Article Corporate Counsel

Voluntary Self-Disclosure of Sanctions Violations: How it Works in the U.S. (Part 2)

In the first part of this article, we examined the counterintuitive nature of self-reporting sanctions violations, the penalties that sanctions violators face in the United Kingdom and the United States, and the U.K.’s self-disclosure framework. In part two, we analyze how the self-reporting regime functions in the United States.

United States’ Voluntary Self-Disclosure Regime
OFAC Framework

OFAC follows a three-step process for assessing and imposing civil penalties for sanctions violations. Upon learning of a sanctions violation, OFAC first determines whether to initiate a civil enforcement proceeding. When making this assessment, OFAC considers a variety of factors, including whether the violation involved willful or reckless conduct, the harm the violation caused to the sanctions program objectives, and the individual characteristics of the violator, including whether the violator had a sanctions compliance program in place.

If OFAC elects to move forward with a civil enforcement proceeding, the agency will then calculate a base penalty. In the absence of a voluntary self-disclosure, the base penalty for egregious violations is the applicable statutory maximum, which is the greater of $284,582 or twice the value of the impermissible transactions for the sanctions regulations promulgated under the International Emergency Economic Powers Act. The base penalty for nonegregious violations is roughly equivalent to the revenue derived from the violative transactions for parties that do not receive self-disclosure credit. OFAC then adjusts the base penalty upward or downward based on various aggravating and mitigating factors to calculate the final penalty.

Companies that voluntarily self-disclose sanctions violations can benefit in two ways. First, OFAC is less likely to bring a civil enforcement proceeding against self-reporting parties. A party’s cooperation is a factor that OFAC is required to take into account when determining whether to initiate a civil enforcement proceeding. If OFAC elects not to pursue an enforcement action, it can close out the matter with a warning letter. Second, if OFAC elects to bring an enforcement action, companies that voluntarily self-disclose receive a 50-percent reduction in the base penalty for both egregious and nonegregious violations.

In order to receive credit for self-disclosing, a party must report the violation prior to or at the same time that OFAC or another government agency otherwise learns of the conduct. This feature creates an incentive for parties to report potential violations to OFAC promptly. Furthermore, parties do not receive credit for making a voluntary self-disclosure if a third party is required to report the underlying conduct to OFAC. Despite these restrictions, parties that do not meet all of the criteria for submitting a voluntary self-disclosure still can receive cooperation credit, which can result in a substantial reduction of the applicable penalty imposed.

DOJ Framework

Historically, parties that elected to self-report sanctions violations made a single submission to OFAC describing any potential civil or criminal misconduct. If OFAC determined the conduct at issue resulted in civil violations of the sanctions regulations, the agency would handle the matter and assess whether to bring a civil enforcement proceeding against the self-disclosing party. In situations where the underlying conduct gave rise to criminal sanctions violations, OFAC would refer the matter to the Department of Justice (DOJ) for review and prosecution. In the latter scenario, the party making the disclosure would still receive cooperation credit from the DOJ for its self-disclosure to OFAC.

In October 2016, the DOJ’s National Security Division changed this framework by issuing guidance related to self-reporting criminal sanctions violations. This guidance mandates that parties must affirmatively disclose potentially “willful” sanctions violations to OFAC and the DOJ’s National Security Division in order to obtain cooperation credit for criminal misconduct.

The guidance states that parties will receive substantial credit for voluntarily self-disclosing potential violations but does not provide details regarding the specific benefits that such parties will receive. By contrast, the DOJ’s other self-reporting regimes contain more granularity. For instance, the DOJ’s Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy mandates a presumption of declination of prosecution when a party self-discloses FCPA violations, cooperates with the DOJ, and undertakes timely remediation. In situations where FCPA prosecution is warranted, the DOJ will recommend a 50-percent reduction off the bottom end of the sentencing guidelines for criminal fines imposed on self-disclosing parties.

The new sanctions self-disclosure system marks a dramatic change and could put affected parties in a difficult situation. A company that determines it has violated U.S. sanctions regulations can take the position that its conduct only constituted a civil violation and file a voluntary self-disclosure with OFAC alone. But if the government disagrees and determines the party committed a criminal sanctions violation, the party would not receive self-disclosure credit. Alternatively, a party could concede that it engaged in a potentially willful sanctions violation and submit a voluntary self-disclosure to OFAC and the DOJ. The party would receive credit for self-disclosing in this scenario, but it would have to admit to potentially engaging in criminal conduct to do so.

Parties could avoid this dilemma by submitting voluntary self-disclosures to the DOJ in situations in which they conclude that no criminal violation occurred, but suspect that the DOJ might reach a different conclusion. At this point, it is unclear whether the DOJ will accept this type of defensive self-disclosure.

The U.S. and UK governments have each developed systems that provide parties with powerful incentives to voluntarily self-disclose potential civil and criminal sanctions violations. Whether self-reporting any particular sanctions violation is the best option for a party will hinge on a number of facts tied to the specific circumstances at issue. But the benefits available to parties that elect to self-report will make voluntary self-disclosure an attractive option in many scenarios.

Matt Bell is the chief compliance officer and legal counsel for ZTE USA. Mike Casey is a partner in the London office of Kirkland & Ellis. Both Bell and Casey advise companies throughout the world on sanctions issues.