Sanctions Settlements: Lessons Learned
Revised by Bachir El Nakib (CAMS)
Sanctions are complex and challenging because they derive from many different types of law. They come in multiple variations and are more abstract than the export control laws. First, unlike the International Traffic in Arms Regulations (ITAR) which comprise one set of regulations authorised by one statute, the Arms Export Control Act, US sanctions laws are based on a host of statutes, executive orders, country-specific regulations and now, with Iran, an international ‘plan of action’ implemented through licensing statements and frequently asked questions. It is often difficult to find the right answer or even to know where to look. Second, sanctions consist of full embargoes, limited restrictions that outlaw certain activities with a country but not others and list-based prohibitions that restrict all activities with just certain individuals of a country. With the implementation of the Russian sanctions, screening is even more difficult because the mere fact that an entity is listed does not necessarily mean that you cannot do business with them, if the business in question is not a prohibited activity. Sanctions often involve complex financial transactions and abstract concepts like facilitation that can be difficult to comprehend due to their intangible nature.
The significant changes made to Iran, Cuba and Russia sanctions programmes have dominated the sanctions landscape in recent years. Tensions in the relationship between the US and Russia intensified in 2016, as did the sanctions imposed by the US against Russia, including the recent cyber sanctions targeting Russian actors associated with the alleged interference in the US election through cyber operations. With the election of Donald Trump in November 2016, the questions and uncertainties with respect to the sanctions landscape became quite pressing.
The US – notably OFAC – remains the most feared and most active sanctions enforcer. An interesting facet of its sanctions enforcement is that much of it has been by way of settlement agreements rather than court decisions. Outside of the US, sanctions enforcement is patchy at best. It is more rigorous in the context of export restrictions than in the financial sanctions context, where the main route by which sanctions compliance is ensured is that banks and other financial services businesses require it of their clients.
According to OFAC, in 2016, the agency entered into nine settlement agreements totalling $21.6m, and in the first two months of 2017 prior to the ZTE settlement, there were only four settlements for just over $1m. Despite ZTE’s record penalties, the trend has been a sharp decline from 2014 and 2015 which saw 23 enforcement actions for $1.2bn and 15 enforcement actions for just under $600m, respectively. I can only speculate about the causes of the decline, but I would say it is a combination of increased awareness, training and dedication of resources to sanctions compliance, mixed with a healthy amount of fear.
U.S. Treasury fines Los Angeles freight forwarder $500,000 over Iran sanctions violations
Aug 18 2017
The U.S. Treasury Department on Thursday fined Los Angeles-based freight forwarding company American Export Lines and International Shipping Company More than $500,000 for alleged transgressions of Washington's sanctions against Iran.
Between 2010 and 2012, the company shipped used and junked cars and parts from the United States, through Iran to Afghanistan, on 140 occasions, Treasury's Office of Foreign Assets Control (OFAC) said in its penalty notice.
The company, incorporated as Blue Sky Blue Sea Inc, "demonstrated a reckless disregard for U.S. sanctions requirements by failing to exercise a minimal degree of caution or care in transshipping goods through Iran" and did not voluntarily self-disclose the apparent violations, OFAC said.
The company's president and co-owner "knew and approved of the transshipments via Iran," OFAC added.
The company, which could have faced a fine of up to $35 million, did not respond to a request for comment.
However, the goods did "not appear to have had an end use in Iran" and the company had an OFAC compliance program in place at the time of the violations, "although it was silent on transshipments via Iran," OFAC said when laying out mitigating factors.
The company addressed the problem prior to OFAC's investigation, altered its compliance program, and cooperated with authorities, the Treasury agency said.
Treasury Targets Chinese and Russian Entities and Individuals Supporting the North Korean Regime
OFAC Designates 16 for Activities Related to Support of North Korea’s Nuclear and Ballistic Missile Programs, Energy Trade, Labor Exports, and Sanctions Evasion
Washington – The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated 10 entities and six individuals in response to North Korea’s ongoing development of weapons of mass destruction (WMD), violations of United Nations (UN) Security Council Resolutions, and attempted evasion of U.S. sanctions. Today’s sanctions target third-country companies and individuals that (1) assist already-designated persons who support North Korea’s nuclear and ballistic missile programs, (2) deal in the North Korean energy trade, (3) facilitate its exportation of workers, and (4) enable sanctioned North Korean entities to access the U.S. and international financial systems. As a result of today’s action, any property or interests in property of the designated persons in the possession or control of U.S. persons or within the United States must be blocked, and U.S. persons are generally prohibited from dealing with them.
