Construction Specialties, Inc. (“CSI”), a U.S. company specializing in the sale of building materials, agreed to pay $660,594 to settle its liability for three violations of OFAC’s sanctions on Iran. CSI’s illegal conduct occurred through its United Arab Emirates (UAE) subsidiary, Construction Specialties Middle East (“CSME”), which imported building materials from the United States to the UAE and then knowingly reexported them to Iran. In doing so, CSME’s general manager and a senior manager disregarded CSI’s company policy and falsified trade documents. CSI voluntarily disclosed the conduct to OFAC.
In June 2016, CSI executives visited CSME’s offices in Dubai. At the meeting, they discussed CSME’s potential business to sell building materials to construct a shopping mall in Tehran, Iran. CSI executives instructed CSME not to pursue any business in Iran after CSI consulted with external counsel to confirm whether such business activity was permissible under U.S. sanctions.
Row months later, in August 2016, CSI issued a new Iran Sanctions Policy to CSME and other business units. It included information concerning recent additions to the Iran Sanctions Program, including the issues of a new General License H, which authorized foreign subsidiaries of U.S. companies, and non-U.S. employees to conduct a limited set of commercial trade transactions with Iran.
General License H, however, did not authorize the proposed transactions to Iran that were previously contemplated by CSME relating to the construction of the shopping mall in Tehran, Iran. In a cover email accompanying the new policy, CSI reminded CSME that the prohibitions continued to apply on prospective business with Iran, and that U.S. persons could not be involved with foreign subsidiaries’ dealings with Iran.
Notwithstanding CSI’s issuance of the new Policy, and the policy’s specific direction, between December 4, 2016, and August 3, 2017, CSME imported goods from CSI and another supplier in the United States to the UAE and then knowingly reexported them to Iran.
CSME concealed or obfuscated the destination of the goods from the U.S. suppliers. Among their deceptive acts, CSME senior managers falsified the ultimate destination of goods on seven purchase orders to the U.S. suppliers, omitted the ultimate destination on another purchase order, used a false project name to avoid linkage to Iran, and took steps to ensure that purchase of these U.S.-origin goods and their association with Iran would not be reflected in CSME records. CSME also removed labels denoting the U.S. origin of goods, and commingled U.S.-origin goods with goods produced by CSME in the UAE when they were sold to Iran, all in an effort to obfuscate the true country of origin.
Despite CSME’s senior managers’ efforts to conceal these activities, a U.S. person employed at CSME in Dubai discovered the conduct at issue after overhearing the CSME senior managers reference U.S.-origin goods for a “big job.” When the U.S. person employee inquired, the managers told them they were “confused.” The CSME employee inspected related documentation and discovered elevated levels of sales, general, and administrative expenses in the region, which the U.S. person employee believed corroborated their suspicion. CSME immediately dismissed the employee after they confronted the senior executive about the unexplained elevation in regional expenses. The same day, the U.S. person employee flew to the United States and reported the discovery and suspicions to CSI headquarters. CSI initiated an internal review soon, thereafter, terminated all Iran- related business activity, and voluntarily reported the matter to OFAC.
OFAC cited the fact that two members of CSME’s senior management team willfully violated the Iran Sanctions Program. The two individuals stripped Iran as the final destination of the U.S.-origin goods in an attempt to disguise the otherwise illegal transactions.
The enforcement action highlighted the dangers that multinational companies face when pursuing opportunities in high-risk jurisdictions and the need for tailored controls to prevent rogue employees from circumventing sanctions compliance controls. In this respect, OFAC emphasized the importance of parent companies making sure that overseas subsidiaries implement appropriate compliance programs and policies, routinely audit their overseas subsidiaries and exercise appropriate oversight of activities that may create sanctions risks.
