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2024 New Years’ Resolutions for Retirement Plans

Over the past few years, numerous pieces of legislation affecting retirement plans have been signed into law, including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Bipartisan American Miners Act, and the SECURE 2.0 Act (the “Acts”). While some of the changes, including both mandatory and optional provisions under the Acts previously became effective, other provisions under the SECURE Act and SECURE 2.0 Act had a delayed effective date. As we enter into 2024, many of the remaining mandatory and optional provisions established under these Acts are now going into effect. As a refresher, we have compiled a brief list of some of the important changes that will affect retirement
plans in 2024:

Long-Term Part-Time (“LTPT”) Employee Rule –
We resolve to permit more part-time employees to defer to our plans.

Beginning January 1, 2024, 401(k) plans are required to allow eligible employees who have at least 500 hours of service over 3 consecutive, 12-month periods beginning on or after January 1, 2021 to participate for purposes of making elective deferrals only, even where the 401(k) plan provides for a longer service requirement for deferral eligibility. See our prior SECURE Act and SECURE 2.0 Act newsletters, linked below, for more details on the LTPT employee rule; however, note that the IRS recently published proposed regulations on the LTPT employee rule, which are not addressed in these newsletters.

Effective January 1, 2025, the SECURE 2.0 Act changed the rule to require only 2 consecutive 12-month periods of service with at least 500 hours of service, and to apply the LTPT employee rule to 403(b) plans.

RMD Age and Roth Accounts –
We resolve to permit our elders to stay in our plans longer (again).

The age at which required minimum distributions (“RMDs”) must commence was increased again by SECURE 2.0, this time to age 73 for individuals who turn age 72 on or after January 1, 2023. Additionally, pre-death RMDs are no longer required for Roth accounts in retirement plans, generally effective for taxable years after December 31, 2023.

New Emergency Withdrawals –
We resolve to permit more access to retirement plan savings.

Beginning January 1, 2024, plan sponsors may add a number of new optional features addressing emergency situations, including:

Emergency Expense Distributions – Plans may permit participants to receive one emergency distribution of up to $1,000 per calendar year to cover unforeseeable or immediate financial needs relating to personal or family emergency expenses.
Distributions for Victims of Domestic Violence – Plans may permit a participant who is a domestic abuse victim to take a distribution up to the lesser of $10,000 (indexed) or 50% of the participants vested account balance during the 1-year period beginning on the date on which the individual is a victim of domestic abuse by a spouse or domestic partner.
Emergency Savings Accounts – Plan sponsors may offer an emergency savings account linked to their defined contribution retirement plan. Participants who are not highly compensated employees may contribute (on a post-tax, Roth basis) a maximum of $2,500 (indexed), or such lower amount that may be set by the plan sponsor. The account must allow for withdrawal by the participant at least once per calendar month, and the first 4 distributions per year from the account cannot be subject to fees or charges.

Mandatory Distribution Threshold –
We resolve to increase our automatic IRA rollover threshold.

The limit on involuntary distributions (i.e., the automatic IRA rollover limit) is increased from $5,000 to $7,000 for distributions occurring on or after January 1, 2024. However, this increase is optional – therefore, the limit under a plan will stay at $5,000 unless the plan administrator takes action to increase it to $7,000.

Roth Employer Contributions –
We resolve to treat employer contributions more like Roth.

Plans may permit employees to designate employer matching contributions or nonelective contributions as Roth contributions if such contributions are 100% vested when made.

Matching Contributions on Student Loan Payments –
We resolve to treat student loan payments like employee deferrals.

Plan sponsors may treat certain “qualified student loan payments” as elective deferrals for purposes of matching contributions.

2024 Resolutions Saved for Another Year

Roth Catch-Up Contribution Requirement is Pushed Back.

SECURE 2.0 required that all catch-up contributions made to a retirement plan by employees paid more than $145,000 (indexed) in FICA wages in the prior year be made on a Roth basis. The original effective date of this requirement was generally January 1, 2024 – however, in September, the IRS provided for a 2-year administrative transition period, which essentially moved the effective date for this requirement from January 1, 2024 to January 1, 2026. This extension provides plan sponsors with additional time to prepare for this new requirement.

Amendment Deadline to Reflect the Acts

IRS Notice 2024-02, released in the last week of December 2023, further extended the amendment deadline for changes made by the Acts. In general, the deadline to adopt an amendment to a qualified plan for required and discretionary changes made by the Acts is now December 31, 2026.

For more in-depth analysis of the new provisions briefly described above, please refer to our prior newsletters linked below:

The Secure Act Becomes Law!

SECURE 2.0 Passes

IRS Relief for Roth Roth Catch-up Requirement

Wealth Management Update January 2024

JANUARY 2024 INTEREST RATES FOR GRATS, SALES TO DEFECTIVE GRANTOR TRUSTS, INTRA-FAMILY LOANS AND SPLIT INTEREST CHARITABLE TRUSTS

The January applicable federal rate (“AFR”) for use with a sale to a defective grantor trust, self-canceling installment note (“SCIN”) or intra-family loan with a note having a duration of 3-9 years (the mid-term rate, compounded annually) is 4.37%, down from 4.82% in December 2023.

The January 2024 Section 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 5.20%, down from the 5.80% Section 7520 rate in December 2023.

The AFRs (based on annual compounding) used in connection with intra-family loans are 5.00% for loans with a term of 3 years or less, 4.37% for loans with a term between 3 and 9 years, and 4.54% for loans with a term of longer than 9 years.

REG-142338-07 – PROPOSED REGULATIONS RELATED TO DONOR ADVISED FUNDS

On November 13, 2023, the Department of the Treasury and IRS released Proposed Regulation REG-142338-07 under Section 4966; providing guidance related to numerous open-issues with respect to certain tax rules relating to donor advised funds “(DAFs”).

Pursuant to §4966(d)(2)(A), a DAF is defined generally as a fund or account (1) that is separately identified by reference to contributions of a donor or donors, (2) owned and controlled by a sponsoring organization, and (3) with respect to which a donor (or person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in the fund or account by reason of the donor’s status as a donor.

Under the proposed regulations, the definition of a DAF is consistent with the definition under the statute (the same three elements), however, the proposed regulations provide key definitions with respect to specific terms under the Statute.

Element #1: a fund that is separately identified by reference to contributions of a donor or donors.

Separately Identified: The proposed regulations provide that a fund or account is separately identified if the sponsoring organization maintains a formal record of contributions to the fund relating to a donor or donors (regardless of whether the sponsoring organization commingles the assets attributed to the fund with other assets of the sponsoring organization).