These actions taken by the Treasury Department complement United Nations Security Council Resolution (UNSCR) 2371, enacted on August 5, 2017, and hold the Government of North Korea responsible for its continued testing of ballistic missiles and WMD development.
“Treasury will continue to increase pressure on North Korea by targeting those who support the advancement of nuclear and ballistic missile programs, and isolating them from the American financial system,” said Treasury Secretary Steven T. Mnuchin. “It is unacceptable for individuals and companies in China, Russia, and elsewhere to enable North Korea to generate income used to develop weapons of mass destruction and destabilize the region. We are taking actions consistent with UN sanctions to show that there are consequences for defying sanctions and providing support to North Korea, and to deter this activity in the future.”
Today’s designations were made pursuant to E.O. 13382, which targets WMD proliferators and their supporters, and E.O. 13722, which targets, in part, North Korea’s revenue from coal, as well as its energy and financial services industries. Details of these actions are described below.
North Korean WMD Programs
OFAC designated China-based Dandong Rich Earth Trading Co., Ltd. for its support to UN- and U.S.-designated Korea Kumsan Trading Corporation, an entity OFAC previously designated for being owned or controlled by, or acting or purporting to act for or on behalf of, directly or indirectly, the UN- and U.S.-designated General Bureau of Atomic Energy, which is responsible for North Korea’s nuclear program. Dandong Rich Earth Trading Co., Ltd. has purchased vanadium ore from Korea Kumsan Trading Corporation. UNSCR 2270 prohibits North Korea’s exports of vanadium ore, and requires member states like China to prohibit the procurement of vanadium ore from North Korea.
OFAC designated Gefest-M LLC and its director, Russian national Ruben Kirakosyan, for support to the UN- and U.S.-designated Korea Tangun Trading Corporation, also known as Korea Kuryonggang Trading Corporation, which is subordinate to the UN- and U.S.-designated Second Academy of Natural Sciences, an entity involved in North Korea’s WMD and missile programs. Gefest-M LLC, a company based in Moscow, has been involved in the procurement of metals for Korea Tangun Trading Corporation’s Moscow office.
OFAC also designated China- and Hong Kong-based Mingzheng International Trading Limited (“Mingzheng”). Mingzheng acts as a front company for UN- and U.S.-designated Foreign Trade Bank (FTB), and it has provided financial services to FTB by, among other things, conducting U.S.-dollar denominated transactions on behalf of FTB. FTB is North Korea’s primary foreign exchange bank; it was designated by the United Nations on August 5, 2017 as part of UNSCR 2371. OFAC designated FTB in 2013 for facilitating transactions on behalf of North Korea’s proliferation network, including for UN- and U.S.-designated Korea Mining Development Corporation and Korea Kwangson Banking Corporation. On June 29, 2017, OFAC designated Mingzheng’s owner, Sun Wei.
North Korean Coal and Oil Trade
North Korea generates a significant share of the money it uses to fuel its nuclear and ballistic missile programs by mining natural resources and selling those resources abroad. In particular, coal trade has generated over $1 billion in revenue per year for North Korea, activity which prompted the UN Security Council to seek to sharply curtail such exports in UNSCR 2321 of November 30, 2016, and to fully ban them in UNSCR 2371 of August 5, 2017. Today OFAC designated three Chinese coal companies collectively responsible for importing nearly half a billion dollars’ worth of North Korean coal between 2013 and 2016. Dandong Zhicheng Metallic Materials Co., Ltd. (“Zhicheng”), JinHou International Holding Co., Ltd., and Dandong Tianfu Trade Co., Ltd. have sold, supplied, transferred, or purchased coal or metal, directly or indirectly, from North Korea, and the revenue may have benefitted the nuclear or ballistic missile programs of the Government of North Korea or the Workers’ Party of Korea. JinHou International Holding Co., Ltd. and Dandong Tianfu Trade Co., Ltd. also were designated for operating in the mining industry in the North Korean economy.
