Compliance considerations for doing business in Sudan

The lifting of sanctions against Sudan that took effect last week provides U.S. companies with significant new business opportunities in the country, but be warned: Significant compliance risk remains.

Effective as of Oct. 12, the U.S. Department of State conditionally lifted the Sudan Sanctions Regulations (SSR), authorizing all transactions that had previously been prohibited under the SSR, including transactions involving property in which the Government of Sudan has an interest.

The lifting of the sanctions follows a State Department report, issued on Oct. 7, which concluded that the government of Sudan has met the conditions imposed by Executive Order 13761 that former President Obama issued earlier this year. That order called for the SSR to be terminated in July 2017, provided that the Sudanese government continued to sustain certain positive actions. President Trump kept the sanctions in place and extended the review period for an additional three months.

In its report, the State Department concluded that the Sudanese government had made positive progress in five key areas:

Maintaining a cessation of hostilities in Darfur and two other conflict areas;

Improving humanitarian access throughout Sudan;

Maintaining its cooperation with the United States on the conflict in South Sudan;

Countering the Lord’s Resistance Army; and

Addressing the threat of terrorism.

The State Department’s report further praised the Sudanese government for its commitment to fully implement United Nations sanctions against North Korea, following reports that Sudan had officially halted its arms deals with North Korea.

Although the SSR has been wiped off the books, sanctions imposed on Sudan by other U.S. regulatory bodies remain. These exceptions can pose a compliance risk if U.S. companies do not continue to practice proper due diligence and take a proper risk-based approach.

U.S. companies must keep in mind the following important compliance considerations when entering the market of Sudan:

Firstly, Sudan remains on the “State Sponsors of Terrorism” list. Thus, stringent restrictions remain on the export and reexport of many U.S.-origin goods to Sudan subject to the Export Administration Regulations (EAR), enforced by the U.S. Commerce Department’s Bureau of Industry and Security (BIS).

The BIS requires a license to export or re-export most items on the Commerce Control List to Sudan. Applications to export or reexport items to military end users or for military end use in Sudan are generally denied, in addition to certain specified items—such as chemical and biological weapons and other items controlled for national security or anti-terrorism reasons. Additionally, applications for items destined to a sensitive end user—such as the Sudanese military, police or intelligence services—also continue to be reviewed under a presumption of denial.

“Apparent sanctions violations are analyzed in light of the laws and regulations that were in place at the time of the underlying activities, and civil and criminal enforcement authorities are applied accordingly.”
OFAC

There are certain exceptions. In January 2017, BIS issued a final rule amending EAR to establish a favorable license policy for the exports or reexports to Sudan that are intended to ensure the safety of civil aviation or the safe operation of fixed-wing, commercial passenger aircraft, along with certain items related to railroads in Sudan. “Such applications will now be reviewed under a general policy of approval rather than a general policy of denial,” the final rule states.

From a compliance standpoint, U.S. or non-U.S. companies should first determine whether they are exporting or reexporting products subject to the EAR and, thus, subject to license requirements by BIS. “You have to carefully consider whether you’re dealing in an item subject to U.S. jurisdiction. If so, what is its classification? Is it controlled? If it’s controlled, then the regime remains highly restrictive,” says Bart McMillan, a partner at law firm Baker & McKenzie.

Furthermore, contracts concerning items on the Commerce Control list, subject to U.N. embargoes or on the U.S. Munitions List, should be written up accordingly. “If you are thinking of selling those types of products, you want to make sure that you condition your contract of sale with the Sudanese party on your ability to get a license to export that product,” says Barbara Linney, a member in the International Department at law firm Miller & Chevalier.

Another contractual hurdle posed by the lifting of the Sudan sanctions are loan agreements, because they often include warranties related to sanctions, says Anthony Rapa, of counsel at law firm Steptoe. Many of the bank warranties pertaining to the Sudan sanctions that have been in place for 20 years still refer to Sudan as an embargoed country.

“Banks are extremely risk-adverse when it comes to sanctions,” Rapa says. Thus, it’s going to take time for banks to get comfortable with the fact that Sudan is no longer a sanctioned country, he says.