If the sponsoring organization does not maintain a formal record, then whether a fund or account is separately identified would be based on all the facts and circumstances, including but not limited to whether: (1) the fund or account balance reflects items such as contributions, expenses and performance; (2) the fund or account is named after the donors; (3) the sponsoring organization refers to the account as a DAF; (4) the sponsoring organization has an agreement or understanding with the donors that such account is a DAF; and (5) the donors regularly receive a statement from the sponsoring organization.

Donor: The proposed regulations broadly define a Donor as any person described in 7701(a)(1) that contributes to a fund or account of a sponsoring organization. However, the proposed regulations specifically exclude public charities defined in 509(a) and any governmental unit described in 170(c)(1). Note: Private foundations and disqualified supporting organizations are not excluded from the definition of a donor since they could use a DAF to circumvent the payout and other applicable requirements.

Element #2: a fund that is owned or controlled by a sponsoring organization. The definition of a sponsoring organization is consistent with §4966(d)(1), specifically, an organization described in §170(c), other than a private foundation, that maintains one or more DAFs.

Element #3: a fund under which at least one donor or donor-advisor has advisory privileges.

Advisory Privileges: In general, the existence of advisory privileges is based on all facts and circumstances, but it is presumed that the donor always has such privileges (even if no advice is given).

The proposed regulations provide that advisory privileges exist when: (i) the sponsoring organization allows a donor or donor-advisor to provide nonbinding recommendations regarding distributions or investments of a fund; (ii) a written agreement states that a donor or donor-advisor has advisory privileges; (iii) a written document or marketing material provided to the donor or donor-advisor indicates that such donor or donor-advisor may provide advice to the sponsoring organization; or (iv) the sponsoring organization generally solicits advice from a donor or donor-advisor regarding distributions or investment of a DAF’s assets.

Donor-Advisor: Defined by the proposed regulations as a person appointed or designated by a donor to have advisory privileges regarding the distribution or investment of assets held in a DAF. If a donor-advisor delegates any of the donor-advisor’s advisor privileges to another person, such person would also be a donor-advisor.

Potential Issue related to Investment Advisors: Is a donor’s personal investment advisor deemed a “donor-advisor?” Pursuant to the proposed regulations:

An investment advisor will not be deemed a donor-advisor if he or she:
- Serves the supporting organization as a whole; or
- Is recommended by the donor to serve on a committee (of more than 3) of the sponsoring organization that advises as to distributions
However, an investment advisor will be deemed a donor-advisor if he or she manages the investments of, or provides investment advice with respect to, both assets maintained in a DAF and the personal assets of a donor to that DAF while serving in such dual capacity. This provision, if finalized may have important consequences for fee structures used by supporting organizations since payments from a DAF to an investment advisor who is considered a donor-advisor will be deemed a taxable distribution under §4966. The IRS is requesting additional comments on this potential issue and is still under consideration.

Exceptions to the Definition of a DAF Under the Proposed Regulations:

A multiple donor fund or account will not be a DAF if no donor or donor-advisor has, or reasonably expects to have, advisory privileges.
An account or fund that is established to make distributions solely to a single public charity or governmental entity for public purposes is not considered a DAF.
A DAF does not include a fund that exclusively makes grants for certain scholarship funds related to travel, study or other similar purposes.
Disaster relief funds are not DAFs, provided they comply with other requirements.

Applicability Date: The proposed regulations will apply to taxable years ending on or after the date on which final regulations are published in the Federal Register.

EILEEN GONZALEZ ET AL V. LUIS O. CHIONG ET AL (SEP. 19, 2023)

Miami Circuit Court enters significant judgment for liability related to ownership of golf cart.

Eileen Gonzalez and Luis Chiong and their families were neighbors in a Miami suburb. The families were good friends and had many social interactions. Luis owned a golf cart which he constantly allowed to be driven and used by other people and Eileen’s minor children were often passengers on this specific golf cart.

Luis’ step-niece, Zabryna Acuna, was visiting for July 4^th weekend in 2016. Zabryna (age 16 at that time) visited often and during each visit, she had permission to drive the golf cart. On July 4, 2016, Zabryna took the golf cart for a drive with Luis’ son and Eileen’s minor children as passengers.

While driving on a public street, Zabryna ran a stop sign and collided with another car which caused all of the passenger to be ejected from the golf cart. Every passenger suffered injuries, however, Eileen’s son, Devin, suffered a particularly catastrophic brain injury. This led to an eventual lawsuit.

The Circuit Court ruled that Luis owed the plaintiffs a duty of reasonable care which he breached and was negligent in entrusting the golf cart to his niece who negligently operated it causing the crash and injuries at issue. The Court further held that pursuant to the Florida Supreme Court, a golf cart is a dangerous instrumentality, and the dangerous instrumentality doctrine imposes vicarious liability upon the owner of a motor vehicle who voluntarily entrusts it to an individual whose negligent operation if it causes damage to another.

Ultimately, the Court awarded a total judgment of $50,100,000 (approximately $46,100,000 to Devin and approximately $4,000,000 to his parents).

IR-2023-185 (OCT 5, 2023)

The IRS warns of Art Valuation Schemes (Oct 5, 2023).

The IRS essentially issued a warning to taxpayers that they will be increasing investigations and taxpayer audits for incorrect or aggressively creative deductions with respect to donations of art. Additionally, the IRS is paying attention to art promoters who are involved in such schemes.

The IRS is warning taxpayers to exercise caution when approached by art promoters who are commonly attempting to facilitate the following specific scheme wherein: (i) a taxpayer is encouraged to purchase art at a significantly discounted price; (ii) the taxpayer is then advised to hold the art for a period of at least one year; and (iii) the taxpayer subsequently donates the art to a charity (often times a charity arranged by the promoter) and claim a tax deduction at an inflated market value, often significantly more than the original purchase price.

This increased scrutiny has led to over 60 completed audits with many more in process and has led to more than $5,000,000 in additional tax.

The IRS reminds taxpayers that they are ultimately responsible for the accuracy of the information reported on their tax return regardless of whether they were enticed by an outside promoter. Therefore, the IRS has provided the following red flags with respect to the purchase of artwork: (i) taxpayers should be wary of buying multiple works by the same artist that have little to no market value outside of what a promoter is advertising; and (ii) when the appraisal coordinated by a promoter fails to adequately describe the artwork (such rarity, age, quality, condition, stature of the artist, etc.).

