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On August 30, the U.S. Court of Appeals for the Second Circuit held that a district court did not err in denying an investment firm’s motion to hold a group of Chinese banks in contempt for failure to implement certain asset restraints. According to the opinion, in 2015, an athletic apparel corporation and one of its subsidiaries won a more than $1 billion default judgment against hundreds of participants in several Chinese counterfeiting networks (counterfeiters). The judgment enjoined the counterfeiters “and all persons acting in concert or in participation with any of them . . . from transferring, withdrawing or disposing of any money or other assets into or out of [the counterfeiters’ accounts] regardless of whether such money or assets are held in the U.S. or abroad.” The investment firm (the corporation’s successor-in-interest) moved to hold the Chinese banks in contempt for failing to implement the asset restraints and asked the district court to impose a $150 million penalty, claiming, among other things, that the Chinese banks allowed the counterfeiters to transfer more than $32 million from their accounts after the Chinese banks were informed of the asset restraints. The investment firm further claimed that the Chinese banks also failed to produce documents during discovery. The district court denied the motion.
In agreeing with the district court, the 2nd Circuit concluded that (i) until the contempt motion was filed, the corporation and the investment firm never sought to enforce the asset restraints against the Chinese banks; (ii) “there is a fair ground of doubt as to whether, in light of New York’s separate entity rule and principles of international comity, the orders could reach assets held at foreign bank branches”; (iii) “there is a fair ground of doubt as to whether the [b]anks’ activities amounted to ‘active concert or participation’ in Defendants’ violation of the asset restraints that could be enjoined under Federal 16 Rule of Civil Procedure 65(d)”; and (iv) the investment firm failed to provide clear and convincing evidence of a discovery violation.
On August 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a roughly $2.3 million settlement with a UK subsidiary of a Chinese financial institution for allegedly processing transactions in violation of the Sudanese Sanctions Regulations, “which prohibited the exportation, directly or indirectly, to Sudan of any goods, technology, or services from the United States.” According to OFAC’s web notice, between September 2014 and February 2016, the bank processed 111 commercial transactions totaling more than $40 million through U.S. correspondent banks on behalf of parties in Sudan. In conducting a lookback review to identify potential Sudan-related transactions, the bank identified two customers who processed transactions through the U.S. financial system. For both of these customers, the bank’s internal customer database did not reference Sudan in the name or address fields, and messages processed on behalf of these customers by the bank through U.S. banks also failed to include any references to Sudan.
In arriving at the settlement amount, OFAC considered various aggravating factors, including, among other things, that (i) the bank demonstrated reckless disregard for U.S. sanctions regulations by processing the transactions “despite having account and transactional information indicating the Sudanese connection to the accounts and in contravention of the bank’s existing policies and procedures”; (ii) certain bank personnel responsible for processing the transactions knew that the payments were related to entities in Sudan; (iii) the bank conferred economic benefit to a comprehensively sanctioned country; and (iv) the bank “is a commercially sophisticated financial institution that processes transactions internationally.”
OFAC also considered various mitigating factors, including, among other things, that the bank (i) has not received a penalty notice from OFAC in the preceding five years; (ii) self-identified the alleged violations, cooperated with OFAC’s investigation, conducted a lookback, and entered into a tolling agreement; and (iii) has undertaken remedial measures, including enhancing policies and procedures to improve compliance with U.S. sanctions when processing payments through the U.S.
On July 30, SEC Chair Gary Gensler issued a statement instructing staff to seek certain disclosures from China-based operating companies and offshore issuers associated with such companies before their registration statements can be declared effective. Gensler explained that the Chinese government recently provided “new guidance to and placed restrictions on China-based companies raising capital offshore, including through associated offshore shell companies.” This is relevant to U.S. investors, Gensler stated, because a number of Chinese sectors restrict companies from having foreign ownership and prohibit them from listing on exchanges outside of China.
