United States: Don’t Try This At Home Or Abroad: Export Controls And Sanctions Violations Lead To $21 Million In Penalties For Dutch Company Fokker Services B.V.

We frequently discuss enforcement actions in this blog, because understanding enforcement is a key aspect of trade compliance.  From a fifty-thousand foot view, each enforcement case serves as a cautionary tale about the overall need for compliance.  On a more granular level, enforcement actions provide valuable insight into how the government thinks about and targets violations of law.  These cases also showcase key details about international business practices that might pose "red flags," and let us learn from others' mistakes.  Effective compliance requires companies to commit high-level attention and large dollar amounts, but also requires entities to critically respond to the facts and details of particular markets on the ground.

The June 5 settlement of Netherlands-based aerospace service provider Fokker Services, B.V. ("Fokker") with three different U.S. government agencies is a great learning tool.  The proposed penalties against Fokker totaled $21 million for violations of U.S. economic sanctions (on Iran, Sudan, and Burma) and U.S. export controls laws, arising from Fokker's unauthorized exports of aircraft spare parts from the United States.

In a significant recent twist, on July 9, Judge Richard Leon of the U.S. District Court for the District of Columbia delayed signing off on the deal, voicing "great concerns" about certain aspects of the settlement terms.  A hearing has been scheduled for July 24, 2014 to address some of these concerns.


Legal Framework.  The Export Administration Regulations ("EAR"), which are administered by the U.S. Department of Commerce, Bureau of Industry and Security ("BIS"), control exports and re-exports of commercial items such as aircraft parts, for both national security and foreign policy reasons.  The EAR covers all items listed on the Commerce Control List that either are in the United States or are of U.S. origin, wherever located.  To export or re-export commercial aircraft parts to Iran or Sudan, a company must get appropriate licenses from BIS, or, in some cases, the U.S. Treasury Department, Office of Foreign Assets Control ("OFAC").

Under U.S. sanctions laws, which are administered by OFAC, U.S. companies and individuals are prohibited from providing virtually any goods or services to Iran, whether directly or indirectly.  In addition, no U.S. company may engage in any transaction or dealing in (including selling, transporting, swapping, financing, or facilitating) or related to goods or services for exportation, re-exportation, sale, or supply, directly or indirectly, to Iran.  With a few exceptions, the trade embargo on Sudan also restricts U.S. companies and individuals from doing business with Sudan.  U.S. restrictions on Burma historically restricted many transactions with Burma by U.S. persons, including investment in Burma and imports of Burmese products to the United States.

There are both civil and criminal penalties for violations of the EAR and the sanctions regime: up to $1 million and 20 years in prison for criminal violations; up to $250,000 or twice the value of the prohibited transaction for each civil violation; and the potential denial of export privileges.

The Alleged Schemes.  From 2005 to 2010, Fokker allegedly employed several schemes aimed at avoiding U.S. export laws and sanctions to do business in sanctioned countries.  These "work-arounds," as described in court documents, allegedly included withholding aircraft tail numbers or providing false tail numbers to repair shops, and asserting falsely that U.S. parts submitted for repair were for general inventory.  Fokker also allegedly maintained a separate database of end users in sanctioned countries and a "black list" of U.S. companies with whom they refused to do business, because those companies had more sophisticated export control compliance systems.  Moreover, Fokker's President purportedly ignored advice of the company's export compliance manager and in-house counsel that no U.S.-origin parts should be shipped to Iran.

According to the settlement documents, Fokker voluntarily self-disclosed the matter in 2010, although whether the government knew of the violations prior to the self-disclosure is now being questioned by Judge Leon.  After actually or attempting to disclose, the company conducted an in-depth internal investigation.  Ultimately, the company was charged with 1,112 violations of the Iranian Transactions and Sanctions Regulations, 41 violations of the Sudanese Sanctions Regulations, and 253 violations of the EAR.  Those violations included transactions involving Iranian military end users and violations of a denial order in place against Iran Air.  The U.S. Attorney's Office for the District of Columbia, citing shipments to Burma in addition to Iran and Sudan, charged Fokker criminally for conspiracy to violate the International Emergency Economic Powers Act, which serves as the statutory authority for most U.S. economic sanctions programs.


Re-Exports and Non-U.S. Companies.  The Fokker case serves as a reminder that U.S. export controls follow U.S.-origin goods even when they are being re-exported.  This aspect of U.S. export controls essentially mandates that non-U.S. businesses who trade in U.S. goods must comply with U.S. law; the Fokker settlement highlights the willingness and ability of U.S. enforcement agencies to pursue actions against non-U.S. companies.  In the past few years, we have seen the largest historical penalties involving sanctions violations in cases against non-U.S. companies, especially in the financial sector.  The Fokker settlement may be seen as an extension of that trend to non-U.S. businesses outside of the financial sector.