Within the Notice, the IRS details the tax reporting requirements for donations of art. Specifically, whenever a taxpayer intends to claim a charitable contribution deduction of over $20,000 for an art donation, they must provide the following: (i) the name and address of the charitable organization that received it; (ii) the date and location of the contribution; (iii) a detailed description of the donated art; (iv) a contemporaneous written acknowledgement of the contribution form the charitable organization; (v) completed Form 8283, Noncash Charitable Contribution, Section A and B including signatures of the qualified appraiser and done; and (vi) attach a copy of the qualified appraisal to the tax return. They may also be asked to provide a high-resolution photo or digital image.

NEW YORK PUBLIC HEALTH LAW AMENDED TO PERMIT REMOTE WITNESSES FOR HEALTH CARE PROXIES (NOV 17, 2023)

An amendment to Section 2981 of New York Public Health Law was signed into law by the governor on November 17, 2023.

Section 2981 was amended to add a new subdivision 2-a, as follows:

2-A. Alternate procedure for witnessing health care proxies. Witnessing a health care proxy under this section may be done using audio-video technology, for either or both witnesses, provided that the following conditions are met:

The principal, if not personally known to a remote witness, shall display valid photographic identification to the remote witness during the audio-video conference;
The audio-video conference shall allow for direction interaction between the principal and any remote witness;
Any remote witness shall receive a legible copy of the health care proxy, which shall be transmitted via facsimile or electronic means, within 24 hours of the proxy being signed by the principal during the conference; and
The remote witness shall sign the transmitted copy of the proxy and return it to the principal.

SMALL BUSINESS SUCCESSION PLANNING ACT INTRODUCED (OCT 12, 2023)

On October 12, 2023, the Small Business Succession Planning Act was introduced to provide businesses with resources to plan successions, including a one-time $250 credit to create a business succession plan and an additional one-time $250 tax credit when the plan is executed.

Under the proposed Bill, the SBA will provide a “toolkit” to assist small business concerns in establishing a business succession plan, including:

Training resource partners on the toolkit;
Educating small business concerns about the program;
Ensuring that each SBA district office has an employee with the specific responsibility of providing counseling to small business concerns on the use of such toolkit; and
Hold workshops or events on business succession planning.

Pursuant to the proposed Act, the following credits would be available:

$250 for the first taxable year during which the SBA certifies that the taxpayer has: (a) established a business succession plan; (b) is a small business concern at that time; and (c) does not provide for substantially all of the interests or assets to be acquire by one or more entities that are not a small business concern.
An additional $250 for the first taxable year which the SBA certifies that the taxpayer has successfully completed the items described above.

Look-back Rule: If substantially all of the equity interests in business are acquired by an entity that is not a small business concern within three-years of establishment of a business succession plan or completion of such responsibilities (as the case may be) the credits will be subject to recapture.

Small Business Concern (defined under Section 3 of the Small Business Act): A business entity that (a) is legal entity that is independently owned and operated; and (b) is not dominant in its field of operation and does not exceed the relevant small business size standard (subject to standards and number of employees provided by the North American Industry Classification System).

Henry J. Leibowitz, Caroline Q. Robbins, Jay D. Waxenberg, and Joshua B. Glaser contributed to this article.

Beware of Corporate Transparency Act Scams and Fraud

The Corporate Transparency Act’s (CTA) Beneficial Ownership Information reporting requirements are set to take effect on January 1, and bad actors are already using the CTA’s requirements to solicit unauthorized access to Personally Identifiable Information. To that end, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a warning regarding such scams. FinCEN describes these efforts as follows:

“The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests (emphasis added). Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.”

10 Market Predictions for 2024 from a Healthcare Lawyer

As a healthcare lawyer, 2023 was a pretty unusual year with the sudden entrance of a number of new players into the healthcare marketplace and a rapid retrenchment of others. With innovation showing no signs of slowing down in the year ahead, healthcare providers should consider how to adapt to improve the patient experience, increase their bottom line, and remain competitive in an evolving industry. Here are 10 personal observations of the past year that may help you plan for the year ahead.

Health tech will continue to boom. Without a doubt, in my practice, health tech exploded, and understandably. In the face of tight margins, healthcare technology may offer the promise of immediate returns (think revenue cycle). But it is also important to understand the context. Health tech offers the promise of quick implementation relative to construction of clinical space, and it can be accomplished without additional clinical staff or regulatory oversight, potentially resulting in a prompt return on investment. Advancing technologies and AI will enable real-time, data driven surgical algorithms and patient-specific instruments to improve outcomes in a variety of specialties.
Value-based care is here to stay. Everyone is interested in value-based care. In the past, value-based care was simply aspirational. Now, there are significant attempts to implement it on a sustained basis. It is not a coincidence that there has also been significant turnover in healthcare leadership in the past few years, and that has likely led to more receptivity.
Expansion of value-based care models. There has been considerable activity around advanced primary care and single-condition chronic disease management. We are now starting to see broader efforts to manage care up and down the continuum of care, involving multi-specialty care and the gamut of care locations. Increased pressure to lower costs will result in increased volumes in lower cost, ambulatory settings.
Regulatory scrutiny will continue to increase. For most, this is a given. In 2023, we saw increased scrutiny up and down the continuum, whether related to pharmaceutical costs, regulation of pharmacy benefit managers, healthcare transaction laws, or innovations in thinking around healthcare from the Federal Trade Commission. With the impending election, it is likely healthcare will receive considerable attention and scrutiny.
Private equity (“PE”) will resume the march – with discipline. In my practice, PE entities rethought their growth strategies to focus on how to bring acquisitions to profitability quickly, from a “growth at all costs” mind set. Now there appears to be an increasing focus on operations and an emphasis on making realistic assumptions to underly growth. This has led to a more realistic pricing discipline and investment in management teams with operational experience.
Partnerships. There is an increasing trend towards partnerships between PE entities and health systems. Health systems are under considerable financial stress, and while they do not universally welcome PE with open arms, some systems do appear open to targeted partnerships. By the same token, PE entities are beginning to realize that they require clinical assets that are most readily available at health systems. This will continue in 2024.
The rise of independent physician groups. There is increasing activity among freestanding physician groups. Some doctors are leery of PE because they believe it is solely focused on profits. Similarly, many physicians are reluctant to be employed by health systems because they believe they will simply become a referral source. While we are not likely to see a return to 2002, where many PE and health system physician deals were unwound, we will see increasing growth by independent physician groups.
Continued consolidation. The trend towards consolidation in healthcare is nowhere near ending. To assume risk (the ultimate goal of value-based care), providers require scale, both vertically and horizontally. While segments of healthcare slowed in 2023, a resumption of growth is inevitable.
Increased insolvencies. Most healthcare providers have very high fixed costs and low margins. Small swings in accounts receivable collections, wages, and managed care payments can have a large impact on entities that are just squeezing by.
New entrants. Last year saw several new entrants to the healthcare marketplace nationally. Who in 2023 would have thought Best Buy would enter the healthcare marketplace? There is still plenty of room for new models of care, which we will see in 2024.

