Export Controls Advisory - OFAC Issues Economic Sanctions Enforcement Guidelines

On September 8, 2008, the Office of Foreign Assets Control (OFAC) issued new Economic Sanctions Enforcement Guidelines (Guidelines), which are applicable immediately to persons subject to US sanctions laws.  The Guidelines supersede those issued by OFAC in the January 29, 2003 proposed guidelines (except for the proposed Appendix to the Cuban Assets Control Regulations (CACR)) and the Economic Sanctions Enforcement Procedures for Banking Institutions issued on January 12, 2006.  OFAC was prompted to develop new guidelines by the increased maximum penalty amounts provided for in the International Emergency Economic Powers Enhancement Act (on which we have previously advised) and their application to pending and new cases.  The Guidelines apply to all pending and future enforcement matters before OFAC, with the following two exceptions:  (1) categories of cases set forth in OFAC’s November 27, 2007 Civil Penalties – Interim Policy; and (2) matters addressed in the proposed Appendix to the CACR or the Service Provider Circular issued by OFAC pursuant to the CACR.

The Guidelines make several changes to the 2003 proposed guidelines, including new methods for determining the administrative response to an apparent violation and the amount of civil penalties where appropriate.  Instead of identifying specific “aggravating” and “mitigating” factors, the Guidelines set forth several General Factors that OFAC will consider in determining the appropriate enforcement response to an apparent violations, and if a civil monetary penalty is warranted, in setting the amount of that penalty.  The Guidelines also alter the potential responses that OFAC may make, and provide more structure for setting civil penalty amounts.  In many instances, the penalty will be based on the statutory maximum (or a percentage thereof), the value of the transaction giving rise to the violation (or a percentage thereof), or a fixed penalty schedule.  These methods seem likely to raise the minimum penalty in many cases, although it remains to be seen how OFAC will exercise its discretion under the Guidelines.

Types of Responses to Apparent Violations

The Guidelines make certain changes to the potential actions OFAC may take, and add important details for others.  The range of responses to apparent violations includes the following:

No action: OFAC will take no action if there is insufficient evidence to conclude that a violation has occurred, or if it concludes that the conduct does not rise to the level warranting an administrative response.  It is a final determination as to the matter.

Request Additional Information:  OFAC may request additional information regarding an apparent violation, including through an administrative subpoena.

Cautionary Letter:  As in the 2003 proposed guidelines, OFAC may issue a cautionary letter if there is insufficient evidence to conclude that a violation has occurred, but the conduct could lead to a violation in other circumstances or the subject person does not appear to be exercising due diligence in economic sanctions compliance.  A cautionary letter does not constitute final agency action regarding whether a violation has occurred.

Finding of Violation:  Instead of the warning letters used in the past (and set out in the 2003 proposed guidelines), OFAC may issue a “finding of violation” if it determines that a violation has occurred, but based on the General Factors, concludes that an administrative response is appropriate, but no civil monetary penalty is warranted.  A finding of violation will identify the violation, OFAC’s concerns about the person’s conduct and/or compliance practices, and the need for further compliance steps.  Since a finding of violation is a final agency determination that a violation has occurred, the subject person will have an opportunity to respond to OFAC.

Civil Monetary Penalty:  A civil monetary penalty will be imposed if a violation has occurred and a penalty is warranted based on the General Factors.

Criminal Referral:  In appropriate, OFAC may refer a matter for criminal investigation, possibly in conjunction with civil administrative action.

Other Administrative Actions, including license denial, suspension, modification, or revocation, and a cease and desist order.

General Factors Affecting Administrative Action

In determining which administrative action to take, and if appropriate, what amount of civil penalty to impose, OFAC will consider the following General Factors.  This is intended to be a holistic approach, rather than the previous consideration of certain listed aggravating and mitigating factors.  Although many of these factors appear in the 2003 proposed guidelines, the Guidelines provide more detail and additional inquiries.  As with the current system, however, these factors are largely subjective.

A.    Willful or Reckless Violation:  Was the violation a result of willful or reckless action?  Under this factor, OFAC will consider:

• Did the person act with knowledge that it was violating US law?
• Did the person act with reckless disregard for US law or fail to exercise a minimal degree of case in avoiding violations? 
• Did the person purposely conceal its actions? 
• Did the person have prior notice that the action violates US law? 
• If an entity, were supervisory or managerial level staff involved in willful or reckless conduct?
  

