Since the beginning of August, there have been three publicly released enforcement actions by the Office of Foreign Assets Control (OFAC), including two within the same week. These enforcement actions are showing that OFAC is taking a close look at two different things: 1) the constant updating and updated screening of names on one’s list when providing services to someone, and 2) taking the proper steps when engaging an activity that would be eligible for a license.
Regularly screening your sanctions list.
On August 2, 2016, OFAC issued a finding a violation to Humana Incorporated, which is the parent company of Kanawha Insurance Company, for violations of the Foreign Narcotics Kingpin Sanctions Regulation. The Foreign Narcotics Kingpin Sanctions Regulations can be found in 31 CFR Part 598.
The fact pattern in these enforcement actions is interesting, as the violations were a result of not regularly screening existing customers. The finding of violation was to a life insurance company’s third party administrator.
In December of 2009, OFAC designated some specific individuals under the Foreign Narcotics Kingpin designation and these parties were added to the SDN list. When these names were designated, it appeared that these parties, Mr. Grayeb, Mr. Fernandez, and Mr. Fernandez, had policies with an insurance company for which Kanawha was the third-party administrator.
However, after these designations, it appeared that neither Kanawha nor the insurance company took the steps which OFAC would expect from private companies to screen the names of existing customers or policyholders to ensure that no insurance policies are issued to any newly-added SDN persons.
As a result of the lack of periodic screening, no parties identified and blocked the policies’ premium payments for these new SDN persons.
Over this period of time, there were some premium payments for the life insurance policies that were close to $15,000 across the different parties. What is interesting is that there was no knowledge by any employees or managers in Kanawha that they were actually providing services to persons on the SDN list.
Rather, OFAC found the parties had what is called a reason to know. They had reason to know because if they had screened the names of their existing policyholders against the SDN list, they would have seen that some names had been added to the SDN list. At that point, they could have taken the appropriate action.
Per usual, OFAC implements a much higher standard for parties that they believe to be commercially sophisticated, and they deemed that Kanawha was a commercially sophisticated company. As such, they expected Kanawha to have procedures, policies, and internal controls in place and a compliance program *link here* to make sure that they could identify, block, report, or otherwise appropriately deal with any policies, premiums, or policyholders which have been added to the SDN list.
The real lesson to take away from this enforcement action is that OFAC is trying to communicate that it is expecting service providers to be regularly screening the list of their existing customers and/or policyholders to make sure that they are not on the SDN list.
This is particularly important for the types of companies that are acting in sectors that have a regular engagement from most people, such as insurance companies, doctors, cable providers, internet providers, utilities, and so forth.
Enforcement for actions that could have been licensed.
On September 7th and September 13th, 2016, OFAC issued two enforcement actions that focus on companies dealing in exports to Iran that may have been eligible for a license had they followed the proper licensing process. However, both these companies sent their products to Iran without asking for the appropriate license and they were fined.
World Class Technology Corporation, the enforcement action on September 7th, agreed to pay $43,200 to settle potential civil liability for alleged violations of the ITSR. The shipments that were involved were not guns, weapons, or computer technology, but orthodontic devices that were shipped between April, 2008 and July, 2010.
Under the ITSR licensing policy that exists today, some of these orthodontic devices may have qualified under the general license. But at the time, the supply of orthodontic devices, which are similar to dental and medical devices, would probably have been licensed if the company had the knowledge or had taken the time to go through the process.
One of the factors considered to be an aggravating factor against World Class Technology Corporation was the fact that it had no compliance program. One mitigating factor that applied to the World Class Technology Corporation is that it lacked commercial sophistication in conducting international sales.
The most interesting case was released on September 13, 2016 against PanAmerican Seed Company, which is a company is West Chicago, Illinois. The PanAmerican Seed Company, referred to as PanAm Seed, ended up settling for approximately $4.3 million for the sale of flower seeds to Iran.
However, PanAm Seed was not exporting flower seeds directly to Iran. They were exporting seeds to a third party in a third country, but they had knowledge those flower seeds were going to be re-exported to Iran.
There were 48 shipments which may have occurred. OFAC calculated that the benefit to Iran from these transactions was $770,000, but there were a number of aggravating factors that made these alleged violations egregious.
OFAC has a much more aggressive penalty schedule for egregious cases. The penalties involved in an egregious case is the statutory maximum, which with Iran is $289,238, or twice the value of the transaction, it is the greater of the two. So, the maximum penalty was $12 million for shipments of flower seeds.
What were these aggravating factors? They must have been very serious. One of the aggravating factors that OFAC identified is that PanAm Seed, after it discovered the alleged violation to OFAC, did voluntarily self-disclose them.
On top of that, they argued that PanAm Seed demonstrated recklessness by ignoring the compliance responsibilities for OFAC sanctions compliance, even though they were considered to be fairly sophisticated customers and other parties may have warned them that they should be considering sanctions compliance for their company.
Another aggravating factor was that many of the employees and possibly some of the managers had some knowledge of at one point was that one or more of these transactions were related to Iran, but they chose to go ahead with them instead of flagging it an internal compliance program and potentially voluntarily self-disclosing it.
Another very important aggravating factor is that OFAC deemed PanAm Seed to have not initially cooperative with OFAC’s investigation. Specifically, OFAC said that PanAm Seed provided some information that was inaccurate, misleading, or incomplete.
So, what can we take away from this enforcement of trends? It is clear that based on the aggravating and mitigating factors in these cases, as well as the nature of some of the underlying violations, that OFAC is very focused on people following the proper licensing procedure.
It is important to remember that both flower seeds and orthodontic devices may have been licensed, and OFAC admitted that may have been licensed, had a specific license had been requested.
Another important takeaway is that companies should be very cognizant to have their own compliance program. Even if they do not, companies should recognize the potential sanctions liability that they are putting their company in and appropriately flagging it and at least consulting with counsel or their risk management chair to determine the proper steps. The September 13th enforcement action against PanAm Seed also demonstrates that OFAC may be looking for voluntary self-disclosures and complete information.
This is somewhat at odds with the Treasury Fact Sheet that was released some weeks ago stating that deficiencies in the compliance program do not necessarily lead to enforcement actions and may be corrected with some immediate responses, whereas OFAC wants complete information and there have been some significant fines.
This blog is for informational purposes only and is not legal advice.