Zhicheng specializes in the import, export, and transport of steel and anthracite coal, and it has worked with a number of U.S.-designated entities, including the UN-designated Koryo Credit Development Bank and Korea Ocean Shipping Agency. Zhicheng allegedly used the foreign exchange received from the end users of North Korean coal to purchase other items for North Korea, including nuclear and missile components. Zhicheng’s director and majority owner, Chi Yupeng, was also designated today pursuant to E.O. 13722. Chi Yupeng has used a network of companies to engage in bulk purchases, wire transfers, and other transactions on behalf of North Korean interests. UNSCR 1718 prohibits direct and indirect support for North Korea’s WMD program.
OFAC designated three Russian individuals and two Singapore-based companies involved in providing oil to North Korea. Transatlantic Partners Pte. Ltd. (“Transatlantic”), Mikhail Pisklin, and Andrey Serbin were designated pursuant to E.O. 13722 for operating in the energy industry in the North Korean economy. Pisklin, through Transatlantic, concluded a contract to purchase fuel oil with Daesong Credit Development Bank, a North Korean bank designated in 2016. Serbin is a representative of Transatlantic who worked with Irina Huish of Velmur Management Pte. Ltd. (“Velmur”) to purchase gasoil for delivery to North Korea. Velmur was designated for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, Transatlantic. Velmur also sold gasoil to North Korea. OFAC also designated Velmur’s executive director, Irina Huish, for acting or purporting to act for or on behalf of, directly or indirectly, Velmur, and she has also worked with Transatlantic to circumvent sanctions. Both of these companies have attempted to use the U.S. financial system to send millions of dollars in payments on behalf of North Korea-related transactions.
Overseas Labor Revenue
OFAC designated Mansudae Overseas Projects Architectural and Technical Services (Proprietary) Limited for being owned or controlled by, or acting or purporting to act for or on behalf of, directly or indirectly, and having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, Mansudae Overseas Projects Group of Companies (MOP). MOP was designated by the United Nations on August 5, 2017 as part of UNSCR 2371. OFAC designated MOP in December 2016 for having engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea. MOP is known to have used these workers to build statues abroad to raise revenue, a practice prohibited by UNSCR 2321, which led to MOP also being designated by the UN through UNSCR 2371. Some of the revenue generated by overseas laborers has been used by the UN- and U.S.-designated Munitions Industry Department, which is responsible for overseeing North Korea’s ballistic missiles program and was designated by the U.S. Department of State in 2010 pursuant to E.O. 13382.
OFAC also designated Kim Tong-Chol and Qingdao Construction (Namibia) CC (“Qingdao”) pursuant to E.O. 13722. Kim Tong-Chol was designated for acting or purporting to act for or on behalf of, directly or indirectly, and having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, MOP, Mansudae Overseas Projects Architectural and Technical Services (Proprietary) Limited, and Qingdao. Qingdao, a Namibia-based subsidiary of a Chinese company, was designated for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, MOP and Mansudae Overseas Projects Architectural and Technical Services (Proprietary) Limited. Kim Tong-Chol entered into an agreement with Qingdao wherein Qingdao would take over four Namibian government-sponsored construction projects, as well as MOP employees and materials associated with the projects.
For identifying information on the individuals and entities designated today, click here.
Settlement Agreement between the U.S. Department of the Treasury's Office of Foreign Assets Control and IPSA International Services, Inc.
A firm who specialized in investigations and sanction compliance has been fined for violating sanctions.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today announced a $259,200 settlement with IPSA International Services, Inc. (IPSA) of Phoenix, Arizona. IPSA agreed to settle its potential civil liability for 72 apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR). The apparent violations involve, on 44 separate occasions, IPSA’s importation of Iranian-origin services into the United States in apparent violation of § 560.201 of the ITSR, and on 28 separate occasions, IPSA’s engagement in transactions or dealings related to Iranian-origin services by approving and facilitating its foreign subsidiaries’ payments to providers of Iranian-origin services in apparent violation of §§ 560.206 and 560.208 of the ITSR. OFAC determined that IPSA did not voluntarily disclose the apparent violations, and that the apparent violations constitute a non-egregious case.
