On February 25, 2016, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced that it concluded an enforcement action against Halliburton Atlantic Limited (“HAL”) and its affiliate Halliburton Overseas Limited (“HOL”) for alleged violations of the Cuban Assets Control Regulations (“CACR”).
HAL and HOL are both Cayman Islands-headquartered subsidiaries of U.S. company Halliburton Energy Services, Inc. (collectively, “Halliburton”). Combined, they exported $1,189,752 worth of goods and services in support of oil and gas exploration and drilling activities in Angola’s Cabinda Onshore South Block oil concession, which is controlled by an oil and gas exploration joint venture consisting of five energy companies. None of the companies has a 50 percent or greater ownership stake, and the largest minority owner – Pluspetrol Angola Corporation (45 percent stake) – is the operator, to whom HAL issued nineteen invoices and for whom HOL primarily performed the invoiced services.
Most importantly, in late 2009 the original majority shareholder of the consortium – Roc Oil (Cabinda) Company – assigned a 5 percent participating interest to Cuba Petroleo (“Cupet”), which is Cuba’s state-owned oil company. This participating interest in the consortium also gave Cupet a beneficial interest in the concession and any oil or gas procured from it.
OFAC found that HAL and HOL violated CACR § 515.201(b), which prohibits U.S. persons from conducting transactions involving property in which Cuba or a Cuban national has “any interest of any nature whatsoever, direct or indirect . . . .” (emphasis added) OFAC concluded that HAL and HOL “acted with reckless disregard for U.S. sanctions” because they “knew or should have known they were dealing in property in which Cupet – and therefore Cuba – had an interest”, but instead they undertook these transactions without conducting sufficient due diligence to determine the identities of all members of the consortium and which members had a corresponding interest in the concession. In particular, OFAC noted that Pluspetrol provided HAL with documents indicating Cupet was a member of the consortium, and this information was also contained in publicly-available sources.
Although it is not entirely clear, OFAC’s theory of liability may be based on the fact that Cupet owned a 5 percent interest in the concession and any oil or gas procured therein. OFAC apparently concluded that by providing goods and services in support of exploration within the concession, HAL and HOL dealt in blocked property—that is, goods and services that worked towards the extraction of resources that Cupet ultimately would have the right to offtake.
Notably, OFAC’s enforcement could not have rested on the theory that HAL and HOL violated the CACR by conducting business with a consortium that was owned 50 percent or greater by Cupet pursuant to OFAC’s 50 Percent Rule, since Cupet owned only a 5 percent interest in the consortium. Rather, OFAC seemed to focus on Cupet’s rights to the oil and gas that the consortium was working to extract. However, OFAC has not enforced similar penalties against U.S. entities that supply goods or services to the unincorporated joint venture investors developing the Shah Deniz Gas Field, which include the National Iranian Oil Company, even though the Shah Deniz Exploration, Development, and Production Sharing Agreement provides for the investors to receive proceeds from the exploration and development. Therefore, it is possible that OFAC may weigh other factors in determining whether to initiate enforcement action for these activities.
OFAC stated that it could have imposed a fine of between $423,202 and $1,235,000, but imposed a fine of $304,706 because HAL and HOL voluntarily disclosed, this was their first violation in at least five years, and Cupet’s interest in the concession was only 5 percent – thus reducing the economic benefit provided to a sanctioned country.
This enforcement action serves as a warning that OFAC defines “dealing in property” of a sanctioned country or person very broadly. This enforcement action also puts companies – especially sophisticated international companies that OFAC expects to have rigorous compliance programs in place – on notice that OFAC expects them to conduct due diligence not only into counterparties and their majority and minority shareholders, but also into the direct and indirect interests those shareholders possess.