The 2018 FIFA World Cup, which just concluded, is celebrated by some as the best World Cup in terms of its administrative and entertainment value. It is worth reflecting on what this event can teach consumers and participants alike about the complexities of complying with the U.S. sanctions regimes.1
U.S. Sanctions Regime and the 50 Percent Rule
Governments typically impose economic sanctions to alter the strategic decisions of states and nonstate actors that threaten their interests or violate international norms.
In the United States, the Department of Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals.
Essentially, there are two types of economic sanction programs:
1) Primary sanctions, which can either be country or sectoral based, and which prohibit U.S. persons from engaging in virtually all activities and transactions with a certain geographical area, business sectors of a certain country, or those persons listed on the OFAC’s Specially Designated National (SDN) list; and
2) Secondary sanctions, which target third country persons doing business with a sanctioned geographical area, business sectors, or persons listed on the SDN list.
Although compliance with OFAC’s primary and secondary sanction regimes appear simple at an initial glance, the burden of compliance is quite daunting if the potential business partner not listed on the SDN list are considered blocked because they are owned by persons on the SDN list.
Under these circumstances, OFAC applies an agency rule – the 50 Percent Rule – to determine whether those persons would be blocked under U.S. sanction regime.
Ngosong Fonkem, West Virginia University College of Law 2011 (JD, MBA) and Tulane Law School 2012 (LLM), is a senior advisor at Addison-Clifton LLC, Milwaukee, where he assists U.S. and foreign companies with day-to-day compliance with U.S. trade laws and related audits, investigations, intervention, and civil enforcement proceedings, and with conducting business in Asia.
Under this rule, U.S. businesses are required to determine whether any potential transaction involves persons, owned 50 percent or more by a blocked person, even if the blocked person itself is not otherwise involved in the transaction.2
Further, the rule applies whether the ownership is individual or in the aggregate, directly or indirectly.3
Penalties for Sanction Violations
The fines for sanctions violations are substantial, and in many cases, civil and criminal penalties can exceed several million dollars.
Civil penalties typically vary by sanctions program, and the amounts are adjusted annually.4
Recent OFAC enforcement cases illustrates that even non-U.S. companies that do business with sanctioned persons, whether transacting with a listed person directly or using U.S. payments system face significant risks of being subjected to U.S. sanction law.5
U.S. Sanction’s Impact on the 2018 FIFA World Cup
In the context of a major global sporting event like the FIFA World Cup, what constitute as compliance with U.S. sanctions is difficult to determine, because the law is not clear whether visiting fans, the teams, and or entities that transact with a sanctioned host nation, or sanctioned persons involved with the organizations of an international sporting events, are exempt from sanction compliance during the period of time that the event is in effect.
Furthermore, the law is not clear regarding whether participating teams and fans from sanctioned jurisdictions are exempt during the event.
These uncertainties are a business and legal risk not only for impacted U.S., but also foreign persons, and it added complexities to the alluring pull of the World Cup. Some seminar examples evidencing these difficulties, and efforts made by impacted companies and teams to comply with U.S. sanction laws were presented at the recent 2018 FIFA World Cup in Russia, the host nation currently under severe U.S. economic sanctions.
Specifically, eight of the main airports used by the teams, airlines, and tourists traveling to and from the host cities are owned directly or indirectly by 13 Russian individuals and firms listed on the SDN list.
Compliance with U.S. sanctions and efforts made to avoid transacting with these persons provided key challenges – as was evident by the Scandinavian Airline, SAS, that reportedly went to great lengths to assess the potential impact of U.S. sanctions on it plans to fly the Danish National Team to and from an airport owned by a listed firm.6
Not only were airlines impacted by U.S. sanctions, but also participating teams and players.
The Iranian National team faced sponsorship difficulties when Nike pulled out of its agreement to supply the team with soccer shoes two weeks prior to the commencement of the World Cup due to President Donald Trump’s decision to pull out of the Joint Comprehensive Plan of Action (JCPOA) and to reimpose economic sanctions on the Iranian Republic.7
Similarly, and as a result of being added to the SDN list in 2017, U.S. businesses and banks actively avoided engaging with Rafael Márquez, a Mexican national team soccer player. This created some challenges between World Cup advertisers, sponsors, partners, and the Mexican national team.
Some of the controls implemented to avoid direct contact with Rafael Márquez involved prohibiting him from transacting with any American company while on team duties – although the rest of the Mexican team could wear sponsored shoes and clothing, drink branded beverages, and remained in the running to be named “Budweiser Player of the Game.”8 Márquez further agreed not to be paid for playing in the games, despite the team’s payment purposely being routed through non-U.S. banks.9
Compliance with U.S. Sanctions
The abundance of caution and efforts taken by impacted teams, companies, and FIFA itself during the World Cup illustrates the efforts made by these companies and teams to comply with the extraterritorial arm of the U.S. sanction laws.
Notwithstanding the lack of clarity in the law as it relates to sanctions compliance associated with global sporting events, and although most businesses or persons do not have the resources to uncover the ownership structures of their potential business partners so as to avoid running afoul of U.S. sanctions regulation, they nonetheless need to have controls and procedures in place to monitor and manage foreseeable compliance risks.
These scenarios illustrate how powerful the long arm of U.S. sanctions is, and why U.S. and foreign companies alike need to make sanctions compliance a priority.
1 50 U.S.C. Section 1701(a).
2 See Basic Information on OFAC and Sanctions, U.S. Treasury.
3 Id. Example 3 from the FAQ provides, “Blocked Person X owns 50 percent of Entity A and 10 percent of Entity B. Entity A also owns 40 percent of Entity B. Entity B is considered to be blocked. This is so because, through its 50 percent ownership of Entity A, Blocked Person X is considered to indirectly own 40 percent of Entity B. When added to Blocked Person X's direct 10 percent ownership of Entity B, Blocked Person X's total ownership (direct and indirect) of Entity B is 50 percent. Entity B is also blocked due to the 50 percent aggregate ownership by Blocked Person X and Entity A, which are themselves both blocked persons.”
4 Electronic Code of Federal Regulations.
5 On July 27, 2017, OFAC announced a $12 million settlement with a Singaporean company, CSE Global Limited and its subsidiary, CSE TransTel Pte. Ltd. TransTel violated U.S. sanctions by using its U.S. dollar account at a Singapore based bank to make over $11 million in payments to various third-party vendors that included several Iranian companies providing goods and services to multiple Iranian contracts. OFAC claimed jurisdiction over these payments because they were processed through the U.S. financial system (using U.S. dollars) and caused multiple financial institutions to violate U.S. sanctions by participating in the illegal exportation of financial services. Also, recently, the U.S. Department of Commerce banned American companies from selling components to Chinese telecom equipment maker ZTE Corp for seven years after ZTE was found to have illegally shipped goods to Iran, in violation of the Iran Sanctions.
6 The Swiss International Air Lines also said in April it was aware of the issue and was examining its scope. Switzerland’s national team base was Togliatti, near the airport of the World Cup host city of Samara. See also U.S. sanctions cause air travel headaches for Russia's World Cup, Reuters.com, April 11, 2018.
7 Nike withdraws Iran World Cup squad's supply of boots due to sanctions, ESPN.com, June 11, 2018.
8 Mexico’s World Cup Captain Is on a U.S. Blacklist, New York Times, June 18, 2018.