The Office of Foreign Assets Control (OFAC) is a key player in advancing U.S. foreign policy and national security objectives. As a part of the Department of the Treasury, OFAC is responsible for implementing and enforcing economic and trade sanctions against specific foreign countries, entities, and individuals.
These sanctions, aimed at combating threats such as terrorism, narcotics trafficking, cybercrime, and weapons proliferation, make compliance with OFAC sanctions not just a regulatory obligation but a critical business responsibility for international companies.
Even unintentional non-compliance with these rules can lead to severe penalties, including criminal prosecution. This underscores the gravity of the situation and the urgent need for strict compliance, impressing upon the audience the serious consequences of non-compliance.
International companies can inadvertently breach OFAC sanctions through various pathways, highlighting the need for utmost caution and vigilance in their operations.
Companies might unknowingly engage in business with entities that, while not directly listed on the OFAC sanctions list, have a significant ownership or control interest held by sanctioned individuals or entities.
The OFAC emphasizes caution when dealing with non-blocked entities where sanctioned persons have less than 50% ownership or control, as these entities could become targets of future sanctions.
Some sanctions programs, like those for Crimea, Cuba, Iran, North Korea, Syria, and Venezuela, block people and entities without a specific OFAC designation based on other criteria, such as government connections.
Understanding OFAC Sanctions
OFAC sanctions often prohibit 'facilitation,' which means that U.S. persons are prohibited from taking actions that would indirectly enable a transaction they would be prohibited from directly undertaking. In simpler terms, if a U.S. person cannot directly engage in a transaction due to sanctions, they also cannot facilitate that transaction for someone else.
For instance, even the approval of a contract or transaction by a U.S. manager between a foreign subsidiary and a sanctioned entity can be considered facilitation. This means that if a U.S. manager approves a contract between a foreign subsidiary and a company on the SDN List, they are facilitating a transaction that would be prohibited if undertaken directly.
OFAC sanctions serve as a diplomatic tool to pressure foreign governments or groups into compliance with international law and U.S. policy objectives.
OFAC sanctions can take various forms, including asset freezes, trade prohibitions, or restrictions on transactions with designated entities or individuals. Each form carries its own set of implications for international companies, making it crucial for them to understand the full scope of these sanctions.
To enforce this framework, OFAC maintains lists such as the Specially Designated Nationals and Blocked Persons (SDN) List, which identifies parties with whom U.S. persons and businesses are prohibited from engaging in transactions. While the purpose of these sanctions is to protect national interests, they may present challenges for international companies engaged in cross-border transactions.
OFAC enforcement actions are often based on strict liability, meaning a company can be held liable for a violation even if it lacked knowledge or intent. This can lead to penalties even if a company relies on third-party compliance systems that fail to catch violations.
Violate OFAC Sanctions Without Intent
International business operations often involve complex networks of suppliers, distributors, and customers spread across different jurisdictions. This complexity increases the risk of unintentional violations of OFAC sanctions. Below are some common scenarios under which companies may inadvertently breach these regulations:
- Insufficient Due Diligence: A lack of robust screening of third-party business partners may result in transactions with parties who are subject to sanctions. For instance, a company may unknowingly engage with a vendor listed on the SDN List or located in a sanctioned country.
- Complex Supply Chains: Global supply chains often involve multiple intermediaries, making it difficult to trace the origin or destination of goods and services. A foreign subsidiary or distributor may unknowingly sell products to a sanctioned entity despite the parent company's efforts to maintain compliance.
- Indirect Transactions: Companies may unwittingly violate sanctions through indirect dealings. For example, payments routed through third parties or banking institutions in sanctioned countries could result in unauthorized access to the U.S. financial system.
- Evolving Sanction Regulations: Sanction rules and lists are frequently updated. Without a mechanism in place for ongoing monitoring, businesses could inadvertently conduct transactions that were permissible at one point but later prohibited.
OFAC Enforcement
Violations of economic sanctions are strict liability offenses. This means that OFAC only needs to prove failure by a company to adhere to sanctions programs. It does not need to establish that there was intent or fault by the company. In other words, a company can be held liable for a violation even if it lacked knowledge or intent.
This can catch some companies off guard, especially when they rely on third-party software to screen for potential violations, and those systems fail. Inadvertent violations are still violations that are grounds for OFAC to initiate an investigation and ultimately issue a civil penalty.
Civil penalties can vary significantly and depend largely on the relevant statutory authority and OFAC's evaluation of the circumstances.
There are examples where the applicable statutory maximum civil monetary penalty has amounted to several million dollars, and OFAC has chosen to reduce those penalties to a few hundred thousand dollars based on mitigating circumstances.
This highlights the potential for reduced penalties through cooperation and remedial action, providing a ray of hope for companies facing enforcement actions and reassuring them that proactive measures can mitigate the impact of violations.
OFAC generally favors companies that self-report violations, take remedial action, or cooperate with its investigation. OFAC and the Department of Justice may bring enforcement actions for economic sanctions violations. If OFAC believes that a US person is violating economic sanctions, it often triggers an investigation. Based on the outcome of that investigation, OFAC may decide to do any of the following:
- Conclude that there was no violation,
- Find that there was a violation,
- Find that there was a violation and attach a civil monetary penalty,
- Refer the matter to the Department of Justice (DOJ) for criminal investigation and enforcement.
Penalties for Violating OFAC Sanctions
Violating OFAC sanctions can lead to severe penalties, even in the absence of intent, as sanctions are often enforced under strict liability.
When an organization violates OFAC sanctions, it may face both civil and criminal penalties. Civil penalties are often imposed for non-willful violations, but can still be significant. OFAC has the authority to levy civil penalties of approximately $350,000 per violation or twice the value of the transaction, whichever is greater.
This underscores the importance of strict compliance and the potential financial impact of non-compliance, emphasizing the urgency of adherence to OFAC regulations.
However, the stakes are significantly higher if the violation is deemed willful. Criminal penalties apply in cases where an individual or company knowingly engages in prohibited transactions. Under federal law, convicted violators may face the following severe penalties, instilling a sense of fear and deterrence against willful violations:
- Fines: Corporations convicted of criminal violations may be fined up to $1 million per violation. Individuals involved in such conduct could also face steep financial penalties.
- Imprisonment: Key executives or employees found guilty of willfully breaching OFAC sanctions may face up to 20 years in prison.
- Asset Forfeiture: Any funds or property derived from illegal transactions may be seized by the government.
- Further Investigations and Legal Actions: Criminal cases can lead to more extensive investigations, which often result in additional charges such as conspiracy or fraud.
The consequences of criminal penalties extend beyond financial losses. A conviction could undermine investor confidence, disrupt operations, and potentially lead to the revocation of government permits or licenses. Given these risks, companies must take aggressive measures to prevent both accidental and intentional violations and understand the gravity of the situation.
Importance of Legal Representation
If your company is accused of violating OFAC sanctions, time is of the essence. These cases can quickly escalate, and the complexities of U.S. sanction laws make it imperative to seek guidance from an experienced federal criminal defense attorney. Such attorneys understand the intricacies of OFAC regulations and can help craft a robust defense strategy tailored to your specific circumstances.
A good attorney will assist by analyzing the transaction history, investigating the facts surrounding the alleged violation, and determining whether the breach was intentional.
Additionally, legal counsel can engage with OFAC authorities on behalf of the company to negotiate potential settlements or mitigate penalties. Building a solid defense case can mean the difference between a favorable resolution and severe criminal penalties. For more information, contact Eisner Gorin LLP, a federal criminal defense law firm in Los Angeles, CA.
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