Tag: trade sanctions

Can U.S. Companies Insure Against A Trade War?

The recent trade deal between the U.S. and China was welcome news for U.S. companies with investments in China.  The tenuous relationship between the countries, however, continues to cause substantial uncertainty for U.S. investors.  Their concerns are not unique to China—the Trump Administration has taken an aggressive trade stance even with nations usually considered friendly, including Brazil, Argentina, and France.

A growing number of companies are turning to political risk insurance to protect their foreign investments.  Such policies typically cover a variety of commercial losses stemming from political events, including expropriation, political violence, or currency conversion restrictions.

Are political risk policies a valuable tool in a company’s arsenal for mitigating the uncertainties of doing business in China or other countries embroiled in a trade war with the United States?  The answer depends, in large part, on the specific wording of the policy at issue.  There is no standard political risk policy form, and jurisprudence on such policies is extremely limited.  Potential policyholders must evaluate their needs carefully and be strategic during policy placement to ensure they are maximizing potential coverage.  For example:

Expropriation:  Political risk policies may cover losses stemming not only from a government’s outright nationalization or expropriation of a policyholder’s assets, but also from more subtle forms of unlawful discrimination against foreign entities.  The bounds of such coverage, however, are not always clear.  Many policies exclude incidental damages arising from lawful or legitimate acts of governance, which may give rise to disputes between policyholders and insurers as to the nature and motivation of a particular governmental act.

For example, the Chinese Government imposed tariffs and restrictions on U.S. companies doing business in China throughout 2019.  A policyholder seeking coverage for losses suffered due to these measures would argue that the restrictions were retaliatory acts in response to the U.S.-China trade war, meaning that its damages arose from covered acts of discrimination in violation of international law.  An insurer seeking to limit its coverage obligations may argue that China imposed these restrictions based on its view that the companies had violated market rules or otherwise damaged the interests of Chinese companies for noncommercial reasons—in other words, that these were legitimate act of governance taken in the public interest.

Given the lack of case law on the intended scope of expropriation coverage and the fact-intensive nature of disputes over the legitimacy of a particular governmental act, companies should seek to include the broadest possible definition of “expropriation” in their policy and to clarify the bounds of any exclusions.

Political Violence:  In addition to coverage for expropriation and related governmental acts, political risk policies also may provide coverage for losses stemming from physical damage to property due to protests, riots, or other acts of violence intended to achieve a political objective.  While U.S. investors may not commonly associate trade wars with physical violence, recent protests and riots over economic issues in countries such as Chile and Ecuador demonstrate the potential for severe economic turmoil (a common result of any trade war) to cause such violence.  As a result, U.S. companies with warehouses, offices, or other property in countries facing aggressive trade restrictions by the U.S., or in any nation suffering from substantial economic uncertainty, may find such coverage appealing.

The potential benefit of political violence coverage may depend, in large part, on how a policy proposes to determine the value of any damaged property or resulting financial losses.  Potential policyholders should ensure, for example, that a loss is valued pursuant to objective accounting standards and/or by a neutral third-party, as opposed to the insurer, who may have an interest in minimizing its liability.

Currency Inconvertibility:  A third component of political risk insurance is currency inconvertibility coverage—i.e., coverage for losses arising from a policyholder’s inability to convert currency due to exchange restrictions posed by a foreign government.  For example, such coverage might apply if a policyholder is unable to obtain repayment of a loan to a Chinese entity because of new restrictions by the Chinese Government on conversion of local currency to U.S. dollars or the transfer of funds to U.S. banks.  U.S. companies with investments in countries facing particularly extreme economic instability, such as Venezuela, may benefit most from such coverage, as those countries are most at risk for collapse of their currency exchange system.

As with political violence coverage, a policy’s proposed standards for valuing a currency inconvertibility loss are once again crucial to maximizing a policyholder’s protection.  Policies often calculate the value of a policyholder’s loss using the foreign country’s exchange rate on the date of loss.  In such scenarios, policyholders may benefit from defining the “date of loss” as occurring the first time the policyholder is unable to convert currency, as opposed to after a waiting period has occurred or after the insured has made multiple conversion attempts.  This may minimize the risk that the value of a covered loss decreases if the exchange rate in the country plummets while the insured fulfills other conditions for coverage.

