• $2 million penalty against Exxon overturned
• Court concluded that OFAC failed to provide clear notice of violative conduct
• Companies are at risk when acting in context of ambiguous agency guidance

At the end of December 2019, the U.S. District Court for the Northern District of Texas vacated a $2 million penalty that the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) had imposed against ExxonMobil for alleged violations of U.S. sanctions related to Russia and Ukraine. OFAC is the U.S. government agency that administers most U.S. sanctions.

This matter has been of interest since the penalty was first announced in July 2017 – read our July 2017 blog post detailing the matter. As described below, the district court’s reasoning in vacating the penalty against Exxon is worthy of interest, too.

Penalty Imposed Based on Contracts Signed in May 2014

In May 2014, ExxonMobil entered into eight contracts with Rosneft, one of Russia’s largest oil and gas companies. At that time, Rosneft was designated by OFAC as a sanctioned party under U.S. Sectoral Sanctions imposed on certain Russian and Ukrainian entities and individuals. Under those sanctions, some but not all transactions with Rosneft were prohibited. The contracts between Exxon and Rosneft were not by themselves prohibited.

Complicating the matter, however, was that each of the contracts was signed by Igor Sechin, the president of Rosneft. Sechin was also at the time a Specially Designated National (SDN). As a general matter, U.S. parties (such as Exxon) cannot engage in any transaction or other dealing with an SDN.

In July 2017, OFAC announced its $2 million civil monetary penalty against Exxon for eight violations of the Ukraine-Related Sanctions Regulations. This represented the maximum possible civil penalty under the International Emergency Economic Powers Act, which provides the statutory authority for the Ukraine-Related Sanctions.

In announcing the penalty, OFAC asserted that the regulations themselves as well as public statements made by OFAC and members of the White House “made clear U.S. persons may not deal with any persons designated pursuant to E.O. 13361, including Sechin, or receive, deal in, or benefit from any service a designated person might provide.” Exxon promptly challenged the penalty.

Court Concluded that OFAC Did Not Provide Fair Notice of Prohibition

Exxon argued that neither the regulatory language itself, nor related guidance issued by OFAC, was sufficiently clear for the company to understand that co-signing a contract with an SDN was forbidden. OFAC countered by pointing to an FAQ on the agency’s website related to U.S. sanctions on Burma and which indicated that dealing with an SDN in a transaction on behalf of the SDN’s organization would be prohibited.

The court rejected this OFAC argument. In particular, the court found it unreasonable for Exxon to necessarily understand that similar regulatory provisions in different sanctions regimes should be interpreted in the same way absent “explicit” guidance from OFAC.

Court Frowned on Exxon’s Decision Not to Seek Advice Directly from OFAC

OFAC also asserted that, if Exxon were uncertain about the scope of the prohibitions against Sechin, it should have sought guidance directly from the agency. Although the court concluded that the agency ultimately has responsibility for providing fair notice, the court also looked dimly on Exxon’s decision not to seek guidance directly from OFAC. More generally, the court was somewhat troubled that Exxon decided to proceed in the context of considerable regulatory uncertainty – particularly given that Exxon could have sought guidance from OFAC to alleviate that uncertainty.

One can surmise that Exxon may not have sought guidance because of concern of getting the wrong answer. That of course is not much of an excuse. But those dealing regularly with OFAC also will appreciate how difficult it often is to extract any information from the agency, let alone pertinent guidance. Thus as a practical matter, Exxon may simply have made a business judgment that it was reasonable to proceed with the contracts. (Interestingly, it does not appear that OFAC has claimed that Exxon’s multi-million dollar contracts were themselves tainted, only that the dealings with Sechin in order to execute the contracts were prohibited.)

Lessons for Regulated Companies and Their Advisors

OFAC penalties are rarely challenged in court. And the district court’s decision is far from a clear victory for Exxon. (OFAC may also appeal the decision.)

As a general matter, it would be unwise to assume that regulatory ambiguity about whether specific conduct is prohibited creates a green light to proceed with a potentially problematic transaction. Rather, in the case of genuine uncertainty, the smart – and perhaps even expected – course of action would be to seek OFAC guidance.

More specifically, it seems safe to conclude that OFAC will view any dealing with an individual SDN – whether in their professional or personal capacity – as prohibited. This could create a heavy compliance burden for regulated parties.

For example, imagine that Sechin was simply a senior manager with which Exxon met while negotiating its contracts with Rosneft. Presumably Exxon met with many such people during negotiations. Does Exxon need to screen all individuals it meets with, at least in countries or affiliated with companies that are subject to some U.S. trade restrictions? The answer would seem to be yes.

More positively, the regulated community will surely hope that OFAC views this decision as the basis for issuing clearer regulations and / or guidance, whether in the form of FAQs or in some other manner. Practitioners often look to OFAC guidance about all of its sanctions programs to discern the agency’s enforcement intent and regulatory interpretations. While we do not expect this practice to change, additional guidance would be welcome. That would be the best possible response by the agency to this rare defeat.