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Tuesday
Aug012017

Compliance Alert: Lessons from OFAC’s recent enforcement action against non-U.S. companies

Last week the U.S. Treasury Department’s Office of Foreign Assets Control announced a $12 million settlement with CSE Global Limited and its subsidiary, CSE TransTel Pte. Ltd., both based in Singapore.

TransTel entered into contracts to install telecommunications equipment for several Iranian energy projects. According to the settlement, TransTel apparently violated U.S. sanctions by using its U.S. dollar account at a Singapore-based bank to make over $11 million in payments to various third-party vendors -- including several Iranian companies -- that were providing goods and services in connection with the Iranian contracts.

These payments (which did not indicate their relation to Iran) were processed through the U.S. financial system and caused multiple financial institutions to violate U.S. sanctions by engaging in the prohibited exportation of financial services (i.e., processing U.S. dollar payments) from the United States to Iran or for the benefit of Iran.

This action is significant because it appears to be the first time OFAC has penalized a non-U.S., non-financial company for “causing” sanctions violations by initiating U.S. dollar payments involving a sanctioned country.

Historically, OFAC has focused its enforcement resources on penalizing non-U.S. banks that processed such U.S. dollar transactions involving sanctioned countries, especially where the banks were alleged to have knowingly removed (or helped their customers to remove) information indicating a link to the sanctioned country. OFAC has chosen not to pursue the banks’ customers that initiated these transactions.

While this particular case involves Iran sanctions -- and could reflect the Trump Administration’s policy of more aggressively confronting Iran -- it likely signals a broader enforcement trend that applies across the range of U.S. sanctions programs.

In light of this action, companies should consider the following:

1. Non-U.S. companies should terminate the use of U.S. dollar payments in business involving OFAC-sanctioned jurisdictions and parties. While non-U.S. companies outside the United States are not prohibited by OFAC regulations from doing business with OFAC-sanctioned jurisdictions and parties, companies must be vigilant to avoid the involvement of U.S. individuals, companies, goods, or territory in such business because such involvement could easily bring a transaction within OFAC’s enforcement jurisdiction. 

OFAC’s recent enforcement action highlights how the making of U.S. dollar payments -- which typically route through the U.S. financial system -- can serve as a U.S. nexus that alone causes otherwise permitted conduct to fall within OFAC’s jurisdiction. (This is true whether or not a company signs an “undertaking” with a bank about not making payments involving sanctioned countries or parties.) 

Companies should therefore avoid making U.S. dollar payments in connection with business involving OFAC-sanctioned jurisdictions or parties. 

Such a policy should be a component of a larger compliance program -- involving appropriate policies and procedures, officer and employee training, and periodic monitoring -- to ensure compliance with OFAC sanctions.

2. Non-U.S. companies should also avoid receiving U.S. dollar payments involving OFAC-sanctioned jurisdictions and parties. While OFAC’s action involved a company that initiated U.S. dollar payments, depending on the facts and circumstances OFAC could potentially apply the same “cause” theory to non-U.S. companies that receive U.S. dollar payments from or involving OFAC-sanctioned countries or parties. 

While a more attenuated theory, OFAC could argue that a company that asks or encourages its customers or distributors to send payment in U.S. dollars -- where those payments involved sanctioned jurisdictions or parties -- “caused” these payments to be made and thus “caused” financial institutions to violate sanctions in the course of processing these payments through the U.S. financial system. 

The risk is even greater where the recipient of the payments agrees with the payor that payments will be made in U.S. dollars and that all mention of the sanctioned country or party should be omitted from the payment instructions.  Companies should therefore strongly consider discontinuing the receipt of such U.S. dollar payments in connection with business involving sanctioned jurisdictions or parties.

3. Use of U.S. dollar payments involving OFAC-sanctioned jurisdictions or parties can also give rise to U.S. criminal liability. In addition to OFAC’s ability to impose civil monetary penalties, the Department of Justice can also pursue criminal charges for willful violations of U.S. sanctions. 

In March 2016, the U.S. Attorney’s Office for the Southern District of New York brought criminal charges against a Turkish and Iranian national, Reza Zarrab, along with a number of co-conspirators, for making U.S. dollar payments on behalf of Iranian entities through a network of companies in Turkey and the U.A.E. Zarrab and his co-conspirators were charged, among other things, for causing banks to violate OFAC sanctions by processing these payments through the U. financial system and for defrauding these banks by disguising the nature of these payments. 

Whether U.S. authorities will pursue criminal or civil actions, or both, for sanctions violations will depend on the particular facts and circumstances.

4. Non-U.S. banks should make appropriate use of customer diligence and “undertakings,” along with internal monitoring mechanisms, to mitigate U.S. sanctions risk. OFAC’s settlement suggests that the bank in Singapore was prudent in requiring that the companies sign an undertaking to not use their U.S. dollar accounts to conduct business with Iran. 

Of course, such an undertaking would only be one part of a bank’s strategy to address the risks of a customer doing business with an OFAC-sanctioned jurisdiction or party.

OFAC’s settlement agreement (pdf) does not indicate why the bank required the companies to sign a sanctions undertaking. The agreement does state, however, that TransTel owned a 49 percent stake in TransTel Engineering Kish Co Ltd, an Iranian limited liability company. At a minimum, the bank’s diligence into TransTel’s affiliates presumably identified this Iranian affiliate as a clear indicator of the customer’s Iranian business. 

Although OFAC’s announcement does not so indicate, it is also possible that the use of the U.S. dollar accounts to make Iran-related payments was identified by the Singapore bank’s internal controls, and that the bank cooperated with OFAC’s enforcement effort.

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This post is adapted from our firm's client alert. The full alert is here.

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Roberto J. Gonzalez, picture above left, former Deputy General Counsel of the U.S. Treasury Department, is a litigation partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Michael E. Gertzman, pictured above right, former Assistant United States Attorney in the Southern District of New York, is a litigation partner and co-chair of the Litigation Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Richard Elliott and Matthew Rosenbaum also contributed to this post.