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Penalty Case Highlights Need for Due Diligence Before and After Foreign Acquisitions

Monday, April 01, 2019
Sandler, Travis & Rosenberg Trade Report

A recent penalty case highlights the importance for U.S. companies to conduct sanctions-related due diligence both prior and subsequent to mergers and acquisitions and to take appropriate steps to audit, monitor, and verify newly acquired subsidiaries and affiliates for compliance, according to the Office of Foreign Assets Control. U.S.-owned or -controlled foreign subsidiaries are subject to U.S. sanctions, OFAC states, and parent companies may face exposure to civil penalties vis-à-vis their subsidiaries’ actions.

An OFAC press release states that in the case at issue a U.S. company has agreed to pay $1.87 million to settle its potential civil liability for 23 apparent violations of the Iranian Transactions and Sanctions Regulations by its Chinese subsidiary. Before and after its acquisition of the Chinese company the U.S. company took steps to halt the subsidiary’s exports to Iran, including by training subsidiary employees on its business conduct guidelines, the Foreign Corrupt Practices Act, and sanctions. However, it did not implement procedures to monitor or audit the subsidiary’s operations to ensure that its Iran-related sales did not recur, which they did.

Specifically, the subsidiary utilized six trading companies (four in the United Arab Emirates and two in China) as conduits for sales of power tools and spare parts to Iran or a third country knowing they were intended for Iran. Among other things, the subsidiary created fictitious bills of lading with incorrect ports of discharge and places of delivery and instructed customers not to write “Iran” on business documents.

The statutory maximum civil monetary penalty for the apparent violations is $6.92 million and the base penalty is $3.46 million. OFAC considered the following to be aggravating factors.

- the subsidiary and its senior management participated in the apparent violations knowing that they violated the parent company’s policies as well as U.S. economic sanctions

- the subsidiary conferred an economic benefit to Iran in a systematic scheme involving a series of transactions that occurred on a continuing basis

- the subsidiary is a sophisticated company with a history of extensive export operations and executive leadership who had knowledge of U.S. economic sanctions

However, OFAC considered the following to be mitigating factors.

- neither company received a penalty notice or finding of violation from OFAC in the previous five years

- the U.S. company implemented immediate and substantive remedial efforts upon learning of the apparent violations, including halting all subsidiary exports and hiring an independent investigator

- the U.S. company cooperated with OFAC’s investigation by conducting an extensive investigation and submitting the results to OFAC and responding to OFAC’s requests for additional information with detailed records and meaningful clarifications

- the U.S. company has committed to enhancing the subsidiary’s compliance procedures by ensuring it has a management team in place that, among other things, conducts regular risk assessments to ensure that its internal controls appropriately mitigate its sanctions-related risks

For more information on U.S. sanctions and ways to ensure your company is in compliance, please contact Kristine Pirnia at (202) 730-4964.

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