Hong Kong Company Pays $5M Fine After Employees Buy and Sell Iranian-Origin Goods Using U.S. Dollars

Kelley Drye & Warren LLP

Last week, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $5,228,298 settlement agreement with Sojitz (Hong Kong) Limited (Sojitz HK) for causing U.S. financial institutions to process U.S. dollar payments related to the purchase and resale of Iranian-origin goods in Asia.  This case demonstrates how U.S. dollar payments often trigger OFAC jurisdiction over business dealings that otherwise occur outside of the United States, and highlights the need for effective internal controls to identify potential employee misconduct.

What Happened

Despite explicit and repeated advisements to the contrary, Sojitz HK employees, including one holding a mid-level managerial position, arranged a trading agreement with suppliers in Thailand for the purchase of Iranian-origin high density polyethylene resin (HDPE) to be resold to customers in China.  Sojitz HK used its Hong Kong bank to make payments to its suppliers totaling over $75 million.  Those U.S. dollar payments were processed and settled through U.S. financial institutions, causing those institutions to impermissibly facilitate the sale of Iranian-origin goods.  Company officials and executive management, as well as the U.S. institutions processing the payments, did not detect the involvement of the Iranian actors because the noncompliant Sojitz HK employees removed mention of Iran from relevant transactional documents.  Moreover, the employees concealed this circumvention of Sojitz HK policy during the company’s internal approval process.

The settlement amount reflects OFAC’s balancing of several mitigating and aggravating factors.  Mitigating factors include Sojitz HK’s organized and voluntary disclosure of the apparent violations, the lack of any violations in the past five years, and the company’s proactive implementation of strengthened compliance procedures.  Aggravating factors include the employees’ knowing violation of U.S. sanctions as well as OFAC’s finding that the trading agreement conferred a substantial economic benefit to Iran and undermined U.S. sanctions targeting Iran’s petrochemical sector.

Lessons Learned

U.S. dollars – This case is a reminder that the use of U.S. dollars in cross-border trade often triggers U.S. jurisdiction, even if the underlying trading activity occurs outside of the United States, because U.S. dollar payments often flow through U.S. financial institutions.  In this case, a non-U.S. company violated U.S. primary sanctions rules for “causing” U.S. financial institutions to support Iran-related business that was otherwise conducted outside the United States.

Iranian-origin goods – The U.S. embargo does not just apply to direct dealings with Iran; it also applies to dealings in Iranian-origin goods between non-sanctioned countries, like Thailand and China.  Companies outside the United States should have processes in place to identify transactions that may implicate U.S. sanctions rules and ensure that those transactions occur in compliance with OFAC’s regulations to the extent that U.S. jurisdiction applies.

Employee misconduct –  The violations in this case were the result of intentional employee misconduct.  As noted by OFAC in the settlement agreement, companies should adopt internal controls designed to spot this type of activity, to the extent possible, before it becomes a systemic issue that could generate substantial liability.  Such measures may include risk assessments, testing and auditing of compliance program procedures, and ensuring that appropriate controls apply to overseas subsidiaries.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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