2024 promises to be an interesting year in the healthcare industry.

2023 Foreign Direct Investment Year End Update: Continued Expansion of FDI Regulations

As previously reported, regulations and restrictions on Foreign Direct Investment (“FDI”) have expanded quickly in the United States and in many of its trading partner countries around the world. FDI has been further complicated in the U.S. by the passage of individual State laws – often focused the acquisition of “agricultural land,” and in Europe by the passage of screening regimes by the individual Member States of the European Union (E.U.).

In 2023, fifteen U.S. States enacted some form of FDI restrictions on real estate. Some States elected to incorporate U.S. Federal regulations regarding who is prohibited from acquiring certain real estate, while other States have focused on broadly protecting agricultural lands. State laws also vary from those that prevent foreign ownership, to those that only require reporting foreign ownership.

Thus far Alabama, Arkansas, Florida, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin have passed laws related to FDI in real estate.

Alabama, Arkansas, Florida, Illinois, Iowa, Kansas, Maine, Missouri, Ohio and Texas all currently require foreign investors to disclose acquisitions of certain real estate, much like the U.S. Federal Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA). Arkansas, Illinois, Maine, and Wisconsin, actually allow acquirers to fulfill their reporting requirements by simply submitting a copy of applicable federal AFIDA reports. Texas currently only limits Direct Foreign Investment in certain “critical infrastructure.”

Ohio, Pennsylvania, South Carolina, South Dakota, and Wisconsin limit foreign investment in real estate based on the number of acres; while Iowa, Minnesota, Missouri, Nebraska, North Dakota, and Oklahoma ban foreign ownership of certain land completely.

The Alabama Property Protection Act (“APPA”), which went into effect in 2023, is one of the most expansive of the U.S. State laws, and which also incorporates U.S. Federal law. The APPA restricts FDI by a “foreign principal” in real estate related to agriculture, critical infrastructure, or proximate to military installations.

The APPA broadly covers acquiring “title” or a “controlling interest.” The APPA also broadly defines “foreign principal” as a political party and its members, a government, and any government official of China, Iran, North Korea, and Russia, as well as countries or governments that are subject to any sanction list of the U.S. Office of Foreign Assets Control (“OFAC”). The APPA defines “agricultural and forest property” as “real property used for raising, harvesting, and selling crops or for the feeding, breeding, management, raising, sale of, or the production of livestock, or for the growing and sale of timber and forest products”; and it defines covered “critical infrastructure” as a chemical manufacturing facility, refinery, electric production facility, water treatment facility, LNG terminal, telecommunications switching facility, gas processing plant, seaport, airport, aerospace and spaceport infrastructure. The APPA also covers land that is located within 10 miles of a “military installation” (of at least 10 contiguous acres) or “critical infrastructure.”

Notably, APPA does not specifically address whether leases are considered a “controlling interest,” nor does it specify enforcement procedures.

U.S. Federal Real Estate FDI

Businesses involved in the U.S. defense industrial base have been historically protected from FDI by the Committee on Foreign Investment in the United States (“CFIUS”). The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) expanded those historic protections to include certain Critical Technologies, Critical Infrastructure, and Sensitive Data – collectively referred to as covered “TID.”

FIRRMA specifically expanded CFIUS to address national security concerns arising from FDI impacting critical infrastructure and sensitive government installations. Part 802 of FIRRMA established CFIUS jurisdiction and review for certain covered real estate, including real estate in proximity to specified airports, maritime ports, military installations, and other critical infrastructure. Later in 2022, Executive Order 14083 further expanded CFIUS coverage for certain agricultural related real estate.

Covered installations are listed by name and location in appendixes to the CFIUS regulations. Early this year, CFIUS added eight additional government installations to the 100-mile “extended range” proximity coverage of Part 802. The update necessarily captured substantially more covered real estate. Unlike covered Section 1758 technologies that can trigger a mandatory CFIUS filing, CFIUS jurisdiction for covered real estate currently remains only a voluntary filing. Regardless, early diligence remains critical to any transaction in the United States that may result in foreign ownership or control of real estate.

U.S. Trading Partners FDI Regimes

The U.S. is not alone in regulating FDI, or the acquisition of real estate by foreign investors. Canada, United Kingdom and the European Union have legislative frameworks governing foreign investment in business sectors, technology, and real estate. Almost all European Union Member States have some similar form of FDI screening.

Key U.S. trading partners that have adopted FDI regimes include, Australia, Austria, Belgium, China, Germany, France, Hungary, Ireland, Italy, Japan, Luxembourg, Netherlands, Poland, Singapore, Spain, and Sweden. What foreign parties, economic sectors, or technologies are covered vary from country to country. They also vary as to the notification and approval requirements.

The UK National Security and Investment Act (NSI Act) came into effect on 4 January 2022, giving the UK government powers to intervene in transactions where assets or entities are acquired in a manner which may give rise to a national security risk. There were over 800 notifications under the NSI during the previous 12-month reporting period. In November 2023 the Deputy Prime Minister Oliver Dowden published a call for evidence on the legislation which aims to narrow and refine the scope of powers to be more ‘business friendly’, given that very few notified transactions have not been cleared within 30 working days. We will revisit developments on this in 2024.

The UK has continued to implement other reforms to improve transparency of foreign ownership of UK property. Part of the UK Economic Crime (Transparency and Enforcement) Act 2022 requires the register of overseas entities. The register is maintained by Companies House and requires overseas entities which own land in the UK to disclose details of their beneficial owners. Failure to comply with the new legislation will impact any registration of ownership details at the UK Land Registry (and thus the relevant legal and equitable ownership rights in any relevant property) and officers of any entity in breach will also be liable to criminal proceedings.

Recommendations

Whether a buyer or a seller, all transactions involving FDI should include an analysis of the citizenship of the interested parties, the nature of the business, land and products, and the applicability of laws and regulations that can impact the parties, timing, or transaction.