Political risk policies likely cannot insulate U.S. companies from the full impact of a global trade war or other politically-inspired disruptions.  However, U.S. businesses can maximize the benefits of such coverage through careful policy drafting and strategic evaluation of their individual risk profile.

© 2020 Gilbert LLP

ARTICLE BY Emily P. Grim of Gilbert LLP.
More on recent US trade negotiations on the National Law Review Antitrust Law and Trade Regulation page.

Apollo Settles Alleged Sanctions Violations: Aircraft Lessors Pay Attention

The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury has broad delegated authority to administer and enforce the sanctions laws and related sanctions programs of the United States. As a key component of its enforcement authority, OFAC may investigate “apparent violations” of sanctions laws and assess civil monetary penalties against violators pursuant to five statutes, including the Trading with the Enemy Act and the International Emergency Economic Powers Act.1

An “apparent violation” involves “conduct that constitutes an actual or possible violation of U.S. economic sanctions laws.”2 An OFAC investigation of an “apparent violation” may lead to one or more administrative actions, including a “no action” determination, a request for additional information, the issuance of a cautionary letter or finding of violation, the imposition of a civil monetary penalty and, in extreme cases, a criminal referral.3 Investigations of apparent violations by OFAC often lead to negotiated settlements where a final determination is not made as to whether a sanctions violation has actually occurred.4

Upon the conclusion of a proceeding that “results in the imposition of a civil penalty or an informal settlement” against or with an entity (as opposed to an individual), OFAC is required to make certain basic information available to the public.5 In addition, OFAC may release on a “case-by-case” basis “additional information” concerning the penalty proceeding,6 and it often does. Such additional information will sometimes include informal compliance guidance, cautionary reminders and best practices recommendations. Such information is routinely consumed by corporate compliance officers seeking fresh insight on ever-evolving compliance and enforcement trends, particularly in the context of proceedings relating to industries with which they are involved.

On November 7, 2019, OFAC released enforcement information that has caught the attention of the aircraft leasing community, particularly U.S. aircraft lessors and their owned or controlled Irish lessor subsidiaries.7 The matter involved a settlement by Apollo Aviation Group, LLC8 of its potential civil liability for apparent violations of OFAC’s Sudanese Sanctions Regulations (SSR) that existed in 2014–5.9 Although the amount of the settlement was relatively modest, the enforcement activity by OFAC in the proceeding has attracted scrutiny by aircraft lessors because, for the first time in recent memory, a U.S. aircraft lessor has paid a civil penalty to OFAC for alleged sanctions violations.

At the time of the apparent violations, Apollo was a U.S. aircraft lessor which became involved in two engine leasing transactions that came back to haunt it.

In the first transaction, Apollo leased two jet engines to a UAE lessee which subleased them to a Ukrainian airline with which it was apparently affiliated. The sublessee, in turn, installed both engines on an aircraft that it “wet leased”10 to Sudan Airways, which was on OFAC’s List of Specially Designated Nationals and Blocked Persons within the meaning of the “Government of Sudan.” Sudan Airways used the engines on flights to and from Sudan for approximately four months before they were returned to Apollo when the lease ended. Meanwhile, in a separate transaction, Apollo leased a third jet engine to the same UAE lessee, which subleased the engine to the same Ukrainian airline, which installed the engine on an aircraft that it also wet leased to Sudan Airways. Sudan Airways used the third engine on flights to and from Sudan until such time as Apollo discovered how it was being used and demanded that the engine be removed from the aircraft.

Both leases between Apollo and its UAE lessee contained restrictive covenants “prohibiting the lessee from maintaining, operating, flying, or transferring the engines to any countries subject to United States or United Nations sanctions.”11 Thus, by allowing the engines to be installed by its sublessee on aircraft that were eventually wetleased to Sudan Airways, and flown to and from Sudan during the country’s embargo, the lessee presumably breached the operating restrictions and covenants imposed by Apollo in the leases. Moreover, once Apollo learned that the first two engines had been used, and the third engine was being used, for the benefit of Sudan Airways, it demanded that the third engine be removed from the aircraft that the sub-lessee had wet-leased to Sudan Airways, and this was done.12

One might reasonably conclude from these facts that Apollo acted like a good corporate citizen. So what did Apollo do wrong from a sanctions compliance standpoint?

