On March 25, 2015, Schlumberger Oilfield Holdings Ltd. (SOHL), a non-US, wholly-owned subsidiary of Schlumberger Ltd., the world’s largest oilfield services company, pled guilty to conspiring to violate US sanctions laws on Iran and Sudan. SOHL agreed to pay approximately $232.7 million, including a $77.6 million forfeiture and a $155.1 million criminal fine. This represents the largest criminal fine ever levied for a sanctions violation under the International Emergency Economic Powers Act (IEEPA), although it is not the largest total penalty, with numerous non-US banks in particular having paid several hundreds of millions of dollars in forfeiture and civil penalties in connection with sanctions settlements.
SOHL admitted to conspiring with a US-headquartered unit of the parent company to provide goods and services to Iran and Sudan. While SOHL conducted this sanctioned country business from outside the United States, it was overseen and supported by the business unit located in the United States, which was responsible for approving expenditures, reviewing business performance and providing technical support.
This plea deal concludes a joint investigation that began in 2009 led by the Department of Justice (DOJ), the US Attorney’s office for the District of Columbia and the Department of Commerce’s Bureau of Industry and Security (BIS).
SOHL agreed to a three-year probation that requires it to cooperate with the government and not commit any additional felonies. As part of SOHL’s plea, the parent company also agreed to a three-year obligation to retain an independent consultant to review its sanctions compliance program and to maintain its cessation of all operations in Iran and Sudan. The parent company also agreed to report to the US Government not only any potential violations of US sanctions laws, but also fraud or anti-bribery laws, to cooperate with the government in any related investigations, including of its own directors, officers and employees, and to maintain an export controls and sanctions compliance program.
From at least February 2004 through June 2010, Schlumberger Drilling & Measurements (D&M), a Texas-based business unit of parent company Schlumberger Ltd., provided services to customers in Iran and Sudan through SOHL’s non-US subsidiaries. SOHL was incorporated in the British Virgin Islands. The parent company was incorporated in Curaçao, which is part of the Netherlands, with headquarters in Houston, Paris and the Netherlands. Therefore neither SOHL nor the parent company was a “United States person” within the meaning of the Iran and Sudan sanctions regulations. However, D&M, a unit of the parent company, was a US person because, even though it was part of the non-US person parent, it was physically located in the United States. Similarly, D&M’s employees located in the United States were US persons, even those who were not US citizens or lawful permanent residents. D&M was responsible for developing certain technologies and working with SOHL personnel around the world responsible for deploying the technology and maintaining customer relationships. D&M equipment was manufactured in the United States, the UK and France, and certain technical support was provided from those same manufacturing locations.
SOHL, a non-US company operating outside the United States, was not alleged to have itself provided any goods or services to sanctioned countries from the United States. Instead, it is accused of conspiring with D&M personnel in the United States to export and cause the export of services to Iran and Sudan, to facilitate trade with Iran and Sudan and to evade the prohibitions on dealing with those countries. The primary business activities in Iran and Sudan were carried out by SOHL’s non-US subsidiaries, which were not prohibited under US law from conducting that business as long as no US persons were involved. But D&M management and technical personnel based in the United States did participate in those sanctioned country activities, which is what triggered the conspiracy charge.
The underlying facts in this enforcement action highlight the risk that non-US companies face if they engage in sanctioned country transactions that involve, even tangentially, persons (including non-US citizens or residents), affiliates, unaffiliated business partners or facilities located in the United States. This is true even when the foreign company’s primary business with a sanctioned country may be undertaken by non-US persons located outside the United States. In other words, any involvement in sanctioned country activities by a person or entity (whether an affiliate or not) within the United States, or by US citizens or residents anywhere in the world, may trigger liability for a foreign company that itself has no direct presence in the United States.
Although SOHL operated in Iran and Sudan through its non-US subsidiaries, D&M employees in the United States are alleged to have committed the following acts in support of that sanctioned country business:
- Approved capital expenditures to manufacture and purchase equipment for Iran and Sudan. D&M’s Global Asset Manager in the United States was in charge of approving capital expenditure requests from every D&M operation in the world, with no carve-out for sanctioned countries. Although the requests were made through an automated system, the D&M Global Asset Manager received emails seeking to justify certain requests and personally approved those requests.
- Made business decisions relating specifically to Iran and Sudan, such as analyzing revenue opportunities there to determine the relative attractiveness of deals in those countries versus non-sanctioned countries and participating in conference calls regarding business outlook and performance in every global market, including sanctioned countries. For instance, on one occasion, D&M management identified Iran as a country requiring particular business focus because performance there was not meeting expectations.
- Provided technical services to troubleshoot mechanical failures on equipment in Iran and Sudan. Requests for technical support were also routed through an automated system, often to the product center that manufactured a particular tool. Certain inquiries were routed to D&M personnel in the United States.
