The Office of Foreign Assets Control (“OFAC”) has increased its enforcement of U.S. economic and trade sanctions. In 2009 and 2010, OFAC recovered over $1 billion – a significant increase from roughly $5 million recovered in 2007 and 2008. The increase in civil recoveries is one indication of a new and more aggressive enforcement approach. OFAC also has brought enforcement actions against different categories of parties, expanded covered conduct, and coordinated with other enforcement agencies. In addition, where allegations of willful violations are involved, the U.S. Department of Justice (“DOJ”), U.S. Attorney’s Offices, and state prosecutors have required more external control and extracted higher penalties under deferred criminal prosecution agreements. All of this underscores the importance of compliance and careful review of issues falling under OFAC regulations.
OFAC’s Economic Sanctions Enforcement Guidelines (the “Guidelines reflect an increased effort to enforce U.S. sanctions. OFAC relies on the Guidelines in administrative civil enforcement actions. Under the Guidelines, OFAC considers “voluntary self-disclosure” of an apparent violation favorably in its response to the violation. According to the Guidelines, the civil penalty amount that OFAC will assess is to be reduced to one-half the statutory maximum if the violator has voluntarily self-disclosed the violation. If the self-disclosure occurs after OFAC or another government agency discovers a violation, the company cannot receive credit for a voluntary self-disclosure under the Guidelines. Nevertheless, the OFAC penalty may still be reduced by 25 to 40 percent if the violator provides OFAC with “substantial cooperation.”
OFAC has increased enforcement actions against non-U.S. entities. The U.S. government takes trade sanctions compliance seriously, and businesses that have any nexus to the U.S. are at risk if they fail to comply with OFAC sanctions. Non-U.S. businesses need to exercise the same level of care and caution in OFAC compliance as their U.S. counterparts.
The following recent cases highlight the importance of compliance, the risks and impact of a violation, and the need for quick action after a sanctions violation has occurred.
On August 12, 2010, Barclays Bank PLC (“Barclays”), a major global financial services institution, settled criminal and civil allegations that it facilitated and concealed from U.S. financial institutions electronic transfers that violated economic and trade sanctions under the IEEPA. The transactions―1,285 in all, over a period of approximately 10 years― transferred U.S. dollars for the benefit of individuals and entities, including correspondent banks, in Burma, Cuba, Iran, Libya, and Sudan when U.S. sanctions against those countries were in effect. Barclays paid a penalty of $298 million under a global settlement of the allegations, which covered the civil OFAC enforcement action, the federal criminal case filed in the U.S. District Court in the District of Columbia, and related forfeiture claims brought by the New York County District Attorney’s Office. A consent cease and desist order was also issued by the Federal Reserve Board and the New York Banking Department requiring Barclays to comply with U.S. sanctions on a global basis.
The DOJ’s Asset Forfeiture and Money Laundering Section filed criminal charges against Barclays for willfully violating OFAC’s sanctions under IEEPA and for willfully engaging in financial transactions for the benefit of sanctioned entities under TWEA. The government alleged that these violations occurred over a 10-year period, and that they resulted in the movement of hundreds of millions of dollars through the U.S. financial system. The government considered the harm “substantial” and the nature of the apparent violations “systemic.”
In its civil action based on this conduct, OFAC credited Barclays for self-disclosing all violations and for a “first offense.” 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. Therefore, had Barclays not self-disclosed and fully cooperated with OFAC, the fine could have been much more onerous. Another important element of OFAC’s civil settlement with Barclays is that it required Barclays to retain an independent corporate monitor to conduct “an appropriate risk-focused sampling of USD payments, to ensure that its OFAC compliance program is functioning effectively to detect, correct, and report OFAC-sanctioned transactions when they occur.”
Balli Aviation LTD (“Balli”), a UK-based company, pled guilty on February 5, 2010 to economic and trade sanctions offenses involving the export of three Boeing 747 aircraft to Iran. The government sued Balli both criminally and civilly, alleging that Balli conspired to export three aircraft from the U.S. to Iran in violation of the U.S. embargo, the IEEPA, and the Iranian Transactions Regulations (“ITR”). Specifically, representatives of Mahan Air, an Iranian airline, allegedly met with Balli in an effort to acquire three Boeing 747s for use in commercial flights into, within, and from Iran. Mahan loaned the money for the purchase of the three aircraft to Balli’s subsidiaries through Blue Sky Aviation FZE, a United Arab Emirates company. Without informing the U.S. sellers about the purpose of the sale, Balli purchased the three planes, and title was transferred to Balli under bills of sale executed by Wells Fargo Bank in September 2006. Balli then entered into lease agreements with Blue Airways, an Armenian company, under which Mahan began using the planes as early as December 2006. In July 2007, Boeing sent Balli a letter demanding that use of the 747s by the Iranian airline be stopped, and in October 2007, the Department of Commerce warned Balli by letter that export or re-export of the Boeing aircraft to Iran would violate export regulations. Despite these warnings, in November 2007, Balli agreed to extend the leases for another year.
