OFAC is capable of extending a long-arm of enforcement, reaching sometimes non-U.S. companies that may “cause” another company to violate U.S. Sanctions laws.  If you need to find an example of this long reach, look no further than last week’s OFAC settlement with SCG Plastics (“SCG”), in which SCG, a Thailand company, which sells plastic resins, agreed to pay $20 million for violations of the Iran Sanctions Program.

From 2017 to 2018, SCG “caused” U.S. financial institutions to process $291 million in wire transfer sales of Iranian-origin high-density polyethylene resin (“HDPE”) manufactured by a joint venture in Iran owned by, SCG’s parent company and the National Petrochemical Company of Iran (“NPC”), a part of the Iran government. HDPE is used to create a wide-variety of injection-molded plastics, including food and beverage containers, shampoo and cleaning product bottles, and other industrial items.

During this time when SCG received wire payments for Iranian-origin HDPE, it initiated U.S. dollar transactions on behalf of the Iran-based joint venture to pay the joint venture’s outstanding debts to third-party vendors. To attempt to disguise the transactions, SCG used shipping and documentation practices that obfuscated the product’s Iran origin and the parties involved, which caused U.S. financial institutions to process these wire transfers in violation of the Iran Sanctions Program.

OFAC’s enforcement action demonstrates its willingness to extend enforcement actions to non-U.S. companies that obfuscate the involvement of sanctions persons or jurisdictions in shipping or payment documentation so that U.S. financial institutions process those financial transactions.

Going back to March 2005, SCG Chemicals, the parent company of SCG Plastics, and two other unaffiliated companies formed a Singaporean company to enter into a joint venture with NPC.  This joint venture, Mehr Petrochemical Company, constructed a petrochemical plant in Assaluyeh, Iran, which began production in 2009 and had the capacity to produce 300,000 metric tons of HDPE annually. 

SCG Plastics was a trading company that purchased, marketed and sold plastic resin products manufactured by affiliates of SCG Chemicals, including Mehr.  SCG Plastics’ customers for Oran-origin HDPE products produced by the Mehr joint venture generally were manufacturers in East Asia that purchased bulk plastic resins for the manufacture of plastic goods. SCG Plastics purchased and resold 60 percent of Mehr’s output of Iran-origin HDPE to its customers from 2009 to 2018, with a one-year pause between 2013 and 2104.

To receive payment, SCG Plastics issued invoices to its customers in U.S. dollars for payment to it bank accounts in Thailand. These U.S. dollar transactions were processed by U.S. financial institutions acting as correspondent banks.

To ensure the payments, SCG Plastics executed documentation that disguised the fact that the HDPE originated from Iran. Specifically, SCG Plastics issued shipping and payment documents that listed variants of the term “Middle East” as the country of origin rath than “Iran”.  This practice was evident in export pro forma invoices that listed the loading port as “any port in the Middle East” or “Jebel Ali, UAE,” without any notation of the Iran loading port of Assaluyeh.  In addition, SCG Plastics routinely sent final commercial invoices to its customers omitting the Iran nexus by listing shipments as being from Jebel Ali, UAE and entering “Middle East” as the HDPE’s country of origin.

SCG Plastics also transshipped the Iran-origin HDPE it resold to its customers through the UAE.  Once the cargo arrived in the UAE, SCG Plastics’ shipping agent issued an ocean bill of lading and corresponding shipping documents indicating Jebel Ali, UAE as the port of loading for the HDPE rather than Iran.

On at least ten occasions, SCG Plastics paid debt owed by Mehr in U.S. dollars to Mehr’s third party vendors in exchange for HDPE produced by Mehr.  By completing these transactions, SCG enabled Mehr to access the international financial system and mislead financial institutions concerning its involvement in the transactions. For those vendors that were Iran companies, Mehr instructed SCG Plastics to pay to bank accounts held other non-Iranian companies names in countries other than Iran.

In July 2018, SCG Chemicals sold its indirect interest in Mehr, and SCG Plastics stopped selling Iranian-origin HDPE, ending SCG Plastics’ business relations with Iran.  SCG Plastics committed 467 violations of the Iran Sanctions Program.  These transactions fell into two categories.

The first category involved 457 transactions in which SCG Plastics received U.S. dollar payments processed by U.S. correspondent banks from its customers for sales of Iranian-origin HDPE.  The total value of these transactions exceeded $289 million.

In the second category, SCG Plastics initiated U.S. dollar wire transfers on behalf of Mehr to pay for Mehr’s debts to third-party vendors.  The total value of these 10 transactions was $1.8 million.

SCG Plastics voluntarily disclosed the 10 violations from the second category but did not voluntarily disclose the 457 violations from the first category.  OFAC determined that all 467 violations were egregious violations.

OFAC agreed to a $20 million settlement in recognition of the following considerations.

In January 2022, SCG Plastics transferred all of its assets and existing liabilities to Thai Polyethylene Co., Ltd. (“TPE”), a subsidiary of SCG Plastics’ parent company, that is based in Thailand. Accordingly, following this entire business transfer, SCG Plastics is no longer an operating business. In connection with SCG Plastics’ settlement agreement with OFAC, TPE has also entered into an independent agreement with OFAC to maintain U.S. sanctions compliance commitments for five years.

As aggravating factors, OFCA noted that SCG Plastics willfully engaged in a persistent, multi-year pattern of conduct to circumvent the Iranian Sanctions Program; SCG plastics caused significant harm to the OFAC sanctions policy objectives against Iran, providing illicit benefits to Iran’s petrochemical sector; and SCG earned substantial revenues from its violations. 

On the mitigating side, OFAC cited: the absence of any prior violations; SCG Plastics’ substantial cooperation, including its independent internal investigation, providing large volumes of information and entering into tolling agreements with OFAC; SCG Plastics’ planned liquidation in Thailand, and the successor company, TPE, plans to adopt significant sanctions compliance commitments;  TPE’s compliance commitments include a risk-based compliance program; hiring a new sanctions compliance officers; implementing screening policies and procedures; conducting regular training sessions and ensuring regular auditing of sanctions compliance procedures.

OFAC noted several significant compliance considerations — first, commercial activity that may fall outside the jurisdiction of OFAC sanctions may result in a violation when the financial transactions related to the activity are processed through or involve U.S. financial institutions.  Further, non-U.S. companies that obfuscate the involvement of sanctions persons or entities in shipping or payment documentation expose themselves to significant penalties.

OFAC has issued recent guidance as part of the Joint Compliance Note on requirements for foreign-based persons to comply with U.S. sanctions and export control laws.  This note specifically identified risks that non-U.S. persons who engage in conduct that cause U.S. persons to violate sanctions can themselves be subject to prosecution by OFAC.

OFAC also mentioned the fact that it has repeatedly warned companies of the risks facing companies in the energy and maritime sectors for violation of Iran Sanctions.