B.    Awareness of Conduct:  Did the person know, or have reason to know, about the conduct giving rise to the violation?  Under this factor, OFAC will consider:

• Did the person have actual knowledge of the conduct?
• Was the business structure designed with the intent to prevent a person from having actual knowledge, or were there legitimate reasons why it was difficult or impossible for the person to have actual knowledge?  It is not clear whether this factor would affect US persons properly recused from a transaction to prevent that person’s involvement in a violation.  Presumably, this factor only applies once a US person has been involved in a violation, which is not the case when a US person has properly been recused.
• Did the person have reason to know that the conduct took place?
• If an entity, was the conduct taken with the knowledge of senior management?  If not, was there sufficient oversight?
  

C.    Harm to Sanctions Program Objectives:  Under this factor, OFAC considers the actual or potential harm to sanctions program objectives:

• The economic or other benefit to the sanctioned entity or country, including the number, size, and impact of the transactions, the length of time over which they occurred, and the nature of the benefit conferred.
• The effect of the circumstances on the integrity of the US sanctions program and related policy objectives.
• Whether the conduct would likely have been licensed.
• Whether the conduct was in support of a humanitarian activity.
  

D.     Individual Characteristics:  OFAC may consider the circumstances of the subject person, including the following:

• Commercial sophistication
• Size of operation and financial conditions, including whether a company qualifies as a small business or organization
• Volume of transactions
• Sanctions violation history
  

E.    Compliance Program:  The existence and nature of the subject person’s OFAC compliance program at the time of the apparent violation.

F.     Remedial Response:  The subject person’s corrective actions taken in response to the apparent violation, including internal reviews and compliance improvements.

G.    Cooperation with OFAC:  The nature and extent of the person’s cooperation with OFAC, including whether the violation was voluntarily self-disclosed.

H.     Timing of Apparent Violation:  Whether the apparent violation took place soon after the adoption of the prohibition, particularly the timing after a change to a sanctions program or addition to the SDN list.

I.     Other Enforcement Action:  Other federal, state, or local enforcement for the same or similar apparent violations.

J.    Future Compliance/Deterrent Effect:  OFAC may take administrative action to promote future compliance by the same person and others in the same industry sector.  This provision seems to contemplate OFAC action intended to send a message to parties other than the subject person.

K.    Other Relevant Factors

Amount of Civil Penalty

The Guidelines establish a complicated process, whereby OFAC will set the amount of civil monetary penalties in two stages:  (1) selecting a “base category” to determine the base penalty amount; and (2) adjusting the base penalty amount for relevant factors. 

Selecting Base Penalty Amount:  There are four base categories, each one with a separate rule for calculating the base penalty amount.  OFAC will select a base category using two factors:  (1) whether the matter is an “egregious case;” and (2) whether the person voluntarily self-disclosed the matter.

The concept of an “egregious case” represents a change from OFAC’s 2003 proposed guidelines.  Now, a case will be considered “egregious” when an analysis of the General Factors “indicates that the case represents a particularly serious violation of the law calling for a strong enforcement response.”  Such a determination will be made by the Director or Deputy Director.  In making the egregiousness determination, OFAC will give “substantial weight” to General Factors A (“willful or reckless violation of law”), B (“awareness of conduct at issue”), C (“harm to sanctions objectives”), and D (“individual characteristics”), with particular emphasis on General Factors A and B.  OFAC anticipates that the majority of enforcement cases will fall in the non-egregious category.  However, this determination, like the original analysis of the General Factors, appears subjective.

A voluntary self-disclosure must be notified to OFAC prior to the discovery of the violation or a “substantially similar apparent violation” by OFAC or other law enforcement authority.  A “substantially similar apparent violation” is an apparent violation “that is part of a series of similar apparent violations or is related to the same pattern or practice of conduct.”  The Guidelines include one notable exclusion from the voluntary self-disclosure policy.  A notification will not be considered a voluntary self-disclosure if a third party is required to notify OFAC of the apparent violation or a substantially similar apparent violation because the transaction was blocked or rejected by that third party (regardless of whether or when that third party actually notifies OFAC).  Therefore, if a US company transfers money to Cuba through a US bank, and the bank blocks or rejects the transfer, the company’s notification of the matter to OFAC will not be considered a voluntarily self-disclosure because the bank blocked/rejected the funds and is legally required to notify OFAC (even if the bank never actually notifies OFAC).