OFAC stated that Apollo may have violated section 538.201 of the SSR, which at the time “prohibited U.S. persons from dealing in any property or interests in property of the Government of Sudan,”13 as well as section 538.205 of the SSR, which at the time “prohibited the exportation or re-exportation, directly or indirectly, of goods, technology or services, from the United States or by U.S. persons to Sudan.”14

What are the takeaways and possible lessons to be drawn by aircraft lessors from this settlement based upon these alleged violations and the facts upon which they were based?

First, according to OFAC, Apollo did not “ensure” that the engines “were utilized in a manner that complied with OFAC’s regulations,” notwithstanding lease language that effectively required its lessee to comply.15 OFAC is clearly suggesting here that aircraft lessors have a duty to require sanctions compliance by their lessees. And, in view of the fact that many sanctions programs are enforced on a strict liability basis, OFAC’s comment that Apollo failed to “ensure” compliance by its lessee and sublessees makes sense. Apollo was not in a position to avoid civil liability by hiding behind the well-drafted language of its two leases. If a sanctions violation occurred for which Apollo was strictly liable, the mere fact that its lessee’s breach of the lease was the proximate cause of the violation would not provide a safe harbor.

As an example of Apollo’s alleged failure to “ensure” legal compliance, OFAC observed that Apollo did not obtain “U.S. law export compliance certificates from lessees and sublessees,”16 a comment which is somewhat puzzling. To our knowledge, there is nothing in the law requiring a lessor to obtain export compliance certificates, at least not in circumstances where an export or re-export license is not otherwise required in connection with the underlying lease transaction. Moreover, as a practical matter, it would be difficult, at best, for an aircraft lessor to force the direct delivery of certificates from a sublessee or sub-sub-lessee with whom it lacks privity of contract. In view of the foregoing, one assumes that OFAC was looking for Apollo to install procedures by which its lessee would self-report on a regular basis its own compliance (and compliance by downstream sublessees) with applicable export control laws and the relevant sanctions restrictions contained in the lease.

Second, OFAC found that Apollo “did not periodically monitor or otherwise verify its lessee’s and sublessee’s adherence to the lease provisions requiring compliance with U.S. sanctions laws during the life of the lease.”17 In this regard, OFAC observed that Apollo never learned how and where its engines were being used until after the first two engines were returned following lease expiration and a post-lease review of engine records, including “specific information regarding their use and destinations,” actually conducted.

In view of the foregoing, OFAC stressed the importance of “companies operating in high-risk industries to implement effective, thorough and on-going, risk-based compliance measures, especially when engaging in transactions concerning the aviation industry.”18 OFAC also reminded aircraft and engine lessors of its July 23, 2019, advisory warning of deceptive practices “employed by Iran with respect to aviation matters.”19 While the advisory focused on Iran, OFAC noted that “participants in the civil aviation industry should be aware that other jurisdictions subject to OFAC sanctions may engage in similar deception practices.”20 Thus, according to OFAC, companies operating internationally should implement Know Your Customer screening procedures and “compliance measures that extend beyond the point-of-sale and function throughout the entire business of lease period.”21

As a matter of best practices, aircraft lessors should implement risk-based sanctions compliance measures throughout the entirety of a lease period, and most do. Continuous KYC screening by lessors of their lessees and sublessees is a common compliance practice. Periodic reporting by lessees as to the use and destination of leased aircraft and engines appears to be a practice encouraged by OFAC.22 Lessors can also make it a regular internal practice to spot check the movement of their leased aircraft through such web-based platforms as Flight Tracker and Flight Aware. If implemented by lessors, such practices may enable early detection of nascent sanctions risks and violations by their lessees and sublessees.

Finally, OFAC reminded lessors that they “can mitigate sanctions risk by conducting risk assessments and exercising caution when doing business with entities that are affiliated with, or known to transact business with, OFAC-sanctioned persons or jurisdictions, or that otherwise pose high risks due to their joint ventures, affiliates, subsidiaries, customers, suppliers, geographic location, or the products and services they offer.” Such risk assessment is an integral part of the risk-based sanctions compliance program routinely encouraged by OFAC, as outlined in its Framework for OFAC Compliance Commitments on May 2, 2019.23 For aircraft and engine lessors, conducting pre-lease due diligence on the ownership and control of prospective lessees and sublessees, as well as the business they conduct, the markets they serve, the equipment they use and the aviation partners with whom they engage, are key to identifying and understanding the sanctions risks that a prospective business opportunity presents.

