Originally published by the Journal of Commerce in June 2017
Even in the current environment, there remains massive confusion about what is and is not permitted under U.S. law when it comes to trading with Cuba and Iran. The President is expected in the next few days to reverse some of the openings created by President Obama regarding Cuba, but American exporters are still not clear. They think trade with Cuba is permitted. They think trade with Iran is permitted. It is not, expect in very limited circumstances. Nonetheless, at a time when so much of the focus by international compliance professionals is on the import side, export issues should not get lost in the shuffle.
Clearly, there is much well-deserved attention to what is hoped to be the soon to occur final roll-out of the originally planned Automated Commercial Environment or ACE features. Even so, questions abound regarding what features/upgrades will follow and how long they will take to reach implementation.
In the produce industry, compliance professionals are still yanking their hair out in clumps while continuing to sort out the newly effective Foreign Supplier Verification Program (“FSVP”) which took effect on May 30, 2017. Is their food subject to the Preventive Control regulations? The Produce Safety rule? How do they interact with their recalcitrant supply chain partners? How long will “UNK” be accepted before FDA and CBP cut off that option as evidence of non-compliance?
It remains a surprise that, with all the effort made by the customs brokers to get their importers ready, our firm is still receiving calls from food importers who do not understand the difference between importer of record for entry purposes and FSVP importer of record. Perhaps even more concerning are calls from those food importers who have not taken the first step to implement the new requirements!
Even though much on the FDA website is confusing, one thing FDA has done well is its efforts surrounding FSVP implementation. Here is a link to a graphic depiction the agency has published about which products are subject to the FSVP rules and the relevant timelines – https://www.fda.gov/downloads/Food/GuidanceRegulation/FSMA/UCM472461.pdf. Further compounding the confusion is the Produce Safety rule which deals with the controls that apply to raw agricultural products. The Produce Safety rule itself seems relatively straight forward, but questions abound here, too, when it comes to how to define something that is not a raw agricultural product. For example, if one freezes berries and then imports them, are those berries subject to the FSVP or the Produce Safety Rule?
Just as with the FSVP rules, the Produce Safety Rule also includes exceptions:
1) Produce that is not a raw agricultural commodity (A raw agricultural commodity is any food in its raw or natural state);
2) Commodities that FDA has identified as rarely consumed raw: asparagus; black beans, great Northern beans, kidney beans, lima beans, navy beans, and pinto beans; garden beets (roots and tops) and sugar beets; cashews; sour cherries; chickpeas; cocoa beans; coffee beans; collards; sweet corn; cranberries; dates; dill (seeds and weed); eggplants; figs; horseradish; hazelnuts; lentils; okra; peanuts; pecans; peppermint; potatoes; pumpkins; winter squash; sweet potatoes; and water chestnuts;
3) Food grains, including barley, dent- or flint-corn, sorghum, oats, rice, rye, wheat, amaranth, quinoa, buckwheat, and oilseeds (e.g., cotton seed, flax seed, rapeseed, soybean, and sunflower seed);
4) Produce that is used for personal or on-farm consumption; and
5) Farms that have an average annual value of produce sold during the previous three-year period of $25,000 or less.
In the midst of this somewhat understandable chaos, OFAC has announced imposition of an $87,255 fine on American Honda Finance Corp. (“AHFC”) for violations of the Cuba sanctions. Troublingly, OFAC’s published explanation only leads one to scratch one’s head.
There were 13 vehicle leases approved by Honda Canada Finance Inc. (“HCFI”), a majority-owned Canadian affiliate of AHFC. The problem transactions involved vehicles leased in Canada by unaffiliated Honda dealerships to the Cuban embassy, which were financed by HCFI!
There are two interesting facts stated in the press release which perhaps shed some light on why things came out as they did, but you decide. First, both HCFA and AHFC has policies and procedures in place to properly screen, despite being advised the Cuban embassy in Ottawa was the lessee, those screening programs did not include “Cuba” or any other country name as a possible red flag. Second, AHFC filed a voluntary disclosure. Nowhere in its press release does OFAC explain what violation(s) it was AHFC disclosed, so exactly why the Canadian blocking statute – the Foreign Extraterritorial Measures Act – was not a total defense remains a mystery. The total value of the leases was $276,999. The ultimate fine, as noted, was $87,255.
On a more positive note, OFAC did articulate both aggravating and mitigating factors which serve as a reminder to international traders of what is important when it comes to penalty calculations.
The aggravating factors were:
– AHFC had reason to know about the conduct that led to the alleged violations, especially those leases which occurred after its voluntary self-disclosure was filed;
– HCFI personnel “seemed to have actual knowledge” of the Cuban Embassy’s involvement with the leases;
– AHFC is a “large and commercially sophisticated financial institution; and
– Of course, the alleged violations resulted in “harm to U.S. sanctions program objectives”.
When it came to mitigating factors, OFAC noted:
– AHFC had not receive a penalty notice or other finding of violation in the past five (5) years;
– AHFC took remedial action, including implementing a new compliance policy;
– AHFC cooperated with the investigation by voluntarily self-disclosing, providing “detailed and well-organized” information in a “timely and efficient manner”, and by signing a tolling agreement and thereby extending the statute of limitations; and
– Most mysteriously – OFAC issued a specific license to AHFC in June 2015 regarding “the subject leases”!
Proving once again that OFAC lives in its own rarified world – it found AHFC had violated the law, imposed a fine and issued a license, all in one breath – and all regarding the same transactions! How are international trader supposed to understand that sequence of events? No wonder there is a confusion about trading with Cuba or Iran!