I like the General Factors Affecting Administrative Action. I really do. If you don’t know what I’m talking about, allow me to provide some background. As you (hopefully) are aware, the United States Department of Treasury’s Office of Foreign Assets Control (OFAC), administers U.S. economic sanctions programs targeting the countries, organizations, persons, etc. that the U.S. Government believes to be engaged in conduct which threatens certain U.S. national security and foreign policy, as defined by various legal authorities. In this role, OFAC is responsible for enforcing violations of the sanctions programs they administer. Their processing of such enforcement cases are guided by a body of regulations known as the Economic Sanctions Enforcement Guidelines. These guidelines contain “General Factors Affecting Administrative Action” which identify specific criteria that OFAC will consider in determining whether to aggravate or mitigate an enforcement response for apparent violations of the sanctions which they administer.
Of these general factors, two are of particular relevance to this blog post: General Factor A and General Factor B. General Factor A takes into account whether the apparent violations were carried out willfully or recklessly, and General Factor B takes into consideration whether there was awareness of the conduct at issue. These two factors were cited as aggravating factors in the recently announced civil settlement between OFAC and Zhongxing Telecommunications Equipment Corporation (ZTE)–a settlement of 251 apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR) in which ZTE agreed to remit $100,872,266.
In assessing General Factor A, OFAC found that “[v]arious executives and senior executives knew or had reason to know of the conduct that led to the apparent violations and engaged in a long-term pattern of conduct designed to hide and purposefully obfuscate its conduct in order to mislead U.S. government investigators for several years. ZTE’s conduct was the result of a widespread pattern or practice involving the coordination of many divisions and departments within the company.” In addition, when assessing General Factor B, OFAC found that “ZTE had actual knowledge that the conduct giving rise to the apparent violations took place….ZTE had actual notice from multiple sources that both its initial business with Iran and its later resumption of business with Iran constituted or likely constituted a violation of U.S. economic sanctions laws….ZTE’s management played a key role in authorizing and carrying out the transactions at issue, and ZTE’s senior leadership and management appear to have been involved with and possessed actual knowledge of the company’s violative patterns and practices.”
For those of you unfamiliar with these two General Factors, General Factor A takes into consideration whether Subject Person’s conduct leading to a violation was willful or reckless in nature. General Factor B, on the other hand, takes into consideration the Subject Person’s awareness of the conduct giving rise to the apparent violation. In the case of a corporation, awareness will focus on supervisory or managerial level staff in the business unit at issue, as well as other senior officers and managers.
So where’s the problem? The problem is that if you are a company whose management knows of an apparent violation of U.S. sanctions, and has failed to take action to remediate that conduct–or worse, has sought to conceal such conduct–then in the words of Walter Sobchak “you’re entering a world of pain.” This is because is appears that OFAC can rely upon one factual predicate–knowledge, notice, or reason to know of an apparent violation–to aggravate a penalty twice–i.e., under General Factor A and under General Factor B.
Moreover, it seems that OFAC doesn’t clearly distinguish between which facts allow for application of each of these respective General Factors. For example, in analyzing “awareness of conduct” under General Factor B, and aggravating ZTE’s penalty under that General Factor, OFAC took into account that ZTE was aware of that its conduct was in violation of the law. However, in the sanctions context violation of a known legal duty is indicia of willful conduct–conduct that should be analyzed and assessed under General Factor A–as opposed to awareness of the conduct which is assessed under General Factor B. Thus, it appears that OFAC will use facts that seemingly should be analyzed under General Factor A, as part of an analysis of General Factor B, and vice versa–as ZTE’s knowledge that it was in breach of the law is a fact more appropriately assessed under General Factor A, and is less pertinent to General Factor B than the fact that ZTE was aware of the conduct leading to the violations, regardless if they knew or not they it was a violation of law.
The reason I raise this point, and it is concerning to me, is because it shows an ability, and a willingness by OFAC to use certain facts to aggravate a penalty under multiple General Factors under which those facts might not necessarily be intuitively assessed. This leads to a situation where Subject Persons (those being investigated for apparent violations of OFAC administered sanctions programs) are being penalized twice for the same factual circumstance.
So can OFAC get away with this? Yes, probably. Federal agencies receive deference when it comes to their interpretation of their own regulations, and in an area such as U.S. economic sanctions which is at the intersection of law, national security, and foreign policy, courts have found that OFAC should be afforded extreme deference in their decision making. From a compliance perspective then, ZTE is a teaching lesson on the importance of self-disclosing and remediating a violation once a company becomes aware of it, and regardless of whether or not the company knows it to be a violation of the law. Failure to do so could lead to a situation where a penalty is aggravated under multiple general factors even where it may seem on its face that only one of the general factors applies.
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