Schlumberger did have policies and procedures in place designed to prevent D&M from violating US sanctions, such as a policy requiring US persons to recuse themselves from any involvement in business related to Iran or Sudan. However, the company failed to enforce or oversee the effectiveness of those policies and did not provide adequate training. Many of D&M’s non-US citizens working in the United States were said to have had “little or no prior exposure to US sanctions laws” and were not adequately trained or specifically instructed to recuse themselves from sanctioned country activities. Schlumberger policy also prohibited exports from the United States to sanctioned countries, including a “one-year rule” that only allowed US-origin equipment to be reexported to a sanctioned country if it had been in use outside the United States for more than one year. That rule was ineffective in preventing prohibited reexports, as D&M personnel were able, for example, to direct facilities in non-embargoed countries to swap used drilling equipment with identical new items from the United States and then send the used equipment to embargoed locations after it had been in service for over one year.
Some of the other business activities Schlumberger conducted in sanctioned countries included exporting equipment from Canada to the National Iranian Oil Company (NIOC), a Specially Designated National (SDN), purchasing equipment for Iran from a company in the UK, testing lubricants used in oil wells in Sudan, and improving oilfield infrastructure in Sudan.
The government considered the company’s conduct to have been willful, justifying the criminal conspiracy charge, because D&M’s facilitation of sanctioned country trade and concealment of that activity took place with the direct involvement, knowledge, approval and encouragement of its management. Management knew and understood that US sanctions laws applied to the company, and acted with the purpose of evading the prohibitions. For instance, D&M personnel outside the United States tried to disguise their business with sanctioned countries by referring to Iran as the “Northern Gulf” and Sudan as “Southern Egypt” in emails to personnel in the United States. In addition, employees outside the United States entered a code applicable to the UAE in the automated capital expenditure request system for transactions that were in fact intended for Iran and Sudan, in order to conceal the involvement of sanctioned countries from the D&M Global Asset Manager. D&M personnel outside the United States told staff in Iran to use the misleading country codes “since US/European people cannot approve [Iran] orders.” However, in other instances there was no effort to conceal the true location of the activities, and staff openly discussed in emails with personnel in the United States the business activities in sanctioned countries and steps taken to conceal them.
The relevant sanctions provisions listed in the criminal information include the prohibitions on evasion of sanctions on Iran or Sudan (31 C.F.R. §§ 560.203, 538.211), exportation/reexportation of goods, technology or services to Iran or Sudan (31 C.F.R. §§ 560.204, 538.205), dealing in goods, technology or services for exportation/reexportation to Iran (31 C.F.R. § 560.206), facilitation of transactions involving Iran or Sudan (31 C.F.R. §§ 560.208, 538.206), and transactions related to Sudan’s petroleum industry (31 C.F.R. § 538.210).
Schlumberger did take steps to remediate this conduct in consultation with the Department of State, including agreeing to stop pursuing contracts in Iran as far back as 2009 and in 2011 to stop providing services in Iran and Sudan. According to DOJ’s press release, Schlumberger ceased providing oilfield services in Iran as of June 30, 2013, which was the day before the effective date of the Iran Freedom and Counter-Proliferation Act, on which we have previously advised.
The case against Schlumberger is particularly noteworthy in that it is a non-US company whose non-US subsidiary was charged with criminal conspiracy to violate US sanctions laws based on the conduct of employees of another business unit located in the United States (many of whom were non-US citizens). It was the US-based business unit’s failure to train and supervise its employees that led to criminal charges against the foreign subsidiary and onerous obligations for the parent company as part of the plea deal, not to mention the largest criminal sanctions fine ever imposed.
The charging documents make clear the broad scope of activities by US person managers that can give rise to liability based on facilitation or approval of prohibited conduct by a foreign entity, such as discussions about offshore sourcing, including trying to expedite offshore shipments by non-US persons of non-US goods, and participating in business planning for offshore entities like formulating revenue objectives, approving expenditures and reviewing business performance. The line dividing permissible from impermissible management activities can become a bit less clear when, as here, sanctioned countries are grouped together with non-sanctioned countries into larger geographic business divisions. Any management discussions involving the sanctioned countries would have to be dealt with separately, without any US person involvement. While management must always be a key focus of any compliance program, technical experts providing product troubleshooting advice were also part of the alleged conspiracy here, highlighting that attention should also be paid to lower-level personnel. Any compliance program facing a set of risks as diverse and complex as those that Schlumberger had to deal with should be diligently monitored and periodically assessed.
It should be underscored that the parent company itself was not charged with any offense even though D&M, one of its business units, was said to have violated US sanctions laws within the United States. Instead, the government used D&M’s prohibited activities within the United States as the basis for a conspiracy charge against SOHL, the foreign subsidiary. This demonstrates the reach of the criminal conspiracy statute, which can be used to obtain jurisdiction over foreign entities engaged in a scheme to violate US law, but it also raises questions about the government’s charging decisions. Furthermore, it is significant that the government did not charge any violations of export controls or accounting laws, or any direct violations of sanctions laws (aside from the conspiracy charge), as it did in the December 2013 settlements with Weatherford, another major oilfield services provider, on which we previously advised. OFAC reached a settlement with Weatherford, but did not in this case.