OFAC Promulgates Final Economic Sanctions Enforcement Guidelines

OFAC Promulgates Final Economic Sanctions Enforcement Guidelines

On November 9, 2009, the Office of Foreign Assets Control (OFAC) issued a final rule regarding Economic Sanctions Enforcement Guidelines (Guidelines), 74 Fed. Reg. 57,593-57,608, which are applicable immediately to persons subject to U.S. sanctions laws (Subject Persons).  The Guidelines supersede the interim Guidelines that OFAC issued on September 8, 2008, for which OFAC sought public comments and we previously issued an Advisory.  As we also have previously advised, OFAC promulgated the interim Guidelines and these Guidelines in accordance with implementation of amendments to the International Emergency Economic Powers Enhancement Act (Act), which authorized increased civil and criminal penalties for violations of certain U.S. economic sanctions and other applicable export control laws.  OFAC has published the Guidelines as an Appendix to the Reporting, Procedures and Penalties Regulations at 31 C.F.R. Part 501.

In this final rule, OFAC largely left intact the framework established by the Interim Guidelines, including adoption of the base penalty amounts previously published.  However, in the Background preamble, as well as by amendments to certain regulatory provisions, OFAC has revised or clarified sections of the interim Guidelines that Subject Persons had found unclear, vague, or confusing. 

OFAC’s most substantial revisions or clarifications to the Guidelines involve the provisions regarding the meaning and penalty mitigation or reduction credit that will be accorded in an enforcement matter for a voluntary self-disclosure.  Among other issues, OFAC also addressed provisions regarding: (1) voluntary disclosure timing and acceptance; (2) whether a “suggestion” by a federal or state agency or official to a Subject Person regarding an apparent violation will obviate a voluntary disclosure; (3) how conduct in accordance with foreign laws in conflict with U.S. economic sanctions, as well as risk-based compliance processes or programs, will affect assessment of the apparent violations; (4) agreements on statute of limitations tolling waivers; and (5) maximum and mitigated base penalty amounts for failing to maintain records as required, as well as Trading With the Enemy Act violations (which were not increased by the Act). 

Possible OFAC Responses to Apparent Violations

The Guidelines specify a range of responses that OFAC will have to apparent violations of U.S. economic sanctions regulations and laws.  There is no material change in this aspect of the Guidelines when compared to the interim Guidelines, including (1) No Action; (2) Request for Additional Information; (3) Cautionary Letter; (4) Finding of Violation; (5) Civil Monetary Penalty; (6) Criminal Referral; or (7) Other Administrative Actions.

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 enumerated by letters:  (A) Willful or Reckless Violation; (B) Awareness of Conduct; (C) Harm to Sanctions Program Objectives; (D) Individual Characteristics; (E) Compliance Program; (F) Remedial Response; (G) Cooperation with OFAC; (H) Timing of Apparent Violation; (I) Other Enforcement Action; (J) Future Compliance/Deterrent Effect; and (K) Other Relevant Factors.

OFAC has stated that it intends the assessment of these General Factors regarding the apparent violations to be a holistic approach, rather than a consideration of certain aggravating and mitigating factors.  Although the list of factors is identical to that promulgated in the interim Guidelines, OFAC has clarified or revised certain points, the most significant of which affect General Factors D, G, and E (among others), discussed below.

• OFAC addressed many comments regarding the definition of “voluntary self-disclosure”, defined as meaning a:

“self-initiated notification to OFAC of an apparent violation by a Subject Person that has committed, or otherwise participated in, an apparent violation of a statute, Executive order, or regulation administered or enforced by OFAC, prior to or at the same time that OFAC, or any other federal, state, or local government agency or official, discovers the apparent violation or another substantially similar apparent violation.”

• Many commenters expressed concern regarding the role a third-party notification may play in OFAC’s decision of whether or not to credit a Subject Person for a voluntary self-disclosure as being “self-initiated.”  The final rule provides that:

“[n]otification to OFAC of an apparent violation is not a voluntary self-disclosure if: a third party is required to and does notify OFAC of the apparent violation or a substantially similar apparent violation because a transaction was blocked or rejected by that party (regardless of when OFAC receives such notice from the third party and regardless of whether the Subject Person was aware of the third party’s disclosure) . . . .”

