Facilitation is a unique risk for logistics companies. Specifically, it is unlawful for logistics providers to facilitate transactions with any person or entity sanctioned by the U.S. government.
The Justice Department has pursued facilitation cases against half a dozen logistics companies in recent months, and penalties include up to 10 years imprisonment. Criminal fines range up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or the greater of $250,000 or twice the pecuniary gain for an individual.
What activities put logistics companies in jeopardy of violating facilitation laws, and how can companies avoid falling prey to these violations? What is the best response should the government indicate intent to prosecute potential violations?
OFAC Sanctions Programs
The Office of Foreign Assets Control (OFAC), part of the U.S. Treasury Department, oversees a range of sanctions and embargoes that prohibit U.S. persons from transacting or facilitating business with targeted people or organizations. Most sanctions are directed against people, businesses, and organizations on OFAC’s Specially Designated Nationals (SDN) list. The remaining OFAC sanctions prohibit transactions between a U.S. person and any person or entity from Cuba, Iran, North Korea, Sudan or Syria.
OFAC defines a U.S. person as any business or entity organized under U.S. law, as well as any U.S. citizen, permanent resident or national. The definition includes anyone present in the United States, regardless of nationality, foreign branches of U.S. businesses, and U.S. branches of foreign businesses.
Actions that OFAC would view as facilitation include routing a prohibited transaction in order to evade sanctions; enabling non-US persons to perform functions that would be prohibited if undertaken by US persons; altering policies or procedures to enable a foreign affiliate to perform OFAC-prohibited transactions; or referring business opportunities involving OFAC sanctioned persons or jurisdictions to foreign entities.
Facilitation includes "should have known" conduct, or situations where a logistics provider knows that a specific course of action carries a high likelihood of resulting in a violation. In other words, "red flags" increase responsibility for due diligence.
Examples of "red flags" include: a customer who is reluctant to offer information about the end-user or intended use of a product, or the product is incompatible with the technical level of the destination country. A customer who is willing to pay cash for shipping, plans vague delivery dates and abnormal routes, or requests delivery to out-of-the-way destinations or to a freight forwarding firm.
Foreign affiliates conducting transactions outside of the United States increase facilitation risk for the U.S. parent, as do shared personnel or requirements for U.S. participation in transactions. Changing an affiliate’s processes and procedures to enable a sanctions-violating transaction to occur is almost per se facilitation, as is brokering or referring business opportunities offshore to avoid US sanctions.
Foreign parents present unique challenges to a U.S. affiliate, which should play no role in any transaction with a sanctioned entity.
Mitigating Facilitation Risk
Logistics companies should adopt and continuously update a risk-based export compliance program to minimize facilitation risk. A robust compliance policy should designate a person or group responsible for export compliance; require the proper screening of any customer or client against government lists; and specify how red flags should be escalated within the company.
The company should separate interactions with sanctioned jurisdictions from the operations of any U.S. entity, specify a records retention policy, and require OFAC compliance language in all contracts. Finally, the policy should require contract language that allows for periodic and trigger-based reviews and audits of third parties to ensure OFAC compliance. Multijurisdictional logistics companies also need a recusal policy enabling U.S. persons to recuse themselves from participating in a transaction that may violate OFAC regulations.
Recently, the Islamic Republic of Iran Shipping Lines, a sanctioned entity, began giving its ships new identities to avoid U.S. sanctions. Thus, in daily operations, it is critical to verify the accuracy of ship and container numbers
Inquire also about the details of a routed transaction when asked by a foreign postal service to ship to a country or ultimate consignees that are different from those provided by the U.S. postal firm. End-user destination information should be included on all commercial documents such as invoices, bills of lading or air waybills accompanying the export or re-export.
Logistics companies that take the time to identify and mitigate facilitation risk are less likely to run afoul of sanction programs, and will be better prepared to respond in the event of an OFAC inquiry.