HOW SUDAN SANCTIONS WILL CHANGE

How will sanctions with respect to Sudan and the Government of Sudan change on October 12, 2017?
Effective October 12, 2017, sections 1 and 2 of Executive Order (E.O.) 13067 of November 3, 1997 and all of E.O. 13412 of October 13, 2006 will be revoked, pursuant to E.O. 13761 of January 13, 2017, as amended by E.O. 13804 of July 11, 2017. Sections 1 and 2 of E.O. 13067 and E.O. 13412 block the property of the Government of Sudan and generally prohibit U.S. persons from engaging in transactions with Sudan and the Government of Sudan.
As a result of the revocation of these sanctions provisions, effective October 12, 2017, U.S. persons will no longer be prohibited from engaging in transactions that were previously prohibited under the Sudanese Sanctions Regulations, 31 C.F.R. part 538 (SSR). Consistent with the revocation of these sanctions provisions, OFAC expects to remove the SSR from the C.F.R. Pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), an OFAC license is still required for certain exports and reexports to Sudan ofagricultural commodities, medicine, and medical devices as a result of Sudan’s inclusion on the State Sponsors of Terrorism List (SST List). However, these exports and reexports are generally licensed by OFAC.
U.S. persons and non-U.S. persons will still need to obtain any licenses required by the Department of Commerce’s Bureau of Industry and Security (BIS) to export or reexport to Sudan certain items (commodities, software, and technology) that are on the Commerce Control List (CCL), Supp. No. 1 to part 774 of the Export Administration Regulations, 15 C.F.R. parts 730-774 (EAR).
In limited circumstances, U.S. persons and non-U.S. persons may also need to obtain licenses from BIS to export or reexport to Sudan items that are subject to the EAR but not specifically listed on the CCL (“EAR99” items) if such transactions implicate certain end-use or end-user concerns (see 15 C.F.R. part 744). [10-06-2017].
Source: OFAC FAQs

U.S. companies looking to do business with Sudan should re-examine their loan agreements with banks to see if or whether they can be renegotiated. “If necessary, they may want to seek to amend the agreements to get permission to do business with Sudan,” Rapa says.

A second sanctions compliance consideration pertains to activities involving items subject to the EAR that may have been illegally exported or reexported to Sudan before the SSR was lifted. These so-called “installed base” items pose a compliance risk and are something to be aware of every time sanctions are lifted or relaxed against a country, McMillan says.

It’s not just items for current and future transactions that require due diligence, but also items already in the country that are subject to U.S. jurisdiction, McMillan adds. For those installed base items in Sudan, one question sanctions compliance officers need to assess is, “Did they get there legally?” McMillan says. If the answer to that question is “no,” if they did not obtain the necessary license, “in that situation, you may need to go to U.S. export control authorities before you proceed,” he says.

Because Sudan remains a State Sponsor of Terrorism, the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA) still requires an OFAC license for certain exports and reexports to Sudan of agricultural commodities, medicine, and medical devices. Thus, OFAC has issued General License A to authorize these exports and reexports of TSRA items, which must be shipped within 12 months of the date on which the relevant contract is signed.

In addition to EAR, Sudan also remains subject to the International Traffic in Arms Regulations under Section 126.1. Importantly, this means there remains in place a general policy of denial regarding the export and re-export of any defense article or defense service, with very limited exceptions pertaining to peacekeeping and humanitarian operations.

Finally, Sudan remains subject to OFAC sanctions related to Darfur and South Sudan. Thus, U.S. companies are still prohibited from engaging in dealings with Specially Designated Nationals (SDNs) listed under the [DARFUR] and [SOUTH SUDAN] tags under OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List), or terrorism-related activities under the [SDGT] tag on the SDN List.

At present, seven individuals and one entity are listed as SDNs relating to the Darfur conflict, and another nine individuals and three entities are listed as SDNs relating to South Sudan. U.S. companies that wish to engage in transactions with Sudan should carefully screen for the names of individuals and entities against OFAC’s SDN list to avoid running afoul of U.S. sanctions that remain in place.

In addition to screening against the SDN list, U.S. companies must also ensure compliance with OFAC’s 50 percent rule. That rule states that “any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person.”

OFAC’s 50 percent rule effectively means that sanctions compliance officers must not only screen against those on the SDN list, but conduct further due diligence to identify their beneficial owners. “Companies ought to be doing their ordinary due-diligence checks and sanctions screening and denied-persons screening,” Rapa says.

U.S. companies further should be aware that neither suspension of sanctions under the January 2017 general license nor revocation of the sanctions on Oct. 12 will have any effect whatsoever on past, present, or future OFAC enforcement investigations or actions for SSR violations.

“Apparent sanctions violations are analyzed in light of the laws and regulations that were in place at the time of the underlying activities, and civil and criminal enforcement authorities are applied accordingly,” OFAC stated.

Thus, OFAC’s general recordkeeping and reporting obligations continue to apply. Companies that conduct transactions with Sudan under these general licenses should keep records that clearly demonstrate compliance with the terms of the licenses, should OFAC initiate an investigation for past conduct.

Finally, it’s important to keep in mind that sanction risk is just one compliance risk in Sudan; bribery and corruption risk should also be given significant consideration. In Transparency International’s 2017 Corruption Perceptions Index, Sudan ranked at the bottom (170th out of 176 countries), with a low score of 14 out of a possible 100, indicating a high risk of corruption.