- Written Comments Accepted on or Before Nov. 7, 2008
On Sept. 8, 2008, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) published Economic Sanctions Enforcement Guidelines (“2008 Guidelines” or “the Guidance”) as an interim final rule, effective Sept. 8, 2008.1 The 2008 Guidelines supercede both the Economic Sanctions Enforcement Guidelines that OFAC issued as a proposed rule on Jan. 29, 2003 (“2003 Enforcement Guidelines”)2 and the Economic Sanctions Enforcement Procedures for Banking Institutions, rules applicable to banks, that were released as an interim final rule on Jan. 12, 2006 (“2006 Enforcement Guidelines”).3
Purpose of OFAC
OFAC has the authority to administer and enforce economic sanctions that are imposed against targeted foreign countries and regimes, as well as certain individuals and entities, pursuant to the President’s national emergency powers and statutory authorities. Where appropriate, OFAC may coordinate its investigative and enforcement activity with other federal, state, local or foreign regulators or law enforcement agencies. OFAC issues Economic Sanctions Enforcement Guidelines to advise which factors it generally considers when determining the enforcement action to take in response to a potential violation, and to set forth the framework for determining a proposed civil monetary penalty amount. The 2008 Guidelines were issued in response to the substantial increase in the maximum penalty amount that may be imposed under the International Emergency Economic Powers Act (“IEEPA”), a principal statutory authority for most of OFAC’s sanctions programs.4
The 2008 Guidelines – Generally
The 2008 Guidelines are applicable to all persons that are subject to OFAC’s sanctions programs, and will be applied to all enforcement matters currently pending with OFAC under IEEPA, TWEA or any other statutes pursuant to which OFAC enforces sanctions programs, with the exception of those cases described in OFAC’s Nov. 27, 2007 Civil Penalties – Interim Policy,5 the Appendix proposed to the Cuban Assets Control Regulations (“the Cuba Penalty Schedule”)6 and the Service Provider Program Circular.7
The 2008 Guidelines are not applicable to the release of blocked property by OFAC, the penalty or enforcement actions of any other agencies based on the same underlying conduct, or the disposition of goods that have been seized by Customs and Border Protection.
Summary of the 2008 Guidelines
Enforcement Actions taken by OFAC. Pursuant to the Guidelines, OFAC may take the following types of enforcement actions in response to an apparent violation. It may (1) take no action, (2) send a request for additional information, (3) send a cautionary letter, (4) issue a finding of violation, (5) impose a civil monetary penalty, (6) make a criminal referral, or (7) take other administrative actions, such as (i) license denial, suspension, modification or revocation, or (ii) cease and desist order.8 Under the 2008 Guidelines, issuing a “finding of violation” is a new type of enforcement action that OFAC may take. OFAC will no longer issue warning letters, as provided for in the 2003 Enforcement Guidelines, or evaluative letters, as provided for in the 2006 Enforcement Guidelines. OFAC will issue a finding of violation when it concludes that a violation occurred and should be documented, but decides that imposing a civil penalty is not the appropriate enforcement action. A finding of violation constitutes a final determination by OFAC, to which the Subject Person9 will be given the opportunity to respond.
General Factors. The 2008 Guidelines set forth General Factors that OFAC considers to determine the enforcement action to be taken and the proposed civil penalty amount where appropriate. Unlike the prior enforcement guidelines, there are no “aggravating” and “mitigating” factors identified. In addition, OFAC may consider some or all of these General Factors in determining the civil penalty amount, if appropriate. The General Factors to be considered include:
- Willful or Reckless Violation of Law. OFAC will generally take more serious enforcement action if the Subject Person engaged in willful or reckless activity that violated the law. As part of its analysis to determine whether this factor applies, OFAC will consider the following:
— Willfulness. Was the relevant conduct, activity, or transaction the result of willful misconduct or a deliberate choice to act knowing that such action is a violation of U.S. law?
— Recklessness. Did the Subject Person show a reckless disregard or fail to use a minimal degree of caution or care to avoid the conduct, activity, or transaction that violated U.S. law?
— Concealment. Did the Subject Person attempt to hide conduct, activity, or transactions constituting a potential violation to mislead OFAC, federal, state, or foreign regulators, or other parties involved in the conduct/transactions?
