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Faulty Export Controls, False Information Net Substantial Penalty

Monday, December 17, 2018
Sandler, Travis & Rosenberg Trade Report

The Office of Foreign Assets Control has announced that a Chinese company and its affiliated companies and subsidiaries worldwide have agreed to pay $2.77 million to settle the company’s potential civil liability for 11 apparent violations of the Iranian Transactions and Sanctions Regulations. The company will also pay a separate $600,000 penalty to the Bureau of Industry and Security under an agreement settling related charges but will have a denial of export privileges suspended for five years provided it commits no further export violations during that time. OFAC states that this enforcement action highlights the importance of the implementation of audits, reviews, and control measures to ensure compliance with U.S. export controls and sanctions regulations.

According to OFAC, the company appears to have violated the ITSR on at least 11 occasions when it exported or reexported, or attempted to export or re-export, U.S.-origin goods ultimately intended for end-users in Iran by way of China. The company also exported certain U.S.-origin items with knowledge or reason to know that the items were intended for production of, commingling with, or incorporation into goods made in China to be supplied, transshipped, or re-exported to end-users in Iran. The goods in question included oilfield equipment such as spare parts, coiled tubing strings, and pump sets.

OFAC states that an external review found that the company’s compliance controls were largely non-existent and, when in place, were ineffective and easily circumvented, which occurred and went undetected. In addition, although the company had changed its contracts to include an explicit provision prohibiting the re-exportation of its products to countries subject to U.S. economic sanctions, the legal contracts signed with certain intermediary countries excluded this language.

OFAC also notes that that nine of the eleven transactions at issue occurred after BIS officials began communicating with the company and that the apparent violations did not cease until BIS added several of the company’s subsidiaries and related individuals to its Entity List.

The base civil monetary penalty amount for the apparent violations was $3.08 million. OFAC considered the following to be aggravating factors.

- the company willfully violated U.S. sanctions on Iran by engaging in and systematically obfuscating conduct it knew to be prohibited by company policy and economic sanctions and continued to engage in such conduct even after the U.S. government began to investigate the conduct

- company employees, including several management-level personnel, had contemporaneous knowledge of the transactions at issue

- company employees took actions, including establishing intermediaries, to conceal the nature of the transactions from the U.S. government

- the company falsified information on electronic export filings and made other false statements to the U.S. government in the course of this investigation

- the company engaged in this pattern of conduct over a period of years, providing more than $500,000 of U.S.-origin goods for the economic benefit to Iran

- the company is a commercially sophisticated, international corporation with subsidiaries around the world

However, OFAC considered the following to be mitigating factors.

- the company has no prior sanctions history with OFAC and has not received a penalty notice or finding of violation in the five years preceding the earliest date of the transactions giving rise to the apparent violations

- the company cooperated with OFAC’s investigation by disclosing possible violations involving other sanctions programs and responding to OFAC’s requests for information regarding Iran

- the company took remedial steps and corrective actions, including firing the individuals responsible; hiring a third party to conduct an internal review, develop a trade and sanctions compliance program, and train employees and senior executives; establishing an international business compliance department and a compliance committee comprising representatives from its legal, sales, procurement, logistics, engineering, and finance departments; hiring full-time compliance personnel; preparing and circulating a sanctions and export compliance manual and implementing trade and sanctions compliance policies and procedures; and issuing sanctions compliance certifications requiring its suppliers to not sell, transfer, re-export, or divert any of its products to countries subject to U.S. economic and trade sanctions programs

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