We read this change to mean that where a Subject Person notifies OFAC of an apparent violation, and a third party is required to notify OFAC of such activity but subsequently notifies OFAC after a disclosure has been made, the third party’s action negates the voluntary nature of the Subject Person’s voluntary disclosure submission.

OFAC’s position may seem inconsistent with the policy underlying credit for voluntary self-disclosure, which seeks to encourage good corporate citizenship and compliance with the regulations by informing the U.S. Government of apparent sanctions violations.  OFAC takes the position, however, that “[t]he purpose of mitigating the enforcement response in voluntary self-disclosure cases is to encourage the notification to OFAC of apparent violations of which OFAC would not otherwise have learned” (emphasis added).  Thus, in OFAC’s view, a Subject Person’s notification of an apparent violation is unavailing where OFAC would have learned of the apparent violation anyway (even if a third party were to report to OFAC after the Subject Person’s voluntary disclosure notification).  Consequently, OFAC decided to implement a bright line rule regarding the status of the disclosure, rather than a consideration of “good faith” by the party making the disclosure.  (OFAC did confirm that this exclusion of self-voluntary disclosure covers only those cases where there is an actual report by a third party, rather than a mere obligation to report.) 

• OFAC rejected the argument that the definition of voluntary self-disclosure should not exclude disclosures that include false or misleading information, but are made in good faith.  OFAC explained that such a good faith standard would be subjective and administratively unworkable.  Furthermore, OFAC stated that a finding of voluntary self-disclosure would not be warranted in whistleblower cases, i.e., where disclosures are made without management authorization.

• In response to critical comments, OFAC stated the definition of voluntary self-disclosure provides that “[i]n addition to notification, a voluntary disclosure must include, or be followed within a reasonable period of time by, a report of sufficient detail . . . .” (emphasis added).  According to OFAC, the Guidelines therefore expressly contemplate that a Subject Person may inform OFAC of an apparent violation in an initial notification, and then provide supplemental information within a reasonable period of time to complete the disclosure.  Subject Persons may want to utilize this process to inform the U.S. government of apparent violations immediately, and then undertake a review to determine the facts and legal considerations at issue for submission to OFAC.  However, OFAC did not provide guidance regarding a period of time that would be deemed reasonable for filing the complete report.

• OFAC rejected an argument that the Guidelines should not exclude from the definition of voluntary self-disclosure those disclosures made at the “suggestion” of a federal or state agency or official.  Comments asserted that the word suggestion was vague.  OFAC explained that in many instances, federal or state agencies or officials do not order Subject Persons to disclose apparent violations to OFAC, but rather suggest that they do so.  Such disclosures, according to OFAC, are not self-initiated and thus do not constitute voluntary self-disclosures.  It remains unclear whether a Subject Person is obligated to notify OFAC whether a federal or state regulator suggested disclosure, particularly if the agency or official never informs OFAC about the suggestion.

• OFAC amended the Guidelines to provide that a simultaneous disclosure to OFAC and another agency, that is otherwise a legitimate voluntary self-disclosure, counts as a voluntary self-disclosure to OFAC.  OFAC also amended the final rule to provide that it will assess on a case-by-case basis whether it should treat a disclosure submitted to another agency as a voluntary self-disclosure to OFAC.  The case-by-case assessment may be informed by the nature of the violations being disclosed, and the respective roles of OFAC and the other agency in administering the regulations applicable to such violations.

• OFAC amended the final rule to provide that a party’s willingness to enter into a tolling agreement may be considered a mitigating factor, but that a party’s refusal to do so will not be considered an aggravating factor.  OFAC also stated that it is not general practice to seek waivers of the statute of limitations, unless particular circumstances warrant.

• OFAC amended the Guidelines to refer to “sanctions history” rather than “sanctions violations history”.  This change is to make clear that OFAC’s consideration of a Subject Person's disclosure and compliance profile is not limited to prior formal determinations of sanctions violations, but can include warning letters as well as any prior correspondence concerning OFAC compliance.  (This would appear to broaden OFAC's authority to make negative inferences from past, but non-violation, conduct.)  OFAC has further amended the rule to note that consideration of a Subject Person’s sanctions history will generally be limited to the five (5) years preceding the transaction giving rise to the apparent violation.