CFTCs Increased Reach over Environmental Commodities

During 2023 the Commodity Futures Trading Commission (CFTC) engaged in several regulatory actions aimed at further clarifying its jurisdictional reach over environmental commodity markets generally and the voluntary carbon credit (VCC) markets in particular. First, on June 20, 2023, the CFTC issued an alert seeking whistleblower tips relating to carbon market misconduct. CFTC noted that many VCCs serve as the underlying commodity for futures contracts that are listed on CFTC designated contract markets (DCMs) over which the CFTC has full enforcement authority as well as the regulatory oversight. Importantly, the CFTC also noted that it has anti-fraud and anti-manipulation enforcement authority over the related spot markets for VCCs as well as carbon allowances and other environmental commodities products that are linked to futures contracts.¹

Second, on July 19, 2023 the CFTC held its second convening where several market participants expressed the view that reliability, integrity and resilience of VCCs will be significantly improved with greater regulatory involvement.²

Third, in response to a growing demand to become more actively involved in environmental commodity markets on December 4, 2023, the CFTC issued proposed Guidance Regarding the Listing of Voluntary Carbon Credits Derivatives and Request for Comment (VCC Guidance).³ The VCC Guidance “outlines factors for a DCM to consider in connection with product design and listing [of futures contracts on VCCs] to advance the standardization of such products in a manner that promotes transparency and liquidity.”

The VCC Guidance is remarkable because: (i) it is non-binding (i.e., it is only guidance, not a regulation – stating that DCMs “should consider”); (ii) it notes several times that “for the avoidance of doubt, this proposal is not intended to modify or supersede the Appendix C Guidance” [to Part 38 of CFTC regulations];⁴ (iii) it addresses the already existing regulatory requirements for DCOs (i.e., Core Principle 3 – the requirement that all listed futures are not readily susceptible to manipulation);⁵ (iv) it attempts to reach over spot physically-settled VCC markets over which the CFTC does not have the regulatory jurisdiction and can only exercise its limited enforcement anti-fraud and anti-manipulation jurisdiction; (v) it requires DCMs to “consider” a number of VCC characteristics that are clearly outside of DCM’s control and probably competency, which include transparency, additionality, permanency and risk of reversal, robust quantification, governance and tracking mechanisms, and measures to prevent double-counting of VCCs; (vi) it requires DCMs to submit to the CFTC “explanation and analysis of the contract” it intends to list; (vii) it requires DCMs to actively monitor VCC contracts to ensure that they continue to meet these standards; and (viii) notes that the same standards should apply to swap execution facilities (SEFs) that may list swaps on VCCs. Finally, this VCC Guidance is followed by a number of questions and an open comment period ending on February 16, 2024.

The VCC Guidance is an important step forward to promoting transparency and integrity of VCC markets within the jurisdictional constraints of the CFTC. Even though the VCC Guidance does not (and cannot) impose any additional compliance requirements on DCMs and SEFs short of promulgating a rulemaking in compliance with the Administrative Procedure Act, it is clear that DCM’s compliance burden with respect to listed VCC contracts before the VCC Guidance was issued are clearly different than after the VCC Guidance would become effective. Further, unlike other physically-deliverable commodities that serve as underliers to futures contracts on DCMs, VCCs traded in spot and forward markets are treated differently and will probably be in the same category as virtual currencies.

https://icvcm.org/

1 https://www.cftc.gov/PressRoom/PressReleases/8723-23

2 https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923

3 https://www.cftc.gov/PressRoom/PressReleases/8829-23

4 https://www.ecfr.gov/current/title-17/chapter-I/part-38/appendix-Appendix%20C%20to%20Part%2038

5 https://www.law.cornell.edu/uscode/text/7/7

The Corporate Transparency Act December 2023 Update

The Corporate Transparency Act (“CTA” or the “Act”) comes into effect on January 1, 2024. Enacted by Congress as part of the Anti-Money Laundering Act of 2020, the CTA requires certain entities, domestic and foreign, to report beneficial ownership to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

The CTA’s reporting obligations will apply to “Reporting Companies” (discussed below) currently in existence, and to those formed after January 1, 2024. However, while FinCEN estimates that the CTA will affect over 32 million entities, it will largely impact only smaller and unregulated companies. For example, companies that meet the CTA’s definition of a “large operating company,” are publicly traded or regulated, or are a subsidiary of certain exempt entities are not required to submit beneficial ownership information to FinCEN. Accordingly, while all companies should take note of the CTA and the significant change in the law for corporate reporting obligations, an equally vast number of entities will likely find themselves exempt from these requirements.

With the CTA’s effective date fast approaching, companies should consider its potential impact to their compliance obligations and, if appropriate, implement appropriate policies and procedures for handling reporting.

WHAT DOES THE CTA REQUIRE?

The CTA will require Reporting Companies to file reports electronically with FinCEN identifying their beneficial owners, in addition to certain other information. For Reporting Companies formed prior to 2024, these reports require information about the Reporting Company and its beneficial owners. Reporting Companies formed prior to 2024 will have until January 1, 2025, to file an initial report.

For Reporting Companies formed on or after January 1, 2024, reports will require information about the Reporting Company and its beneficial owners, as well as its company applicants (i.e., individuals involved in the company’s formation filing). Reporting Companies formed after January 1, 2024, will have 30 days from formation to file their initial reports, although FinCEN recently issued a final rule extending this reporting period to 90 days for companies created or registered in 2024.

WHO MUST REPORT?

Reporting Companies are defined as legal entities that are formed through a filing in a state secretary of state’s office or similar office under the law of a state or Indian tribe. Reporting Companies can be domestic or foreign and include, but are not limited to, corporations, limited liability companies, certain partnerships and certain trusts. A foreign Reporting Company is an entity formed under foreign law that registers to do business in any state or Indian tribe. Certain entities outside of the CTA’s scope include sole proprietorships, most general partnerships, common law trusts, unincorporated
associations, and foreign entities not registered to do business in a state or tribal jurisdiction. These entities are likely to have no reporting obligations under the CTA.

EXEMPT ENTITIES

The CTA provides 23 exemptions for Reporting Companies that would otherwise be required to report beneficial ownership information under the Act. These exemptions are predominantly for large or heavily regulated companies, including:

securities reporting issuers, banks, credit unions, depository institution holding companies, money services businesses, brokers-dealers, securities exchange or clearing agencies, pooled investment vehicles, regulated investment companies and investment advisors, insurance companies and state-licensed insurance providers, and accounting firms;
“large operating companies” who have more than 20 full-time employees in the U.S., an operating presence at a physical office within the United States, and more than $5 million in gross receipts or sales on their previous years’ U.S. tax returns;
U.S. publicly traded companies;
governmental authorities and tax-exempt entities; and
inactive entities who have been in existence prior to January 1, 2020, are not engaged in active business, are not owned in any manner by a foreign person, have not had a change in ownership within the last 12 months, have not sent or received any amount greater than $1,000 within the last 12 months, and have no assets or ownership interests in any entity in the United States or abroad.