1 See U.S. Department of the Treasury, Office of Foreign Assets Control, Inflation Adjustment of Civil Monetary Penalties, Final Rule, 84 Fed. Reg. 27714, 27715 (June 14, 2019).

2 31 C.F.R. Part 501, Appendix A, Section I.A.

3 31 C.F.R. Part 501, Appendix A, Section II.

4 31 C.F.R. Part 501, Appendix A, Section V.C.

5 31 C.F.R. §501.805(d)(1). Such information includes “(A) [t]he name and address of the entity involved, (B) [t]he sanctions program involved, (C) A brief description of the violation or alleged violation, (D) [a] clear indication whether the proceeding resulted in an informal settlement or in the imposition of a penalty, (E) [a]n indication whether the entity voluntarily disclosed the violation or alleged violation to OFAC, and (F) [t]he amount of the penalty imposed or the amount of the agreed settlement.” Id. OFAC communicates all such information through its website. 31 C.F.R. § 501.805(d)(2).

6 31 C.F.R. § 501.805(d)(4).

7 See OFAC Resource Center, Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Apollo Aviation Group, LLC (Nov. 7, 2019) (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Page…) (the Settlement Announcement).

8 In December 2018, Apollo was acquired by The Carlyle Group and currently operates as Carlyle Aviation Partners Ltd. According to the Settlement Announcement, neither The Carlyle Group nor its affiliated funds were involved in the apparent violations at issue. See id. at 1 n.1.

9 See 31 C.F.R. Part 538, Sudanese Sanctions Regulations (7-1-15 Edition). Note that most sanctions with respect to Sudan were effectively revoked by general license as of October 2, 2017, thereby authorizing transactions previously prohibited by the SSR during the time period of the apparent violations by Apollo. However, as is true when most sanctions programs are lifted, the general license issued in the SSR program did not “affect past, present of future OFAC enforcements or actions related to any apparent violations of the SSR relating to activities that occurred prior to the date of the general license.” Settlement Announcement at 1 n.2. See also OFAC FAQ 532 (https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#sudan_whole). 

10 A “wet lease” is “an aviation leasing arrangement whereby the lessor operates the aircraft on behalf of the lessee, with the lessor typically providing the crew, maintenance and insurance, as well as the aircraft itself.” See Settlement Announcement at 1 n.3.

11 Id. at 1.

12 Unfortunately, Apollo did not learn that the first two engines were used in violation of lease restrictions until they were returned following lease expiration and it conducted a post-lease review of the relevant engine records. 

13 The alleged application of section 538.201 to Apollo in the circumstances confirms the broad interpretive meaning that OFAC often ascribes to terms such as “interest,” “property,” “property interest” and “dealings,” which appear in many sanctions programs.

14 The alleged application of section 538.205 to Apollo in the circumstances suggests that a U.S. lessor of aircraft and jet engines may be tagged with the “re-export” of such goods and related services from one foreign country to another, notwithstanding the existence of a contractual daisy-chain of lessees, sub-lessees, and/or wetlessees that actually direct and control such flight decisions. In the context of U.S. export control laws, the Export Administration Regulations (EAR) define the term “re-export” to include the “actual shipment or transmission of an item subject to the EAR from one foreign country to another foreign country, including the sending or taking of an item to or from such countries in any manner.” 15 C.F.R. § 734.14(a)(1). Thus, for export control purposes, the flight of an aircraft subject to the EAR from one foreign county to another foreign country constitutes a “re-export” of the aircraft to that country. 

15 Settlement Announcement at 1.

16 Id.

17 Id., at 1–2.

18 Id. at 3. (emphasis added).

19 Id. See OFAC, Iran-Related Civil Aviation Industry Advisory (July 23, 2019) (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20190723.aspx)

20 Id.

21 Id. (emphasis added).

22 In Apollo, OFAC reacted favorably to certain steps alleged to have been taken by Apollo to minimize the risk of the recurrence of similar conduct, including the implementation of procedures by which Apollo began “obtaining U.S. law export compliance certificates from lessees and sublessees.” Id.