• OFAC clarified that the filing of a Suspicious Activity Report pursuant to the Bank Secrecy Act does not itself preclude a determination of a voluntary disclosure for a subsequent self-initiated disclosure to OFAC of the same transaction, unless OFAC had learned of the apparent violation prior to the submission of the self-disclosure.

Amount of Civil Penalty

The Guidelines implemented no changes regarding base category (i.e., “egregious” and/or self-voluntary disclosure case) for IEEPA penalties, but did clarify policy concerning penalty ranges for TWEA violations, as demonstrated in the matrix below. 

The Guidelines confirm that the term “statutory maximum” refers to the current maximum civil penalty under IEEPA – the greater of $250,000 or twice the transaction value.          

Although 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.”  The transaction value is intended to represent the dollar value of the transaction, but in some cases market values may be difficult to determine.  The Applicable Schedule Amount is based on a schedule set forth in the Guidelines at several levels of $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.

As a result of this framework, in certain circumstances, the highest base penalty amount could occur in a non-egregious case that is not considered to be a voluntary self-voluntarily disclosed, as opposed to an egregious case that is voluntarily disclosed.  Although one commenter identified this disparity, OFAC did not depart from the interim Guidelines formulation.  OFAC reasoned that the calculation ensures the base penalty for a voluntarily self-disclosed case will always be one-half or less than one-half of the base penalty for a case of similar transaction value that is not voluntarily self-disclosed.  This conclusion further underscores the importance discussed above regarding whether a report to OFAC constitutes a voluntary disclosure.

Adjustment of Base Civil Penalty

OFAC clarified, revised, and amended several provisions regarding the adjustment of base civil penalty amounts, which may be increased or decreased to reflect applicable General Factors. 

• In cases of apparent violations involving “substantial cooperation” with OFAC but not voluntary self-disclosure, the base penalty amount “generally” will be reduced by 25 to 40 percent.   OFAC clarified that substantial cooperation credit will be recognized, even if a voluntary self-disclosure is not applicable.  Additionally, OFAC will consider substantial cooperation when assessing what type of enforcement response to make.  In this regard, OFAC amended the Guidelines to expressly provide that substantial cooperation by a Subject Person in a civil investigation may be publicly noted, where appropriate.

• With respect to a “first violation,” OFAC revised the rule to provide that where a Subject Person discloses a group of substantially similar apparent violations, and the disclosure is the person’s first in the past five years, the entire group of apparent violations will be considered a first violation warranting up to 25 percent reduction credit.

• OFAC rejected a comment suggesting that OFAC revise adjustment rules to state that the actions of “rogue employees” are not attributable to entities that establish a reasonable compliance program before the time of an apparent violation.  However, OFAC amended the Guidelines to state explicitly that the agency will take into account risk-based compliance programs processes of the Subject Person when assessing General Factor E.

• OFAC further stated that it would not stipulate a certain percentage of penalty reduction for economic sanctions violations based on remediation, including internal reviews and compliance improvements, but that such corrective actions will be considered when assessing the totality of the case’s circumstances.

• OFAC deleted the word “soon” and retained only the word “immediately” for purposes of determining whether to afford mitigation credit based on the timing of the violation in relation to the imposition of sanctions (General Factor H).  The deletion of the word “soon” signals that mitigation will only be considered under this factor where the apparent violation is very close in time to any changes in economic sanctions laws, regulations, or orders (i.e., person recently added to the Specially Designated Nationals List).

• OFAC stated that it generally will not consider compliance with foreign laws as a relevant mitigating factor, except where a foreign law requires conduct at variance with the sanctions regulations, under General Factor K, which provides for the consideration of relevant circumstances on a case-by-case basis.

Civil Penalties for Record Keeping Violations

In addition to the interim Guidelines’ establishment of maximum penalty amounts for violations of various recordkeeping compliance obligations, which have not been changed, OFAC amended the Guidelines to set a maximum $50,000 penalty for failure to maintain required records in accordance with OFAC’s regulations.

If you have any questions regarding the final Guidelines or other economic sanctions issues, please contact Ed Krauland at 202.429.8083, Jack Hayes at 202-429-6491, or Anthony Rapa at 202-429-8120.