— Pattern of Misconduct. Did the potential violation result from a pattern or practice of behavior or was it isolated and atypical?
— Prior Notice. Was the Subject Person on notice, or should it have reasonably been on notice, that the conduct at issue violated U.S. law?
— Management Involvement. If the Subject Person is an entity, at what level did the willful or reckless misconduct occur?
- Awareness of Conduct at Issue. Generally, the more a Subject Person knows or has reason to know about the conduct, activity, or transaction that is a potential violation U.S. law, the more elevated OFAC’s enforcement response will be. If the Subject Person is a corporation, OFAC will focus on the awareness of the supervisory or managerial level staff in the relevant business unit, as well as senior officers and managers.
— Actual Knowledge. Did the Subject Person actually know about the conduct, activity or transaction that caused the potential violation?
— Reason to Know. If the Subject Person did not have actual knowledge of the conduct, activity, or transaction, did the Subject Person have reason to know based on “readily available information and with the exercise of reasonable due diligence” that the conduct, activity, or transaction would or might occur?
— Management Involvement. If the Subject Person is an entity, did senior management know about the conduct, activity, or transaction at issue?
- Harm to Sanctions Program Objectives. The level of enforcement action taken by OFAC may increase accordingly if the conduct, activity or transaction at issue has a harmful effect on the policy goals of an OFAC sanctions program. This may include an assessment of the following:
— Economic or Other Benefit to the Sanctioned Individual, Entity or Country. What benefit, economic or other, was conferred to a sanctions target as a result of the potential violation?
— Implications for U.S. Policy. What effect did the potential violation have on the integrity of the relevant sanctions program and its policy objectives?
— License Eligibility. Was the potential violation activity that would likely have been licensed under OFAC’s existing licensing policy?
— Humanitarian Activity. Was the activity at issue in support of humanitarian activity?
- Individual Characteristics. OFAC may determine that increased enforcement action is appropriate for certain Subject Persons that are expected to have a greater awareness of the OFAC sanctions programs, e.g., large, commercial entities with a high volume of international business. Some of the characteristics may include:
— Commercial Sophistication. What is the commercial sophistication and experience of the Subject Person?
— Size of Operations and Financial Condition. What is the size of the Subject Person’s business operations and what is its financial condition?
— Volume of Transactions. What is the Subject Person’s annual volume of transactions?
— Sanctions Violation History. Does the Subject Person have a history of sanctions violations?
- Compliance Program. Did the Subject Person have an OFAC compliance program in place at the time of the potential violation? If yes, and OFAC has entered into a Memorandum of Understanding (MOU) with the Subject Person’s regulator, OFAC will follow the MOU’s procedures to consult with the regulator about the quality and effectiveness of the compliance program. Additionally, OFAC may consider the views of federal, state, or foreign regulators, as applicable, even if there is no MOU in place.
- Remedial Response. What, if any, corrective action did the Subject Person take since becoming aware of a potential violation? Did conduct, activity, or transactions at issue stop? If an entity, did the Subject Person determine the cause and extent of the potential violation, and take steps to identify any other potential violations? Have the Audit Committee and Board of Directors been informed?
- Cooperation with OFAC. Did the Subject Person make a voluntary self-disclosure about the potential violation? Did the Subject Person cooperate with OFAC’s requests for information?
- Timing of Apparent Violation in Relation to Imposition of Sanctions. Did the potential violation occur shortly after a change in the relevant sanctions program or a new name was added to OFAC’s List of Specially Designated Nationals and Blocked Persons?
- Other Enforcement Action. Have other federal, state, or local agencies taken action against the Subject Person for the potential violation or similar violations?
- Future Compliance/Deterrent Effect. What impact will administration action have on future compliance by the Subject Person and others?