23 See https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf.

© 2019 Vedder Price

ARTICLE BY John E. Bradley of Vedder Price.
More sanctions actions on the National Law Review Antitrust & Trade Regulation law page.

Increased Sanctions on North Korea Focus on China and Russia

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.

Article By Jeremy P. Paner of Holland & Hart LLP.
Copyright Holland & Hart LLP 1995-2016.

Further Relaxation of Sanctions for Commercial Aircraft Operations in Cuba

cuba_800_11429On January 27, the US Department of Commerce’s Bureau of Industry and Security (BIS) and the Treasury Department’s Office of Foreign Assets Control (OFAC), took steps to further ease trade restrictions against Cuba, including transactions relating to the export and operation of civil aircraft in Cuba.[1] In order to sell or lease a commercial aircraft to an airline in Cuba, a US national must obtain licenses for each transaction from BIS and OFAC. The changes by BIS relax its licensing policies for certain transactions with Cuba and Cuban nationals, while OFAC lifted financing and payment restrictions for authorized exports, and broadened the scope of authorizations for travel to and from Cuba.

On February 16, the United States and Cuba announced the resumption of scheduled commercial air services between the two countries, and the US Department of Transportation (DOT) invited US air carriers to apply for permission to operate scheduled flights to and from Cuba.

As outlined below, these actions may lead to easier opportunities to provide aircraft leasing and related services to prospective customers in Cuba. They also will facilitate travel between the United States and Cuba by allowing US and Cuban airlines to fly scheduled flights between the two countries.

BIS Eases Licensing Policy for Exports of Items Necessary to Ensure Civil Aviation Safety

In light of moves earlier in 2015 to loosen restrictions on trade with Cuba, air travel to and from Cuba has significantly increased in that time. The policy change announced by BIS on January 27 emphasizes “the importance of civil aviation safety and . . . recognize[s] that access to aircraft used in international air transportation that meet US Federal Aviation Administration and European Aviation Safety Agency operating standards by Cuban state-owned enterprises contributes to that safety.”

In its notice, BIS indicated that it would move to generally approve license applications for the export of items for the safe operation of commercial aircraft in lieu of reviewing such applications on a case-by-case basis. This policy includes approving license applications for the export of commercial aircraft leased to Cuban state-owned enterprises.

Both commercial passenger and cargo aircraft are eligible for treatment under this revised policy of license approval. However, BIS will continue to generally deny license applications for exports or re-exports of goods (including aircraft) for use by the Cuban military, police, intelligence and security services. BIS also will generally deny such license applications for the export or re-export of goods for use by Cuban government or state-owned entities that primarily generate revenue for the state, including those engaged in tourism and extraction of minerals or raw materials.

BIS also will move from a general policy of denial to a policy of case-by-case review for applications to export certain items to “meet the needs of the Cuban people,” including those to Cuban state-owned entities that provide goods and services for the use and benefit of the Cuban people. This policy covers a number of categories, including goods for agricultural production, artistic endeavors, education, food processing, disaster preparedness, public health and sanitation, and public transportation.

OFAC Authorizes Certain Arrangements With Cuban Airlines to Facilitate Authorized Travel to Cuba

In conjunction with BIS, OFAC published its own regulatory amendments to ease restrictions on certain transactions with Cuba and Cuban nationals, including measures to facilitate air carrier services with Cuban airlines.[2] OFAC’s amendments authorize the entry by US persons into blocked space, code-sharing and leasing arrangements with Cuban nationals to facilitate the provision of authorized air carrier services. OFAC also is allowing travel-related and other transactions directly incident to the facilitation of the temporary sojourn of aircraft authorized for travel to Cuba. This allows US companies to engage with Cuba for services by personnel required for normal aircraft operation, such as aircraft crew, or to provide services to an aircraft on the ground in Cuba. These allowances are part of a larger expansion of authorized travel to Cuba—from organizing professional meetings, professional sports competitions and other events, to the creation and dissemination of artwork and informational materials.

Resumption of Scheduled Air Service Between the United States and Cuba

The memorandum of understanding signed by the United States and Cuba on February 16 allows for the re-establishment of scheduled commercial air service between both countries. For more than 50 years, there have been no scheduled flights between the United States and Cuba. As a result of the new agreement, a total of 110 daily scheduled round trip flights between the countries will be allowed to be conducted by each country’s carriers. Each country will be able to operate up to 20 daily roundtrip flights between the United States and Havana, and up to 10 daily roundtrip flights between the United States and each of nine other destinations in Cuba.