Based on the determinations of egregiousness and voluntary self-disclosure, the base penalty amount will be set forth in the matrix below.

	EGREGIOUS CASE
VOLUNTARY SELF-DISCLOSURE	NO	YES
YES	One-half of Transaction Value (capped at $125,000 per violation)	One-half of Statutory Maximum
NO	Applicable Schedule Amount (capped at $250,000 per violation)	Statutory Maximum

While the Guidelines do not define the term “statutory maximum” (and without consulting OFAC), we presume that it refers to the current maximum civil penalty under IEEPA – the greater of $250,000 or twice the transaction value.  Although it is possible that “statutory maximum” could also refer to higher penalties provided for other statutes that may govern an apparent violation, such as the Foreign Narcotics Kingpin Designation Act.  This point may be clarified by future OFAC practice or policy guidance.

While the selection of a base penalty category depends only on egregiousness and voluntary self-disclosure, the actual base penalty amount will often be determined by the “Transaction Value” and “Applicable Schedule Amount,” two new concepts included in the Guidelines.  The transaction value is intended to represent the dollar value of the transaction.  Where the value of the transaction is not easily determined (for example, where there is no import/export, or seized or blocked property), OFAC “may consider the market value of the goods or services that were the subject of the transaction, the economic benefit conferred on the sanctioned party, and/or the economic benefit derived by the subject person.”  Therefore, OFAC retains great discretion in determining the “transaction value” for violations such as facilitation, which do not have a clear dollar value.  If there is a large number of apparent violations, OFAC may estimate or extrapolate the transaction value.  The “Applicable Schedule Amount” is based on a schedule set forth in the Guidelines, which has several levels from $1,000 to $250,000, each linked to ranges of transaction values.  The Applicable Schedule Amount is often higher than the transaction value, and base penalty amounts could therefore be significant even in self-disclosed cases.

To illustrate the new matrix system, take for example, two violations of IEEPA involving transactions values of $10,000 and $1 million, respectively.  The base penalty amounts, before any adjustment, would be those set forth below.  Note that the new methodology could lead to counterintuitive results, such that the highest base penalty amount for the $10,000 transaction occurs in a non-egregious case.

	$10,000 Transaction Value	$1 million Transaction Value
Non-egregious Case with Voluntary Disclosure	$5,000	$125,000
Non-egregious Case, No Voluntary Disclosure	$25,000	$250,000
Egregious Case with Voluntary Disclosure	$10,000	$1 million
Egregious Case, No Voluntary Disclosure	$20,000	$2 million

Adjustment for Relevant Factors:  The base penalty amount may then be adjusted upward or downward to reflect applicable General Factors.  In particular, the Guidelines state that OFAC will use the following general rules:

• In cases involving substantial cooperation with OFAC but not voluntary self-disclosure, the base penalty amount will be reduced by 25% to 40%.
• In cases of a person’s first violation, the base penalty amount will be reduced by up to 25%, although the degree of mitigation will be affected by the issuance of previous cautionary, warning, or evaluative letters.

Despite the great detail provided on the methodology OFAC will use to determine civil penalty amounts and the nature of the General Factors, OFAC still retains great discretion.  It remains to be seen how often and to what extent OFAC will use its discretion to adjust base penalty amounts.  The Guidelines do not include a cap on this adjustment.

Process for Imposing Civil Penalties

After applying the General Factors, if OFAC believes that imposition of a civil monetary penalty is warranted, it will take the following steps.  Besides the specific information that will be included in Pre-Penalty Notice, these provisions are similar to those in the 2003 proposed guidelines.

• Issue a Pre-Penalty Notice.  This will include the proposed penalty amount (determined as described above), which may be changed as OFAC learns additional information.  OFAC will issue a revised Pre-Penalty Notice if it decides to increase the proposed penalty amount by more than 10% or to allege additional violations.  The Pre-Penalty Notice will provide information on the alleged violation and regulatory provision, the General Factors most relevant in OFAC’s analysis, and the base category from which the penalty amount was calculated.  It will also provide information on how to respond to the Pre-Penalty Notice.
  
