From what I understand the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), sends out over 1,000 administrative subpoenas every year. Many of these subpoenas go to companies and financial institutions that have the resources to properly respond to OFAC’s inquiries. While such responses are often organized and (sometimes) fully responsive, I am often struck by the fact that companies, and even some counsel, don’t address OFAC’s Enforcement Guidelines in their response to OFAC’s subpoenas.
The Enforcement Guidelines guide OFAC’s determination as what an appropriate response to an apparent violation of an OFAC administered sanctions program should be. For example, these guidelines set forth criteria to be considered by OFAC when determining the appropriate resolution of an OFAC Enforcement investigation. These criteria are known as the “General Factors.” I have set out below how these factors can be leveraged to seek increased mitigation. Specifically, I describe below–in a general sense–arguments we made for a mitigated sentence in an export enforcement case that led to approximately 70% mitigation from OFAC’s base penalty amount. The case involved the export prohibitions of the Iranian Transactions and Sanctions Regulations.
General Factor A
General Factor A considers a Subject Person’s willfulness or recklessness in violating an OFAC administered sanctions program. To that end we argued that language found in guidance published on OFAC’s website conflicted with OFAC’s regulations. This discrepancy in language undercut any finding of willfullness, as the guidance–which the exporter relied upon–suggested that the regulation did not actually prohibit the conduct being investigated.
General Factor B
Under General Factor B OFAC considers whether the Subject Person demonstrated a reckless disregard of U.S. sanctions or failed to exercise a minimal degree of caution or care in avoiding the conduct that lead to the apparent violation. To mitigate against a finding of reckless conduct, we pointed out to OFAC that the company used screening software during its customer on-boarding process to identify with a connection to parties or conduct demonstrating heightened sanctions risk. We argued that, far from being reckless, the utilization of such screening and due diligence software demonstrates that the exporter was demonstrated caution in avoiding sanctions violations, despite the fact that such procedures were not prevalent in the client’s particular industry.
General Factor C
Under General Factor C, OFAC will consider whether the Subject Person attempted to hide or purposefully obfuscate its conduct in order to mislead OFAC or other regulators. While its hard to prove the negative–that our client didn’t conceal their conduct–we were able to highlight there was no evidence to suggest that they falsified shipping documents or information provided for the Automated Export System (AES). We argued that given the lack of evidence concerning fraudulent or misleading documentation, that General Factor C should not be considered aggravating in the client’s case.
General Factor D
General Factor D considers a Subject Person’s particular circumstances and characteristics, including commercial sophistication, size of operations and financial condition, volume of transactions, and sanctions history. General Factor D is one of the easiest general factors to argue because there is clarity as to what criteria is considered under the general factor. In our case, we argued that the business qualified as a small business entity under the Small Business Regulatory Enforcement Fairness Act. We also argued that there had been a substantial downsizing in operations since the time of the conduct leading to the apparent violations, and a significant deterioration in the entity’s overall financial condition. Further, we noted that the apparent violations constituted a small portion of the overall business between during the relevant time period, and the gross profit made on the transactions was negligible.
OFAC acknowledged that these circumstances, in consideration of General Factor D, were mitigating.
General Factor E
Under General Factor E, OFAC will consider the existence, nature, and adequacy of a Subject Person’s risk based OFAC compliance program at the time of the apparent violation. During the course of the enforcement proceedings, we argued that our client maintained an OFAC compliance program at the time of the apparent violations, that the program prohibited transactions where Iran was identified as the final destination, and that the program required the company to maintain a list of potential red flags unique to their industry.
General Factor F
General Factor F considers any corrective action taken by the Subject Person in response to an apparent violation. Considerations under this general factor include what steps the Subject Person took upon learning of the apparent violation, the process followed to resolve issues arising from the apparent violations, whether the Subject Person adopted new and more effective internal controls and policies to prevent a recurrence of the apparent violations, and whether the Subject Person undertook a thorough review to identify other possible violations.
In our sample case, the company immediately ceased all transactions from which the apparent violations arose many months prior to receiving an OFAC subpoena. Further, the company revised their OFAC compliance policy to specifically prohibit the types of transactions that had led to the apparent violations.
OFAC mitigated its enforcement response after analyzing the facts in light of General Factor F.
General Factor G
Pursuant to General Factor G, the nature and extent of the Subject Person’s cooperation with OFAC are considered. In our sample case we argued that the company responded to all of OFAC’s inquiries in a well-organized, timely, and fully responsive manner. The company also signed multiple tolling agreements with OFAC extending the applicable statute of limitations. Finally, we held that in cases where there was no voluntarily self-disclosure filed, but in which the Subject Person had provided substantial cooperation, that OFAC should mitigate the penalty by up to 40%.
OFAC ultimately held that the circumstances, in light of General Factor G, were mitigating.
General Factor H
We didn’t make any arguments under General Factor H, however, that general factor takes into account the timing of an apparent violation in relation to the imposition of a sanctions. In other words, OFAC considers whether the apparent violations occurred within a short time after the sanctions’ prohibitions at issue went into effect. In this case we could not argue anything as the prohibitions had been in place for nearly fifteen years prior to the occurrence of the conduct giving rise to the apparent violations.
General Factor I
OFAC’s analysis under General Factor I involves a review of whether there have been other enforcement actions taken by federal, state, or local agencies against the Subject Person for the apparent violation or other similar violations. In our case, the company had not been the subject of any prior law enforcement investigations or proceedings. As a result, we requested “first offense” mitigation of 25%. OFAC’s analysis of this general factor ultimately concluded that the circumstances were mitigating.
General Factor J
General Factor J’s objective is to assess the impact of the enforcement action with respect to ensuring future compliance with U.S. sanctions by the Subject Person, or deterring persons similar to the Subject Person–particularly those in the same industry–from engaging in such violations. Here we argued that due to the Subject Person’s size that any significant penalty could put them out of business, and that such a result would not promote compliance by the company but would rather lead to its demise–an unfavorable result considering the actions they took to remediate the conduct and install model sanctions compliance practices.
General Factor K
General Factor K is a catch-all of sorts that allows Subject Persons to present any additional information not directly relevant to the other general factors, but which may nonetheless be relevant to OFAC’s consideration. To ensure our client’s confidentiality, I won’t include what we argued under this general factor, and such a recitation would not be instructive to readers given the fact that is highly dependent on the facts being addressed.
I hope that you found this breakdown useful. Keep in mind that you don’t have to wait until the Pre-Penalty Notice is returned to make these arguments relevant to OFAC’s Enforcement Guidelines considerations. Indeed, making arguments under these general factors, or at a minimum, highlighting information relevant to such general factors in a response to an OFAC administrative subpoena or in a voluntary self-disclosure may help prevent a Pre-Penalty Notice from being issued in the first place.
The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or firstname.lastname@example.org