Sanctions Compliance Lessons from Recent OFAC Actions
In August, the Office of Foreign Assets Control announced the resolution of a trio of enforcement actions against U.S.-based and foreign-organized companies that had run afoul of the Iranian Transactions and Sanctions Regulations (ITSR). While the monetary penalties associated with the settlements were relatively modest, these enforcement actions are notable because they illustrate that OFAC is increasingly bringing cases against nonfinancial institutions, taking aggressive jurisdictional and interpretative positions, and focusing its enforcement efforts on penalizing companies that violate the ITSR.
Recent Settlements
COSL Singapore Ltd.
COSL Singapore Ltd. agreed to a settlement agreement with OFAC to resolve its liability stemming from potential violations of the ITSR. COSL Singapore entered into various charter agreements with third-party drilling companies pursuant to which the third-party drilling companies used oil rigs owned by COSL Singapore for drilling operations. While the third-party drilling companies had control of the oil rigs, COSL Singapore remained responsible for maintaining and purchasing spare parts for the oil rigs. Between October 2011 and February 2013, COSL Singapore personnel in Singapore made 55 orders of supplies from U.S.-based vendors that were intended for oil rigs located in Iranian territorial waters. The U.S. vendors apparently shipped the supplies to Singapore and the United Arab Emirates, and COSL Singapore then re-exported (or attempted to re-export) the products to Iran. OFAC concluded that COSL Singapore’s conduct violated §§ 560.203 and 560.204 of the ITSR.
COSL Singapore agreed to pay approximately $415,000 to settle this matter, which was less than the value of the shipments at issue (approximately $525,000) and a fraction of COSL Singapore’s maximum potential liability ($13.75 million). OFAC identified several aggravating factors, including that COSL Singapore is a large, sophisticated company operating throughout the world. COSL Singapore’s failure to exercise a minimal degree of caution by re-exporting (or attempting to re-export) U.S.-origin goods to Iran and its lack of an OFAC compliance program were deemed to be aggravating factors as well. OFAC cited COSL Singapore’s remedial actions and cooperation with OFAC as mitigating factors. COSL Singapore did not voluntarily self-disclose the apparent violations of the ITSR.
IPSA International Services
IPSA International Services Inc. entered into an agreement with OFAC to settle its potential liability for 72 violations of the ITSR. Organized under U.S. law, IPSA specializes in conducting due diligence for various countries in connection with their citizenship-by-investment programs. In 2012, IPSA and its Canadian subsidiary entered into two contracts with foreign governments to undertake due diligence on individuals applying for the countries’ respective citizenship-by-investment programs. Some of the applicants were Iranian nationals, and IPSA was unable to verify information about these Iranian nationals through sources outside of Iran. IPSA’s Canadian and Dubai-based subsidiaries retained subcontractors to conduct due diligence on the Iranian nationals in Iran, and the subcontractors hired third parties to validate information related to the Iranian nationals.
OFAC concluded that IPSA violated the ITSR in two different ways. First, IPSA improperly imported Iranian-origin services into the United States. The enforcement information states that “IPSA appears to have imported Iranian-origin services into the United States because [its] foreign subsidiaries conducted the due diligence in Iran on behalf of and for the benefit of IPSA.” In addition, IPSA improperly facilitated its foreign subsidiaries’ dealings with Iran. The enforcement information noted that “IPSA also appears to have engaged in transactions or dealings related to Iranian-origin services and facilitated [its] foreign subsidiaries’ engagement in such transactions or dealings because IPSA reviewed, approved, and initiated the foreign subsidiaries’ payments to providers of the Iranian-origin services.”
IPSA agreed to pay roughly $260,000 to resolve its potential liability, which was less than the transaction value of the apparent violations (approximately $290,000) and the maximum civil penalty ($18 million). OFAC considered IPSA’s failure to exercise a minimal degree of care by importing Iranian-origin services to the United States and its facilitation of Iran-related transactions to be aggravating factors. OFAC also concluded that IPSA’s violations “constitute[d] a pattern or practice of conduct” and that IPSA’s OFAC compliance program was “ineffective” because “it did not recognize or react to the risks presented by engaging in transactions that involved Iranian-origin background investigation services.” OFAC found IPSA’s lack of historical violations, the company’s remedial measures, and its cooperation with OFAC to be mitigating factors. IPSA did not voluntarily self-disclose its violations to OFAC.
American Export Lines and International Shipping
American Export Lines and International Shipping Co. (USA) (AEL) agreed to pay over $518,000 to resolve its potential liability for committing 140 violations of the ITSR. During a two-year period between 2010 and 2012, AEL apparently shipped used and junked cars and parts from the United States that were ultimately destined for Afghanistan through Iran.
AEL agreed to pay a small percentage of its maximum potential liability of $35 million, even though OFAC concluded that AEL is a “sophisticated international full-service freight forwarder with experience with U.S. export laws and OFAC regulations, particularly the ITSR” and that AEL’s president knew of, and approved, the violative transactions. OFAC also identified several mitigating factors, including that AEL is a small business, the products at issue were not intended for end users in Iran, and AES cooperated with OFAC during the investigation. AEL did not voluntarily self-disclose these violations to OFAC.
