The Strange Case of OFAC Against Exxon for Sanctions Violations

In a bizarre enforcement action, The Treasury Department’s Office of Foreign Asset Control (“OFAC”) assessed a $2 million civil monetary penalty against ExxonMobil (“Exxon”) for violations of the Ukraine sanctions. (Copy Here).

OFAC’s enforcement action boiled down to Exxon’s execution of eight legal documents with Igor Sechin, the CEO of Rosneft OAO (“Rosneft”), who is a Specially Designated Nation and Blocked Person on what is commonly referred to as the “SDN List.” Rosneft is Russia’s largest oil conglomerate. Sechin is a close confidant of Putin and has a long-standing relationship with Russia’s FSB.

OFAC has argued that Exxon’s execution of the contracts with Sechin violated the Ukraine sanctions regulations. Under the Ukraine sanctions, Exxon is prohibited from the receipt of any contribution or provision of funds, good or services from Sechin as a designated SDN. In other words, Exxon was prohibited from doing business with Sechin. Rosneft is not a prohibited entity.

The interesting twist to OFAC’s case against Exxon is whether Exxon violated the Ukraine sanctions when Exxon executed the contracts with Sechin in his capacity as the President and CEO of Rosneft. Sechin signed the contracts in his representative capacity as the CEO of Rosneft, not in his personal capacity.

Exxon is challenging the OFAC civil monetary penalty assessed for its execution of the contracts. Exxon argues that it executed the contracts with Sechin in his representative capacity not in his personal capacity.

In response, OFAC cites the plain language of the applicable Executive Order and in the Ukraine regulations, the purpose of the sanctions against a designated national, as opposed to the corporate entity, Rosneft, as reflecting its intent to sanction business transactions with SDNs and not Rosneft. In sum, OFAC claimed that U.S. persons may not deal with a designated national, including Igor Sechin or receive, deal in, or benefit from any service a designated person (like Sechin) might provide.

OFAC also cited a FAQ on its website addressing this issue in relation to the Burma sanctions program. FAQ #285 stated that US parties should be “cautious in dealings with [a non-designated] entity to ensure that they are not providing funds, goods, or services to the SDN, for example, by entering into any contracts that are signed by the SDN.”

Exxon is challenging OFAC’s enforcement assessment and filed suit in federal court. Exxon argues that OFAC’s enforcement action defies common sense. Sechin executed the contract as the CEO of Rosneft, which is not a prohibited entity under OFAC regulations. Rosneft is subject to the Ukraine Sectoral Sanctions that restricts the permissible transactions that persons can conduct with the designated individual.

It is hard to predict how this case will turn out – from my perspective, I give a slight advantage to Exxon in this case. Exxon executed the contracts with Sechin as the CEO of Rosneft and not in his personal capacity. The fact that Rosneft was not placed on the SDN list suggests that OFAC intended only to benefit transactions with Sechin from which Sechin would benefit, as opposed to a transaction in which Sechin serves in a representative capacity.

OFAC characterized this case as an “egregious” violation and cited Exxon’s sophisticated understanding of sanctions regulations and its reckless disregard of known OFAC SND regulations.

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