Regulators Cracking Down on Trade Sanction Violations

The Office of Foreign Assets Controls is demonstrating that its bite is as big as its bark.

The watchdog agency, which is part of the Treasury Department and is responsible for administering and enforcing violations of economic and trade sanctions, is increasingly pursuing companies that violate the rules with more aggressive and broader enforcement than in past years. It recovered more than $1 billion in fines and penalties from 2009 to 2010 for sanction violations—a significant increase from the $5 million recovered in all of 2007 and 2008. And the pace is only quickening.

“The government is simply better organized today, better resourced, better coordinated, and more focused,” says Mario Mancuso, a partner with law firm Fried Frank and former under secretary of commerce for Industry and Security. The result of this more robust regime is more serious actions and greater penalties, he says.

The magnitude of the increase in civil fines, however, is only one indication of an increasingly aggressive enforcement environment. More actions against non-U.S. companies are another indication. “Some non-U.S. companies believe that sanctions don't extend to them,” says Mancuso. In reality, some of the largest fines OFAC has ever assessed have involved companies that are based outside of the United States but conduct business inside its borders.

For example, OFAC and other U.S. government agencies reached a $536 million global settlement with Zurich, Switzerland-based Credit Suisse in December 2009. According to the settlement charges, Credit Suisse knowingly established improper policies and payment practices for the benefit of the Iranian government and Iranian officials from 1996 through 2006 in violation of OFAC sanctions.

OFAC also charged Credit Suisse with executing U.S. securities trades between 2000 and 2006 with a Libyan government-owned investment company and a bank in Sudan in violation of U.S. sanctions. The bank used code names and sub-accounts to disguise the identities of sanctioned entities, processing 169 securities transactions with an aggregate value of over $150 million.

Currently, the United States has economic and trade sanctions in place with 13 countries, including North Korea, Cuba, Syria, Burma, and Zimbabwe. The most common violations involve transaction and business dealing with Iran, Libya, and Sudan.

The fines levied against Credit Suisse demonstrates the need for non-U.S. companies to exercise the same level of care and caution in OFAC compliance as their U.S. counterparts, says Michael Volkov, a partner with law firm Mayer Brown.

Egregious conduct especially will result in significant fines. According to OFAC's Economic Enforcement Sanctions Guidelines that went into effect in November 2009, factors that might constitute “egregious” conduct include “the substantial economic benefit to sanctioned parties, the scope and severity of the apparent violations, and the awareness of the conduct within the bank.”

Greater coordination among state and federal prosecutors is another indication of a tougher enforcement regime. OFAC will occasionally refer cases to the Department of Justice for a criminal investigation and prosecution. “If they have a case that's so egregious that they feel a criminal violation is warranted, they will refer it to the Justice Department,” says Erich Ferrari, founder of Ferrari Legal who specializes in OFAC matters.

 “Coordination has definitely increased between OFAC and the Justice Department,” says Volkov. And it can lead to higher penalties. For example, Barclays Bank paid a total of $298 million to settle charges with OFAC and the Justice Department in August 2010.

Barclays was charged with willfully facilitated and concealed from U.S. financial institutions electronic transfers—1,285 in all over a 10-year period— to individuals and government banks in Burma, Cuba, Iran, Libya, and Sudan in violation of economic and trade sanctions.

As part of the settlement OFAC required Barclays to retain an independent corporate monitor to conduct “an appropriate risk-focused sampling of payments, to ensure that its OFAC compliance program is functioning effectively to detect, correct, and report OFAC-sanctioned transactions when they occur.”   

Unsuspecting Violators

While Credit Suisse and Barclays represent examples of willful misconduct, many companies run afoul of the rules without realizing that they aren't in compliance. “Most companies actually want to comply with the law and may not know how,” says Mancuso.

“Some non-U.S. companies believe that sanctions don't extend to them. In reality, some of the largest fines OFAC has ever assessed have involved non-U.S. companies.”

—Mario Mancuso,

Partner,

Fried Frank

Facilitation payments, in particular, are one area where companies often get tripped up. For example, if you tell a foreign person you can't sell a certain product because it runs afoul of sanctions, but give that person the name of another foreign entity that sells the product, that's considering facilitating the transaction.

