On October 20, 2020, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced that it had reached a $4.1 million settlement with Berkshire Hathaway, Inc., the multinational conglomerate holding company controlled by Warren Buffett, and its Turkish subsidiary, Iscar Kesici Takim Ticareti ve Imalati Limited Sirket (“Iscar Turkey”), for the subsidiary’s violations of U.S. economic sanctions against Iran. This settlement underscores OFAC compliance risks associated with foreign subsidiaries, and the significant financial benefit of voluntarily disclosing violations and cooperating with OFAC investigations.
Notably, the $4.1 million settlement is a fraction of the statutory maximum civil monetary penalty of $36.8 million that Berkshire Hathaway could have faced. Under OFAC’s Enforcement Guidelines, because Berkshire Hathaway made a voluntary disclosure, the base monetary penalty was $18.4 million, one-half of the maximum. OFAC then reduced the penalty further because Berkshire Hathaway cooperated with OFAC’s investigation, took employment actions against complicit personnel, and enhanced compliance procedures for subsidiaries.
The Subsidiary’s Exports to Iran
The general manager of Berkshire Hathaway’s wholly owned Turkish subsidiary, Iscar Turkey, sought to position the company to sell to customers in Iran if sanctions against the country were lifted by the United States and the European Union. To develop this market, between December 2012 and January 2016, Iscar Turkey fulfilled 144 orders of cutting tools with a total value of $383,443 to distributors, knowing that those distributors would ship the tools to Iranian end-users, including several entities falling within the definition of the “Government of Iran” under U.S. sanctions. Because these transactions would have been prohibited if engaged in by a U.S. person, they violated the prohibition against foreign subsidiaries of U.S. companies knowingly engaging in transactions with the Government of Iran.
According to the settlement agreement, at the direction of senior managers, the subsidiary’s personnel hid the sales by setting up private email accounts for the transactions, receiving payments in cash, and creating false invoices reflecting incorrect customers. OFAC noted that they also faked a sanctions compliance session with false documents and lied during an internal investigation. These acts led OFAC to classify the matter as an egregious case.
OFAC also faulted Berkshire Hathaway for not recognizing that Iscar Turkey was violating sanctions. Even though Berkshire Hathaway repeatedly communicated to Iscar Turkey the applicability of the U.S. sanctions against Iran and Iscar Turkey hid the transactions, OFAC concluded that Berkshire Hathaway failed to act on red flags, including emails with other subsidiaries referencing customers in Iran. Once Berkshire Hathaway did discover the possible violations after receiving an anonymous tip, it undertook an investigation and disclosed the transactions to OFAC.
Risks from Non-Compliance by Foreign Subsidiaries
In May 2019, OFAC released its Compliance Framework. (Read our client alert on the Framework here.) OFAC explained that an effective compliance program must have five essential components: management commitment, risk assessment, internal controls, testing and auditing, and training. To be effective, a sanctions risk assessment must be tailored to the business. The Berkshire Hathaway settlement highlights the importance of recognizing risks associated with business operations of a foreign subsidiary – its customer base, business networks, products and services, and the geographic locations of its business partners and activities. To avoid risks related to merger and acquisition activity, companies should require thorough due diligence for sanctions issues in deals and thorough corporate integration after closing. Companies must also ensure that their subsidiaries understand and conform with their compliance obligations.
Compliance risk is especially heightened under the U.S. sanctions against Iran and Cuba. These sanctions apply directly to foreign subsidiaries of U.S. companies. Other sanctions programs do not apply directly to foreign subsidiaries — their activities become relevant when the U.S. parent facilitates the subsidiary’s transactions involving sanctioned destinations or parties.
The Value of Voluntary Disclosure and Cooperation
Berkshire Hathaway’s settlement amount, $4.1 million, is significantly lower than the statutory maximum penalty for the violations, $36.8 million. The applicable base penalty was half of that maximum — $18.4 million — under OFAC’s Enforcement Guidelines because Berkshire Hathaway voluntarily disclosed the transactions to OFAC. Because Berkshire Hathaway cooperated with OFAC’s investigation and took other mitigating and remedial actions, OFAC reduced the penalty further, despite the presence of several aggravating factors. OFAC noted that Berkshire Hathaway responded to follow-on questions about its voluntary self-disclosure, cooperated throughout OFAC’s investigation, removed and replaced personnel involved in the violations, and enhanced its compliance procedures for foreign subsidiaries. Berkshire Hathaway also agreed to certify annually for the next five years that it is meeting its compliance obligations.
A company facing potential criminal penalties for sanctions violations may make a voluntary disclosure to the Department of Justice’s (“DOJ”) National Security Division as well as to OFAC, though such disclosures must be carefully considered. If a company discloses potential violations to DOJ before a government investigation is initiated, promptly after becoming aware of violation, and discloses all known relevant facts, it will benefit from a presumption of a non-prosecution agreement and no fine (absent aggravating factors). (Read our client alert on the DOJ disclosure policy here.)
Compliance with OFAC sanctions is challenging for international businesses. A successful compliance program is built on an understanding of the risks specific to the business and regular review and updates to the program, particularly after acquisitions.