By George W. Thompson
Notwithstanding the substantial expansion of authorized trade with Cuba, the United States continues to enforce the embargo on unauthorized trade. The Office of Foreign Assets Control (OFAC) recently issued two penalty notices, involving both U.S. and foreign companies. Although the penalized activities took place before the trade liberalization measures that commenced in December 2014, they do provide guidance on complying with the restrictions that remain in place.
The first case involves CGG Services S.A. (CGG), a French corporation, and affiliated companies in the United States and abroad. Their infraction was to “provide spare parts and other equipment” to vessels operating “in Cuba’s territorial waters”. Exports were made directly from the U.S., as well as from France of U.S.-origin items. Additionally, a Venezuelan subsidiary of the U.S. company performed analyses of seismic data, apparently on behalf of a Cuban enterprise. These activities occurred in 2010 and 2011 and resulted in a penalty of $614,250.
A Trifecta of Violations
The facts described by OFAC indicate three separate types of violations. First, the U.S. affiliate exported goods directly to “Cuba”, in the form of the vessel operating in Cuban waters. “Persons subject to the jurisdiction of the United States”, as that term is defined in the Cuban Assets Control Regulations, are prohibited from exporting to Cuba.
Second, the Venezuelan subsidiary provided services for a Cuban company’s benefit. Since that subsidiary apparently was owned or controlled by CGG’s U.S. affiliate, it too is a “person subject to the jurisdiction of the United States” and subject to the export prohibition.
Third, CGG violated the prohibition on exporting U.S.-origin goods from third countries to Cuba. Even though it is not a “person subject to the jurisdiction of the United States”, the merchandise it shipped constituted property within the scope of OFAC’s coverage.
Without additional facts, I won’t venture an opinion on whether any of the penalized transactions would be permissible under the recent embargo changes. Regardless, they provide continuing lessons even under today’s regulations: U.S. companies and their foreign subsidiaries cannot engage in unauthorized trade with Cuba, nor may U.S.-origin goods be exported there from a third country outside the bounds permitted by OFAC.
Another Screening Fail
The second case involves two Cayman Islands subsidiaries of U.S. company Halliburton Energy Services, Inc., which “exported goods and services in support of oil and gas exploration and drilling activities within the Cabinda Onshore South Block oil concession . . . in Angola” that in turn was operated by a consortium of companies. On its face, this would not appear to implicate the Cuban sanctions. The tie-in is that a Cuban petroleum company held a 5 percent ownership interest in the Cabinda concession’s output through its participation in the operating consortium.
The two subsidiaries invoiced the consortium and received payment. As OFAC saw it, they “knew or should have known they were dealing in property in which” Cuba “had an interest.” The reason? The Cuban ownership stake was stated in documents they had received but apparently failed to review. OFAC termed this as “reckless disregard” of the Cuban sanctions, based on a failure to conduct “reasonable due diligence” by “sophisticated entities” with experience in international trade.
Halliburton was socked with a penalty of $304,706, even though it disclosed the violations to OFAC.
This case provides another variation of the “know your customer” rule that we discussed previously. It highlights the point that foreign and domestic enterprises subject to U.S. sanctions regulations cannot assume that screening only their customer’s name against the Specially Designated Nationals List constitutes a sufficient compliance measure. Additionally, they must determine whether a seemingly innocuous customer has ties to an entity with which a direct transaction is prohibited.