“I would emphasize that it's really important to know who you're selling to, and who those people are dealing with, as well,” advises Ferrari.

Many times, too, companies often wrongly assume that sanction programs apply only to countries, and neglect to take into consideration specially designated nationals who may also be considered a sanctioned party, says Mancuso. It's also important to realize that any person or entity owned or controlled by a designated person is also a sanctioned party, he says.

For example, OFAC added five more Libyan senior government officials, including Libya's Prime Minister Ali al-Mahmoudi Al Baghdadi to its sanctions list last month. The move coincides with the Obama Administration's attempts to freeze the assets of the Libyan government in order to suppress violence against Libyan civilians and safeguard their assets from expropriation by the Libyan government.

Proactive Measures

Companies can take several proactive measures to reduce fines, or avoid them altogether, in the event that a potential violation is discovered. 

Design and implement a robust compliance program. Put policies and procedures in place to ensure that your business activities do not violate OFAC guidelines. The compliance program should be tailored to the business and the geographic scope of those operations, says Mancuso.

In addition, OFAC looks favorably on the implementation of a compliance program. In the event a violation does take place, OFAC considers the existence of an effective compliance program in determining the size of any penalty issued.

Take swift remedial action if a potential violation is discovered.  Companies that take prompt corrective action can obtain additional mitigation credit from OFAC in an enforcement action. Remedial activities can include revising a compliance program in response to the potential violation, disciplining employees who violated company policy, and implementing training programs to help employees better understand how to comply with OFAC sanctions.

Consider self-disclosing violations as a potential strategy.  OFAC provides for at least a 50 percent reduction in the statutory maximum if the violator has voluntarily self-disclosed the violation. If the self-disclosure occurs after a violation is discovered, the company cannot receive credit for a voluntary self-disclosure under OFAC Guidelines.

Credit Suisse, for example, voluntarily “self-disclosed” only after the New York County District Attorney's Office began an investigation of suspicious wire transfers. Nevertheless, the OFAC penalty may still be reduced by 25 to 40 percent if the violator provides OFAC with “substantial cooperation.”

Another word of advice for any company that is considering a voluntary confession: Disclose all or nothing. Mancuso says he has seen many instances during his time as under secretary of commerce where investigators discovered several more violations, when the company had only voluntary disclosed one.

OFAC ENFORCEMENT ACTIONS

The following chart lists the top 10 OFAC enforcement actions from 2009 to 2011:

Source: OFAC.

“If you're already under investigation, give them want they want before they ask for it,” agrees Ferrari. “Don't mislead them.”

Mind the tone-in-the-middle. Management involvement in violations could be considered an indication of recklessness or willfulness, which weighs more heavily against the violator in OFAC's penalty assessment. Self-disclosure and cooperation are particularly important in such cases.

Barclays self disclosed, and its civil penalty was reduced as a result. Barclays also received credit for waiving indictment, accepting responsibility, and cooperating with OFAC by providing extensive, well-organized information about the violations and by entering into tolling agreements with OFAC.  “Had Barclays not self disclosed and fully cooperated with OFAC, the fine could have been much more onerous,” says Mancuso.

Ensure the penalty is proportionate to actual harm done. OFAC evaluates transactions and apparent violations on a case-by-case basis, as demonstrated by its 2010 settlement with container shipping company, Maersk Line.

In that case, Maersk was charged with shipping cargo in or out of Sudan and Iran over a four-year period beginning in January 2003, making 4,714 unlicensed OFAC shipments. Even though OFAC determined that the base penalty amount for Maersk's violations was approximately $61 million, Maersk only paid a little more than $3 million in penalties. This is because OFAC's base penalty calculation for Maersk was excessive because the transactions' total valuation far exceeded the proportion of the sanctioned cargo in each transaction.

By implementing robust compliance programs and employee training, and further following up on those measures, companies will be better able to avoid OFAC violations, or secure lower penalties in the event of a violation. Says Mancuso: “That should frankly well-inoculate—if not completely inoculate—most entities from meaningful material violations and material exposure under sanctions laws.”