licensing Policies for Certain Exports and Reexports
The following transactions still require a license application, but the chances of approval for such licenses have improved:
Exports to Cuban Government Agencies Meeting the Needs of the People: BIS is now considering, on a “case-by-case” basis, license applications for exports and reexports to Cuban state-owned enterprises and government agencies that provide services and goods to meet the needs of the Cuban people. Previously, such license applications were subject to a policy of denial. The new case-by-case policy applies to items for construction of facilities for public water treatment, electricity or other energy; sports and recreation; agricultural production; food processing; disaster preparedness, relief and response; public health and sanitation; residential construction and renovation; public transportation; wholesale and retail distribution for domestic consumption by the Cuban people; and artistic endeavors.
New Policy of Approval for Certain Exports and Reexports: License applications for the following exports and reexports are now subject to a “general policy of approval,” an upgrade from “case-by-case” consideration:
Environmental protection items: U.S. and international air quality, water, or coastline
Telecommunications items: To improve communications to, from, and among the Cuban people.
Civil aviation and commercial aircraft safety items: Those necessary to ensure the safety of civil aviation and safe operation of commercial aircraft engaged in international air transportation, including the export or reexport of civil aircraft leased to state-owned enterprises.
Agricultural items: Such as insecticides, pesticides, and herbicides, as well as other agricultural commodities (e.g., tractors and other farm equipment) not eligible for License Exception AGR
Commodities and software: To human rights organizations or to individuals and non-governmental organizations that promote independent activity intended to strengthen civil society in Cuba; also to U.S. news bureaus in Cuba whose primary purpose is the gathering and dissemination of news to the general public.
4. Travel Authorized for Additional Purposes Including Film Making
U.S. persons are still prohibited from traveling to Cuba for tourism, but OFAC now permits travel to Cuba for additional purposes as highlighted below.
Travel related to information and informational materials now includes travel for the filming of movies and TV programs, music recordings, and artwork creation.
Organization of professional meetings, public performances, clinics, workshops, and athletic and other competitions and exhibitions in Cuba, in addition to the previously authorized attendance at such events.
5. Air Carrier Services Expanded to Permit Code-Sharing and Leasing
U.S. companies can now enter into blocked space, code-sharing, and leasing arrangements to facilitate the provision of carrier services by air, in connection with travel or transportation between the U.S. and Cuba, including such arrangements with a Cuban national.
© 2016 BARNES & THORNBURG LLP