OFAC takes more aggressive approach

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U.S. authorities are taking an “increasingly aggressive posture” against companies that violate economic sanctions, lawyer Jeremy Paner says.
Paner, a former official at the Treasury Department’s Office of Foreign Assets Control, says federal authorities used to avoid issuing penalties to encourage voluntary compliance.
But now OFAC is hitting companies with big fines even when they disclose violations. He writes:

After only issuing seven civil monetary penalties in 2018, OFAC has already issued four penalties in 2019, which were all voluntarily self-disclosed. This trend likely signals a dramatic shift in OFAC’s enforcement philosophy.

On Feb. 14, for instance, OFAC announced that it had issued a penalty of $5,512,564 against AppliChem GmbH of Darmstadt, Germany. The enforcement action didn’t follow OFAC’s usual pattern.

Jeremy Paner

Paner writes:

OFAC has historically closed the vast majority of its enforcement cases without issuing a penalty. For example, in Fiscal year 2016, OFAC issued 17 penalties and closed nearly 1,000 enforcement cases with either a “No Action Letter” or a “Cautionary Letter.”
During its past outreach events, OFAC frequently highlighted the low percentage of its enforcement cases that lead to penalties. This was done in part to encourage companies to submit voluntary self-disclosures of apparent sanctions violations. OFAC has generally favored increased insight of transactions it otherwise would not have learned over punishment for those violations.
The first four OFAC enforcement actions of 2019 arise from apparent violations that were all voluntarily self-disclosed. This continues the trend from 2018 in which five of the seven penalties were disclosed and represents a significant change to historical norms in sanctions enforcement.

Excerpts of OFAC’s statement about AppliChem are below:

Specifically, between May 2012 and February 2016, AppliChem violated § 515.201 of the CACR when it sold chemical reagents to Cuba on 304 occasions.
On January 1, 2012, Illinois Tool Works, Inc. (ITW), a company based in Glenview, Illinois, acquired AppliChem, a German company that manufactures chemicals and reagents for the pharmaceutical and chemical industries. While conducting acquisition negotiations in December 2011, ITW discovered references to countries subject to U.S. economic and trade sanctions on AppliChem’s website. On December 19, 2011, ITW warned AppliChem that it would be required to cease all Cuban transactions after its acquisition by ITW.
On or about January 27, 2016, an anonymous report was made through the ITW ethics helpline alleging that AppliChem continued to make sales to Cuba through an intermediary company in Berlin, Germany. ITW immediately began a full investigation, which revealed that AppliChem’s former owners had continued AppliChem’s Cuba business by creating a scheme that concealed this business from ITW after specifically representing to ITW that it had ceased. The former owners of AppliChem are no longer employed by ITW.
Rather than ceasing sales to Cuba as ITW had directed, between February 2012 and April 2012, AppliChem designed and implemented what were called the “Caribbean Procedures” (whereby Cuba was referred to by the code word “Caribbean”), which made sure that no documents mentioning Cuba would be prepared or retained by AppliChem in connection with its continued business with the country. Pursuant to the Caribbean Procedures, AppliChem engaged an external logistics company and an independent hazardous materials consultant to prepare the necessary shipping documents and hazardous materials declarations, which previously had been handled internally.
Once AppliChem implemented the Caribbean Procedures, AppliChem senior management conducted both written and in-person training sessions for AppliChem’s staff, particularly those working in the logistics department, to help perpetuate the scheme and to ensure it would be fully concealed from ITW. The reasons for the implementation of the Caribbean Procedures were “well known to AppliChem staff during this time” and were described by AppliChem staff as an “open secret” at AppliChem.
Between May 2012 and February 2016, AppliChem fulfilled Cuban orders on 304 invoices. The transaction value of the shipments made during this time was €2,833,701 (approximately $3,433,495).
OFAC determined that ITW voluntarily self-disclosed the Violations on behalf of AppliChem, and that the Violations constitute an egregious case. The statutory maximum civil monetary penalty applicable in this matter is $20,045,688. The base civil monetary penalty amount for the Violations is $10,022,844.
The penalty amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A. OFAC determined the following to be aggravating factors:

  • (1) the willful conduct of AppliChem’s management;
  • (2) the use of written procedures to engage in a pattern of conduct in violation of the CACR;
  • (3) AppliChem’s sales to Cuba of approximately $3,433,495 in 304 transactions over the course of five years caused significant harm to the sanctions program objective of maintaining a comprehensive embargo on Cuba; and
  • (4) the size and sophistication of AppliChem, with an average annual revenue of around $23 million between 2012 and 2015, and the fact that it is a subsidiary of ITW, a large internationally active company.

OFAC determined the following to be mitigating factors: ITW’s cooperation with OFAC on behalf of AppliChem by filing a thorough voluntary self-disclosure, providing prompt responses to requests for information, performing a thorough internal investigation, and by signing a tolling agreement on behalf of AppliChem.
This case demonstrates the importance of

  • (i) implementing risk-based controls, such as regular audits, to ensure subsidiaries are complying with their obligations under OFAC’s sanctions regulations,
  • (ii) performing follow-up due diligence on acquisitions of foreign persons known to engage in historical transactions with sanctioned persons and jurisdictions, and
  • (iii) appropriately responding to derogatory information regarding the sanctions compliance efforts of foreign persons subject to the jurisdiction of the United States.
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