Key Takeaways
OFAC Continues to Bring Cases Against Nonfinancial Institutions
The three settlement agreements illustrate OFAC’s increased efforts to target nonfinancial institutions that violate U.S. sanctions. Since the start of 2017, OFAC has announced settlements with nine nonfinancial institutions operating in a variety of industrial sectors, including oil and gas, telecommunications, health care, automotive and international logistics. Enforcement actions targeting nonfinancial institutions have accounted for all but two of the settlements announced in 2017, as well as nearly all of the civil penalties collected by OFAC this year. OFAC’s increased scrutiny of nonfinancial institutions follows a decade in which the majority of the significant sanctions enforcement actions were brought against financial institutions.
OFAC is Taking Aggressive Positions
OFAC took strong positions in the COSL Singapore matter. For instance, OFAC concluded that COSL Singapore violated Section 560.204 of the ITSR, which prohibits the exportation and re-exportation of products from the United States to Iran. The agency’s determination in this regard was somewhat surprising because COSL Singapore neither is a U.S. person nor owned or controlled by a U.S. person, and thus would not appear to be required to comply with this section. OFAC also asserted that COSL Singapore violated the ITSR by causing its U.S.-based vendors to violate the ITSR.
OFAC pursued a novel theory of liability in the IPSA case as well. OFAC appears to have taken the position that IPSA violated the ITSR by importing into the United States information regarding Iranian nationals obtained by its subsidiaries’ subcontractors and other third parties in Iran. While IPSA’s conduct might have constituted a technical violation of the ITSR, OFAC has not historically brought cases against companies for such conduct. In addition, OFAC concluded that IPSA violated the ITSR by engaging in impermissible facilitation by reviewing, approving and initiating its foreign subsidiaries’ payments to providers of Iranian-origin services. IPSA’s foreign subsidiaries were permitted to pay the service providers and do business with Iran at the time. It is not possible to determine how involved U.S.-based IPSA personnel were with these transactions based on the limited information provided in the enforcement information. Nevertheless, the fact that OFAC pursued an investigation on this theory in light of the transaction value of the shipments at issue indicates that penalizing improper facilitation is a priority for the agency.
OFAC’s positions in these cases are consistent with the agency’s willingness to pursue bold theories of liability and make aggressive jurisdictional arguments in other recent enforcement actions. For example, earlier this year, OFAC issued a finding of violation to Taiwan-based B Whale Corp. (BWC) for violating the ITSR. OFAC concluded that BWC was a “U.S. person,” as defined by the ITSR, because it was participating in a U.S. bankruptcy proceeding when one of its vessels allegedly received over 2 million barrels of Iranian crude oil. In that case, OFAC also concluded the vessel-to-vessel transfer of Iranian oil that occurred outside of the United States constituted an importation from Iran to the United States. Similarly, OFAC determined that Singapore-based CSE TransTel Pte. Ltd. and China-based ZTE incurred liability by causing U.S. companies to violate the OFAC sanctions regulations.
OFAC is Actively Investigating Potential Misconduct
OFAC initiated investigations against AEL, COSL Singapore and IPSA that ultimately resulted in enforcement actions. Historically, OFAC has tended to bring enforcement actions after parties voluntarily self-disclosed potential sanctions violations. The Economic Sanctions Enforcement Guidelines create a strong incentive for parties to alert OFAC of potential violations by reducing the maximum civil penalties available, if such violations are voluntarily reported. OFAC has initiated cases against various financial institutions, although such investigations were typically led by other government agencies, such as the U.S. Department of Justice and the U.S. Securities and Exchange Commission. OFAC’s active pursuit of these companies for violating the ITSR further illustrates the agency’s increased efforts to identify and punish nonfinancial institutions that run afoul of the sanctions regulations.
OFAC Expects U.S. and Foreign Companies to Develop Tailored Sanctions Compliance Programs
These settlements show that OFAC expects a wide range of companies to design and implement effective sanctions compliance programs. The agency found COSL Singapore’s absence of an OFAC compliance program to be an aggravating factor, even though COSL Singapore is not a U.S. person or owned or controlled by a U.S. person. OFAC’s position set forth in the enforcement information seems to be that any company that “conduct[s] business in the United States and/or with U.S. companies” should have OFAC compliance programs in place regardless of whether it is required to comply with the sanctions regulations. Along the same lines, OFAC determined that IPSA’s existing sanctions compliance program was an aggravating factor in the enforcement information. While IPSA had implemented a sanctions compliance program, it was “ineffective in that it did not recognize or react to the risk presented by engaging in transactions that involved Iranian-origin background investigation services.”
One key takeaway from these settlements is that OFAC expects a wide range of companies — including foreign entities — to implement sanctions compliance programs. Another lesson is that companies should implement sanctions compliance programs that are specifically tailored to their business in order to ensure that they receive credit for doing so if they are targeted by OFAC in an enforcement action.
OFAC Prioritizes Punishing Companies That Violate the Iranian Sanctions
OFAC has announced the settlement of 11 enforcement actions this year. Of that total, nine have involved apparent violations of the ITSR, including each of the COSL Singapore, IPSA and AEL settlements. U.S. companies and foreign companies doing business with Iran should proceed carefully, especially in light of OFAC’s recent positions with respect to facilitation and jurisdictional issues.
Conclusion
The COSL Singapore, AEL and IPSA settlements illustrate the negative consequences that can result when companies do not comply with U.S. sanctions. Financial institutions and nonfinancial institutions based in the United States and abroad should assess their sanctions risk and, if necessary, implement sanctions compliance programs tailored to their businesses to prevent, detect and mitigate potential sanctions violations.
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