OFAC 2020 Review: Enforcement Themes and Common Violations (Part II of II)
The 2020 OFAC enforcement record underscores the importance of sanctions compliance. Yet, companies appear to move slowly in response to sanctions risks, often relying on outdated or outmoded screening technologies and failing to build basic policy controls and procedures.
In reviewing the 2020 enforcement actions, many of the cases involve common miscues and compliance failures. These cases fall into the following categories: (1) basic screening and blocking errors; (2) post-acquisition illegal sales to sanctioned countries; (3) use of third-parties to circumvent sanctions restrictions; and (4) reliance on incorrect compliance and/or legal advice.
Basic Screening and Blocking Errors
OFAC continued to impose penalties when companies violate sanctions programs because of screening technology errors. OFAC’s view is quite clear – if your screening program fails, it is your responsibility to ensure proper operation of the screening system.
OFAC has made this point over and over.
First, in the 2018 Cobham/Metelics case; and then in 2019, when Apple violated the Narcotics Kingpin Sanctions Program because its screening program did not distinguish between a full capitalization entry of a counter-party and the proper initial capitalization on the prohibited person list.
In 2020, Amazon was the latest to fall victim to this error. Amazon settled with OFAC for $134,000 for violations of the Crimea, Iran, Syria Sanctions Programs. Amazon conducted numerous low amount transactions, some involving foreign embassies from prohibited countries. Just like Apple, Amazon had screening errors, such as a failure to distinguish between an entry, “Yalta, Krimea” and the prohibited location, “Yalta, Crimea.” Also, Amazon failed to maintain basic blocking protocols using IP addresses.
In a December 2020 enforcement action, OFAC brought its first enforcement action against a cryptocurrency company, BitGo, which provides digital wallet services. BitGo agreed to pay $98,830 for 183 violations of the Crimea region, Cuba, Iran, Sudan and Syria sanctions program. BitGo failed to implement IP blocking technology and therefore had “reason to know” that customers in sanctioned countries were using its services.
Post-Acquisition Illegal Sales
In 2019, OFAC had five (5) separate enforcement actions focused on mergers and acquisitions in which companies acquired foreign companies that continued to engage in business in violation OFAC sanctions.
OFAC brought an enforcement action against Keysight Technologies for sales to Iran after its acquisition of Anite Finland, a foreign company which was not subject to OFAC sanctions until after it was acquired by Keysight. Prior to and after the acquisition, Keysight officials repeatedly advised Anite that, after the closing, Anite had to cease business with Iran customers. Notwithstanding these directions, Anite continued to conduct business with Iran customers. In fact, Anite disguised the transactions and used private email addresses to evade detection by Keysight. In the end Keysight agreed to pay a civil penalty of $437,000 for completing six transactions with Iranian distributors.
Third-Party Sanctions Violations
As in the case of FCPA enforcement, OFAC regularly uncovers use of third party agents and distributors to carry out sanctions evasion schemes.
Comtech Technologies and its subsidiary EF Data paid $894,000 for violations of the Sudan Sanctions Program. Comtech enlisted a third-party in Canada to sell an advanced communications system to a Sudan government entity in violation of the Sudan Sanctions Program.
In a second case against Generali Global Assistance, which provides U.S.-based travel and medical insurance claims assistance, Generali agreed to pay $5.8 million for 2,593 violations of the Cuban Sanctions Program. During the period of 2010 to 2015, Generali provided travel and medical claim services to U.S. claimants and arranged for two Canadian insurers to to make the actual payments to U.S. customers for Cuba travel and medical insurance claims.
Reliance on Improper Advice and Counsel
OFAC had three separate enforcement actions against Whitford, Biomin and Deutsche Bank, in which lawyers or compliance officers provided incorrect advice to the company on specific issues concerning compliance with sanctions.
Between November 2012 and December 2015, Whitford engaged in 74 transactions when (a) Whitford’s foreign subsidiaries exported goods to Iran and completed transactions with persons in Iran; and (b) US-person employees of Whitford facilitated the Iran business.
Whitford’s Regulatory Manager incorrectly advised Whitford business personnel that foreign subsidiaries could conduct business with Iran so long such business was executed through a third party.
Biomin, a U.S. based animal nutrition company, agreed to pay OFAC $257,000 for violations of the Cuba Sanctions Program. During a period from July 2012 to September 2017, Biomin engaged in 30 prohibited transactions with a Cuban company in violation of the Cuba Sanctions Program. Biomin’s senior management mistakenly believed that conducting the transactions through foreign subsidiaries would not violate the Cuban Sanctions Program. As a result, Biomin arranged the transactions through two foreign companies that it either owned or controlled.
Finally, Deutsche Bank agreed to pay $157,500 for its conduct of a $28 million transaction involving IPP Oil Products as part of a series of related transactions. While the payment instructions did not specifically identify IPP Oil, the payment was related to a series of purchases of fuel oil that involved IPP Oil.
Before the transaction occurred, US counsel for IPP Oil represented to Deutsche Bank that IPP Oil’s interest in the transaction no longer existed. Notwithstanding this representation, OFAC cited Deutsche Bank for its failure to conduct due diligence to corroborate the US counsel’s representation concerning IPP Oil’s lack of interest in the transaction. OFAC subsequently determined that IPP Oil nonetheless had an interest in the transaction. Deutsche Bank incorrectly relied on verbal assurances from US Counsel concerning IPP Oil’s status under OFAC sanctions.