Businesses receive online orders or inquiries from international entities through their websites constantly. In addition to business due diligence of vetting a potential customer and potential business deal (see Part I of this article dated June 12, 2017), legal due diligence on the export control side is key.

U.S. economic sanctions are targeted against certain foreign countries and regimes, terrorists and terrorist organizations, weapons of mass destruction (WMD) proliferators, narcotics traffickers and others. You may think that you don't have to worry about the Foreign Assets Control Regulations (FACR) because your company doesn't export or you don't do business with drug traffickers, WMD proliferators or criminals, but you should think again. Manufacturing, high tech, financial, insurance and services industry companies have all suffered penalties for violating these regulations.

In 2016, $21,609,315 was assessed in fines and settlements by the U.S. Treasury Department Office of Foreign Assets Control for for violations of U.S. economic sanctions.

The dollar amount above represents 9 cases for 2016. Three of the nine cases involved medical end use products. Another three involved the oil and gas industry. Two of the nine involved entities providing services (financial and engineering/architectural) and one involved distribution of an agricultural product.

Here are a couple of examples from 2016. Some companies are household names while others are small/ lesser known businesses.

  1. WATG Holdings, Inc. and its UK subsidiary. WATG Holdings, Inc. of Irvine, CA had a UK subsidiary that entered into a contract to perform architectural/design work for a Qatari company. The problem was that hotel project was in Cuba and Cuba or its nationals, had an interest. This meant that WATG-UK (controlled by a U.S. company) provided services in support of Cuba’s tourism industry in violation of U.S. trade sanction against Cuba. The UK subsidiary received 3 payments on the contract from October 2009 to May 2010 totaling nearly $300,000 for services totaling more than $350,000 ( a portion of the services was written off). $140,400 settlement for violation of Cuba sanctions program (January 2016).
  2. PanAmerican Seed Company a division of Ball Horticultural Company. From 2009 through 2012 PanAmerican Seed of West Chicago, IL indirectly exported flower seeds to buyers in Europe or the Middle East. From there, the seeds were re‑exported by the buyers to two Iranian distributors. According to enforcement agencies “PanAm Seed engaged in a pattern or practice designed to conceal the involvement of Iran and/or obfuscate the fact that the seeds were ultimately destined for distributors located in Iran.” Aggravating factors included the company’s continued sales to its Iranian distributors after the company’s management learned of OFAC’s investigation. The heart breaker here is that the exports (agriculture) may have been eligible for an OFAC export license. $4.32 Million settlement for violation of Iran sanctions program (Sept. 2016).
  3. National Oilwell Varco, Inc. National Oilwell Varco, Inc. a publically traded Delaware corporation with operations in Houston and its subsidiaries settled violations of the Cuba, Iran and Sudanese sanctions programs. Between 2002 to 2009, management approved commission payments from one of its subsidiaries to a UK entity relating to sale and export of goods from the subsidiary to Iran. The company and the subsidiary directly or indirectly sold or exported product to Iran or facilitated the transactions. Another subsidiary engaged in direct or indirect exports of goods or services to Cuba and Sudan. $5,976,028 settlement (November 2016). The conduct also violated the U.S. Department of Commerce, Bureau of Industry and Security (BIS) regulations and the settlement with OFAC was deemed satisfied by the Company’s payment of $25,000,000 to settle the BIS violations. The Departments of Justice, Commerce, Treasury and ICE were all involved.

Now you know the FACR exists and you also know that fines and civil penalties for violating the applicable laws can be large (and willful violations can result in imprisonment). So, what can you do to avoid violating those regulations? Our recommendations are as follows:

  1. Determine how the FACR can affect your business.
  2. Perform appropriate restricted party screening on your supply chain, your customers, joint venture partners, employees, independent contractors and intermediaries such as distributors. Private companies also sell restricted party screening software that can automate the process.
  3. Develop a formal, written OFAC compliance program and policies to ensure you are following the law.
  4. Conduct due diligence on your foreign partners to ensure they are aware of U.S. legal requirements and have procedures in place to ensure compliance and avoid violations of U.S. law.
  5. Check your existing international contracts to confirm you are flowing down U.S. legal requirements to your foreign partners as necessary, since you cannot do indirectly through a foreign partner what you cannot do directly (for example, violate the FACR).