Interpreting OFAC Sanctions: The Line Between Compliance and Evasion | The Volkov Legal Group
Matt Stankiewicz, Partner at The Volkov Law GrWhoops, join us for a post on OFAC Sanctions Compliance.
Unsurprisingly, we have responded to a significant number of inquiries regarding the latest Russian sanctions. Most companies are looking for black or white answers – what can we do and what can’t we do. However, penalties are very rarely, if ever, so black and white, and instead have a relatively large gray area. Unfortunately, creativity can cause problems for some companies despite their attempts to comply with the letter of the regulations. In general, companies may seek solace by applying narrow interpretations of certain phrases or terms, or, in some cases, offer “technical” interpretations that may in fact appear to circumvent or significantly defeat the purposes of these sanctions. Companies can have significant problems with these technical interpretations, and regulators can easily dismiss these technical details as evasion or worse. From our experience with OFAC, we can say with certainty that the agency is not necessarily receptive to these “technical aspects” if they conflict with the agency’s objectives.
Always keep in mind that OFAC’s mission is to achieve foreign policy and national security objectives and that these sanctions regulations are a tool to achieve those objectives. As such, OFAC takes its role as an enforcement agency very seriously and interprets its regulations with a keen eye to its overall mission. On some occasions, OFAC will adopt extended or unique interpretations of its rules. Given the importance of this mission, OFAC will do what is necessary to accomplish it.
To put things into perspective, we frequently equate sanctions with economic warfare. Unlike 40 or 50 years ago (and perhaps more recently), geopolitical struggles frequently required military intervention – boots on the ground. Nowadays, however, the United States relies more on its economic powers. As the latest Russian sanctions make clear, although we are not at “war” in the traditional sense, the United States is using its economic weapons against Vladimir Putin’s regime. As such, companies must be careful not to impede or frustrate these interests.
The wording of the regulations is only the beginning of the analysis of prohibited transactions and those which may be authorized. First, most new penalty programs include a cache of other tips, including a collection of FAQs. These FAQs help define certain terms and phrases that are used in the initial decrees, licenses and declarations. Although useful, these additional tips very often answer certain questions, while raising several new ones. For example, Executive Order 14066 prohibits “new investments in the energy sector in the Russian Federation”. Fortunately, OFAC has published FAQ 1019 which defines this phrase to include “a transaction that constitutes a commitment or contribution of funds or other assets for, or a loan or other extension of credit to, new energy sector activities (excluding maintenance or repair ) located or occurring in the Russian Federation on or after March 8, 2022.” The FAQ then goes on to state that:
the energy sector includes the supply, exploration, extraction, drilling, mining, harvesting, production, refining, liquefaction, gasification, regasification, conversion, enrichment, manufacture or transport of petroleum, natural gas, liquefied natural gas, natural gas liquids or petroleum products or other products capable of producing energy, such as coal or timber or agricultural products used to manufacture biofuels, development, production, generation, transmission or exchange of energy, by any means, including nuclear, electric, thermal and renewable.
Although very useful, the FAQ raises a number of questions: what exactly does production mean? What about transport? And so on.
In addition to advice, companies should listen to OFAC’s intentions and expectations, and they should try to anticipate the agency’s interpretations and motivations. Seasoned sanctions lawyers frequently rely on historical enforcement action to provide forward-looking guidance on more recent regulations that may not yet have meaningful guidance. This can lead to an initially conservative interpretation in order to ensure conformity, especially in the beginning when tensions are usually heated. This is especially the case with the current Russian sanctions, as the Biden administration has made it clear that it will aggressively enforce these regulations. This includes setting up a DOJ KleptoCapture task force to identify blocked assets of sanctioned Russian oligarchs, which is an aggressive new step in sanctions enforcement.
