Why it matters: In recent years, international banks have been the government’s favored target for the imposition of huge penalties arising from violations of the U.S. sanctions laws, most recently in the Commerzbank case (discussed in our March newsletter). However, two recent cases, Schlumberger and PayPal, illustrate that the government is cracking down on sanctions violations in other global industry sectors.
Detailed discussion: In the recent high-profile cases involving international banks BNP Paribas and Commerzbank, the government exacted significant penalties arising from the banks’ doing business with blacklisted countries in violation of the U.S. sanctions laws. Two recent government enforcement actions, one by the DOJ and the other by OFAC, illustrate that the government is looking beyond international banks to seek penalties for U.S. sanctions violations from global companies operating in other industry sectors.
Schlumberger: Schlumberger, Ltd. is a global oilfield services organization. On March 25, 2015, the DOJ announced that Schlumberger Oilfield Holdings Ltd. (SOHL), a subsidiary of Schlumberger, agreed to plead guilty and pay a penalty of over $232.7 million (including a criminal forfeiture of over $77.5 million and a criminal fine of over $155.2 million) for willfully violating the U.S. sanctions laws by facilitating trade with Iran and Sudan. The criminal indictment and statement of offense filed on March 25 set out the following facts: From roughly 2004 to 2010, Drilling & Measurements (D&M), a business segment of Schlumberger headquartered in Sugar Land, Texas, provided oilfield services to customers in Iran and Sudan through SOHL’s non-U.S. subsidiaries. Among other things, D&M employees were found to have approved capital expenditure requests from Iran and Sudan for the manufacture of new oilfield drilling tools, which requests were often worded so as to disguise the identities of the embargoed locations. In addition, headquarters personnel at D&M made and implemented business decisions involving, and provided technical services to, D&M operations in Iran and Sudan.
During the relevant time period, Schlumberger had sanctions compliance policies and procedures in place designed to ensure that U.S. sanctions laws were not violated, including a “Recusal Program” whereby U.S. citizens were required to recuse themselves from involvement in business related to Iran and Sudan. However, the government found that Schlumberger failed to effectively enforce its policies and procedures, and failed to provide adequate compliance training and supervision of D&M personnel (including non-U.S.-citizen D&M employees living in the U.S.) pursuant to such programs. These “failures” were found to have contributed to D&M’s “willful” violation of the U.S. sanctions laws.
In addition to the hefty penalty, the plea agreement requires that SOHL agree to a three-year corporate probation period during which it must continue to cooperate with the government and not commit any additional violations of U.S. law. In addition, the plea agreement requires Schlumberger to hire an independent consultant to review its internal sanctions policies and procedures as well as its company-generated sanctions compliance audit reports.
PayPal: While the amount of the penalty is not as significant as inSchlumberger, OFAC demonstrated that it will aggressively pursue enforcement of its various U.S. sanctions programs in the case of PayPal, Inc., a licensed money services business headquartered in San Jose, California (PayPal). On March 25, OFAC announced that it had entered into a civil settlement of over $7.7 million with PayPal in connection with claims that it violated multiple OFAC sanctions programs. OFAC found that, from roughly late 2009 through mid-2013, PayPal processed 486 transactions (totaling approximately $44,000) involving embargoed countries (Cuba, Iran and Sudan) and/or the accounts of embargoed individuals on OFAC’s lists of “Specially Designated Global Terrorists” and “Weapons of Mass Destruction Proliferators and Their Supporters.” In many cases, the transactions giving rise to the sanctions violations contained explicit references to the embargoed locations or individuals.
In one case, which OFAC deemed to be an “egregious” violation of its Weapons of Mass Destruction Proliferators Sanctions Regulations, PayPal said that it at first failed to identify the embargoed individual whose name was on the account, Turkish national Kursud Zafer Cire, because its automated filter (designed to catch and identify transactions involving Specially Designated Nationals or SDNs) was not “working properly.” Even when the filter started working and the next five transactions involving Cire’s account were flagged, PayPal’s risk management employees dismissed the warnings in violation of PayPal’s internal policies and procedures. The sixth time a transaction involving Cire was flagged, a risk management employee followed internal procedures by creating a “case” for the match, restricting Cire’s account and requesting additional information from Cire. However, upon receiving the requested information, including a copy of Cire’s passport that showed a birth date and place identical to the person on the SDN list, a risk management employee dismissed the match due to an “apparent misunderstanding” of why the filter had flagged Cire’s account for review. It was not until the seventh time Cire’s account was flagged that PayPal appropriately blocked the account and reported it to OFAC.
OFAC cited many “aggregating factors” in the case, including its finding that PayPal’s compliance program was inadequate to prevent the sanctions violations. It cited as “mitigating factors” PayPal’s substantial cooperation with OFAC’s investigation and its hiring of new management in its compliance division, which undertook various measures to strengthen PayPal’s OFAC screening processes, identify OFAC-related issues in its payment system and generally implement more effective controls.
To sum up, in addition to concerns about FCPA compliance, it is apparent that corporations operating in the global arena now have to be alert to U.S. sanctions compliance as well. As U.S. Attorney Ronald C. Machen Jr. (District of Columbia) said at the Schlumberger press conference, “Today’s announcement should send a clear message to all global companies with a U.S. presence: whether your employees are from the U.S. or abroad, when they are in the United States, they will abide by our laws or you will be held accountable.”
See here to read the criminal information in U.S. v. Schlumberger Oilfield Holdings, Ltd. (filed 3/25/15).
See here to read the statement of offense to the plea agreement in U.S. v. Schlumberger Oilfield Holdings, Ltd (3/25/15).
See here to read the OFAC enforcement information for 3/25/15 relating to PayPal, Inc.
For more on this matter, refer to the following:
DOJ press release issued on 3/25/15 regarding Schlumberger.
Plea agreement dated 3/25/15 between U.S. v. Schlumberger Oilfield Holdings Ltd.