In order to bypass these restrictions, many China-based operating companies are structured as Variable Interest Entities (VIEs), where they establish an offshore shell company in another jurisdiction, such as the Cayman Islands, to issue stock to public shareholders, Gensler said. He expressed concerns that the average U.S. investor “may not realize that they hold stock in a shell company rather than a China-based operating company,” where the investors’ “exposure” to the Chinese company is derived only through a series of contracts between the shell and the operating company, with neither the investor nor the shell company holding any equity in the Chinese company itself.
In light of the overall risks associated with the China-based VIE structure, Gensler asked staff to ensure that offshore issuers associated with China-based operating companies prominently and clearly disclose (i) that investors are buying shares of a shell company issuer; (ii) that “investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements”; and (iii) the financial relationship between the VIE and the issuer. In addition, for all China-based operating companies seeking to register securities with the SEC (either directly or through a shell company), Gensler asked staff to ensure these companies disclose, among other things, whether the company and the issuer received permission from Chinese authorities to be listed on U.S. exchanges, as well as the risk that an approval could be denied or rescinded. Gensler further noted that China-based operating companies may be delisted in the future if the Public Company Accounting Oversight Board is unable to inspect an issuer’s public accounting firm within three years, as required by the Holding Foreign Companies Accountable Act.
On July 16, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), along with the Departments of State, Treasury, Commerce, and Homeland Security, issued an advisory on the risks associated with actions carried out by the Government of the People’s Republic of China and the Government (PRC) of the Hong Kong Special Administrative Region (SAR) that may impact U.S. companies operating in the Hong Kong SAR of the People’s Republic of China. The advisory divides risks into four categories: (i) risks for businesses following the imposition of the NSL; (ii) data privacy risks; (iii) risks regarding transparency and access to critical business information; and (iv) risks for businesses with exposure to sanctioned Hong Kong or PRC entities or individuals. As previously covered by InfoBytes, OFAC issued regulations implementing Executive Order (E.O.) 13936 issued last July. E.O. 13936, among other things, targets and authorizes the imposition of sanctions on persons who materially assist, sponsor, or provide financial, material, or technological support to activities contributing to the undermining of Hong Kong’s democracy and autonomy (covered by InfoBytes here). In addition to the advisory, OFAC added several individuals and entities to its Specially Designated Nationals List.
On July 13, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), along with the Departments of State, Commerce, Homeland Security, and Labor, as well as the Office of the U.S. Trade Representative, issued an updated advisory on the risks for businesses with possible exposure in their supply chain to entities involved in human rights abuses in the Xinjiang Region. The recent advisory updates the original version released in July 2020 (covered by InfoBytes here), which was issued after OFAC announced sanctions pursuant to Executive Order 13818 against a Chinese government entity and four current or former government officials for alleged corruption violations of the Global Magnitsky Human Rights Accountability Act. The updated advisory outlines risks to be considered when “assessing business partnerships with, investing in, sourcing from, or providing other support to companies operating in Xinjiang, linked to Xinjiang, or with laborers from Xinjiang.”
President Biden issues executive order prohibiting securities investments in Chinese military companies
On June 3, President Biden issued an Executive Order (E.O.) on “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” The E.O. takes additional steps pursuant to the national emergency declared pursuant to E.O. 13959 (covered by Infobytes here), including the threat posed by the military-industrial complex of the People’s Republic of China (PRC) and “its involvement in military, intelligence, and security research and development programs, and weapons and related equipment production under the PRC’s Military-Civil Fusion strategy.” The E.O. generally prohibits U.S. persons from “the purchase or sale of any publicly traded securities, or any securities that are derivative of such securities, or are designed to provide investment exposure to such securities, of” any listed Chinese military company. The E.O. also establishes the deadlines for divestment of investments in companies currently listed as Chinese military companies as well as companies that later may be added to the list of Chinese military.