When it comes to OFAC expanding its reach, we’ve seen the agency take some unusual steps in the past. The first example that comes to mind is its enforcement action against Exxon in 2017. At that time, OFAC had recently implemented a series of sanctions against Russia, including designating several Russian oligarchs as specially designated nationals (“ SDN”). This series of designations included Igor Sechin, the CEO of Rosneft, which primarily impacted Mr. Sechin on a personal level, but did not ban all dealings with Rosneft. Shortly after this designation, Exxon entered into a variety of important agreements with Rosneft to seal major partnerships. To celebrate these agreements, the CEO of Exxon met with Mr. Sechin and conducted a signing ceremony of the legal documents. There were pictures of this ceremony in major news outlets and it was broadcast on Russian television. OFAC later filed a lawsuit against Exxon, finding that the company violated the new sanctions by signing agreements directly with Mr. Sechin, despite dealing with Mr. Sechin in a professional capacity and not as a personal title. Exxon believed itself to be compliant, while OFAC viewed their actions as violations.
We believe OFAC was furious to see one of America’s largest corporations blatantly flout its latest sanctions. OFAC called Exxon’s actions a “flagrant” violation and cited the company’s sophisticated understanding of sanctions regulations and its reckless disregard for known OFAC regulations. Watching Exxon openly celebrate with an individual whom OFAC believed to be contrary to the national security interests of the United States certainly did not sit well with the agency, and they made this decision to, at the very least, send a message to other companies that may be considering similar actions. Again, the focus was on national security interests and foreign policy goals, and OFAC believed their actions were aimed at achieving those goals.
Exxon challenged OFAC’s actions and ultimately prevailed nearly three years later. The original enforcement action sought a civil penalty of $2 million. Meanwhile, it’s certainly likely that Exxon has spent more than that on legal costs fighting in court. We now use this case to illustrate the potential outcomes for companies that take a narrow reading of regulation or otherwise attempt to rely on a technical detail. While they may have a legal argument to justify that their actions were not prohibited by virtue of their reading of the language, OFAC would, at the very least, require a company to defend that interpretation in court. The process would be expensive, frustrating, time consuming and always damage reputation during the procedure.
Interestingly, companies should be careful to avoid a common pitfall similar to FCPA compliance – the use of third-party intermediaries as a means of complying with sanctions programs. For example, can a company use an intermediary to make a payment to a Russian company that would be prohibited if made by the company itself? This is a classic example of structuring transactions with the use of a third party to improperly “evade” a specific prohibition. This situation presents an important boundary between compliance and evasion.
First, some of the sanctions expressly prohibit such behavior. For example, recent Directive 4 Under Executive Order 14024, states that “the following are also prohibited: (1) any transaction that evades or avoids, is intended to evade or avoid, causes a violation or attempts to violate any of the prohibitions in this directive; and (2) any conspiracy formed to violate any of the prohibitions in this guideline.
Second, even where not specifically mentioned in the rules or regulations, OFAC previously relied on theories of causation and facilitation to impose sanctions. Indeed, even foreign companies that are ostensibly outside US jurisdiction should be wary. OFAC has previously relied on the theory of “causing” a violation to bring an enforcement action against an entirely non-US person. In 2017, OFAC reached a settlement agreement with CSE TransTel Pte. (“TransTel”) for “causing” sanctions violations. TransTel is a Singaporean company that knowingly did business with Iran. In connection with this activity, TransTel knowingly used US financial institutions to process and facilitate payments for businesses based in Iran. TransTel concealed and obscured these transactions and signed letters stating that it would not pass Iran-related business transactions through the bank. Bank remittances were processed via the United States and involved USD. OFAC determined that TransTel “induced” a U.S. person to violate Iran’s sanctions program and filed a lawsuit against TransTel directly for those violations. TransTel ultimately agreed to pay a civil penalty of over $12 million to settle its potential civil liability.
Two final notes of caution. First, it is simply related to US sanctions. Keep in mind that a significant number of countries are implementing their own sanctions against Russia at the same rate as the United States, and companies should take this into account as well.
Second, as the war in Ukraine continues, we expect the United States to impose tougher sanctions, perhaps even instituting a full embargo, like the sanctions against Iran and North Korea. And to reinforce the effects of these restrictive measures, the United States could add “secondary sanctions” to any entity or individual who is not directly subject to American sanctions but deals with Russia, essentially giving them the choice: to deal with the United States or Russia, but not both.