On December 31, 2019, the U.S. District Court for the Northern District of Texas overturned a $2 million fine imposed by the Department of the Treasury's Office of Foreign Assets Control (OFAC) against ExxonMobil Corp., and its U.S. subsidiaries ExxonMobil Development Company and ExxonMobil Oil Corp. (collectively, "Exxon"). This marked a rare court decision overturning an OFAC sanctions penalty. The Court's decision focused not on the subject of the sanctions but addressed whether OFAC had provided proper notice of its sanctions requirements.
Background and Decision
On July 20, 2017, OFAC assessed a penalty in the amount of $2 million against Exxon for entering into contracts with Rosneft OAO (Rosneft) that were signed by Igor Sechin, its chief executive officer. Rosneft is not a Specially Designated National (SDN), but Mr. Sechin was designated an SDN pursuant to Executive Order (E.O.) 13661 at the time Exxon signed the eight contracts with Rosneft, between May 14, 2014 and May 23, 2014. OFAC determined that Exxon dealt in services from a blocked individual by entering into contracts signed by Mr. Sechin.
Exxon subsequently challenged the penalty, arguing that Mr. Sechin was subject to sanctions only in his individual capacity and not as an officer of Rosneft, and that OFAC failed to provide fair notice of its interpretations of E.O. 13661 and the Ukraine-Related Sanctions Regulations. U.S. District Judge Jane Boyle overturned the penalty finding that (i) Mr. Sechin's signing of the contacts with Exxon could constitute a service and (ii) it would violate the regulations if Mr. Sechin, as an SDN, provided services to a U.S. person. However, the Court determined that the regulations and related guidance failed to provide "fair notice" to Exxon of OFAC's interpretation that executing a contract with a company counter-signed by an SDN was prohibited.
Takeaways from the Decision
- OFAC regulations prohibit U.S. persons from signing any agreement with or countersigned by an SDN, and OFAC will continue to enforce this rule. On August 13, 2014 (after Exxon signed the Rosneft contracts), OFAC published FAQ 400, which states, "OFAC sanctions generally prohibit transactions involving, directly or indirectly, a blocked person, absent authorization from OFAC, even if the blocked person is acting on behalf of a non-blocked entity. Therefore, U.S. persons should be careful when conducting business with non-blocked entities in which blocked individuals are involved. U.S. persons may not, for example, enter into contracts that are signed by a blocked individual." Thus, the arguments advanced by Exxon regarding lack of notice no longer apply.
- Companies have an obligation to seek clarification. The Court found that Exxon's failure to seek guidance from OFAC, although not dispositive, was a relevant factor in its fair notice analysis. While Exxon ultimately prevailed, the Court's decision makes clear that willful blindness can be a risky compliance strategy. When OFAC rules and their application are unclear, there are a number of avenues through which companies or their outside counsel can seek written clarification from OFAC before taking actions.
- Clarification can be provided from a number of sources. The Court determined that public statements issued by Executive Branch officials, including White House and OFAC press releases, in addition to FAQs and other formal guidance, are relevant to a court's fair notice inquiry. However, the Court found that press reports, quotes and interviews publicized by third-party media outlets may not rise to the level of authoritative public statements.
- Contrary to OFAC's long held position that it seeks to apply consistent interpretations across its sanctions programs, the Court found that OFAC's interpretive guidance with respect to any particular program is unique to that program. Thus, in the Court's view, when OFAC published FAQ 285 for Burma in 2013, stating that U.S. persons should not enter into contracts that are signed by SDNs, it should have made clear that OFAC would take the same approach for all SDNs under any Executive Order or regulation. The Court found that the Ukraine/Russia regulations held themselves out as subject to independent interpretation. All OFAC regulations in 31 C.F.R. Chapter V contain a statement that "[t]his part is separate from, and independent of, the other [regulations] in this chapter" and most contain language to the effect that "different foreign policy and national security contexts may result in differing interpretations of similar language." This decision may encourage OFAC to offer more explicit guidance on whether its regulatory interpretations with respect to one program apply to other sanctions programs.
- Courts normally defer to OFAC because it implements U.S. national security objectives and foreign policy, areas within the purview of the Executive Branch. This decision does not change that general rule. Indeed, the U.S. government is expected to appeal the decision, and any further litigation and decisions may shed additional light on these issues.
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