OFAC Penalizes Communications Systems Exporter For Sudan Sales And Related Services - Corporate and Company Law

On September 17, 2020, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") reached a $894,111 settlement with Comtech Telecommunications Corp. ("Comtech") and its subsidiary Comtech EF Data Corp. ("EF Data"), two U.S.-based advanced communications systems providers, for exporting satellite equipment to Sudan and facilitating related services and training to a Sudanese state-owned enterprise in apparent violation of the now rescinded U.S. embargo against Sudan. OFAC's Comtech case shows the value of investing in and maintaining appropriate internal controls to identify and escalate sanctions issues when they occur, the danger of proceeding with a transaction while an OFAC license application is pending, and the danger of attempting to contract OFAC compliance obligations to downstream (and non-U.S.) counterparties.

I. Background

In early 2014, EF Data and one of its Canadian subsidiaries prepared a price quote for an order of satellite equipment under warranty, ongoing telephone support, and technical training for a Canadian satellite communications equipment manufacturer (the "Canadian Company"). These terms were eventually incorporated into a sales agreement with the Canadian Company that listed the ultimate destination of the satellite equipment as Sudan.

A month prior to shipping the satellite equipment, an EF Data credit manager warned other senior EF Data managers that they might encounter export issues because the end-user of the equipment was located in Sudan. Shortly thereafter, an EF Data export compliance official received a document from the Canadian Company indicating the shipment's ultimate consignee was the Sudan Civil Aviation Authority ("SCAA"), a Government of Sudan entity and blocked person. After learning SCAA was the equipment's ultimate end-user in Sudan, the EF Data export compliance official attempted to transfer OFAC compliance obligations from EF Data to the Canadian Company.

Immediately prior to shipping the satellite equipment to Canada, EF Data received another warning, this time from its third-party screening software, that OFAC export restrictions for Sudan could apply to the shipment.

Despite warnings from its credit manager and screening software, EF Data shipped the satellite equipment to the Canadian Company. The Canadian Company then integrated the equipment into a system of satellite-enabled earth-based telecommunications stations called V-SATs. The Canadian Company later shipped the V-SATs to SCAA in Sudan. EF Data's Canadian subsidiary later trained seven SCAA employees in Canada on the satellite equipment's use.

Following a self-assessment, Comtech disclosed these transactions to OFAC and instructed EF Data to apply for an OFAC license to perform warranty services on the equipment shipped to SCAA. While the OFAC license application was pending, EF Data's Canadian subsidiary continued to provide telephone support under its agreement with SCAA. During this time, the EF Data export compliance official approved a warranty request to loan (and export from the United States) four hardware units to the Canadian Company to fix a problem SCAA was experiencing with its hardware.

While EF Data's license application was pending, OFAC sent Comtech a subpoena requesting additional information about the transactions described above. While reviewing documents provided by Comtech in response to the subpoena, OFAC discovered that Comtech provided two versions of the same email with no supplemental explanation. The email appeared to have been doctored by the EF Data export compliance official to minimize her knowledge of the equipment's ultimate destination in subsequent discussions with her supervisor, the Comtech vice president, office of trade compliance. The manipulated email removed text that indicated the Canadian Company was open and upfront from the start about identifying Sudan as the end destination of the satellite equipment. The removal of this text indicates that EF Data personnel had knowledge the sale was likely prohibited and attempted to mislead the parties reviewing the conduct. The manipulation of this email required OFAC to expend significant time and resources to build an accurate administrative record.

OFAC ultimately denied EF Data's license application to provide warranty services on March 13, 2016.

II. Apparent Violations

OFAC maintained a comprehensive embargo against Sudan and the government of Sudan until its revocation in 2017. The embargo prohibited U.S. persons (defined as U.S. citizens, permanent residents, entities organized under U.S. law, or persons in the United States) from exporting or reexporting any goods or services to Sudan and from facilitating exports of goods or services to Sudan. Here, EF Data violated the reexport prohibition by engaging in two shipments of satellite equipment to Canada that it knew would be reexported to Sudan and the facilitation prohibition by providing related telephone support and training. In total, these constituted four apparent violations of OFAC's Sudan Sanctions Regulations.

III. Aggravating and Mitigating Factors

OFAC must consider ten " general factors" when determining how to respond to sanctions violations. The more aggravating these factors are, the more likely OFAC is to issue a penalty. The more mitigating they are, the less likely OFAC is to issue a penalty. OFAC determined the following to be aggravating factors in Comtech's case:

EF Data demonstrated reckless disregard for U.S. sanctions requirements and failed to exercise a minimal degree of caution or care by approving warranty services for equipment provided to SCAA while an OFAC license application was pending (and ultimately denied);
EF Data failed to heed warning signs, such as an alert from its screening software indicating that the sale of the satellite equipment could violate OFAC's sanctions regulations, and proceeded with the transactions anyway;
EF Data managers, including export compliance personnel, proceeded with the indirect exportation of goods and the facilitation of services despite having actual knowledge that the ultimate destination of the equipment was Sudan and that the fin
EF Data's violations allowed SCAA to access and utilize U.S.-origin satellite equipment and facilitated SCAA's access to training, warranty, and telephone support services, resulting in an economic benefit to the Government of Sudan;
Comtech, which operates through its subsidiary EF Data, is a sophisticated supplier with significant international operations, has multiple foreign subsidiaries, and has experience applying OFAC regulations to its business; and
EF Data provided shifting explanations in response to OFAC subpoenas and a request for information, and its subpoena response included an internal email to Comtech and its subsidiary's personnel that was manipulated by an EF Data export compliance official to omit certain relevant language, requiring OFAC to expend significant additional time and resources to build an accurate administrative record.

OFAC determined the following to be a mitigating factor in Comtech's case:

Comtech and EF Data have not received a penalty notice or finding of violation from OFAC in the five years preceding the date of the transaction giving rise to the violations.

OFAC found that Comtech voluntarily self-disclosed its violations and that the violations constituted an egregious case. This means that the base penalty for Comtech's violations should have been half the statutory maximum of $307,922 per transaction, which in Comtech's case would have been $153,961 per transaction or $615,844 in total. However, OFAC determined the base penalty for the four violations to be $584,386, which appears to have been aggravated by 70 percent and then reduced by 10 percent as an inducement to settle to reach the final settlement amount of $894,111. Comtech also committed to a number of personnel changes prior to resolution of the enforcement case, including (1) adding an EF Data vice president tasked with trade compliance, (2) committing to hire an additional trade compliance position to support that vice president, and (3) committing to create a new position of senior trade compliance officer and/or chief trade compliance officer at Comtech's New York headquarters.

It is not clear from the public webpost how OFAC reached its base penalty amount in this case. However, the lower base penalty could arise from a determination that some, but not all, of the violations were egregious.

IV. Conclusion

OFAC stated that it views the Comtech case as highlighting the importance not only of investing in and maintaining adequate internal controls to identify, interdict, and escalate sanctions issues, but also of developing a system of internal checks and balances so individual employees are not able to override a company's controls to approve otherwise prohibited transactions. The Comtech case also shows the risks of proceeding with transactions while an OFAC license application is pending. Finally, OFAC stated that U.S. companies engaging in international transactions should understand their obligations under OFAC's regulations and recognize that they cannot shift those obligations onto their foreign customers or counterparties.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.