• American Honda Finance Corporation pays for alleged violations of U.S. sanctions on Cuba
• Violation committed by American Honda’s subsidiary in Canada
• Penalty underscores breadth of U.S. jurisdiction, importance of compliance reviews

On June 8, the Office of Foreign Assets Control (OFAC) announced a monetary penalty against American Honda Finance Corporation (American Honda) for alleged violations of the Cuban Assets Control Regulations (CACR), the primary regulations by which the United States imposes economic sanctions on Cuba.  A copy of the OFAC press release announcing the penalty is available here.

The penalty amount, approximately $88,000, is not particularly noteworthy.  Nor, as was the case with certain other OFAC matters, did the enforcement action take particularly long to conclude: the conduct occurred between 2011 and 2014.

What we think is notable is that the matter involved the Canadian affiliate of a global company, acting entirely independently of U.S. persons, entirely outside the United States.  (There is no indication that any funds passed through the United States; such funds transfers have previously been the basis for liability.)  The matter thus serves as yet another reminder of the very long arm of U.S. sanctions jurisdiction.  The matter likewise underscores the need for periodic compliance reviews.

Facts.  While the penalty was imposed against American Honda, it was in fact the company’s Canadian subsidiary – Honda Canada Finance, Inc. (Honda Canada) – that engaged in the conduct that triggered liability.  According to OFAC, Honda Canada is majority-owned by American Honda.  Thus, under the CACR, Honda Canada is generally prohibited from doing business with Cuban parties just as if it were a U.S. company.

According to OFAC, between 2011 and 2014 Honda Canada “approved and financed 13 lease agreements between an unaffiliated Honda dealership in Ottawa, Canada and the Embassy of Cuba in connection with the Cuban Embassy’s leasing of several Honda vehicles.”  OFAC also helpfully notes that the actual lessor of the vehicles had the word “Cuba” in its name, i.e., Honda Canada could not plead ignorance that it was involved in financial transactions with a Cuban entity.

Interestingly, this fact did not help Honda Canada when screening transactions against OFAC’s List of Specially Designated Nationals (SDN) and Blocked Persons, which lists parties with which U.S. companies and their non-U.S. subsidiaries – in the case of Cuba transactions – cannot engage.  As OFAC specifically points out, Honda Canada had a mechanism in place to review transactions against the SDN List.  However, that mechanism did not provide for a review of the names of countries subject to comprehensive U.S. sanctions.

Of course, for a Canadian company, there would ordinarily be no prohibition on conducting business in Cuba or with a Cuban party.  Just the opposite, in fact: under the Canadian Foreign Extraterritorial Measures Act, a Canadian company like Honda Canada is generally prohibited from complying with the U.S. embargo of Cuba.  It is therefore possible that Honda Canada affirmatively (and perhaps even reasonably) chose to comply with the laws of its home country rather than the laws of the United States.

Penalty determination.  According to OFAC, the transactions that constituted the alleged violations were valued at roughly $277,000, which corresponds to a base penalty of $138,500.  Yet OFAC agreed to reduce the penalty based on the following factors:

• American Honda took remedial action, including implementing a new OFAC compliance policy.
• American Honda cooperated in OFAC’s investigation, including through:
  • Making an initial voluntary disclosure of the violations,
  • Providing relevant information to the agency in a timely and efficient manner, and
  • Tolling the statute of limitations.
• OFAC issued a license to American Honda in June 2015 regarding the leases, e., OFAC must not have thought the conduct was that problematic or else presumably the agency would not have issued the license.

Analysis.  This is another OFAC action against a non-U.S. company for action that apparently took place entirely outside the United States, presumably complied with the law of the country in which it occurred, and did not involve any U.S. individuals or entities.  And beyond the fact that Honda Canada was a subsidiary of a U.S. company, there is no indication that American Honda took any steps to approve, support or otherwise facilitate Honda Canada’s approval of the 13 lease agreements.  This is extraterritorial jurisdiction at its most brazen.

We also think it worthwhile to point out that this occurred at Honda, one of the largest companies in the world.  Clearly the company has resources available to implement a robust compliance program.  And frankly there is no indication that the compliance program was not robust.

But it did apparently contain a gap with respect to screening.  Which serves as a useful reminder that companies should periodically review and assess their compliance program for such gaps.  An effective compliance program has to be dynamic both to account for changes to the law and to consistently evolve and improve to address the myriad sanctions challenges that arise.  Routine compliance assessments are a critical part of preventing violations before they occur.