International Law Advisory - OFAC Issues Interim Policy on Civil Penalties Under IEEPA Enhancement Act

On November 27, 2007, the Department of the Treasury, Office of Foreign Assets Control (“OFAC”) issued guidance clarifying the methodology that OFAC will apply in determining civil penalties ranges under the International Emergency Economic Powers Enhancement Act (“IEEPA Enhancement Act” or “Act”), Pub. L. No. 110-96.¹  As discussed in our October 16, 2007 advisory, the Act expanded the maximum range of penalties for economic sanctions violations under the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. § 1701, from $50,000 to $250,000 per violation or twice the amount of the transaction giving rise to the violation.  The IEEPA is the implementing legislation for most of the economic sanctions programs administered by OFAC, including the Iranian Transactions Regulations (31 C.F.R. Part 560) and the Sudanese Sanctions Regulations (31 C.F.R. Part 538).

The effective date of the IEEPA Enhancement Act is October 16.  The Act provides, however, that the new civil penalties ranges apply to violations where an enforcement action is “pending or commenced” on or after the date of enactment.  The position OFAC adopts in the November 27 notice serves as confirmation that the agency intends to apply the new civil penalties ranges retroactively, i.e., to violations that precede October 16 but for which a Final Penalty Notice has not been issued as of October 16.  The notice also provides specific guidance on retroactive application in cases where a pre-penalty notice has been mailed prior to October 16, where a tentative settlement amount has been communicated by OFAC, and where a party subject to an investigation has waived the statute of limitations and the limitations period would otherwise have expired before October 16.

The November 27 notice provides that the agency’s pre-existing guidance on assessing penalties, issued in January 2003 (68 Fed. Reg. 4,422 (January 29, 2003)), will otherwise remain in effect.  Under the 2003 guidelines, the value of the transaction is generally used as the basis for establishing the amount of a penalty per violation, plus or minus aggravating and mitigating factors; the statutory maximum is typically used under the earlier guidelines only if it represents a lower figure than the transaction value.   Accordingly, for practical purposes the transaction value will now be basis for penalties in most cases moving forward, as most violations will likely involve transactions in amounts lower than the new IEEPA statutory maximum.  Notably, the November 27 notice does not indicate that OFAC will use a figure of twice the value of the transaction as its starting point, though it would be permitted to do so under the statute.

The 2003 guidelines were written at a time when the civil penalties maximum under the IEEPA was $11,000 per violation.²  The over twenty-fold increase in the available civil penalties range presents fundamentally different conditions from those that informed the 2003 guidelines, and it is not clear how the new penalty ranges will affect the ultimate penalty imposed by OFAC.  This may become more evident once OFAC has completed and published a few enforcement actions under the new regime, and the November 27 notice indicates that OFAC intends to publish revised guidelines (although it is not clear when those guidelines will be issued).  The uncertainty of relying on the 2003 guidelines is particularly evident where (as is the case in many enforcement actions) there are numerous individual violations, each potentially eligible for a separate penalty.  In such cases, application of the 2003 guidelines may cause extremely high penalties even in cases where there are substantial and predominant mitigating factors.

We will continue to monitor this issue, and will publish a follow-up advisory upon further developments.  Should you have any questions in the meantime, please contact Ed Krauland at 202.429.8083 or Julia Court Ryan  at 202.429.6418 in Washington, or David Lorello at +44 (0)20 7367 8007 in London.

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^{1.  Office of Foreign Assets Control, Civil Penalties – Interim Policy, US Department of the Treasury, November 27, 2007.}

^{2. The IEEPA penalties range was increased from $11,000 to $50,000 in March 2006, pursuant to Pub. L. 109-177 (March 9, 2006).}