On November 9, 2009, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury issued its Economic Sanctions Enforcement Guidelines. While the guidelines adopt in large measure an interim final rule issued by OFAC on September 8, 2008, they represent the first final rule published by OFAC, which deals with generally applicable economic sanctions enforcement guidelines.

Background on Economic Enforcement Sanctions Guidelines

OFAC administers and enforces economic sanction programs against targeted foreign countries (countries currently subject to U.S. sanctions include Burma, Cuba, Iran and North Korea), regimes, terrorists and terrorist organizations, and others as dictated by U.S. policy interests. The goal of these sanctions programs is to deprive targeted entities of the use of assets that are subject to U.S. jurisdiction and of access to the U.S. financial system and markets. A primary tool in enforcing these programs is through civil and criminal penalties against U.S. individuals or companies who violate the applicable sanctions programs.

In 2007, the International Economic Powers Enhancement Act substantially increased the maximum penalties for violations of the International Emergency Economic Powers Act, which is a principal statutory authority for much of OFAC sanctions programs. The new law increased substantially the maximum penalties for violations under the IEEPA, leading OFAC to develop a new framework for determining its enforcement response to violations, as well as the amount of any civil penalties relating to violations of U.S. trade law.

In its final form, the OFAC Economic Sanctions Enforcement Guidelines apply to all persons subject to any of the sanctions programs administered by OFAC and to all enforcement matters before OFAC (whether such matters fall under IEEPA or any other statute pursuant to which OFAC is authorized to enforce sanctions).

The guidelines can be broken down into three components: (1) Types of OFAC enforcement responses; (2) General factors OFAC will consider in determining its enforcement response and, if applicable, the corresponding civil penalty amount; and (3) How OFAC will calculate civil penalties.

Possible Enforcement Responses

Depending on the severity of the alleged violation, OFAC may take the following actions:

  • No action—if OFAC determines there is insufficient evidence to establish a violation or that enforcement action is otherwise not required.
  • Cautionary letter—if OFAC determines that there is insufficient evidence to establish a violation or that no enforcement is necessary other than a warning to the alleged violators that their conduct could result in future violations or that their compliance policies may be insufficient.
  • Finding of violation—issued if OFAC determines that a violation occurred, but no further enforcement is necessary beyond identifying the violation and appropriate remedial steps.
  • Civil penalty—issued if OFAC establishes that a violation has occurred which warrants the imposition of a monetary penalty.
  • Criminal referral—if OFAC determines the violation merits referral to the applicable law enforcement agencies for criminal investigation or prosecution.

In addition to these enforcement responses, OFAC may also request additional information from an alleged violator to establish the violation and may impose additional administrative penalties—including denial, suspension, modification, revocation or withholding of OFAC licenses where needed, from a violator—or by issuing a cease and desist ordering the violator to stop engaging in prohibited conduct.

General Factors Impacting OFAC Enforcement Response

In determining the appropriate enforcement response, OFAC will consider eleven general factors, in an effort to move away from a narrow consideration of mitigating and aggravating factors toward a more broad-based and holistic analysis of the violating conduct:

  1. Willful or Reckless Violation of Law. OFAC will consider the alleged violator's knowledge or lack of concern over the violation, whether the violator attempted to conceal the violation, whether the violation fits within an overall pattern of conduct, prior notice that this type of transaction is prohibited, and the degree of involvement by management in the violating activity.
  2. Awareness of Conduct. A violator's awareness that a violating transaction occurred, and any involvement by management in the offending transaction.
  3. Harm to Sanctions Program Objectives. OFAC will also consider whether the violation provided an economic benefit to a targeted entity, harmed U.S. policy interests or U.S. licensing programs, and whether the violation had humanitarian implications in its enforcement process.
  4. Individual Characteristics. The individual characteristics of the alleged violator will also be considered by OFAC in determining its enforcement response. Individual characteristics include the violator's commercial sophistication, size and financial condition, volume of transactions (focused on violations as a percentage of volume), and sanctions history.
  5. Compliance Program. The presence of a risk-based OFAC compliance program focused on complying with the U.S. sanctions programs is another factor considered by OFAC.
  6. Remedial Response. OFAC will also consider the alleged violator's response and corrective action—including those steps taken upon discovering the violation; the process through which the violation was corrected; the subsequent development of internal controls to identify future violations; and whether the alleged violator conducted a review to identify whether other similar violations exist.
  7. Cooperation With OFAC. The nature and extent of the alleged violator's cooperation in OFAC's investigation will also have a role in OFAC's analysis—including whether the violation was self-reported, the amount of information provided, the amount of research into similar transactions by the alleged violator, the voluntariness of the disclosure of the violation, and the speed and completeness of the alleged violator's response to OFAC's investigation and additional inquiries. As far as an alleged violator's cooperation, OFAC will also consider the party's willingness to enter into a tolling agreement, if a tolling agreement is requested by OFAC in order to extend the applicable limitations period so as to give OFAC additional time to research the potential violation. The guidelines note that while agreeing to toll the statute of limitations is a mitigating factor as far OFAC's determination of an appropriate enforcement response, an alleged violator's decision not to enter into a tolling agreement will not be considered as an aggravating factor.
  8. Timing of Violation in Relation to Imposition of Sanctions. OFAC will consider the proximity of the alleged violation to the imposition of, or changes made to, the applicable economic sanctions as part of its enforcement analysis.
  9. Other Enforcement Action. The progression or status of any legal action taken against the violator for the apparent violation will also be considered in determining OFAC's enforcement response, including whether the settlement of the OFAC violations is part of a universal settlement with other federal, state, or local agencies.
  10. Future Compliance/Deterrent Effect. OFAC will also consider the level of administrative response and civil penalty necessary to ensure future compliance and to deter other violators from similar conduct (particularly in the same industry sector).
  11. Other Relevant Factors. Last, OFAC includes a catchall factor to allow for the consideration of any additional case-specific factors it feels bear upon the level of enforcement response required.