The CTA also exempts subsidiaries of certain exempt entities if those exempt entities own or control the subsidiary.

WHAT MUST BE REPORTED?

Reporting Companies are required to report to FinCEN:

basic company information, including full legal name, trade names, business address, state of incorporation or business registration, and employer identification number;
information of Beneficial Owners, including full legal name, date of birth, residential street address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document (e.g., driver’s
license, passport, state-issued ID, etc.), and image of ID document from which unique ID number was obtained;
information of Company Applicants, including full legal name, date of birth, business address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document, and image of ID document from which unique ID number was obtained. A “Company Applicant” is defined as the individual who directly files a document with the state secretary of state’s office to create the entity or register it to do business in the state, and the individual who is primarily responsible for directing or controlling the filing.

There is no cap on the number of beneficial owners a Reporting Company is required to report. In contrast, a Reporting Company cannot have more than two reportable company applicants. Additionally, the CTA only requires Reporting Companies formed on or after January 1, 2024, to report company applicants in their initial reports. There is no requirement to report company applicants for entities formed prior to January 1, 2024.

WHO IS A BENEFICIAL OWNER?

A beneficial owner is defined as any individual who, directly or indirectly, either exercises substantial control over a Reporting Company or owns or controls at least 25% of the ownership interests of such Reporting Company.

An individual may exert substantial control by (i) serving as a senior officer (e.g., company’s president, CEO, COO, CFO or general counsel, or any officer who performs a similar function), (ii) having authority to appoint or remove certain officers or a majority of directors (or similar governing body) of the Reporting Company or (iii) having “substantial influence” over important matters at the company, regardless of their title or role.

Ownership interests in a company generally refer to any arrangement that establishes ownership rights in the Reporting Company, such as stock, capital or profit interests, convertible interests, options to buy or sell any of the above-named interests, or contracts, relationships or other understandings. Option interests must be treated as exercised for purposes of the analysis. Additionally, a beneficial owner may own or control such interest directly or indirectly, jointly with another person or through an agent, custodian, trust or intermediary entity.

The CTA identifies five instances where an individual who would otherwise be a beneficial owner under the Act qualifies for an exception. In these cases, the Reporting Company does not have to report the individual’s information to FinCEN. These exceptions are as follows:

a minor child;
a nominee, intermediary, custodian or agent;
an employee (excluding senior officers);
an inheritor, whose only interest in the company is a future interest through a right of inheritance; and
a creditor.

HOW TO REPORT

No filings are due prior to the Act’s effective date. While FinCEN has published draft forms for filing by a Reporting Company for comment, they are not yet finalized. FinCEN is also in the process of setting up the beneficial owner reporting infrastructure, the Beneficial Ownership Secure System (“BOSS”), which has not yet been finalized.

If beneficial owners or company applicants do not want to provide their personal data to a Reporting Company, individuals have the option of applying directly to FinCEN for a “FinCEN identifier” (a “FinCEN ID”). The individual will need to provide directly to FinCEN all of the same data that he or she would need to submit to the Reporting Company, but then would only need to provide his or her FinCEN ID to the Reporting Company for inclusion on its reporting.

Individuals who receive FinCEN IDs have the burden of keeping their data updated with FinCEN, whereas a Reporting Company has the burden of keeping the individual’s data current if the individual reports such data directly to the Reporting Company.

WHEN TO REPORT

For non-exempt Reporting Companies in existence as of January 1, 2024, they will have until January 1, 2025, to make their initial beneficial ownership report.

For non-exempt Reporting Companies formed on or after January 1, 2024, they will need to file their first beneficial ownership report within 30 calendar days after the date of formation. On November 29, 2023, FinCEN issued a final rule extending this deadline to 90 days for companies formed or registered in 2024. The time of formation is the earlier of (i) a company receiving actual notice of its registration from the state secretary of state or (ii) a company receiving notice of its registration becoming publicly available.

In addition to filing initial reports, Reporting Companies are also obligated to make reports within 30 days of a change to any data that FinCEN requires to be reported for the company and its beneficial owners.

PENALTIES FOR NONCOMPLIANCE

Congress included steep penalties for non-compliance with the CTA’s reporting requirements. Specifically, the CTA provides that willfully reporting or attempting to report false or fraudulent beneficial ownership, or willfully failing to make updates, shall be punishable with a civil penalty up to $500 per day while such violation continues, with a possible criminal fine up to $10,000 and up to two years in prison. If a reporting violation is found to be “willful,” the CTA provides that responsible parties can include individuals that cause the failure, or are senior officers of the Reporting Company at the
time of the failure. The CTA also enhances criminal penalties when a Reporting Company’s failure to file is combined with other illegal activity.

Additionally, it is also unlawful to knowingly disclose or knowingly use beneficial ownership information obtained by the person for an unauthorized purposes. Violations are punishable with a mandatory civil penalty of $500 per day while the violation continues, plus a possible criminal fine of up to $250,000, five years in prison, or both.

HOW YOU CAN PREPARE

The CTA will alter the ways entities organize and govern themselves and it will impose substantial and continuing reporting obligations. In the weeks leading up to the CTA’s implementation, entities should be developing internal policies and procedures to assess their reporting obligations, identify beneficial owners, and identify company applicants on a go-forward basis.

Reporting Companies may wish to consider adopting a CTA compliance policy. Such a policy can educate managers and senior officers on obligations under the CTA, address procedures for reporting to FinCEN and monitoring changes to a company’s reporting status and beneficial ownership, and address the application of the CTA to potential future affiliates of the Reporting Company.

Reporting Companies may also wish to consider how the CTA may implicate its constituent documents and evaluate amending existing operating agreements to incorporate provisions addressing compliance with the CTA. Similarly, some entities may wish to consider their organizational structures and corporate governance in light of the obligation to collect and report personally identifiable information. Additionally, Reporting Companies should consider how the CTA will impact future material transactions, such as mergers and acquisitions.

