On March 25, 2015, the Department of Justice (the “DOJ”) announced that Schlumberger Oilfield Holdings Ltd. (“SOHL”), a subsidiary of Schlumberger Ltd., agreed to plead guilty to a one-count information alleging conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”) by facilitating trade with Iran and Sudan. As part of the plea agreement, SOHL agreed to pay a criminal fine of more than $155 million and to forfeit an additional $77.5 million – a total monetary penalty of over $232.7 million. In addition, SOHL and its parent company, Schlumberger, Ltd., agreed to a number of additional terms, including: maintaining a cessation of activities in Iran and Sudan; cooperating with law enforcement; and retaining an independent compliance consultant, among others.
A Statement of Offense filed with the plea agreement in the case, and with which Schlumberger concurred, laid out the factual predicate for the prosecution. In short, Schlumberger’s Drilling & Measurements (“D&M”) unit, based in Texas, facilitated violations of U.S. economic sanctions programs against Iran by exporting, and causing the export of, technical services to Iran and Sudan. In addition, Schlumberger personnel attempted to evade prohibitions on providing such services in those countries. Even though it is lawful in many circumstances for a non-U.S. subsidiary of a U.S. company to operate in Iran and Sudan despite sanctions laws, Schlumberger “failed to train its employees adequately to ensure that all company U.S. persons, including non-U.S. citizens who resided in the U.S. while employed by D&M, fully complied with Schlumberger’s policies and procedures with regard to U.S. economic sanctions.”1 In short, the DOJ found that Schlumberger’s failure to train its employees – both U.S. and non-U.S. persons – on the company’s policies led to repeated violations of the policies and the law.
Like many other corporations with a U.S. nexus, Schlumberger conducted its operations with Iran and Sudan through foreign subsidiaries. Until section 218 of the Iran Threat Reduction and Syria Human Rights Act (“TRA”)2 went into effect in 2013, it was legal for U.S. companies to conduct business with Iran through bona fide foreign subsidiaries so long as no U.S. person3 (as that term is defined in the Iran Transactions Regulations ( “ITR”)4) was involved in the foreign subsidiary’s business – including in a management or supervisory role.5 Accordingly, to not violate the law, such foreign subsidiaries have to operate fully independently from any U.S. person – including any U.S. parent.6
It was this requirement of foreign subsidiary independence from U.S. person involvement, that Schlumberger was found to have violated. While Schlumberger appeared to have compliance policies and procedures to assure and maintain this independence, the DOJ found that the company failed to train its employees adequately on these policies and procedures and, as a result, such policies and procedures were not followed, leading the Company to facilitate transactions with Iran routinely in violation of U.S. law. Moreover, the DOJ found that the foreign subsidiary acted intentionally to evade Schlumberger policy and the sanctions laws by using code names and disguising the identities of locations in Iran and Sudan.
In addition to capital expenditure approvals, the DOJ found that D&M headquarters staff in the U.S. often made and implemented business decisions involving subsidiary operations in Iran and Sudan. Further, the DOJ determined that in many instances, requests for technical assistance made by D&M field personnel in Iran and Sudan would be routed to, and resolved by, U.S. persons. U.S. law prohibited both the supervision of subsidiary business with Iran and Sudan and the provisions of technical services to Iran and Sudan by U.S. persons.
The Statement of Offense sets forth details of how the foreign subsidiary violated the law, including by:
- Seeking approval of U.S. persons for capital expenditures to support business in Iran and Sudan;
- Utilizing codenames for Iran and Sudan in correspondence with U.S. persons, including “Northern Gulf” for Iran and “South Egypt” for Sudan; and
- Disguising the identities of locations in Iran and Sudan in the Company’s automated computer system by frequently listing a warehouse in UAE rather than the Iranian or Sudanese location.
In announcing the guilty plea, Assistant Attorney General John P. Carlin expressed concern about Schlumberger’s efforts to disguise its business dealings, noting that “knowingly circumventing sanctions undermines their efficacy.” He added that the resolution “underscore[s] that skirting sanctions for financial gain is a risk corporations ought not take. Likewise, U.S. Attorney Ronald Machen warned that the Schlumberger resolution “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.”
The Schlumberger settlement demonstrates the DOJ’s determination to thoroughly investigate and prosecute violations of U.S. sanctions no matter how they are committed if they involve a U.S. person. Particularly noteworthy is the DOJ’s investigation into a foreign subsidiary – an entity that lawfully could engage in such conduct with Iran until section 218 of the TRA became effective – but that still violated the law by permitting the involvement of U.S. persons in the subsidiary’s business with sanctioned countries.
Global corporations with subsidiaries that continue to do business in sanctioned countries should take the Schlumberger resolution as warning sign of what could happen if U.S. persons become involved in the business or supervision of such subsidiaries. Corporations should carefully review and audit applicable foreign subsidiaries to ensure that (1) all employees receive adequate training regarding the company’s economic sanctions policies and procedures, and (2) the applicable subsidiaries operate completely independent of – and without supervision by – any U.S. person, including with regard to reporting structure, expertise, business approvals and technical assistance. Finally, all corporations deemed U.S. persons under the ITR should ensure that their foreign subsidiaries’ activities would not result in liability for them under the TRA