On March 25, 2015, the U.S. Government announced two major settlements related to civil and criminal violations of U.S. economic sanctions laws. Schlumberger Oilfield Holdings, Ltd. (“SOHL”), a subsidiary of the global oilfield services provider, pled guilty to criminal charges of conspiracy to violate U.S. sanctions laws restricting transactions with Iran and Sudan. On the same day, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced a settlement with PayPal, Inc. regarding PayPal’s alleged violations of various U.S. economic sanctions programs. The plea agreement and settlement highlight the U.S. government’s continuing focus on facilitation violations and the financing of sanctioned individuals and entities. These cases also emphasize the importance of robust sanctions compliance programs for U.S.-based businesses, as well as foreign companies with U.S. subsidiaries or business. We have summarized below the major details of these enforcement actions and certain key takeaways for industry.
SOHL agreed to plead guilty to charges that its Texas-based unit Drilling & Measurements (“D&M”) facilitated transactions with, and exported oilfield services to, Iran and Sudan on numerous occasions between 2004 and 2010. While SOHL’s parent company, Schlumberger Ltd., is not a U.S. person and therefore not subject to U.S. sanctions laws, D&M is directly subject to these laws. D&M employees were actively involved in decisions relating to Schlumberger Ltd.’s business operations in Iran and Sudan and, at times, provided technical assistance and support to those operations. D&M employees regularly concealed the names of these sanctioned countries in internal communications and engaged in transactions intended to increase the company’s revenue in prohibited areas. Although SOHL had sanctions compliance policies and procedures in place, its compliance program did not effectively screen off U.S. persons from participating in prohibited transactions. Furthermore, SOHL failed to provide adequate training on U.S. sanctions rules to employees, including foreign nationals who were employed in the United States. SOHL ceased doing business in Iran in 2013, and ceased business in Sudan as of the date of the plea agreement.
Under the plea agreement, SOHL must pay a total penalty of $232.7 million, of which $155.1 million is a criminal fine and $77.6 million is a criminal forfeiture judgment. The criminal fine is the largest ever imposed for economic sanctions violations. The forfeiture amount represents the approximate total revenue that D&M earned as a result of the prohibited transactions. The agreement also imposes a threeyear probation period and requires SOHL to cooperate with the government and comply with Schlumberger Ltd.’s compliance program. Importantly, the plea agreement also obligates Schlumberger Ltd. itself to implement compliance measures, including continuing to refrain from doing business in Iran Fried Frank International Trade and Investment Alert™ No. 15/03/31 03/31/15 2 and Sudan, reporting any potential violations of U.S. sanctions laws to the government during the threeyear probation period, and hiring an outside consultant to conduct a comprehensive review of Schlumberger’s compliance program.
PayPal agreed to pay $7.66 million to settle alleged civil violations of various U.S. economic sanctions programs that it had voluntarily disclosed to OFAC. These include the Cuba, Iran, and Sudan sanctions programs, as well as certain list-based sanctions programs. The alleged violations arose from PayPal’s failure to implement sufficient screening mechanisms to prevent it from processing transactions involving individuals and entities in sanctioned countries or on OFAC’s Specially Designated Nationals (“SDN”) list. OFAC noted that the transactional documentation contained language, including the names of countries subject to sanctions, which should have alerted PayPal that the transactions were improper. Additionally, when PayPal’s screening software flagged transactions with an individual on the SDN list, PayPal employees failed to investigate the possible match and permitted the transactions to proceed on six occasions. As a result, PayPal processed nearly 500 prohibited transactions totaling approximately $44,000 in value. OFAC considered most of the alleged violations to be non-egregious, and therefore involved relatively low base penalty amounts. However, OFAC determined that the alleged violations involving the potential SDN matches (including disregarding screening software hits) were egregious, and accordingly a set of transactions valued at only $7,000 merited a base penalty amount of $17 million.
Key Takeaways for Business
The SOHL and PayPal enforcement actions demonstrate that the U.S. government remains deeply concerned with deterring financial transactions that benefit sanctioned countries and persons. Companies must ensure that U.S. persons (both U.S. nationals and all persons located in the United States) are effectively screened off from participating in any restricted transactions in order to avoid facilitating prohibited trade. While facilitation may sometimes be an ill-defined concept, industry is now on notice that any activities in the United Stats or by U.S. persons, wherever located, that are related to business in sanctioned countries may be considered a civil or criminal sanctions violation. This risk exists in particular for U.S. subsidiaries that play a role in the business transactions of their foreign parents and affiliated companies. The parent companies for their part must ensure that all employees of U.S. subsidiaries receive thorough training on compliance with U.S. economic sanctions programs. As the Schlumberger case shows, U.S. regulators and prosecutors may impose compliance measures on both the U.S. company subject to their jurisdiction and the foreign parent company. Finally, businesses must implement adequate screening procedures to prevent prohibited financial transactions, and should regularly evaluate their screening mechanisms to ensure that they comport with current regulations.