The Long Arm of OFAC: Secondary Sanctions, Facilitation, and Causing a Violation
Matt Stankiewicz, Senior Associate at The Volkov Law Group, rejoins us for a blog posting on OFAC sanctions law. Matt can be contacted at firstname.lastname@example.org.
Sanctions law can be complex. The sanctions programs themselves are often a tangled web of do’s and don’t’s – various wind down periods, General Licenses, payment structures, and more. In order to enforce these laws and regulations, OFAC must necessarily have jurisdiction. There must be some sort of U.S.-nexus, generally involving a “U.S. Person.”
OFAC defines a U.S. Person as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”
However, OFAC regularly pushes the limits of its jurisdiction. They’re not afraid to test the boundaries of the definitions of each and every word in the statutes. To make things more confusing, the law is not well fleshed out. Meaning, OFAC will not hesitate to bring enforcement actions against cases of first impression, against conduct it deems to violate the spirit of the sanctions program. Companies operating under the impression that their conduct is lawful, may be in for a rude awakening when they find out OFAC disagrees due to a contrasting interpretation. This effectively adds even more “bite” to the sanctions programs, as many companies stay far away from any grey areas that OFAC may seek to pursue.
The largest extension of jurisdiction comes from the big arrow in OFAC’s quiver of punishments – secondary sanctions. Through secondary sanctions, OFAC can influence the actions of non-U.S. parties to prevent them from doing business with designated entities. It’s a way to punish parties with no clear connection to the U.S. for violations of a U.S. law – which, as lawyers, can be difficult to stomach. Should a non-U.S. company conduct business with an SDN designated as subject to secondary sanctions, OFAC has the power to designate that non-U.S. company, placing that company on the SDN List itself. The consequences would be prohibiting all U.S. Persons from doing any business with it. The U.S. lays down the choice – would you rather continue doing business with the U.S., or would you rather pursue business with another, obviously much smaller, country? The choice is usually an easy one. The U.S. currently has secondary sanctions within their sanctions programs with Iran, North Korea, and even Russia.
Additionally, facilitation violations are another avenue for OFAC to pursue enforcement. U.S. Persons may not facilitate sanctions violations – meaning, an entity may not indirectly support a transaction that they themselves could not conduct directly. A simple example would be using a foreign subsidiary to engage directly with a sanctioned party, while the U.S. parent supplies the needed materials to the subsidiary. That type of conduct was at the heart of the Schlumberger Oilfield enforcement action. OFAC determined that Schlumberger approved expense reports relating to business in Iran and Sudan, while also providing business advice and guidance to those entities operating in Iran and Sudan. This also calls into question the extent of the “facilitation” reach. Here, the “known or should have known” standard applies, which would necessarily invoke KYC controls and enhanced due diligence. Without the necessary controls in place, a U.S. corporation could be liable for facilitation based upon the conduct of a foreign entity.
Furthermore, OFAC may also go after non-U.S. Persons for “causing” sanctions violations. They’ve used this theory successfully to bring enforcement actions against non-U.S. entities. An entity may be liable for another’s violation, despite not being in violation themselves, due to obfuscation, misrepresentation, or otherwise. In 2017, OFAC entered into a settlement agreement with CSE TransTel Pte. Ltd. (“TransTel”) for “causing” sanctions violations. TransTel, a Singaporean company conducting business with Iran, caused a non-U.S. financial institution to violate Iranian sanctions by concealing the origin or destination of U.S. dollar (“USD”) payments that were destined for Iran-based companies. Despite signing a letter stating that it would not route Iran-related business transactions through the bank, TransTel initiated several wire transfers for several Iranian parties directly or to parties that supplied goods or services for Iran-related business. The Bank’s fund transfers were processed through the U.S., and involved USD, which caused the Bank to violate the Iranian Sanctions Program itself. Rather than prosecute the bank, OFAC went after TransTel for causing those violations. TransTel ultimately agreed to pay a civil penalty of over $12 million to settle its potential civil liability.
The difficult task now is attempting to stay ahead of OFAC and keep a sharp eye out for potential enforcement risks. Sanctioned parties become desperate and often seek to find ways to circumvent the prohibitions. In their desperation, they may unwillingly, or simply through indifference, put another party at risk of a violation. It’s easy to stay away from sanctioned parties or entities in which they hold majority ownership. Yet, what do you do when a designated entity participates in a licensing agreement with a non-sanctioned entity? Can you work with the non-sanctioned entity, knowing that the designated entity stands to benefit financially? Sharp counsel (we know a few!) can help spot these issues ahead of time and determine a proper course of action.