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New Enforcement Guidelines for Violations of U.S. Economic Sanctions Laws are Latest Indication of Aggressive Enforcement by the Office of Foreign Assets Control

November 29, 2009

 

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), which is in charge of administering and enforcing the U.S. economic sanctions laws, has published new Economic Sanctions Enforcement Guidelines ("Enforcement Guidelines") that are intended to implement the vastly increased penalties that went into effect in late 2007. At that time, the maximum civil penalties for most economic sanctions programs were increased five-fold from $50,000 to $250,000 for each violation. As one might expect, criminal fines are significantly higher – up to $1,000,000, with up to 20 years imprisonment for individuals. Companies that violate U.S. economic sanctions laws are thus subject to potentially significant civil and criminal penalties.

OFAC has been steadily building its enforcement team as part of a more aggressive enforcement effort that has emerged in the post-9/11 environment. In parallel, the Department of Justice (“DOJ”) has sharpened its focus on violations of U.S. economic sanctions laws as part of its broader Export Enforcement Initiative. One major focus of both OFAC and the DOJ has been financial institutions, including non-U.S. banks that do business with U.S. firms. OFAC has also focused on other sectors whose business has international reach, including the transportation, high tech and energy sectors. Many recent cases have been in the millions of dollars, and many involve non-U.S. companies:

  • In a recent joint settlement for alleged violations of both the economic sanctions and export control laws, DHL paid a civil fine just under $10 million for shipments to Iran, Sudan, and Syria. 

  • Australia and New Zealand Bank ("ANZ") recently paid $5.75 million to settle civil charges that it processed Sudan-related transactions through U.S. correspondent accounts by removing references to Sudan from its instructions to the United States. ANZ is not the first non-U.S. financial institution to pay penalties for such "transaction stripping" activities, and its fine is comparatively low — in 2008 U.K.-based Lloyds TSB paid a record $350 million fine to settle criminal charges for similar activities. A number of other "transaction stripping" investigations are reportedly on-going. 

  • In October, 2009, Florida company Gold and Silver Reserve, Inc. ("GSR") paid close to $3 million to settle charges involving currency trades for Cuban and Iranian account holders. GSR also paid criminal fines under money laundering laws for such activities. 

  • In early 2009, a U.S. subsidiary of the Swedish transportation company, Stena Bulk, paid close to half a million for facilitating trade-related transactions in Sudan.

Highlights of the New Enforcement Guidelines

In recent remarks concerning the Enforcement Guidelines, OFAC personnel have stated that the goal of OFAC’s new Enforcement Guidelines is to provide greater transparency to the penalty process, particularly in light of the significantly higher penalty exposure. The Enforcement Guidelines (attached) amend interim guidelines issued in September 2008. The principal features of the Enforcement Guidelines are as follows:

  • Factors considered – In deciding the level of penalty, OFAC will consider a number of “General Factors.” These factors are similar to those in other enforcement regimes, such as the related area of export control laws. The General Factors include: whether the conduct was willful or reckless; the violator’s (including company management’s) level of awareness of the conduct; the harm to sanctions program objectives; the relative sophistication of the violator; the existence and effectiveness of a compliance program; whether there was any remedial action taken in response to the violation; the extent of cooperation with OFAC; and the timing of the apparent violation in relation to the imposition of the sanctions. 

  • Two-tiered approach for egregious and non-egregious violations – OFAC has announced that it will use different metrics for determining penalties for “egregious” cases and “non-egregious” violations. The starting point for calculating the penalties for egregious violations is the statutory maximum of $250,000 per violation, which can be mitigated depending on the circumstances. The starting point for non-egregious violations is the transaction value of the activity that led to the violation, which OFAC assumes will typically be significantly lower than the statutory maximum. 

  • Voluntary disclosure advantages – Both egregious and non-egregious violations can be mitigated by at least 50 percent if they are brought to OFAC’s attention as the result of a voluntary disclosure. OFAC has explicitly limited such favorable treatment however, to situations where there was no obligation – by any party – to report the conduct in question. As such, for example, if a U.S. company wired funds through a U.S. bank to a Cuban business, it could not obtain voluntary disclosure credit for that violation, as there was an independent obligation on the part of the U.S. bank to block the funds. This limitation will significantly narrow the category of violations that are eligible for voluntary disclosure benefits. 

  • Compliance programs should be risk-based – In assessing whether a company’s compliance program warrants penalty mitigation, OFAC will assess whether the breadth of the company’s program is commensurate with its risk profile. Namely, a large multi-national company with operations world-wide will be expected to have a more sophisticated and elaborate compliance program than a domestic business.

