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Sanctions Penalty Highlights Importance of Due Diligence but Signals New Approach

Monday, February 11, 2019
Sandler, Travis & Rosenberg Trade Report

A recent sanctions penalty case highlights the importance of performing heightened due diligence, particularly with regard to affiliates, subsidiaries, or counter-parties known to do business with countries or persons subject to U.S. sanctions or that otherwise pose high risks due to their geographic location, customers, suppliers, products, or services. The Office of Foreign Assets Control states that this case also represents a “marked change” to the way it will respond to sanctions violations.

According to OFAC, a U.S.-based company has paid $13,381 to settle potential civil liability for six apparent violations of the Iranian Transactions and Sanctions Regulations by its Turkish affiliate, which serviced machines containing its products in Iran and provided products, parts, or services knowing they were destined for Iranian end-users.

OFAC states that prior to acquisition the U.S. company’s sanctions due diligence revealed that the Turkish company had dealings with Iran. The U.S. company subsequently implemented a wide range of pre- and post-acquisition measures designed to ensure that the affiliate complied with U.S. sanctions. Examples include applying controls to block Iran-related customers from making future orders, training affiliate employees on its trade compliance policies, requiring customers to agree to modified terms and conditions of sale prohibiting the resale of the affiliate’s products to Iran, and requiring senior management to certify every quarter that no products or services were being sent or provided to Iran.

Despite these efforts, OFAC states, for two years after its acquisition the affiliate dispatched employees to Iran to fulfill service agreements and engaged in other transactions related to Iran knowing that doing so was prohibited. Management regularly submitted fraudulent certifications and attempted to obstruct an investigation by instructing employees to delete references to Iran in company records.

Once it uncovered the apparent violations the U.S. company took a series of remedial actions, including terminating the responsible managers, implementing new procedures to educate affiliate employees on compliance, and requiring the affiliate to inform its major Turkish customers that it cannot provide goods or services to Iran.

Nevertheless, OFAC determined that a penalty was appropriate due to the affiliate’s “egregious conduct and specific risk profile.” The statutory maximum civil monetary penalty was $1.5 million and the base penalty amount was $7,434. While OFAC considered the behaviors outlined above to be aggravating factors, it appears to have given significant weight to the fact that the U.S. company conducted an extensive internal investigation, submitted a comprehensive voluntary self-disclosure, and took extensive preventative and remedial steps.

OFAC is also adding the manager primarily responsible for the conduct at issue to the foreign sanctions evader list, which is separate from OFAC’s List of Specially Designated Nationals and Blocked Persons and identifies foreign individuals and entities that have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions against Iran or Syria. As a result of this listing, OFAC is prohibiting all direct or indirect transactions or dealings involving this individual that are related to any goods, services, or technology that is (a) in or intended for the U.S. or (b) provided by or to U.S. persons, wherever located. In addition, U.S. financial institutions must reject payments involving this individual.

OFAC notes that this is the first time it has designated an individual as a foreign sanctions evader while resolving an enforcement matter and is “a clear warning that anyone in supervisory or managerial positions who directs staff to provide services, falsify records, commit fraud, or obstruct an investigation into sanctions violations exposes themselves to serious personal risk.”

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