Immediately upon the announcement of the agreement, the DOT invited US carriers to apply for allocation of the new flight opportunities.[3] Applications from the US carriers are due to the DOT by March 2. The DOT is to answer those applications by March 14 and carrier replies are due March 21. The scheduled services are expected to begin in the fall 2016. All US carriers to which frequencies are eventually allocated will still be required to comply with all applicable regulations and requirements of the DOT and other US agencies and all US laws. US carriers’ ability to provide US–Cuba service through licensed charter flights continues unchanged.

Department of Transportation Matters Regarding Blocked Space, Code-Sharing and Wet-Leasing

The new amendments announced on January 27 allow blocked space, code-sharing or wet-leasing arrangements. As is the case with such arrangements with foreign carriers in general, any proposed blocked space, code-sharing or wet-leasing arrangement between a US air carrier and a Cuban carrier will require the DOT’s advance authorization. The DOT must determine whether the proposed operations are in the public interest, by assessing whether such operations meet an acceptable level of safety and security, and whether they will adversely impact competition in the US airline industry.

A US carrier seeking to conduct the activities allowed pursuant to the most recent OFAC amendments must first apply to the DOT for specific authorization for such planned operations.[4] The DOT will grant authorization only if the foreign carrier is from a country that complies with the safety standards of the US Federal Aviation Administration’s (FAA) International Aviation Safety Assessment (IASA) program and the proposed foreign carrier partner meets the requisite safety standards.[5] As part of the DOT’s analysis, the FAA will assess the safety oversight functions of the national aviation authority having jurisdiction over the proposed foreign partner’s operations.

Based on publicly available information, to date, the safety oversight function of Cuba’s national aviation authority has not been assessed by the FAA.[6] In assessing the safety oversight provided by any country’s civil aviation authority, the FAA will determine whether such oversight meets the minimum international safety standards established by the International Civil Aviation Organization (ICAO). Cuba is an ICAO member state and, according to the currently available ICAO information, in regard to the ICAO Universal Safety Oversight Audit Programme (USOAP), was audited by ICAO between February 19, 2008 and February 28, 2008, and meets the ICAO minimum safety standards. If the FAA determines that Cuba’s USOAP rating satisfies the requirements of the IASA program, it should approve the first prong of the safety assessment of the proposed code-sharing arrangement.

With respect to the proposed foreign carrier, the US carrier seeking authorization for such operations must have an existing FAA-accepted code-share safety program and must conduct safety audits on the proposed foreign partner in accordance with that program. The FAA will review the US carrier’s safety audit program, its initial safety audit report on the foreign carrier, and its statement that the foreign carrier is in compliance with international safety standards. Additionally, after authorization is granted, the US carrier must monitor its foreign partner’s safety programs for continued compliance during the existence of the approved arrangement. The DOT authorization process also includes review of the terms of the parties’ agreement for the proposed operations.

As for arrangements with foreign carriers that will provide service directly to the United States or to US territories, the Transportation Security Administration will provide the DOT with information regarding the security of the foreign carrier and its home country to aid the DOT in its assessment.

In assessing the impact of a proposed arrangement on competitiveness, the DOT will determine whether the agreements are adverse to the public interest because they would substantially reduce or eliminate competition.[7] In addition to serving the application for authorization on the requisite US government agencies, the US carrier seeking such authorization also must serve the application on each US-certificated carrier authorized to serve the general area in which the proposed transportation is to be performed. These other carriers may file any comments for consideration by the DOT.[8]

Of course, since most of the restrictions under the embargo remain in effect, operations under any such code-sharing, blocked space or wet-leasing arrangement, even if authorized by the DOT, may only be conducted within the scope of authorized US–Cuba transactions noted above.