Implications for Multi-National Companies

The new Enforcement Guidelines were promulgated within the context of a more aggressive economic sanctions enforcement environment. The Enforcement Guidelines reveal that OFAC expects companies with a high-risk profile to devote significant resources to compliance in this area. As with the area of the U.S. Foreign Corrupt Practices Act, which has witnessed a recent dramatically significant increase in enforcement, the U.S. Government is signaling that companies operating internationally are responsible for instituting effective compliance measures. Companies whose activities place them at risk of non-compliance with the broad restrictions posed by U.S. economic sanctions laws (including non-U.S. companies with U.S. ties) should accordingly review their existing procedures.

Summary of Existing Sanctions Programs

The United States maintains economic sanctions against a number of countries. The countries currently targeted by comprehensive U.S. sanctions are Cuba, Iran, and Sudan, while transactions involving Burma, North Korea, and Syria are subject to certain less comprehensive restrictions.

In addition to the country programs, U.S. economic sanctions laws restrict or prohibit business by U.S. persons with certain specific individuals and entities, wherever they may be located. These are: (i) Cuban nationals; (ii) “Specially Designated Nationals” of the Balkans, Belarus, Burma, Cuba, Cote d’Ivoire, Democratic Republic of the Congo, Iraq, Liberia, Sudan, Syria, and Zimbabwe (these can include certain state-owned entities or individual governmental representatives or agents of those countries); (iii) certain “Specially Designated Narcotics Traffickers,” or significant Foreign Narcotics Traffickers; (iv) certain “Specially Designated Terrorists,” “Specially Designated Global Terrorists,” or “Foreign Terrorist Organizations;” and (v) designated persons or entities involved in the proliferation of weapons of mass destruction.

  • Persons Subject to Sanctions – The economic sanctions regulations generally apply to “U.S. persons,” which include U.S. citizens and permanent resident aliens, U.S. business entities and their U.S. subsidiaries and foreign branches, and any person actually within the United States. Except for under the Cuban Assets Control Regulations (“CACRs”), “U.S. person” does not include foreign subsidiaries of U.S. entities, although it includes U.S. citizens and permanent resident alien employees and directors of foreign subsidiaries. The CACRs also apply to entities owned or controlled by U.S. persons. The “transaction stripping” enforcement actions discussed above illustrate that non-U.S. companies – even if they don’t fall within the definition of U.S. person – also risk liability under the U.S. economic sanctions laws if they involve U.S. persons in their business with sanctioned countries or entities. 

  • Prohibited Activities in General – The comprehensive sanctions programs (Cuba, Iran, and Sudan) prohibit virtually all business transactions between sanctioned countries/entities and U.S. persons. These include transactions in connection with the export or import of goods, services and technology to or from sanctioned countries, and dealing in goods originating in sanctioned countries. Most financial transactions involving sanctioned entities and countries are also prohibited, including investing in sanctioned countries.

    The sanctions against Syria, North Korea, and Burma are more targeted. U.S. persons are permitted to conduct business in Syria and North Korea, but virtually all U.S.-origin items require export or re-export licenses, which are subject to a policy of denial in most cases. U.S. persons are permitted to provide goods and services to Burma, but there are prohibitions on new investment and the provision of financial services, as well as the import of goods from Burma.

  • Investment – U.S. persons are prohibited from investing in four sanctioned countries – Cuba, Iran, Sudan, and Burma – either directly or through an intermediary. This prohibition extends to commitments of funds or other assets, loans, or any extension of credit in those countries. 

  • Blocking – The sanctions regulations also serve to block assets subject to U.S. jurisdiction in which a sanctioned government entity or person has an interest; blocked assets cannot be paid out, withdrawn, transferred or dealt with in any manner. 

  • Facilitation – The sanctions regulations prohibit U.S. persons from approving or facilitating transactions by foreign persons in which the U.S. person cannot engage, including the activities of foreign subsidiaries of U.S. companies (which are, in most cases, not subject to the regulations directly). This broad prohibition poses significant compliance challenges for U.S. companies.

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O'Melveny & Myers has significant depth of experience in the economic sanctions and export controls areas. Its lawyers are actively engaged in conducting internal investigations and transactional due diligence; responding to criminal and regulatory enforcement inquiries and proceedings; evaluating and implementing compliance programs, and providing prospective advice about economic sanctions and export control issues in international business transactions. Our clients include U.S. and international companies, among them Fortune 100 companies, the world's largest financial institutions, and diversified U.S. and offshore companies.