The Fokker case should also remind U.S. companies that their non-U.S. partners can pose a risk through resale of U.S.-origin items to sanctioned countries or other controlled destinations.  Fokker's concealment of its activity is somewhat extraordinary, and the measures that Fokker took to conceal its transactions with sanctioned countries from U.S. companies suggest that the U.S.-parts suppliers were not complicit in the activity.  Nonetheless, we would not be surprised if Fokker's suppliers received inquiries or suggestions from the Government about the need to upgrade their export controls compliance programs.

Proving the absence of knowledge in retrospect can be an uphill battle, especially in the midst of a government inquiry.  As such, the Fokker settlement highlights the importance of targeted, risk-based due diligence that begins with an understanding of international diversion risks for any given market.

Using Exceptions.  Fokker's apparent use of the "inventory exception" under U.S. economic sanctions is notable.  As practitioners familiar with the field know, that generally recognized exception allows for shipments into general inventory of a distributor even if the distributor sells some items to sanctioned countries, provided that the U.S. person does not know that its parts are destined for the sanctioned countries.

It appears that Fokker deliberately misused this exception to justify shipments from the United States.  For non-U.S. companies, the takeaway is simple: either use the exception appropriately or risk enforcement.  For a U.S. supplier, the lesson is more difficult.  Spotting misuse of the inventory exception by a non-U.S. distributor can be very tough; but one key step to protecting against this type of activity is training the workforce to understand red flags that may signal directed shipments in paperwork or other interactions with a non-U.S. distributor.

The Role of the Court.  The recent developments in the Fokker case highlight the complications that may arise after a company is basking in the relief of a settlement announcement.  It's not over until it's (really) over.  More than a month after the settlement was announced, Judge Leon expressed his apprehensions about the relative leniency of the penalty amount, the lack of criminal charges against the individuals involved, and a media report raising a question of whether the government knew about the violations in 2008, long before Fokker's apparent self-disclosure.  The Court has also asked that the parties submit filings comparing how Fokker's proposed settlement matches up against other deferred prosecution agreements.  Last year, we discussed how Judge Leon's questioning of a proposed settlement between IBM and the Securities and Exchange Commission for alleged books and records violations possibly contributed to an expanded investigation of the Company, and may have complicated the enforcement picture.  Here, there is no indication yet of additional investigations, although the Court's involvement may lead to harsher penalties.

The Role of Compliance.  OFAC noted in its settlement documents that Fokker had no compliance program in place during the five-year period when the violations occurred.  U.S. Attorney Ronald C. Machen said that Fokker "treated U.S. export laws as inconveniences to be 'worked around' through deceit and trickery."  The company undertook several corrective actions in response to the matter, including establishing a formal compliance program.

Let's face it.  Aligning business interests and compliance is tricky.  While business people may understand that compliance is necessary, compliance professionals often have to persuade business development personnel to see compliance as anything other than a burden.  That is especially true where, as was apparently the case with Fokker, there was not a clear tone from the top about the importance of compliance.

But Fokker may be useful in helping compliance personnel connect with their business personnel, because Fokker illustrates plainly that the consequences of non-compliance may be much greater than mere dollar values.  Even assuming the penalty amount sticks, not only was the $21 million penalty roughly equal to the gross revenues for the violative shipments, but the Justice Department described the investigation conducted by outside counsel as "vast;" OFAC described it as "exhaustive."  Thorough internal investigations can wreak havoc on a company's day-to-day operations (not to mention cost a lot).  Prevention is always better than cure.

It is imperative to have a compliance program with clear and efficient processes that allow the business side to manage their own and their customers' expectations, and set real boundaries for results.  Anything less can lead, as Fokker learned, to very significant, negative consequences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
17 Jan 2018, Seminar, Los Angeles, United States

The annual PIHRA Legal Update Seminars provides you with the latest California employment law related updates, compliance and regulatory issues, and the opportunity to network with legal practitioners and HR professionals.

18 Jan 2018, Seminar, Seoul, South Korea

Please join Sheppard Mullin and Lee & Ko for a cutting-edge discussion on “Trends in Intellectual Property – Keep Up or Get Left Behind” in view of key IP law developments in the United States.

18 Jan 2018, Webinar, Los Angeles, United States

Please join Sheppard Mullin for this month's Third Thursday Emerging Company Webinar educating entrepreneurs and emerging companies on the key legal issues they face during the growth of their companies. These complimentary 1-hour webinars are held through WebEx on the third Thursday of the month at noon. They will have both an audio and PowerPoint component.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions