The Four Sanctions Compliance Cases that Everyone Should Know (Part I of IV)
The Justice Department has repeated on several occasions that it intends to aggressively prosecute corporations for sanctions and export controls violations. The “New FCPA” is how the Justice Department characterizes its plan.
To execute the strategy, DOJ has assigned 25 new prosecutors. This is the most important fact — unleashing 25 new prosecutors with the goal of bringing criminal cases against corporations and individuals will inevitably result in fresh criminal cases, complex settlements and application of the National Security Division’s recently-announced corporate enforcement policy and voluntary disclosure program. The DOJ assigned a chief counsel for corporate prosecutions of sanctions violations in the National Security Division to oversee the new initiative to increase prosecution of criminal violations.
In reaction to this new landscape of evolving threats and corporate risks, the DOJ warned companies to take affirmative steps to improve their compliance programs beyond the implementation of sanctions-screening software and focusing on a few sanctioned countries. To this end, the DOJ has noted the importance of “investing significant additional compliance resources in [preventing national security and criminal misconduct].”
Aside from the DOJ’s extensive guidance for ethics and compliance programs, OFAC issued its own guidance governing sanctions compliance programs. See A Framework for OFAC Compliance Commitments (May 2019), available at https://ofac.treasury.gov/media/16331/download?inline. OFAC outlined five key elements of an effective sanctions compliance program: (1) Management Commitment; (2) Risk Assessment; (3) Internal Controls; (4) Testing & Audit; and (5) Training.
To prepare for this new set of criminal enforcement risks, legal, ethics and compliance professionals will need to familiarize themselves with several significant cases in this area. Although some of the cases occurred in the context of OFAC civil enforcement and settlement cases.
Sanctions Law
United States persons are prohibited from engaging in transactions with sanctioned countries or sanctioned entities or persons unless authorized by OFAC or expressly exempted by statute.In general, “US persons” must comply with OFAC regulations, which includes all US citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, and all US incorporated entities and their foreign branches.
The names of sanctioned entities and individuals are consolidated into OFAC’s list of Specially Designated Nationals and Blocked Persons (“SDN List”). United States persons are prohibited from dealing with SDNs wherever they are located and all assets of an SDN must be blocked whenever they come into the possession of a US person. OFAC’s “50-Percent Rule” warns that an indirect interest exists in any entity in which an SDN owns, “whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest.” In sum, “any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person.” As such, companies must often ascertain the ultimate beneficial ownership in order to ensure compliance with OFAC sanctions.
British American Tobacco Case
BAT’s subsidiary in Singapore was required to plead guilty to a criminal sanctions conspiracy, and BAT’s parent company entered into a three-year deferred prosecution agreement (“DPA”). BAT paid a penalty of $629 million.
DOJ and the Office of Foreign Assets Control (“OFAC”) announced a joint settlement with British American Tobacco and its Asian marketing subsidiary (“BAT”), under which BAT agreed to pay combined penalties of $629 million, stemming from its scheme to conduct business in North Korea through a third-party in Singapore.
In another action, DOJ unsealed criminal charges against a North Korean banker and Chinese facilitators, both from the Liaoning Province, for their roles in the illicit sale of tobacco products in North Korea.
BAT’s Singapore subsidiary plead guilty to a one-count Information charging BAT and its subsidiary with conspiracy to commit bank fraud and to violate sanctions. BAT entered into a deferred prosecution agreement (“DPA”).
OFAC announced a separate civil settlement with BAT under which BAT will pay a civil penalty of $508 million, the largest fine against a non-financial institution in OFAC’s history. OFAC cited the fact that BAT and its subsidiary “willfully conspired” to transfer hundreds of millions of dollars through U.S. banks and were “aware” that the transfers were blocked by U.S. sanctions. BAT did not voluntarily disclose the conduct and OFAC characterized BAT’s violations as “egregious.”
OFAC also cited the fact that BAT tried to hide the transactions and payments “through a complex remittance structure that relied on an opaque series of front companies. BAT’s upper management has “actual knowledge” about the “conspiracy.”
The settlements arose from BAT’s conduct starting in 2007, when BAT spun off its North Korea sales business to a third-party company, claiming that it was no longer involved in North Korea tobacco sales. In reality, however, BAT continued to conduct business in North Korea through the third-party company and BAT’s subsidiary maintained control over all relevant aspects of the North Korean business.
Between 2007 and 2017, BAT processed payments for tobacco sold to North Korean entities through the third-party company, totaling $418 million in U.S. dollars. To make the payments to BAT, North Korean purchasers used front companies so that U.S. banks would not know about the connection to North Korea.
U.S. financial institutions processed at least 310 transactions worth approximately $74 million. The transactions resulted in an estimated $700 million in revenue for the North Korean manufacturers, one of which was owned by the North Korean military.
BAT cooperated with the investigation by suspending the statute of limitations, providing detailed document productions and prompt responses to OFAC requests.
Under the OFAC settlement, BAT agreed to maintain sanctions compliance measures for the next five years, including by ensuring its management promotes a “culture of compliance.” BAT must also conduct an OFAC risk assessment, maintain written compliance policies and procedures, conduct internal and external audits, train its staff and submit an annual compliance certification.
Cigarette trafficking generates significant revenue for North Korea’s WMD program. In addition, counterfeit cigarettes are a major source of income to the North Korean regime since smuggled tobacco products generate revenue of up to $20 for every $1 spent in cost.
