OFAC Settles More “Apparent Violations” of Sanctions Regulations

proscribed transactions - OFAC Settles More “Apparent Violations” of Sanctions Regulations

Our first article of 2022 will take up where the final one of 2021 left off: Office of Foreign Assets Control enforcement penalties. Last time, we discussed three cases in which OFAC extended its regulatory reach to foreign companies, because their actions had an effect in the United States. This month, we’ll focus on three others, involving companies in the United States which failed to comply with some basic requirements of sanctions regulations.

U.S. Company’s Facilitation of Foreign Affiliates’ Transactions Was a Bad Idea

Broadly speaking, “facilitation” is involvement by United States persons in transactions performed by non-U.S. parties, which they would be prohibited from directly undertaking. Common examples are referral of sanctioned business opportunities to an affiliated foreign company and giving managerial approval to a foreign subsidiary’s proposed sales. While it may be perfectly permissible for the foreign company to engage in the transaction, a U.S. person’s involvement is not allowed.

This basic tenet of OFAC’s rules was disregarded by employees of Schlumberger Rod Lift, Inc., a U.S. company. They assisted affiliated companies in Canada and China to sell and deliver goods to then-sanctioned Sudan. The Sudanese Sanctions Regulations in effect at the time explicitly prohibited U.S. persons’ facilitation of transactions with that country. Thus, even though the foreign affiliates were not cited with apparent violations for their role, the U.S. company’s participation was improper.

OFAC’s Enforcement Release emphasizes that the employees involved had received sanctions compliance training, including on facilitation, and also were aware of the corporate policy against transactions involving Sudan. Whether they simply ignored these directives, or misunderstood them, is left unaddressed.

So Was Another U.S. Company’s Approval of Services to a Russian Offshore Oil Project

Our next case involves Cameron International Corporation, a U.S. company that approved its Romanian subsidiary’s “provision of services to the Russian energy firm Gazprom-Neft Shelf for an Arctic offshore oil project.” Why was that a problem? As OFAC explained, the Russian company was a subsidiary of “OJSC Gazprom Neft (‘Gazprom’), which is subject to the restrictions of Directive 4 of E.O. 13662.” 

Directive 4 prohibits U.S. persons from directly or indirectly furnishing services to Gazprom, and other parties on the Sectoral Sanctions Identifications List, for use in Russian offshore oil exploration and production. Although Gazprom-Neft Shelf is not itself on the SSI List, its status as a wholly-owned subsidiary of Gazprom subjects it to Directive 4’s coverage as well.

OFAC pointed out that Cameron’s executives who approved the services “had reason to know the services they were providing were in support of Arctic offshore oil-producing projects by Gazprom-Neft Shelf.” The agency also noted that while the company had procedures in place “to determine Cameron’s legal obligations” for Russia-related transactions, they failed to take into account that “U.S.-person involvement in the activities of Cameron’s foreign subsidiaries could have fallen within the applicable prohibitions.” Oopsie.

Not to Mention Exporting Goods with Knowledge that Iran Was the Ultimate Destination 

Wrapping things up is a settlement involving “NewTek, Inc. for Its Potential Civil Liability for Apparent Violations of the Iranian Transactions and Sanctions Regulations.” The apparent violation here was a simple one. NewTek exported “products from the United States to two third-country distributors with knowledge or reason to know its products were intended specifically for a reseller located in Iran.” The ITSR quite clearly prohibit exporting goods to a third country with knowledge they will wind up in Iran. 

NewTek’s excuse was it “incorrectly believed that its product sales through third-party distributors to the Iranian Reseller were in accordance with applicable sanctions regulations in part because NewTek did not deal directly with Iran, but rather through a third-country intermediary.” It’s no wonder it made this fundamental error. The company “did not have export control or sanctions compliance policies or procedures in place during the relevant time period and did not provide training to personnel regarding export control or sanctions compliance.”

Lessons to Be Learned?

Maybe it’s a stretch, but I do see some common threads among these three cases.

First, they very clearly involved transactions covered by sanctions programs: Sudan, the Russian Energy sector, and Iran. That alone should have caused a heightened awareness by the companies involved to pay extra attention.

Second, they show the limits, or inadequacies, of the companies’ compliance efforts. SRLI and Cameron both had what appear, on paper anyway, to have been acceptable procedures. The fact that the proscribed transactions occurred means they failed in practice. We don’t know whether this was because the guidance was insufficiently clear, or was treated as ignorable. The policy and training were ignored in practice, leading to predictable results.

Of course, NewTek’s lack of a compliance program was simply tempting fate, i.e., having no program is inadequate per se, and led to the unfortunate result we discussed above.

Third, and related to the above, none of the companies appear to have required review of the transactions by a compliance officer. Installing a “fail-safe” backup to evaluate questionable deals is, in my view, an essential part of a compliance program.

Finally, it’s not clear whether the Cameron scenario resulted from a failure to realize that Gazprom-Neft Shelf was subject to Directive 4 coverage, notwithstanding it was not named on the SSI List. OFAC’s “fifty-percent ownership” rule places an extra burden on U.S. companies to investigate their foreign customers. Solely relying on list-based matches to screen for sanctioned parties is insufficient, as we already discussed quite some time ago.

Thompson & Associates, PLLC provides representation in all aspects of customs laws and regulations, specializing in export and import regulations and international business counseling. We can be reached at 202-772-2039 or online.


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