Civil Penalties

Once OFAC has determined that civil penalties are the appropriate enforcement response, the guidelines dictate the implementation of this penalty. The guidelines provide both a procedure for imposing an award and a framework for determining the amount of the civil penalty.

Process for Implementation

OFAC's procedure for instituting a civil penalty consists of three steps: (1) pre-penalty notice; (2) the alleged violator's response; and (3) penalty notice

Upon determining that a civil penalty should be issued, OFAC will first issue a pre-penalty notice to the violator. The pre-penalty notice will provide: (1) a description of the violation; (2) the provisions it feels were violated; (3) the base category of the penalty (based upon OFAC's process for determining the appropriate civil penalty); (4) the maximum penalty allowed under law; (5) the proposed penalty; and (6) a brief explanation of the penalty process.

Upon receipt of the pre-penalty notice, the alleged violator will have an opportunity to respond. The violator should either agree or set forth reasons why it feels there was no violation or why a lesser penalty amount is merited, along with the corresponding documentation and information necessary to review this decision.

After reviewing the alleged violator's response, if any, OFAC will issue a penalty notice that will constitute the final agency action on the violation.

Calculation of Amount

As far as determining the amount of the civil penalty, OFAC provides a matrix for calculating the applicable civil penalty based upon the level of egregiousness of the case and whether the violation was voluntarily self-reported. Egregiousness hinges upon OFAC's analysis of four of the general factors: reckless or willful disregard of U.S. law; level of awareness of a potential violation; harm to the objectives of the sanction programs; and individual characteristics of the violator.

Thus, base penalties fall into a matrix with four categories:

  1. A non-egregious and self-reported violation calls for a penalty of up to one half of the transaction value, capped at $125,000 per violation.
  2. A non-egregious violation discovered through other means calls for the applicable schedule amount, capped at $250,000 per violation. The applicable schedule amount is contingent on the value of the relevant transaction. It reaches the $250,000 cap with respect to transactions valued at $170,000 or more.
  3. An egregious and self-reported violation calls for one half of statutory maximum penalty applicable to the violation.
  4. An egregious violation discovered through other means calls for the statutory maximum penalty.

After the base penalty is calculated, OFAC can adjust the penalty amount based upon its consideration of the general factors. OFAC does note that if a party substantially cooperates with OFAC the base penalty amount will typically be reduced by 25 to 40 percent, and that if the violation is the violator's first, the base penalty amount will be reduced by 25 percent . Thus, although the penalty amounts are high, there is some flexibility and OFAC provides strong incentive for cooperation and voluntary disclosure of violations.

Other Civil Penalties

In addition to the above, OFAC may impose civil penalties for failure to comply with a requirement to furnish information or keep records. Thus, for example, failure to comply with OFAC's requirement to furnish information may result in a penalty of up to $20,000 (or up to $50,000 if the relevant transaction is valued at greater than $500,000). Moreover, such failure may be considered a continuing violation so that OFAC may impose said penalties for each month that the failure to furnish information persists.

Conclusion

Overall, the OFAC Economic Sanction Enforcement Guidelines highlight the increased exposure businesses face in the area of international trade. The guidelines do, however, provide some clarity as far as what precautions businesses entering into these transactions should take to limit their exposure and to reduce the severity of OFAC's enforcement response and their civil liability should a violation of U.S. trade law occur. The guidelines also highlight the significance of effective compliance programs and of voluntary self-reporting of violations.

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.