Among other things, the prohibitions apply “except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and not withstanding any contract entered into or any license or permit granted before the date of the order.” The E.O. also prohibits any transactions by U.S. persons or within the U.S. that evade or avoid, have the purpose of evading or avoiding, cause a violation of, or attempt to violate the provisions set forth in the order, as well as any conspiracy to violate any of these prohibitions. Additionally, the Treasury Secretary—after consulting with heads of other executive departments as deemed appropriate—is authorized to take actions, including promulgating rules and regulations, to carry out the purposes of the E.O.
OFAC also published eight new FAQs and seven updated FAQs regarding the new E.O. In addition, several names and entities have been added to OFAC’s Non-SDN Chinese Military-Industrial Complex Companies List.
On May 18, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued General License (GL) 1B, “Authorizing Transactions Involving Securities of Certain Communist Chinese Military Companies.” GL 1B authorizes through June 11 (9:30 a.m. eastern daylight time) certain transactions and activities that involve “publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of an entity whose name closely matches, but does not exactly match, the name of a Communist Chinese military company as defined by section 4(a) of E.O. 13959.” However, GL 1B does not authorize “[a]ny transactions or activities involving publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities of entities identified in the Office of Foreign Assets Control’s Non-SDN Communist Chinese Military Companies List (NS-CCMC List) pursuant to section 4(a)(iii) of E.O. 13959, as amended, as a subsidiary of a person determined to be a Communist Chinese military company, including entities added to the NS-CCMC List on January 8, 2021.” GL 1B immediately replaces and supersedes GL 1A, dated January 26.
On May 6, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published FAQ 893 clarifying that prohibitions under Executive Order (E.O.) 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies,” do not apply to a previously listed company. Specifically, OFAC explained that following a May 5 court order preliminarily enjoining the implementation of E.O. 13959 against the company, the E.O.’s prohibitions will not apply pending further order of the court.
On March 22, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13818 against two current Chinese government officials for alleged corruption violations of the Global Magnitsky Human Rights Accountability Act. According to OFAC, the sanctioned persons are connected to serious human rights abuse against ethnic minorities, including Uyghurs, in the Xinjiang region. The sanctions follow previous OFAC designations taken against several other Chinese government entities and current or former government officials for similar corruption violations (covered by InfoBytes here and here). As a result of the sanctions, all property and interests in property belonging to the sanctioned persons, and “any entities that are owned, directly or indirectly, 50 percent or more” by them, subject to U.S. jurisdiction are blocked and must be reported to OFAC. OFAC notes that its regulations generally prohibit U.S. persons from participating in transactions with these persons, which includes “the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods or services from any such person.”
On March 17, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) added several Chinese citizens and Hong Kong nationals to the Specially Designated Nationals List. The individuals were designated under Executive Order (E.O.) 13936, which, among other things, authorizes the imposition of sanctions on persons who are determined to be responsible for or complicit in actions or policies that threaten the peace, security, stability, or autonomy of Hong Kong. Under E.O. 13936, “[a]ll property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, . . .are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in” with any foreign person identified to have engaged in the aforementioned activities.
- Daniel R. Alonso to discuss internal investigations at the Institute of Internal Auditors of Argentina Spanish-language webinar
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel R. Alonso to discuss anti-money-laundering at FELABAN Spanish-language webinar “Perspective for banks: LAFT, FINCEN, OFAC, Cryptocurrency”
- Daniel R. Alonso to discuss "What’s new in BSA/AML compliance?" at the Institute of International Bankers Regulatory Compliance Seminar
- Marshall T. Bell and John R. Coleman to speak at 2021 AFSA Annual Meeting
- Jon David D. Langlois to discuss "Regulatory update: What you need to know under the new boss; It won’t be the same as the old boss" at the IMN Residential Mortgage Service Rights Forum (East)
- Benjamin B. Klubes to discuss “Creating a Fantastic Workplace Culture”
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek