- On July 20, 2017, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) announced a $2 million civil monetary penalty against Exxon Mobil Corp., including its U.S. subsidiaries ExxonMobil Development Company (EMDC) and ExxonMobil Oil Corporation (EMOC) (collectively, ExxonMobil), for violations of §589.201 of the Ukraine-Related Sanctions Regulations, 31 C.F.R. part 589.
- The civil penalty against ExxonMobil is the first monetary fine imposed by OFAC for violations of the Ukraine-/Russia-related sanctions program since it began in March 2014. ExxonMobil has challenged OFAC's finding of violation and penalty assessment as unlawful under the Administrative Procedure Act (APA) and a violation of its Fifth Amendment rights to due process.
- The civil penalty this large sends a clear message to U.S. persons that OFAC is now interpreting prohibited dealings with SDNs to include executing documents countersigned by an SDN in his representative capacity.
On July 20, 2017, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) announced a $2 million civil monetary penalty against Exxon Mobil Corp., including its U.S. subsidiaries ExxonMobil Development Company (EMDC) and ExxonMobil Oil Corporation (EMOC) (collectively, ExxonMobil), for violations of §589.201 of the Ukraine-Related Sanctions Regulations, 31 C.F.R. part 589. In May 2014, presidents of ExxonMobil's U.S. subsidiaries signed eight legal documents related to oil and gas projects in Russia with Rosneft OAO (Rosneft) countersigned by Igor Sechin, the president of Rosneft. ExxonMobil has challenged OFAC's finding of violation and penalty assessment as unlawful under the Administrative Procedure Act (APA) and a violation of its Fifth Amendment rights to due process. The lawsuit is currently pending in the U.S. District Court for the Northern District of Texas.
Sechin is an individual on OFAC's List of Specially Designated Nationals and Blocked Persons (SDN List). As an SDN, the assets of Sechin are blocked and U.S. persons may not receive, deal in or benefit from any service he might provide. The penalty and subsequent challenge represent a disagreement between ExxonMobil and OFAC over whether a distinction exists between dealings with an SDN in his "individual" capacity as opposed to his "representative" capacity as an officer of Rosneft.
Background on Ukraine-/Russia-Related Sanctions
The civil penalty against ExxonMobil is the first monetary fine imposed by OFAC for violations of the Ukraine-/Russia-related sanctions program. The program began on March 6, 2014, when President Obama, in Executive Order (E.O.) 13660, declared a national emergency to deal with the threat posed by Ukrainian- and Russian-backed separatists responsible for, or complicit in, destabilizing actions and policies which undermine the territorial integrity of Ukraine.
Subsequent sanctions were also established against Russian individuals and entities in response to the purported annexation of the Crimea region of Ukraine. These targeted sanctions are aimed at officials of the Government of the Russian Federation, persons operating in the arms or related materiel sector of the Russian Federation, and individuals and entities operating in the Crimea region of Ukraine.1
Facts Surrounding Violations
OFAC added Sechin to the SDN List on April 28, 2014. Approximately three weeks later, at some point between or around May 14, 2014 and May 23, 2014, it is alleged that "ExxonMobil moved forward with signing the legal documents" with Sechin. In response, ExxonMobil states that it relied on a press statement by a Treasury representative quoted "as saying that a U.S. person would not be prohibited from participating in a meeting of Rosneft's board of directors." Further, ExxonMobil also cites informal guidance from White House and Treasury officials describing that Sechin was sanctioned in his "individual capacity." ExxonMobil further references a May 16, 2014 article in The Wall Street Journal in which the Treasury Department purportedly authorized an oil and gas company CEO, an American, to "participate in board meetings with Mr. Sechin as long as they are conducting Rosneft's, and not Mr. Sechin's, personal business."
After the legal documents were signed by Sechin, on July 22, 2014, OFAC issued an administrative subpoena to EMDC relating to the execution of the documents. ExxonMobil claims that OFAC, even after the subpoena was issued, had not yet interpreted the legal standard that it thought should apply to actions by SDNs in their representative capacities. Specifically, ExxonMobil references communications between OFAC and ExxonMobil's outside legal counsel during which OFAC "conceded that the agency itself had not reached a position on the propriety of executing documents countersigned by SDNs in a representative capacity." In addition, in its federal district court lawsuit, ExxonMobil claims that prohibiting business with Sechin in his representative capacity could be tantamount to a prohibition on U.S. persons' business with Rosneft itself, thus substantially and inappropriately expanding the scope of the sanctions authorized by E.O. 13661.
In response, OFAC noted that the referenced public statements by White House and Treasury officials did not address the violative conduct – Sechin's signature on legal documents in his official capacity as CEO of Rosneft. According to OFAC, no materials or statements were issued that "asserted an exception or carve-out for the professional conduct" of SDNs. In addition, based on publicly available informal guidance from other sanctions programs, OFAC concluded that ExxonMobil should have known "the U.S. parties should 'be cautious in dealings with [a non-designated] entity to ensure that they are not providing funds, goods, or services to the SDN, for example, by entering into any contracts that are signed by the SDN'" (emphasis added). OFAC concluded that previous OFAC precedent, publicly available at the time of the violations, put ExxonMobil "on notice" that it would consider executing documents with Sechin to violate the Ukraine-Related Sanctions Regulations.
An "Egregious" Case?
By issuing a penalty notice, OFAC made a final agency determination that ExxonMobil violated the Ukraine-Related Sanctions Regulations and imposed the statutory maximum civil penalty of $2 million. In so doing, OFAC stated that ExxonMobil did not voluntarily self-disclose and that OFAC determined ExxonMobil's conduct to be "egregious." An "egregious" determination generally gives substantial weight to the following four factors:
- Willful or reckless violation of law. Willfulness, recklessness, concealment, pattern of conduct, prior notice and management involvement.
- Awareness of conduct at issue. Actual knowledge, reason to know or management involvement.
- Harm to sanctions program objectives. Economic or other benefit to the sanctioned individual, entity, or country, implications for U.S. policy, license eligibility or humanitarian activity.
- Individual characteristics. Commercial sophistication, size of operations, financial condition, volume of transactions or sanctions history.
OFAC considered the following to be aggravating factors: "(1) ExxonMobil demonstrated reckless disregard for U.S. sanctions requirements when it failed to consider warning signs associated with dealing in the blocked services of an SDN; (2) ExxonMobil'ssenior-most executives knew of Sechin's status as an SDN when they dealt in the blocked services of Sechin; (3) ExxonMobil caused significant harm to the Ukraine-related sanctions program objectives by engaging the services of an SDN designated on the basis that he is an official of the Government of the Russian Federation contributing to the crisis in Ukraine; and (4) ExxonMobil is a sophisticated and experiencedoil and gas company that has global operations and routinely deals in goods, services, and technology subject to U.S. economic sanctions and U.S. export controls." As a mitigating factor, OFAC noted that ExxonMobil has not violated OFAC sanctions regulations in the five years preceding the date of the first transaction with Sechin. It is notable that OFAC did not credit ExxonMobil for other common mitigating factors, such as remedial steps, compliance programs, tolling agreements or limited harm based on conduct potentially eligible for a specific license.
The civil penalty this large sends a clear message to U.S. persons that OFAC is now interpreting prohibited dealings with SDNs to include executing documents countersigned by an SDN in his representative capacity. It will be up to the courts to determine whether the message was clear before ExxonMobil acted, or whether OFAC's action is a "new interpretation" that is arbitrary and capricious.