On New Year’s Eve, a federal court relieved ExxonMobil of a $2 million fine levied against the company by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”).^[1] OFAC imposed the penalty against Exxon for its violation of Ukraine-related sanctions through oil development deals with Russian petroleum company Rosneft. In lifting the penalty determination, the district court found that Exxon was not given fair notice regarding the policies’ details. Although Exxon eventually escaped a sizable penalty, this case still serves as a cautionary tale. Companies engaging in international trade should seek guidance to interpret agency regulations or risk significant fees, whether they result from agency penalties or the costs of eventual litigation.

As way of background, in March 2014, President Barack Obama issued an Executive Order sanctioning Russia for the country’s deployment of military forces in Ukraine.^[2] The Order authorized the Secretary of the Treasury to promulgate applicable regulations, including the designation of Specially Designated Nationals (“SDNs”) whose property would be “blocked” based on their ties to the Russian government. Under Section 4 of the Order, the prohibitions “include . . . the receipt of any contribution or provision of . . . services” from a specified individual.

In May 2014, Exxon executed several contracts with Rosneft. Each of these contracts was signed by Sechin, the President and Chairman of Rosneft’s Management Board. Although Rosneft was not specifically targeted by the sanctions, Sechin was a recognized SDN. After Exxon entered into these contracts, OFAC issued specific guidance that the sanctions prohibited transactions with SDNs even if the individual is acting on behalf of a non-blocked entity. OFAC investigated and eventually imposed the $2 million civil penalty based on Exxon’s contracts with Rosneft. Exxon challenged OFAC’s penalty, claiming that Exxon had not received fair notice of OFAC’s interpretation concerning the regulations.

District Judge Jane Boyle agreed with Exxon, ruling that the government provided too little detail about whether Exxon’s contracts with Rosneft violated the sanctions at the time they were executed. The court reasoned that according to the plain text of the regulations, it was unclear whether Sechin signing the contracts was a “receipt of services” by Exxon. The Court found that the text failed to address whether a receipt of services included any incidental receipt of a benefit resulting from a SDN’s services, or if receipt was limited to when a SDN’s services are specifically aimed at benefiting a U.S. person. Of particular note to the court was the fact that OFAC updated their guidance after clarifying that conduct like Exxon’s was prohibited after issuing Exxon’s penalty.

Importantly, the Court did consider the fact that Exxon failed to seek clarification from OFAC before completing the transaction. The court specifically weighed this factor against Exxon in the fair notice determination, but ultimately held that the burden of providing fair notice remains with the agency. The court specifically stated that “[t]hough the regulations and public statements, taken together, would likely lead a regulated party, acting in good faith, to hesitate before completing transactions like Exxon’s, they do not create ascertainable certainty that such conduct would be prohibited.” Nevertheless, the court’s decision raises uncertainty in dealing with unclear regulations in developing strategy for companies moving forward.

After years of litigation, Exxon escaped their $2 million penalty. But, the costs of having to respond to an OFAC inquiry can be staggering. Unfortunately, due to expedited timelines and uncertainty concerning established foreign policy, regulations related to international trade can be confusing, contradictory (especially when dealing with multiple agencies that may have jurisdiction), and extremely frustrating.

Although the courts may put significant onus on the governmental agencies to ensure transparency, it is still a subjective analysis as to whether the government properly complied. If it does, then the burden shifts to the company. So, when in doubt and although it may delay a transaction, businesses should consider seeking guidance or, if possible, advisory opinions from regulatory agencies related to international transaction to clarify misunderstandings. Furthermore, businesses should not wait until the transaction is being negotiated to determine potential regulatory impacts. Instead, new regulations should be integrated to existing company policies and procedures. When updated, key stakeholders must be adequately trained about the changes. If the changes are going to impact potential business opportunities, initiating the analysis and starting potential license application process early can avoid significant operational issues.

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Note:
[1] Exxon Mobil Corporation v. Mnuchin, No. 3:17-cv-01930 (N.D. Tex. Dec. 31, 2019). [back]
[2] Exec. Order No. 13660, 79 Fed. Reg. 13,493 (Mar. 6, 2014). President Obama expanded Executive Order 13660 through the issuance of Executive Order 13661. Exec. Order No. 13661, 79 Fed. Reg. 15,535 (Mar. 16, 2014). Both orders are available at https://obamawhitehouse.archives.gov/the-press-office/2014/03/06/executive-order-blocking-property-certain-persons-contributing-situation and https://obamawhitehouse.archives.gov/the-press-office/2014/03/17/executive-order-blocking-property-additional-persons-contributing-situat respectively.