Sanctions compliance and enforcement – a global update

May 2017 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

2017 promises to be an interesting year for US and European Union (EU) sanctions enforcement. The new US administration has stated that it is reconsidering the recent easing of sanctions against Iran and Cuba and many are speculating about the future of Russia and Crimea-related sanctions. There is no need for speculation, however, when it comes to the seriousness with which US and EU authorities are currently enforcing their economic sanctions programmes. The trend at the Office of Foreign Assets Control (OFAC) is to investigate and pursue penalties against the full spectrum of violators, consistent with the regime it administers. Already this year authorities in the US have announced a record-high combined civil and criminal penalty of $1.19bn against Zhongxing Telecommunications Equipment Corporation and ZTE Kangxun Telecommunications Ltd. (collectively ZTE) for selling telecommunications equipment to Iran and North Korea in violation of US sanctions and export controls. At the same time, many recent OFAC settlements show that the agency is routinely penalising lower value transactions, even when they involve inadvertent acts of negligence. More than ever, it is clear that regulators expect all businesses to demonstrate their commitment to compliance.

Recent US enforcement trends

OFAC settlement agreements in the first quarter of 2017 encompass both large-scale, egregious violations, as well as low-dollar infractions, demonstrating the vigilance with which OFAC is enforcing US sanctions. Early in the year, OFAC announced a $516,105 settlement with TD Bank related to 167 violations of the Cuban Assets Control Regulations (CACR) and Iranian Transactions and Sanctions Regulations (ITSR). The bank allegedly processed import-export letters of credit for Canadian customers without screening for OFAC-sanctioned countries or entities. A number of such transactions turned out to be for a Canadian company owned by a Cuban entity. Separately, the bank also maintained accounts in Canada and processed $515,071 in transactions for a cargo shipping company in Canada that was a sales agent for a specially designated national (SDN) in Iran. TD Bank mitigated its exposure by submitting a voluntary self-disclosure detailing these and related violations which OFAC found to be caused by shortcomings in the bank’s OFAC compliance programme. Other mitigating factors included TD Bank’s record of compliance, its robust remedial response, including adjustments to its policies and procedures, and its substantial cooperation.

Cooperation was not similarly forthcoming in the investigation that led up to the landmark settlement involving ZTE. This is borne out by the company pleading guilty to charges of obstruction of justice and making materially false statements to the US Justice Department. The result was a $1.192bn settlement that involved multiple federal agencies. From 2010 to 2016, ZTE engaged in a practice of using third-party intermediaries to secretly supply telecommunications equipment to Iran and North Korea, in violation of the ITSR and the Export Administration Regulations (EAR). The US Treasury Department, of which OFAC is a part, stated expressly that its civil and criminal enforcement actions in this case were meant to send a clear message that it will aggressively pursue companies that wilfully violate US sanctions and obstruct federal investigations of such violations.

Also notable are the low-value transactions that OFAC has rigorously pursued this year. For example, in January OFAC reached a settlement with Aban Offshore Limited related to a modest $10,127 transaction. According to OFAC, Aban’s Singapore subsidiary placed an order for oil rig supplies from a vendor in the US with the intended purpose of re-exporting the supplies from the UAE to a jack-up oil drilling rig located in Iranian territorial waters. Aban did not voluntary disclose the apparent violation and OFAC determined that Aban failed to exercise a minimal degree of caution when it re-exported US origin goods. Aban agreed to pay $17,500 to settle the potential civil liability, a penalty which OFAC said was mitigated by Aban’s lack of prior violations, its substantial cooperation and the swift remedial action it instituted.

Deliberate attempts to evade US sanctions typically attract the strongest response from OFAC and, as demonstrated by a finding of violation issued in February, OFAC is willing to stretch its jurisdiction as far as possible to penalise such attempts to undermine US sanctions programmes. In a published finding of violation, OFAC alleged that B Whale Corporation (BWC) conducted a ship-to-ship transfer to receive $2,086,486 worth of barrels of condensate oil from a vessel owned by the National Iranian Tanker Company (NITC) – a company that was previously on OFAC’s SDN list. What is most notable about this case is that BWC is not a US corporation, nor is it affiliated with a US corporation. It is a member of the Taiwanese TMT Group of shipping companies. Nevertheless, OFAC applied US sanctions to the transaction on the theory that BWC and TMT had, at that time, filed for bankruptcy protection in the US, making BWC’s vessel “property under the jurisdiction of a U.S. bankruptcy court” and “the oil transferred to the vessel…an importation from Iran to the United States”. It appears, therefore, that OFAC viewed BWC as a ‘US person’ because it was, in one sense, located in the US at the time of the transaction. Whatever the merits of this legal position, it shows the great lengths OFAC will go to make its enforcement arm reach foreign entities that undermine the goals of US sanctions.