Beneficial for Whom? Requirement to Provide Beneficial Ownership Information for Business Entities Begins January 1, 2024

On January 1, 2024, the Corporate Transparency Act, a US federal law, will begin requiring certain corporations and limited liability companies to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. The corporate ownership structures of many gaming companies, particularly those that utilize a private equity or Voteco model, may be subject to the reporting obligations.

Unless an exemption applies, entities subject to these obligations must report information about their beneficial owners, including their full legal names, dates of birth, addresses, unique identification numbers, and an image of one of the following non-expired documents: (i) state driver’s license; (ii) US passport; or (iii) identification document issued by a state, local government, or tribe. Gaming companies should consult with their legal counsel on their specific structures and the applicability of the reporting obligations to their corporate ownership models.

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required beneficial ownership information report may be held accountable for that failure.

The obligation to report this information is generally required for entities with at least one beneficial owner who owns 25% or more of the entity or exercises substantial control over it. An individual exercises substantial control over a reporting company if that individual meets any of four general criteria: (1) the individual is a senior officer; (2) the individual has authority to appoint or remove certain officers or a majority of directors of the reporting company; (3) the individual is an important decision maker; or (4) the individual has any other form of substantial control over the reporting company.

Reporting companies created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial reports. Under FinCEN’s regulations, reporting companies created or registered on or after January 1, 2024, will have 90 days after their company’s creation or registration to file their initial reports, and those created or registered on or after January 1, 2025, will have 30 days after their company’s creation or registration to file their initial reports.

Corporate Transparency Act: Implications for Business Startups

Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers, and certain individuals involved in their formation to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The beneficial ownership information (BOI) reporting requirements of the CTA are set to take effect on January 1, 2024. Those who disregard the CTA may be subject to civil and criminal penalties.

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

While the CTA includes 23 enumerated exemptions for reporting companies, newly formed businesses (Startups) may not qualify for an exemption before the date on which an initial BOI report is due to FinCEN. As a result, Startups (particularly those created on or after January 1, 2024) and their founders and investors, must be prepared to comply promptly with the CTA’s reporting requirements.

As an example, businesses may want to pursue the large operating company exemption under the CTA. However, among other conditions, a company must have filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales. By definition, a newly formed business will not have filed a federal income tax or information return for the previous year. If no other exemption is readily available, such a Startup will need to file an initial BOI report, subject to ongoing monitoring as to whether it subsequently qualifies for an exemption or any reported BOI changes or needs to be corrected, in either case triggering an obligation to file an updated BOI report within 30 days of the applicable event.

Startups also should be mindful that the large operating company exemption requires the entity to (i) directly employ more than 20 full time employees in the U.S. and (ii) have an operating presence at a physical office within the U.S. that is distinct from the place of business of any other unaffiliated entity. Importantly, this means that a mere “holding company” (an entity that issues ownership interests and holds one or more operating subsidiaries but does not itself satisfy the other conditions of this exemption) will not qualify. Startups may want to consider these aspects of the large operating company exemption during the pre-formation phase of their business.

Fundraising often requires Startups to satisfy competing demands among groups of investors, which can lead to relatively complex capitalization tables and unique arrangements regarding management and control. These features may cause BOI reporting for Startups to be more complicated than reporting for other small and closely held businesses. Founders, investors, and potential investors should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance, including with respect to the collection, storage and updating of BOI.

By ensuring all stakeholders understand the BOI reporting requirements and are prepared to comply, your Startup can avoid conflicts with current and potential investors and ensure that it collects the information that it needs to provide a complete and timely BOI report.

Yezi (Amy) Yan and Jordan R. Holzgen contributed to this article.

What Can We Learn From OFAC Enforcement Actions?

The Office of Foreign Assets Control (OFAC) has closed eight enforcement actions so far in 2023. These enforcement actions targeted companies, financial institutions, and individuals in the United States and abroad, and they resulted in more than $550 million in settlements.

What can other companies, financial institutions, and individuals learn from these enforcement actions? OFAC publishes Enforcement Releases on its website, and these releases provide some notable insights into OFAC’s sanctions enforcement tactics and priorities. By understanding these tactics and priorities, potential targets of OFAC enforcement actions can take strategic steps to bolster their sanctions compliance programs and efforts and reduce their risk of facing OFAC scrutiny.
Notably, all eight of OFAC’s enforcement actions so far in 2023 resulted in settlements with the target. As discussed further below, the majority of these enforcement actions also resulted from voluntary self-disclosures—so it makes sense that the companies and financial institutions involved were interested in settling. There are several other notable consistencies among OFAC’s 2023 enforcement actions as well.

OFAC Enforcement Actions in 2023

Here is a brief summary of each of OFAC’s enforcement actions so far in 2023:

1. Godfrey Phillips India Limited

Statutory Maximum Civil Monetary Penalty (CMP): $1.78 million

Base Penalty Amount: $475,000 (non-egregious violation, no voluntary self-
disclosure)
Settlement Amount: $332,500

Godfrey Phillips India Limited (GPI) faced an enforcement action related to its use of U.S. financial institutions to process transactions for exporting tobacco to North Korea. According to OFAC, GPI “relied on several third-country intermediary parties to receive payment, which obscured the nexus to the DPRK and caused U.S. financial institutions to process these transactions.”

In agreeing to a $332,500 settlement with GPI, OFAC considered the following
aggravating factors under its Economic Sanctions Enforcement Guidelines:

GPI acted “recklessly” and exercised a “minimal degree of caution or care for U.S. sanctions laws and regulations.”
Several company managers had actual knowledge that the conduct at issue “concerned the exportation of tobacco to [North Korea].”
The company’s actions harmed U.S. foreign policy objectives “by providing a sought-after, revenue-generating good to the North Korean regime.”
Mitigating factors in this case included:
GPI had not received a Penalty Notice or Finding of Violation from OFAC in the previous five years.
GPI took remedial measures upon learning of the apparent violations, including implementing new know-your customer measures and recordkeeping requirements.
GPI cooperated with OFAC during its investigation.

2. Wells Fargo Bank, N.A.

Statutory Maximum CMP: $1.066 billion

Base Penalty Amount: $533,369,211 (egregious violation, voluntary self-disclosure)

Settlement Amount: $30 million

Wells Fargo Bank, N.A. faced an enforcement action related to its predecessor Wachovia Bank’s decision to provide software to a foreign bank that used the software to process trade-finance transactions with sanctioned nations and entities. While noting multiple failures by the bank (including its failure to identify the issue for seven years “despite concerns raised internally within Wells Fargo on multiple occasions”), OFAC agreed to settle Wells Fargo’s potential half-billion-dollar liability for $30 million. Aggravating factors in this case included:

Reckless disregard for U.S. sanctions requirements and failure to exercise a minimal degree of caution or care.
The fact that senior management “should reasonably have known” that the software was being used for transactions with sanctioned jurisdictions and entities.
Wells Fargo undermined the policy of OFAC’s sanctions programs for Iran, Sudan, and Syria by providing the software platform.