For more information on this action, please visit the following web notice
Settlement Agreement between the U.S. Department of the Treasury’s Office of Foreign Assets Control and Blue Sky Blue Sea, Inc., doing business as American Export Lines and International Shipping Company (USA)
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today announced a $518,063 settlement with Blue Sky Blue Sea, Inc., doing business as American Export Lines and International Shipping Company (USA) (collectively referred to as “AEL”) of Los Angeles, California, to settle AEL’s potential civil liability for 140 apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (ITSR). Between on or about April 25, 2010 and on or about June 2, 2012, AEL appears to have violated § 560.204 of the ITSR by transshipping used and junked cars and parts from the United States via Iran to Afghanistan on 140 occasions. OFAC determined that AEL did not voluntarily self-disclose the apparent violations, and that the apparent violations constitute a non-egregious case.
For more information on this action, please visit the following web notice.
Treasury Acts to Increase Economic Pressure on North Korea and Protect the U.S. Financial System
WASHINGTON – The U.S. Department of the Treasury took multiple actions today in response to North Korea’s continued evasion of international sanctions, development of weapons of mass destruction (WMD) and the means of their delivery, and violations of United Nations (UN) Security Council resolutions. Treasury’s Financial Crimes Enforcement Network (FinCEN) announced a finding that Bank of Dandong, a Chinese bank that acts as a conduit for illicit North Korean financial activity, is a foreign bank of primary money laundering concern, and FinCEN has proposed to sever the bank from the U.S. financial system. In addition, Treasury’s Office of Foreign Assets Control (OFAC) designated two Chinese individuals and one Chinese company in response to North Korea’s ongoing WMD development and continued violations of UN Security Council resolutions.
“The Department of the Treasury is committed to protecting the U.S. financial system from North Korean abuse and maximizing pressure on the Government of North Korea until it abandons its nuclear and ballistic missile programs,” said Treasury Secretary Steven T. Mnuchin. “While we will continue to seek international cooperation on North Korea, the United States is sending an emphatic message across the globe that we will not hesitate to take action against persons, companies, and financial institutions who enable this regime.”
PROPOSED FINCEN SECTION 311 MEASURE
FinCEN is taking steps to prevent China-based Bank of Dandong from continuing to serve as a gateway for North Korea to access the U.S. and international financial systems despite U.S. and UN sanctions. As described in a Notice of Proposed Rulemaking (NPRM) issued pursuant to Section 311 of the USA PATRIOT Act, Bank of Dandong acts as a conduit for North Korea to access the U.S. and international financial systems, including by facilitating millions of dollars of transactions for companies involved in North Korea’s WMD and ballistic missile programs. Bank of Dandong also facilitates financial activity for North Korean entities designated by the United States and listed by the United Nations for proliferation of WMDs, as well as for front companies acting on their behalf.
To protect U.S. banks from this illicit North Korean activity, FinCEN is proposing to prohibit U.S. financial institutions from maintaining correspondent accounts for, or on behalf of, Bank of Dandong. Under the proposed rule, covered financial institutions would also be required to apply special due diligence to their foreign correspondent accounts that is reasonably designed to guard against their use to process transactions involving Bank of Dandong. This would help ensure that Bank of Dandong cannot continue accessing the U.S. financial system indirectly through non-U.S. banks.
The NPRM as submitted to the Federal Register, with a 60-day comment period, is currently available here.
Today’s OFAC sanctions designations were made pursuant to Executive Order (E.O.) 13382, which targets WMD proliferators and their supporters, and E.O. 13722, which targets, in part, North Korea’s transportation and financial services industries. As a result of this action, any property or interests in property of the designated persons in the possession or control of U.S. persons or within the United States must be blocked, and U.S. persons are generally prohibited from doing business with them.