The government’s criminal action against Balli was based on the conspiracy to unlawfully export U.S.-origin goods in violation of the IEEPA and the ITR, and on the willful violation of BIS’s Temporary Denial Order and the Export Administration Regulations (“EAR”). Balli pled guilty in the criminal action, and under the plea agreement, Balli paid the maximum criminal fine of $2 million and agreed to corporate probation of five years. In addition, Balli agreed to maintain a permanent compliance and ethics office that complied with Section 8B2.1 of the U.S. Sentencing Guidelines, and to implement a permanent training and education program on U.S. export control laws, putting a specifically identified person in charge of these programs who reports directly to the CEO and board of directors on at least an annual basis.
OFAC and BIS also proceeded against Balli, seeking the imposition of civil penalties for its violations of the ITR and EAR. Balli was fined $15 million under the settlement of the civil enforcement action, with $2 million suspended if no further violations occurred. Under a suspended Denial Order issued by BIS, Balli’s export privileges were made subject to denial for five years, but that denial was suspended provided Balli paid the civil penalty and refrained from further export violations.
Maersk Line Ltd. (“Maersk”), a Delaware corporation, is the world’s largest container shipping company and a subsidiary of A.P. Moller-Maersk A/S (“A.P. Moller-Maersk”), a Danish conglomerate. Maersk paid a penalty to OFAC in settlement of a civil administrative enforcement action alleging that, over a four-year period beginning in January 2003, Maersk shipped cargo in or out of Sudan and Iran without the requisite OFAC license. The allegations were that, in the course of providing foreign flag transportation services to and from Sudan and Iran, A.P. Moller-Maersk time-chartered Maersk’s U.S. flagged vessels to carry the cargo for part of its journey into or out of those sanctioned countries. A company spokesman conceded that Maersk’s cargo-management systems “did not identify that the cargo should not go aboard the U.S.-flag ships, and it did.”
In the civil enforcement action, OFAC found that Maersk’s transportation of cargo bound to or from Sudan without a license violated the Sudanese Sanctions Regulations and that its transportation of cargo to and from Iran violated the ITR. Maersk allegedly made 4,714 such unlicensed shipments. OFAC determined that the base penalty amount for Maersk’s violations was approximately $61 million. However, under the settlement, Maersk paid only $3,088,400 in penalties because the base penalty was based on gross freight charges, and only a portion of the cargo violated the sanctions. The settlement also reflected the fact that Maersk undertook remedial measures throughout the corporation on a global basis to ensure that corporate affiliates did not violate these sanctions in the future, including updating its booking system. Maersk did not self-disclose the violations, but it fully cooperated with OFAC’s investigation, and received substantial credit for providing well-organized data on the shipments over a five-year period, including information not requested about its use of relay vessels for certain legs of the cargo’s journey to or from the sanctioned countries. On the other hand, OFAC took into account that Maersk was part of a sophisticated shipping conglomerate experienced in operating under license requirements.
In light of OFAC’s enforcement activities, companies should:
1. Design and implement meaningful compliance programs to avoid violations and mitigate penalties. OFAC looks extremely favorably on the implementation of a compliance program. In the event a violation does take place, OFAC’s Enforcement Guidelines consider the existence of an effective compliance program in determining the size of any penalty issued.
2. Take swift remedial action if a potential violation is discovered. Companies that take prompt corrective action in response to potential OFAC violations can obtain additional mitigation credit from OFAC in an enforcement action. Remedial activities can include revising a compliance program to respond to the potential violation that occurred, disciplining employees who violated company policy in a way that resulted in a violation, and implementing training programs to help employees better understand how to comply with OFAC sanctions.
3. Consider self-disclosure and cooperation as a potential strategy for minimizing the risk of a serious enforcement action. An important implication of the Barclays settlement is that, after apparent violations have occurred, prompt and thorough self-disclosure of all violations as well as continued cooperation throughout the investigation may be the best investment that a business can make in the enforcement process. OFAC’s Guidelines clearly reinforce this point by providing for at least a 50-percent reduction in the base penalty for self-disclosure, and by offering further reductions for substantial cooperation. This issue is particularly important for sophisticated entities that have more difficulty in demonstrating that violations were inadvertent rather than willful.
4. Be prepared to demonstrate that a potential violation had little, if any, impact on the overall effectiveness of a sanctions program. A key implication of the Maersk settlement is that OFAC took care to ensure that the penalty was proportionate to the actual harm done.