Many companies supply goods and services through third party distributors. When well-structured, the use of distributors can shift some of the cost and compliance risk of selling products outside of your home territory. But distributors can also create sanctions liability for companies, especially when foreign subsidiaries or others within the company are in on the bad acts.

A recent enforcement action by OFAC highlights some of these risks. OFAC fined a U.S.-based dental supply company over $1.2 million for shipments from foreign subsidiaries to third party distributors for ultimate end use in Iran. The sales continued after the foreign subsidiaries confirmed that the distributors had shipped their products to Iran in the past. OFAC also indicated that company personnel knew that some of the sales were destined for Iran and took steps to conceal the end use of these sales from the U.S.-based parent company.

Foreign subsidiaries of U.S. companies cannot shield their U.S. parent companies from liability under OFAC’s regulations simply by lying to the parent company or concealing evidence of the end use of a sale. Under OFAC’s Iran rules, parent companies are liable for the actions of their foreign subsidiaries. OFAC’s rules also generally operate under the principle of strict liability, which means that the U.S. parent is liable even if it did not know that shipments were ultimately destined for Iran. Under other provisions of the rules, OFAC could have also charged the non-U.S. actors in the case – including the distributors and foreign subsidiaries – for illegal transactions involving Iran.

To avoid these kinds of pitfalls, U.S. companies need to exercise oversight over non-U.S. sales channels, including those managed by foreign subsidiaries. Compliance steps like sanctions policies and procedures, written agreements with distributors, training, due diligence on third parties, and auditing or monitoring rights (with actual follow-up) can also help strengthen oversight of non-U.S. subsidiaries and distributors and reduce the risk of sanctions violations for the U.S. company.