Recent EU enforcement trends

There is the distinct possibility of a measure of, but not complete, convergence in sanctions enforcement between the US and the UK. Even in light of the changes recorded below, there are and likely will continue to be differences.

Part 8 of the Policing and Crime Act 2017 (the Act), which was passed on 31 January 2017, came into force on 1 April 2017. HM Treasury, through its chosen organ the Office of Financial Sanctions (OFSI), may now impose civil law monetary penalties to encourage compliance. These penalties must not exceed the greater of £1m or 50 percent of the estimated value of the funds or economic resources involved in the breach. It is to be noted that the standard of proof for the imposition of these penalties is the civil standard of “on the balance of probabilities”, which is less exacting than the criminal standard of “beyond reasonable doubt”. This is important because it allows HM Treasury to impose civil punishment where the evidence available would not necessarily support a criminal prosecution.

In addition, the maximum penalty in the case of conviction on indictment is now seven years. Financial sanctions are now within the scope of Deferred Prosecution Orders and Serious Crime Prevention Orders.

To ensure a fair enforcement environment, the Act mandated HM Treasury to issue guidance as to the circumstances in which it might consider it appropriate to impose a monetary penalty and how it would determine the amount of the penalty. It also mandated HM Treasury publish reports about the imposition of monetary penalties under the Act. This requirement will, over time, create a penalty jurisprudence, which would facilitate professional advisers. OFSI have now published two documents simultaneously, entitled ‘The process for imposing monetary penalties for breaches of financial sanctions: consultation response’ and ‘Monetary penalties for breaches of financial sanctions – guidance’. Both, but in particular the latter, are very important and demand and repay careful reading. Both entrench the idea of the relevance of self-disclosure of breaches to the imposition and extent of punishment.

Section 147 of the Act builds in procedural rights, including an obligation on HM Treasury to inform the subject of a proposed monetary penalty of its intention to impose such a penalty. In so doing, HM Treasury is also obliged to explain the grounds for imposing the penalty, specify the amount of the penalty, explain that the person is entitled to make representations and specify the period within which any such representations must be made. Further safeguards are built in by the existence of a right to seek the review of a minister of the Crown and an appeal from the minister of the Crown’s decision to the upper tribunal.

Lessons learned

There are several key lessons that can be drawn from both the US and EU’s enforcement trends. Both sides of the pond will view the absence of a robust compliance programme as an aggravating factor in the event of a violation resulting in higher penalties. Again, this highlights the need for companies to devote resources to developing and maintaining the right policies and procedures.

Second, from a US perspective, OFAC does not give a pass to violations with low transaction values, demonstrating the need for all companies to identify risk across their operations and to develop effective compliance procedures. Although there is no data indicating how the UK will address this issue, until a track record has developed, prudence dictates that companies should assume the approach adopted will be similar to OFAC’s.

Once a government agency is investigating a violation, the subject company must respond by being cooperative and responsive to all requests by enforcement officials, for example, providing clear, accurate information, even if it reflects poorly on the company, to show a commitment to compliance. They must also take all possible remedial measures, including promptly addressing the problematic conduct or procedures that gave rise to the violation.

Lastly, violations are uncovered in numerous ways. Many investigations arise out of voluntary self-disclosures, blocking reports, whistleblowers and other pending investigations. Others, however, are triggered by information that becomes public in unexpected ways. For example, OFAC’s investigation of BWC appears to have been prompted by a motion in bankruptcy court in which creditors told the court about the illicit ship-to-ship transfer in an effort to replace the management for BWC’s parent company with a trustee for fraud or dishonesty. Investigations into ZTE also arose from public information, namely reports by Reuters in 2012 that ZTE had signed contracts to ship millions of dollars’ worth of hardware and software from some of the best-known US technology companies to Iran’s largest telecommunications carrier.

Leigh Hansson is a partner, Jeffrey Orenstein is an associate and David Myers is counsel at Reed Smith. Ms Hansson can be contacted on +44 (0)20 3116 3394 or by email: lhansson@reedsmith.com. Mr Orenstein can be contacted on +1 (202) 414 9217 or by email: jorenstein@reedsmith.com. Mr Myers can be contacted on +44 (0)20 3116 3740 or by email: dmyers@reedsmith.com.

Leigh Hansson, Jeffrey Orenstein and David Myers

Reed Smith