On July 28, 2020, a Pennsylvania-based cookware coating manufacturer (the “Company”) agreed to pay a $824,314 penalty to the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) to settle claims that it violated OFAC’s Iranian Transactions and Sanctions Regulations (“ITSR”). Executive Order 13628, signed in October 2012, prohibited any U.S.-owned or U.S.-controlled foreign entity from knowingly engaging in any transaction, directly or indirectly, with Iran or any person subject to Iran’s jurisdiction, ITSR at § 560.215, and the claims at issue here identified the risk in indirect transactions. According to OFAC, the penalty amount was substantially reduced by virtue of voluntary remedial actions undertaken by the Company following the identification of the issue.
OFAC claimed that the Company’s subsidiaries in Turkey and Italy continued selling coatings to customers in Iran after the new prohibition was introduced in 2012. OFAC concluded that from November 2012 to December 2015, the Company and its foreign subsidiaries engaged in 74 separate transactions in violation of ITSR. The sales were facilitated by a US citizen, the Company’s Managing Director for Europe, who oversaw operations in Turkey and Italy.
OFAC claimed that in 2013, after learning that sales to Iran could present a potential sanctions issue, the Company’s Regulatory Affairs Manager incorrectly advised the Company that it could continue its sales to Iran as long as the Company did not transact directly with Iran. The Managing Director for Europe then devised a plan with managers at both subsidiaries to continue the sales through a third-party sales agent. Beginning in February 2014, the Company worked with the sales agent to carry out such indirect transactions in Iran but avoided any mention of Iran in the sales documentation. In January 2016, Iran General License H was released, permitting certain transactions with Iran under ITSR, and the Company realized that its prior indirect sales with Iran had in fact been prohibited. The Company then hired external counsel to investigate the transactions and later self-disclosed to OFAC.
OFAC noted several aggravating factors in the enforcement release, including the Company’s knowledge that a manager was facilitating sales to Iran and the Company’s failure to implement enhanced compliance policies for high-risk jurisdictions. Although OFAC claimed that it could have imposed the statutory maximum civil monetary penalty of $19 million, it determined that the applicable penalty would be $1.5 million. OFAC and the Company ultimately settled for $824,314, just more than half of that amount. In deciding the settlement amount, OFAC considered the Company’s “significant corrective actions,” including its internal investigation, self-disclosure, cooperation with OFAC’s investigation, and remedial measures.
The Company had undertaken several notable remedial measures including removing the Managing Director of Europe who had since been promoted to Chief Executive Officer from the Board of Directors; implementing annual and quarterly sanctions reporting requirements; adopting a code of conduct; creating a sanctions compliance policy; and training employees on sanctions compliance.
OFAC also specifically cited the Company’s self-appointment of an internal compliance monitor as well as an independent external compliance monitor as mitigating factors. The external monitor is responsible for auditing the Company’s sanctions compliance and reports to the Board of Directors. Meanwhile, the internal monitor is responsible for implementing recommendations made by the external monitor. While OFAC did not explicitly state that the penalty discount was due to the appointment of not one, but two, monitors, this remedial action does go above and beyond what would typically be expected of a Company in a similar situation. It is uncommon for regulators to request that a non-financial institution install an external monitor, and even more rare for a non-financial institution to self-appoint both an internal and external monitor.
While the facts will always guide any negotiation, the settlement thus suggests that self-appointing monitors may be an option for companies looking to reduce a penalty for sanctions violations. The decision to install a monitor communicates to OFAC that a company is committed to strengthening its sanctions compliance program, increasing the program’s transparency, and implementing changes. It is unclear how monitorships will be weighed in future cases, but in this Company’s case, the double monitorship appears to have been given significant weight.
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OFAC Enforcement Release