Conclusion

The actions by BIS and OFAC and the announcements by the DOT will allow for a further expansion of trade activity and facilitate opportunities between the United States and Cuba. However, OFAC and BIS have made clear that they intend to continue enforcing existing sanctions on and trade embargoes with Cuba. Many restrictions will remain in place until US legislators vote to end or modify the embargo against Cuba. For example, the saleor lease by US persons of aircraft or related services to Cuba without a license continues to be restricted. Furthermore, as it stands now, any aircraft owned by the Cuban government arriving in the United States is subject to immediate seizure in settlement of the billions of dollars in judgments reached in US courts against Cuba in connection with Cuba’s nationalization of property owned by Americans and other civil judgments against the Cuban government. Thus, we remind those looking to take advantage of opportunities to sell or lease aircraft or related services to review all licensing applications and potential transactions with Cuba carefully to ensure that they are in compliance with federal laws and regulations.

[1] See Cuba Licensing Policy Revisions, 81 Fed. Reg. 4,580 (Dep’t Commerce, Jan. 27, 2016); Cuban Assets Control Regulations, 81 Fed. Reg. 4,583 (Dep’t Treasury, Jan. 27, 2016).

[2] OFAC now allows for financing and payment of authorized transactions through US banks or through sales on an open account. These changes were made to address the inability of customers in Cuba to obtain financing or for authorized transactions with the United States, due to more restrictive payment and financing arrangements.

[3] See, Order Instituting Proceeding and Inviting Applications, 2016 U.S. – Cuba Frequency Allocation Proceeding, issued by the US Department of Transportation, Docket DOT-OST-2016-0021, February 16, 2016.  

[4] The foreign carrier also must comply with all other relevant regulations, and hold all requisite DOT authorizations, prior to conducting any of the newly-allowed operations.

[5] See Department of Transportation Office of the Secretary and Federal Aviation Administration Code-Share Safety Program Guidelines, 12/21/2006, Revision 1.

[6] As Cuban carriers have not provided service to the US or participated in code-sharing arrangements with US carriers, and the Cuban national aviation authority has not significantly interacted with the FAA, for a four-year period, Cuba is not included on the publicly available IASA program summary listing, in accordance with standard FAA procedures. Before Cuba can be rated in the IASA program, a full reassessment of its aviation safety oversight must be conducted by the FAA.

[7] 49 U.S.C. 41309(b). Further, in accordance with 49 U.S.C. 41308(b), if it is determined that competition would not be reduced or eliminated, the DOT must approve the proposed agreement. If it is determined that competition would be adversely affected, but the DOT finds that (1) the arrangement is nevertheless necessary to meet a serious transportation need or to achieve important public benefits, including US foreign policy goals, and (2) those public benefits cannot be met or achieved by reasonably available and materially less anticompetitive alternatives, the DOT must approve the agreement.

[8] The DOT, the FAA, the Department of Defense, the Anti-trust division of the Department of Justice and any other US agency the DOT deems necessary must be served, in addition to the other carriers. 14 C.F.R. 212.10(d)(6). See also, Code-Share Safety Program Guidelines, infra at n. 5.

Article By Jane M. Cavanaugh, Stewart B. Herman & Timothy J. Lynes of Katten Muchin Rosenman LLP

©2016 Katten Muchin Rosenman LLP

United States Expands Sanctions in Response to Activities in Ukraine, Names First SDNs (Specially Designated Nationals)

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Early March 18, 2014, President Obama signed an Executive Order (E.O.) expanding on E.O. 13660, which was issued on March 10, 2014.  In addition to naming specific persons subject to the restrictions of E.O. 13660, including former Ukrainian President Viktor Yanukovych, the new E.O. expands the sanctions previously announced in response to recent actions of the Government of the Russian Federation in Crimea to include any person who is determined to:

  • Be an official of the Government of the Russian Federation;
  • Operate in the arms or related materiel in the Russian Federation;
  • Be owned or controlled by, or to have acted or purported to act for or on behalf of, directly of indirectly:
    • a senior official of the Government of the Russian Federation; or
    • a person whose property and interests in property are blocked pursuant to this order; or
  • Have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of:
    • a senior official of the Government of the Russian Federation; or
    • a person whose property and interests in property are blocked pursuant to this order.

Effective immediately, all property and interests in property that are in the control of U.S. persons (including foreign branches) will be blocked, and subject persons will be prohibited from entry to the United States.  The complete list of blocked persons is available here.

As the situation in Ukraine continues to unfold and sanctions are expanded, U.S. companies should be particularly cautious in screening transactions in the region and maintaining records.  In addition, companies with affiliates in the European Union should be mindful of changes to EU sanctions that could impact business in the region.

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