OFAC designated Chinese citizen Sun Wei. Sun Wei has been closely aligned with the U.S.-designated Foreign Trade Bank (FTB) in establishing and running a cover company on behalf of FTB. FTB is North Korea’s primary foreign exchange bank, and it was designated in 2013 for facilitating transactions on behalf of North Korea’s WMD proliferation network.
OFAC also designated Li Hong Ri, a Chinese citizen who cooperates with Beijing-based, U.S.-designated Ri Song Hyok. Li Hong Ri established several front companies used by Ri Song Hyok. Ri Song Hyok is aBeijing-based official for U.S.-designated Koryo Bank and U.S.-designated Koryo Credit Development Bank and has reportedly established front companies to procure items and conduct financial transactions on behalf of North Korea.
Finally, OFAC designated Dalian Global Unity Shipping Co., Ltd. (Dalian Global Unity) pursuant to E.O. 13722 for operating in the transportation industry in the North Korean economy. Dalian Global Unity is reported to transport 700,000 tons of freight annually, including coal and steel products, between China and North Korea. According to the 2013 report by the UN Panel of Experts on North Korea, Dalian Global Unity was actively involved in eight cases of luxury goods smuggling incidents and is suspected of involvement in at least one other case. Middlemen from Dalian Global Unity gave specific instructions about how shipments and transactions could evade the UN-mandated luxury goods ban.
For identifying information on the individuals and entity designated today, click here.
Actions target a Chinese bank and others supporting North Korean sanctions evasion.
The Schlumberger Case
Performing a risk-based analysis of a company’s business operations is essential for the purposes of developing an effective compliance programme. Risk factors that should be analysed include, among other things: business and product lines, customer base, the number and variety of countries served, and the international merger and acquisitions activity of a company. Based on the risk-based analysis, the company should develop robust compliance policies and procedures, which should include effective screening mechanisms, and the policies and procedures should be set forth in a compliance manual. Training relating to the compliance policies and procedures, which should be updated as necessary, should be provided to all company personnel involved in international operations. To ensure that the policies and procedures are working effectively, compliance assessments should be performed on a periodic basis by internal or external entities that are independent of the sanctions compliance group.
On March 25, 2015, the U.S. Department of Justice announced that it had reached a plea agreement with Schlumberger Oilfield Holdings Ltd. (“Schlumberger” or the “Company”) related to violations of the International Emergency Economic Powers Act (“IEEPA”). The Company agreed to: (1) plead guilty to conspiring to violate the IEEPA, (2) pay a $232.7 million penalty and (3) enter into a three-year period of corporate probation. Schlumberger's corporate parent, Schlumberger Ltd., also agreed to various terms as part of the plea agreement, including ceasing all operations in Iran and Sudan, and hiring an independent consultant to conduct audits to assess its compliance with applicable economic sanctions. The plea agreement must be approved by the court before it can be finalized.
Schlumberger's plea agreement is the latest in a line of high-profile enforcement actions that the U.S. government has brought against sanctions violators during the last several years. This settlement demonstrates the government's increased interest in punishing companies that violate economic sanctions and highlights several important trends related to sanctions enforcement and compliance.
The IEEPA authorizes the President to implement and enforce a wide range of economic sanctions in response to extraordinary threats to the national security, foreign policy or economy of the U.S. The Office of Foreign Assets Control within the U.S. Department of Treasury (“OFAC”) has responsibility for administering a wide range of sanctions programs, including comprehensive sanctions programs imposed on Iran and Sudan, as well as other, more limited sanctions programs. Historically, the OFAC has enforced civil violations of the sanctions regulations, and the DOJ has prosecuted individuals and entities who engaged in criminal conduct contrary to sanctions regulations. As discussed below, however, in recent years an increasing number of government entities at both the federal and state levels have become involved in enforcing economic sanctions.
In 2004, one of Schlumberger's foreign subsidiaries began providing oilfield services to customers in Iran and Sudan. While the activities of the Company's subsidiary in these countries were not necessarily illegal when they occurred, the DOJ alleged that Schlumberger personnel in the U.S. violated the IEEPA by facilitating transactions with, and providing services to, Iran and Sudan.