Mitigating factors in this case included:

Wells Fargo had a strong sanctions compliance program at the time of the apparent violations.
The “true magnitude of the sanctions harm underlying the conduct” is less than the total value of the transactions conducted using the software platform.
Wells Fargo had not received a Penalty Notice or Finding of Violation from OFAC in the previous five years and remediated the compliance issue immediately.

3. Uphold HQ Inc.

Statutory Maximum CMP: $44,468,494

Base Penalty Amount: $90,288 (non-egregious violation, voluntary self-disclosure)

Settlement Amount: $72,230

Uphold HQ Inc., a California-based money services business, faced an enforcement action related to its processing of transactions for customers who self-identified as being located in Iran or Cuba or as employees of the Government of Venezuela. The 152 transactions at issue involved a total value of $180,575. Aggravating factors in this case included:

Failure to exercise due caution or care when conducting due diligence on customers who provided information indicating sanctions risks.
Uphold had reason to know that it was processing payments for customers in Iran and Cuba and who were employees of the Venezuelan government.

Mitigating factors in this case included:

Uphold had not received a Penalty Notice or Finding of Violation from OFAC in the previous five years.
Uphold cooperated with OFAC’s investigation.
Uphold undertook “numerous” remedial measures in response to OFAC’s investigation.

4. Microsoft Corporation

Statutory Maximum CMP: $404.6 million

Base Penalty Amount: $5.96 million (non-egregious violation, voluntary self-disclosure)

Settlement Amount: $2.98 million

Microsoft Corporation faced an enforcement action related to its exportation of “services or software” to Specially Designated Nationals (SDNs) and blocked persons in violation of OFAC’s Cuba, Iran, Syria, and Ukraine/Russia-related sanctions programs. According to OFAC’s Enforcement Release, “[t]he majority of the apparent violations . . . occurred as a result of [Microsoft’s] failure to identify and prevent the use of its products by prohibited parties.” Aggravating factors in this case included:

Microsoft demonstrated a reckless disregard for U.S. sanctions over a seven-year period.
The apparent violations harmed U.S. foreign policy objectives by providing software and services to more than 100 SDNs or blocked persons, “including major Russian enterprises.”
Microsoft is a “world-leading technology company operating globally with substantial experience and expertise in software and related services sales and transactions.”

Mitigating factors in this case included:

There was no evidence that anyone in Microsoft’s U.S. management was aware of the apparent violations at any time.
Microsoft cooperated with OFAC’s investigation.
Microsoft undertook “significant remedial measures and enhanced its sanctions compliance program through substantial investment” after learning of the apparent violations.

5. British American Tobacco P.L.C.

Statutory Maximum CMP: $508.61 billion

Base Penalty Amount: $508.61 billion (egregious violation, no voluntary self-
disclosure)
Settlement Amount: $508.61 billion

British American Tobacco P.L.C. entered into a settlement for the full statutory maximum CMP resulting from apparent violations of OFAC’s sanctions against North Korea. According to OFAC, the company engaged in a conspiracy “to export tobacco and related products to North Korea and receive payment for those exports through the U.S. financial system” by obscuring the source of the funds involved. Aggravating factors in this case included:

The company “willfully conspired” to unlawfully transfer hundreds of millions of dollars from North Korea through U.S. banks.
The company concealed its business in North Korea through “a complex remittance structure that relied on an opaque series of front companies and intermediaries.”
The company’s management had actual knowledge of the apparent conspiracy “from its inception through its termination.”
The transactions at issue “helped North Korea establish and operate a cigarette manufacturing business . . . that has reportedly netted over $1 billion per year.”
British American Tobacco is “a large and sophisticated international company operating in approximately 180 markets around the world.”

Mitigating factors in this case included:

British American Tobacco has not received a Penalty Notice or Finding of Violation in the past five years.
British American Tobacco cooperated with OFAC’s investigation.

6. Poloniex, LLC

Statutory Maximum CMP: 19.69 billion

Base Penalty Amount: $99.23 million (non-egregious violation, voluntary self-disclosure)

Settlement Amount: $7.59 million

Poloniex, LLC, which operates an online trading platform in the United States, agreed to settle after it was discovered that the company committed 65,942 apparent violations of various sanctions programs by processing transactions with a combined value of over $15 million. In settling for a small fraction of the base penalty amount, OFAC noted that Poloniex was a “small start-up” when most of the apparent violations were committed and that its acquiring company had already adopted a more-robust OFAC compliance program.

7. Murad, LLC

Statutory Maximum CMP: $22.22 million

Base Penalty Amount: $11.11 million (egregious violation, voluntary self-disclosure)

Settlement Amount: $3.33 million

Murad, LLC, a California-based cosmetics company, faced an OFAC enforcement action after it self-disclosed that it had exported products worth $11 million to Iran. While OFAC found that the company acted willingly in violating its sanctions on Iran, as mitigating factors OFAC noted the company’s remedial response and the “benign
consumer nature” of the products involved.

8. Swedbank Latvia AS

Statutory Maximum CMP: $112.32 million

Base Penalty Amount: $6.24 million (non-egregious violation, no voluntary self-disclosure)

Settlement Amount: $3.43 million

Swedbank Latvia AS faced an enforcement action related to the use of its e-banking platform by a customer with a Crimean IP address to send payments to persons in Crimea through U.S. correspondent banks. While OFAC noted that Swedbank Latvia is “a sophisticated financial institution with over one million customers” and failed to exercise due caution or care, it also noted that the bank took “significant remedial action” in response to the apparent violations and “substantially cooperated” with its investigation.

Insights from OFAC’s 2023 Enforcement Actions To Date

As these recent enforcement actions show, OFAC appears to be willing to give substantial weight to companies’ and financial institutions’ good-faith compliance efforts as well as their remedial efforts after discovering apparent sanctions violations. Cooperation was a key factor in several of OFAC’s 2023 enforcement actions as well. When facing OFAC scrutiny or the need to make a voluntary self-disclosure, companies and financial institutions must work with their counsel to make informed decisions, and they must move forward with a strategic plan in place focused on achieving a favorable outcome in light of the facts at hand.

Category: finance

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