Sam Finkelstein, an Associate at The Volkov Law Group, rejoins us for another posting about 3M’s recent settlement for violations of the Iran Sanctions Program.

[co-author: Sam Finkelstein]

The past few weeks have not been kind to 3M. The company recently settled with the SEC for $6.5 million to resolve alleged FCPA violations related to its Chinese subsidiary’s dealings with Chinese state-owned healthcare institutions. Another federal agency, OFAC, announced that it had settled with 3M for $9.6 million over alleged violations of the Iranian Transactions and Sanctions Regulations.

Beginning in November 2015, 3M’s Dubai-based Middle East subsidiary, 3M Gulf Limited (“3M Gulf”) began working on a proposal to manufacture reflective license plate sheeting (“RLPS”) for a German company, with the understanding that the company would export the license plates to Iran. 3M Gulf undertook this business arrangement due to the Joint Comprehensive Plan of Action (“JCPOA”), which permitted certain categories of transactions with Iran. The JCPOA was accompanied by OFAC’s General License H (“GL H”), which detailed the parameters of permissible business with Iran.

In response to these changes, 3M issued internal guidance on the JCPOA and GL H. The guidance noted that transactions with Iranian government entities, and U.S. person involvement in Iran-related transactions undertaken by foreign subsidiaries, both remained strictly prohibited.

The JCPOA and GL H took effect in January 2016. Not long after, the 3M Gulf manager who had developed the Iranian license plate deal submitted the proposal to 3M’s Trade Compliance personnel in Minnesota. The proposal outlined how 3M would supply RPLS to the German company, who would use the materials to produce license plates for sale to “transport authorities in Iran.” The word “authorities” should have set off alarm bells among the 3M compliance team, but regretfully, it did not.

Five days after receiving the Iran proposal, 3M’s Trade Compliance Counsel approved it. The decision to approve the Iran proposal was based on an incorrect belief that the German company was considered the “end user” for sanctions purposes. As a result of this mistake, 3M only screened the German entity, ignoring the Iranian end user.

In April 2016, the German company notified 3M that it would not be producing finished license plates, but would rather be reselling the RPLS directly to Bonyan Taavon NAJA (“BTN”), a sanctioned entity controlled by Iranian Law Enforcement officials. 3M’s Trade Compliance team was not notified of this change.

In the course of setting up the RPLS agreement, numerous managers at 3M suggested that Trade Compliance re-review the deal, but these suggestions were ignored by the deal’s proponents. Even worse, a 3M subsidiary received an outside due diligence report flagging the connection to Iranian law enforcement, and closed the matter without further investigation.

Instead, 3M managers promoting the RPLS deal took steps to conceal its true nature, in an effort to avoid further scrutiny from their Trade Compliance team. These steps included changing the contracting entity from 3M Gulf to Switzerland-based 3M East, in violation of 3M’s internal sanctions compliance policies. These individuals misrepresented key aspects of the deal in order to push it through, even falsely claiming that it had already been approved by Trade Compliance.

The deal was approved, and between September 2016 and September 2018, 3M East sent 43 shipments of license plate sheeting to the German intermediary, who resold them to BTN. During this time, a U.S.-person employed at 3M Gulf approved six credit notes relating to the RPLS sales, despite knowing that U.S. persons were prohibited from doing business with Iran. OFAC cited sales incentives for this U.S. person that encouraged the Iran business as relevant to its assessment of 3M’s culpability.

After the JCPOA, and with it GL H, were rescinded in late 2018, 3M discovered that the RPLS sales had not been authorized. The company took appropriate remedial steps, voluntarily disclosing the violations to OFAC, terminating or disciplining culpable employees, replacing its Trade Compliance counsel, revamping its sanctions compliance training program, and discontinuing business with the German reseller.

Due to its willful, repeated violations of U.S. sanctions and failure to properly assess the sanctions risk, OFAC determined that 3M’s violations of the Iran Sanctions were an egregious case. OFAC further determined that the RPLS deal, which 3M knew or should have known would result in its products being sold to Iranian law enforcement, and its impermissible involvement of a U.S. person, amounted to 54 apparent violations of the Iran Sanctions Regulations.

While OFAC’s $9.6 million settlement with 3M is nothing to scoff at, 3M got off relatively easy. The statutory maximum civil monetary penalty applicable in this matter, according to OFAC, was $27.5 million. The company avoided the worst case scenario because: (1) 3M had an OFAC compliance program in place at the time of the offenses (even if the employees ignored it); (2) 3M thoroughly investigated the violations and took considerable remedial measures as outlined above; and (3) 3M voluntarily disclosed the violations and cooperated with OFAC through the provision of detailed and well-organized information.