Schlumberger personnel in the U.S. facilitated dealings with Iran and Sudan in two different ways. First, U.S.-based employees approved every capital expenditure that the foreign subsidiary submitted, including expenses in connection with the subsidiary's dealings in oilfields in Iran and Sudan. In addition, Schlumberger personnel in the U.S. made business decisions related to the subsidiary's operations in Iran and Sudan. Both activities were contrary to the applicable sanctions regulations.
The Company also ran afoul of the IEEPA because U.S.-based personnel provided services that benefited Iran and Sudan. When technical problems arose, the Company's subsidiary entered queries into an automated computer system in order to receive assistance. The computer system directed the queries to Schlumberger personnel with the specialized knowledge required to address the queries. Some queries related to the subsidiary's operations in Iran and Sudan were sent to and answered by Schlumberger personnel in the U.S. By answering queries related to the technical problems in Iran and Sudan, the Company's employees in the U.S. violated the sanctions regulations by exporting services to those countries.
The Schlumberger plea agreement offers a number of important lessons, especially for multinational companies with a presence in the U.S.
Terms of Settlement.
During the last several years, a number of large financial institutions and multinational companies have agreed to pay hundreds of millions of dollars—or even billions of dollars—to resolve potential criminal or civil violations of economic sanctions. Viewed only from a total dollar amount perspective, past settlements make the terms of Schlumberger's plea agreement appear fairly reasonable.
Nevertheless, the Company's resolution with the government was surprising for two reasons. First, Schlumberger pled guilty to conspiring to violate the IEEPA. By contrast, many financial institutions that have settled sanctions-related enforcement (continued on page 110)(continued from back page)actions were able to negotiate resolutions short of guilty pleas by entering into deferred prosecution agreements. Second, the $232.7 million penalty imposed on Schlumberger is the largest criminal fine ever incurred in connection with criminal violations of the IEEPA. Indeed, the government appears to have taken an aggressive position in negotiating the settlement with the Company.
The comparatively harsh terms of Schlumberger's plea deal are especially striking because the Company did not engage in direct violations of the sanctions regulations, but rather ran afoul of the regulations by facilitating activities in, and providing services to, Iran and Sudan. The DOJ and OFAC have long taken the position that parties face the same liability for violating the sanctions regulations through direct violations, facilitation or exportation of services. In practice, however, the DOJ and OFAC have primarily focused on investigating individuals and companies that commit direct violations of the sanctions regulations.
The Schlumberger agreement suggests this paradigm might be shifting. Indeed, in the DOJ's press release, U.S. Attorney Ronald C. Machen Jr. expressly cautioned U.S. companies against facilitating activities or export services to sanctioned countries, explaining that “[e]ven if you don't directly ship goods from the United States to sanctioned countries, you violate our laws when you facilitate trade with those countries from a U.S.-based office building.” Given the facts of the Schlumberger case and the tone of U.S. Attorney Machen's statement, the government may be signaling an intention to pursue more aggressively persons who violate the economic sanctions through facilitation and/or exporting services to embargoed countries.
Relatedly, this matter illustrates the difficulties associated with U.S. companies whose foreign subsidiaries do business with countries subject to comprehensive economic sanctions. Some of the sanctions programs administered by the OFAC flatly prohibit foreign subsidiaries of U.S. companies from doing business with countries subject to comprehensive sanctions, but other sanctions programs do not draw a bright-line forbidding all such dealings. Under the less restrictive regimes, it is theoretically possible that foreign subsidiaries of U.S. companies can legally do business with or in embargoed countries. But the Schlumberger case illustrates that U.S. companies can violate economic sanctions in a number of ways when its foreign subsidiaries do business in embargoed countries.
For example, a U.S. company could engage in impermissible facilitation by providing support services, technical support or financing to its foreign subsidiary in connection with the subsidiary's operations in an embargoed country. Similarly, the U.S. parent company could incur liability by exporting services to its foreign subsidiary that will ultimately be used to benefit a sanctioned person or embargoed country. For all of these reasons, U.S. companies should carefully weigh the benefits against the potential costs of their foreign subsidiaries doing business with or in sanctioned countries.