  
• Response to Pre-Penalty Notice:  The subject person may respond to the Pre-Penalty Notice, either agreeing with the proposed penalty or providing reasons (based on the General Factors) why the amount should be reduced.  The new information that OFAC will provide in Pre-Penalty Notice should facilitate rebuttal of the aggravating factors that OFAC considered, and provide an understanding of the mitigating factors that OFAC has taken into account.  However, if OFAC has already determined that the person warrants a penalty under the General Factors, it may be difficult to reverse the penalty determination altogether, short of submitting new evidence.
  
  
• Penalty Notice:  OFAC will issue a Penalty Notice if it continues to believe that a penalty is warranted, or if no response is received.  The final penalty amount will take into account the information provided in the response to the Pre-Penalty Notice and any additional information learned by OFAC.  OFAC may alter the proposed penalty amount if it secures new information through further investigation, a request for information from the respondent, in the course of negotiating a settlement, or otherwise.  The Penalty Notice constitutes a final agency finding that a violation has occurred.

Civil Penalties for Failure to Furnish Information or Keep Records

The Guidelines include the following civil penalty amounts for the failure to furnish information or keep records:

• Up to $20,000 for failure to furnish requested information.
• Up to $50,000 for failure to furnish requested information, if OFAC has reason to believe that the apparent violation related to the request involves transactions valued at greater than $500,000.
• Up to $2,500 for the late filing of a required report, if filed within 30 days after the deadline.
• Up to $5,000 for the late filing of a required report, if filed more than 30 days after the deadline.
• For a report related to blocked assets, an additional $1,000 for every 30 days that the report is overdue, up to five years.
• Up to $5,000 for the first failure to maintain records in conformity with OFAC requirements; up to $10,000 for each additional violation.

The failure to furnish information may result in a penalty regardless of whether any other violation is alleged.  Such a failure may be considered a continuing violation, and the above penalties may be imposed every month that the requested information is not furnished.  On the other hand, the Guidelines do not specifically state that OFAC will consider record-keeping violations to be continuing violations, and do not expressly apply the “continuing violations” concept to any other categories of violations.

Settlements

The settlement provisions in the Guidelines simplify those contained in the 2003 proposed guidelines, but do not generally represent any change in policy.  When settlement discussions occur prior to the issuance of a Pre-Penalty Notice, the subject person may request that OFAC withhold issuance of the Pre-Penalty Notice pending the conclusion of the discussions (the 2003 proposed guidelines had allowed for only a 60 days period).  If settlement occurs after issuance of a Pre-Penalty Notice, OFAC will not make a final determination of whether a violation occurred.  As with the 2003 proposed guidelines, the Guidelines suggest that settlement may only take place before a Penalty Notice is issued.

Concluding Thoughts

OFAC stated that the Guidelines were prompted by the increased maximum statutory penalty.  It seems, however, that many base penalty amounts may increase as a result of the Guidelines.  While the Guidelines are complicated and often subjective, the new reliance on transaction value, applicable schedule amount, and the statutory maximum is likely to result in increased base penalty amounts.  It remains to be seen how OFAC will exercise its discretion in determining whether civil monetary penalties are warranted and how to adjust the base penalty amount.  OFAC certainly has several vehicles short of imposing penalties (including the new finding of violation), but it is not clear whether the Guidelines will result in the imposition of penalties more or less often than in the past.

Overall, the hallmarks of the Guidelines are a complicated penalty calculation methodology, detailed General Factors to be used in determining administrative action, and additional information provided in the Pre-Penalty Notice or other administrative response to an apparent violation.  Despite this level of detail, however, the Guidelines remain largely subjective in many ways.  It is possible to see in the Guidelines a common theme that in the context of higher maximum penalties (and possible higher penalties in general), OFAC may feel obligated to provide a more structured penalty process and more detailed information and rationale for administrative action.  These due process considerations are favorable to those subject to OFAC jurisdiction, although only time will tell if they come at the cost of higher or more frequent civil monetary penalties.

Public comments in response to the Guidelines must be received by OFAC by November 7, 2008.  In particular, OFAC seeks comments on the following issues:  (1) are the General Factors the appropriate factors that should be considered in determining the type of enforcement response to an apparent violation and amount of civil penalty; (2) is the definition of an “egregious” case appropriate; (3) are the proposed base penalty amounts appropriate; and (4) is the new pre-penalty process an improvement, and how can it be further improved.  If you have any questions regarding the new enforcement guidelines, or would like any assistance in submitting comments to OFAC, please contact Ed Krauland at 202.429.8083 or Michael Gershberg at 202.429.6208.