Recent settlements in civil enforcement proceedings brought by the Office of Foreign Assets Control (OFAC) suggest that cover-ups, not crimes, may invite the stiffest penalties. Frequently, companies that cooperate with OFAC investigations, admit wrongdoing and take remedial actions to prevent future violations escape the enforcement process with mild punishments. Indeed, even companies that eventually cooperate after some initial resistance fare well in OFAC’s administrative enforcement process and often avoid criminal penalties altogether — penalties that, aside from the reputational damage, carry much more severe consequences, including prison time for individuals and massive financial impact.
Thus, it is useful for practitioners to understand the OFAC cooperation process. Stated simply, cooperation often yields leniency, and practitioners need to understand how to navigate the process in order to provide their clients with a comprehensive set of options for dealing with a potential sanctions violation. And even for violators who — whether or not they choose to cooperate with OFAC — become the targets of criminal investigations, the administrative penalties dispensed by OFAC provide an important comparison that defense attorneys should use while trying obtain the lowest possible sentence for their clients.
OFAC has issued relatively mild punishments for violations of economic sanctions where the violators cooperate with OFAC’s investigation. Cooperation in these circumstances does not require self-reporting. It does not even seem to require immediate cooperation upon learning of OFAC’s investigation. There is a wide disparity between the administrative punishments dispensed by OFAC and the criminal penalties to which entities might be exposed.
The guidelines for OFAC’s economic sanctions can be found in Appendix A to 31 C.F.R. 501. Each prohibited transaction is viewed as a separate violation, and, depending on a transaction’s value, carries an “applicable schedule amount” between $1,000 and $250,000. The “transaction value” is generally the “domestic value in the United States” of the goods or services involved or, in a case where an entity transfers or attempts to transfer funds, the amount of the funds to be transferred.
When OFAC determines a violation warrants a civil penalty, it first prepares a pre-penalty notice. This pre-penalty notice is not a final agency action, and thus there is no judicial review at this time (31 C.F.R. § 501.703). The notice will contain a “base penalty” based upon the total “schedule amount,” adjusted by two factors: whether the violation is “egregious,” and whether the infraction was “disclosed through a voluntary self-disclosure.”
- Whether an infraction is classified as “egregious” depends on “an analysis of the applicable General Factors,” which basically amounts to a totality-of-the-circumstances determination. Reckless conduct, and violations that harm the objectives of the sanctions programs (e.g., selling weapons to hostile nations) are more likely to be classified as egregious than cases involving, for example, unknowing violations or innocuous infractions (such as regular business transactions with an entity inside a sanctioned country). Efforts to cover-up wrongdoing may enhance the odds of earning an “egregious” tag.
- The second classification is voluntary self-disclosure. To satisfy “voluntary self-disclosure,” an entity must notify OFAC of the infraction “prior to or at the same time” that OFAC, or any other government entity, “discovers the apparent violation or another substantially similar apparent violation.” A voluntary self-disclosure may allow a violator to reduce its base penalty by 50 percent.
Once the base penalty is set, it is adjusted for “Applicable Relevant General Factors.” These factors include “substantial cooperation” with OFAC, which earns a 25-40 percent discount, but for entities that voluntarily self-disclosed (and thus already cut their bill in half), it is just deemed a “further mitigating factor.” “First-time” offenders — defined as entities with a clean OFAC record over the prior five years — “generally” receive a 25 percent reduction. Importantly, neither of these discounts is mutually exclusive. Thus, cooperative “first-time” offenders can receive the benefit of both reductions. OFAC can even further adjust the penalty calculation downward on the basis of any other relevant information, including any remedial measures taken and the impact/severity of the violation.
In the next article in this series, learn some of the recent penalties issued to cooperating entities and what counsel can take from OFAC’s rulings.