OFAC's Apparent Absence From This Investigation.
Another notable aspect of the Schlumberger case is that the OFAC does not appear to have been involved in the investigation. The DOJ's press release stated that the government's agreement with Schlumberger “concludes a joint investigation commenced in 2009 and led by the U.S. Attorney's Office for the District of Columbia, the Justice Department's National Security Division, and the U.S. Department of Commerce's Bureau of Industry and Security Dallas Field Office.” The OFAC was not mentioned.
[I]ncreased sanctions enforcement is likely to continue in the future.
While there are several possible explanations for why the OFAC has not played a visible role in this investigation to date, perhaps the most likely is that it is currently carrying out a civil investigation into Schlumberger and/or Company personnel, and the parties were unable to reach a settlement by the time the criminal matter was resolved. Another plausible explanation is that the DOJ made an early determination that Schlumberger clearly engaged in criminal conduct and elected to open a criminal investigation without involving the OFAC. This explanation seems unlikely, however, because the OFAC has played an active role in other investigations involving criminal violations of economic sanctions, including the government's recent settlements with BNP Paribas, Weatherford International Ltd., Standard Chartered Bank and Commerzbank AG. An even more remote possibility is that the OFAC and DOJ have different views on the severity of Schlumberger's conduct or other legal issues (e.g., jurisdiction) related to the case, which led the OFAC to conclude that a civil enforcement action was not warranted or appropriate.
Oil and Gas Companies Could Be the Next Wave of Sanctions Enforcement.
The Schlumberger settlement is the second major case in which a multinational oil company agreed to pay hundreds of millions of dollars to resolve potential liability from violations of economic sanctions. In November 2013, the oilfield services company Weatherford International Ltd. (“Weatherford”) agreed to pay $253 million in criminal and civil penalties as part of a global settlement with the U.S. government to resolve claims that the company and its subsidiaries violated the Foreign Corrupt Practices Act and various export control and sanctions laws. While there are important differences between the Schlumberger and Weatherford cases, there are notable similarities as well.
For example, Schlumberger and Weatherford are both multinational companies headquartered in foreign countries that have a significant presence in the U.S. They also both engaged in systematic dealings with oil production facilities in Iran and Sudan. It is possible that Schlumberger and Weatherford are the first in a series of cases that the government intends to bring against multinational companies operating in the oil and gas sector for violating applicable economic sanctions.
Schlumberger Employees Do Not Appear to Have Been Investigated.
Schlumberger representatives have publicly stated that no individuals were investigated by the DOJ. The lack of enforcement actions against Company employees is not surprising; in similar cases, the government has not pursued civil claims or initiated criminal proceedings against individuals working for multinational companies or financial institutions that have violated economic sanctions. Nevertheless, a series of public statements by government officials has suggested that the DOJ and/or OFAC will begin to bring criminal or civil cases against culpable individuals employed by companies that violate these laws. Although the DOJ apparently elected not to charge any Company personnel, it would not be surprising in the future to see either the OFAC bring civil enforcement actions against Schlumberger employees or the DOJ target individuals working for another company in connection with a high-profile prosecution related to sanctions violations.
Sanctions Enforcement is a Priority for Many Government Agencies.
Finally, the Schlumberger case shows that sanctions enforcement is a priority for many different parts of the U.S. government. The DOJ's National Security Division, the U.S. Attorney's Office for the District of Columbia and the Commerce Department appear to have led this investigation. In the last few years, the DOJ's Asset Forfeiture and Money Laundering Section, U.S. Attorneys' Offices throughout the country, the OFAC, the Internal Revenue Service, the Federal Reserve Board of Governors, various state agencies and the Securities and Exchange Commission all have been involved in investigating companies that have potentially violated economic sanctions.
The Schlumberger settlement offers a number of important lessons, especially for multinational companies with a presence in the U.S. Given the enhanced scrutiny from many different federal and state government agencies, as well as the heightened penalties associated with violating economic sanctions, increased sanctions enforcement is likely to continue in the future.