This week, the Office of Foreign Assets Control (OFAC) announced a settlement agreement with Berkshire Hathaway Inc. involving apparent violations of the U.S. embargo on Iran by a subsidiary in Turkey. Under the agreement, Berkshire Hathaway agreed to pay over $4.1 million to settle allegations that the Turkish subsidiary exported 144 shipments of cutting tools to third party distributors knowing that the goods would ultimately be shipped to Iran. Although the violations were voluntarily disclosed to OFAC, the agency determined that the Turkish subsidiary’s actions were “egregious” due to the willful nature of the subsidiary’s conduct. Among other things, the senior managers at the Turkish subsidiary intentionally pursued business with Iran when they knew such business was prohibited and took a number of steps to try to conceal their conduct, like using third party intermediaries in Turkey, corresponding via personal email accounts, and entering false information in internal systems. Ultimately, the U.S. parent company launched an internal investigation after receiving an anonymous tip about the conduct of the subsidiary. According to OFAC, the subsidiary’s bad acts continued during the investigation, lying to investigators and encouraging others to do the same.
The case documents are worth a full read, but there are a number of key takeaways for exporters:
- Liability for foreign subsidiaries: This case is a reminder that U.S. parent companies are liable for violations of the Iran embargo committed by their foreign subsidiaries and other overseas operations that are owned or controlled by U.S. parent. This is somewhat unusual under OFAC’s regulations, which generally treat foreign subsidiaries as non-U.S. persons.*
- Intercompany orders can present risk: Many multinationals apply less trade due diligence to intercompany orders than to third party sales. This can make sense for some companies, because doing so often eliminates duplicative compliance steps and because the business unit that is closest to a customer is often the best positioned to conduct the necessary due diligence steps. But this case also illustrates the danger of failing to identify red flags of non-compliance in intercompany orders. OFAC noted that several Berkshire Hathaway foreign subsidiaries received emails from the Turkish subsidiary containing red flags of non-compliance, including an email address from Iran and the name of a company known to be located in Iran. Only one of the intercompany orders from the Turkish subsidiary was flagged and stopped. Employees involved in export transactions should be trained on how to spot red flags of non-compliance, even in intercompany orders, and know how to report potential compliance issues up the ladder.
- Distributor danger: Companies remain liable for indirect sales through intermediaries when they know or should know that the intermediary will ship the items to sanctioned territories or sanctioned parties. The presence of the third party intermediaries in this case counted against the company since they were used to hide the true end use of the products. Even in less egregious cases, proper distributor due diligence and follow-up can help reduce the chances that your products end up in problematic jurisdictions.
- The power and peril of an “egregious” determination: OFAC has the authority to obtain substantial penalties in “egregious” cases that involve, among other things, willful conduct, management knowledge or involvement, or harm to U.S. sanctions objectives. Here, OFAC obtained a penalty of over $4.1 million, and could have imposed a penalty of over $18 million, for sales that were collectively worth only $383,443. Absent a voluntary self-disclosure (VSD) by the company, OFAC could have sought penalties of over $36 million. If the VSD had involved less serious, “non-egregious” conduct, the maximum penalty would have been only around $192,000, and the ultimate penalty assigned to the company would likely have been significantly less than that. Companies that discover potentially egregious violations need to immediately remediate the issue and then carefully consider their options, including whether to pursue a VSD, which can substantially reduce penalty exposure.
- Importance of auditing and monitoring: In this case, the U.S. parent company sent repeated reminders to its overseas operations that business with Iran was prohibited. Those types of compliance reminders and directives are critical, but they cannot replace a solid auditing or monitoring program, which can catch and address bad actions before they become systemic issues. Site visits, remote monitoring of data, and local compliance personnel are all important auditing monitoring tools that can help to spot this type of activity and the more common inadvertent errors that can also generate liability for companies.
*Foreign subsidiaries are fully subject to the Cuba embargo, but not to other OFAC programs.