- Other Relevant Factors on a Case-By-Case Basis
Civil Penalty and Settlement Processes
The civil penalty and settlement processes outlined in the 2008 Guidelines are generally the same as those set forth in the prior enforcement guidelines. However, there have been changes as to how a proposed civil penalty is calculated, to take into account the substantially increased maximum penalty amounts under IEEPA. Under the Guidelines, when OFAC decides that a civil penalty is appropriate, it will determine a base penalty amount based on two factors: (1) whether the violation involves an egregious transaction, conduct, or activity, and (2) whether the transaction, conduct, or activity was voluntarily self-disclosed by the Subject Person. “Egregious” cases are those representing the “most serious sanctions violations” based on an analysis of all applicable factors. The Guidelines do not clearly define “egregious” or state the standards for determining whether a transaction is egregious, but indicate that substantial weight will be given to “considerations of willfulness or recklessness, awareness of the conduct giving rise to an apparent violation, harm to sanctions program objectives and the individual characteristics of the Subject Person.”10 A higher civil penalty will generally be imposed by OFAC for egregious cases.
As in the prior enforcement guidelines, the 2008 Guidelines continue to reflect the significance of voluntary self-disclosures to OFAC.11 Under the 2008 Guidelines, the base penalty amount for a case involving a voluntary self-disclosure will be reduced by at least 50 percent. There are several situations, however, in which notification to OFAC of an apparent violation is not considered a “voluntary” self-disclosure. For example, it is not a voluntary self-disclosure if a third party is required to notify OFAC of the apparent violation because it blocked or rejected the transaction at issue. Nor is it voluntary, if the Subject Person is an entity, if the disclosure was made by an individual without the authorization of the entity’s senior management. The Guidelines do not indicate what, if any, benefits are given for a self-disclosure if it is not “voluntary” as defined. Additionally, it is not clear what constitutes “authorization” by senior management.
In consideration of voluntary self-disclosure and the egregiousness of a potential violation, a base penalty amount will generally be calculated as follows:
- Non-Egregious Case, Voluntarily Self-disclosed. The base amount of the proposed civil penalty will be one-half of the transaction value, with a maximum base amount of $125,000 per violation.
- Non-Egregious Case, Not Voluntarily Self-disclosed. The base amount of the proposed civil penalty will be the “applicable schedule amount,” with a maximum base amount of $250,000 per violation. “Applicable schedule amount” means:
— $1,000 for a transaction valued at less than $1,000
— $10,000 for a transaction valued at $1,000 or more but less than $10,000
— $25,000 for a transaction valued at $10,000 or more but less than $$25,000
— $50,000 for a transaction valued at $25,000 or more but less than $50,000
— $100,000 for a transaction valued at $50,000 or more but less than $100,000
— $170,000 for a transaction valued at $100,000 or more but less than $170,000
— $250,000 for a transaction valued at $170,000 or more, except that where the applicable schedule amount above exceeds the statutory maximum civil penalty amount, the applicable schedule amount will be equal to such statutory maximum civil penalty amount.
- Egregious Case, Voluntarily Self-disclosed. The base amount of the proposed civil penalty will be one-half of the applicable statutory maximum penalty.
- Egregious Case, Not Voluntarily Self-disclosed. The base amount of the proposed civil penalty will be the applicable statutory maximum penalty.
The Guidelines also set the maximum civil penalty amounts that may be imposed for failure to furnish information or to keep records higher than the prior enforcement guidelines. Under the 2008 Guidelines, failure to respond to a requirement to furnish information issued by OFAC or provide requested information can result in a penalty amount up to $20,000, or up to $50,000 if the potential violation involves a transaction valued over $500,000. Both failures will be considered continuing violations and additional penalties may be imposed each month that the Subject Person does not respond or provide the requested information.
Filing a late report with OFAC can result in a penalty amount up to $2,500 if the report is filed within the first 30 days after the due date, or up to $5,000 if filed more than 30 days after the due date. An additional $1,000 penalty may be imposed for every 30 days the report is overdue, up to five years, if the report involves blocked property.
Failure to maintain records as required by the OFAC regulations or a specific license can result in a penalty amount up to $5,000 the first time, and up to $10,000 for each additional violation.
After taking into account the transaction value and the voluntary self-disclosure and egregiousness factors, OFAC may increase or decrease the base penalty amount after considering other General Factors, discussed in the summary of Section III, above, and the resulting amount is the civil penalty that OFAC will propose if a Pre-penalty Notice is issued or in settlement negotiations. In the event that OFAC issues a Pre-penalty Notice, the Subject Person will have the opportunity to respond to the allegations included therein with arguments or evidence regarding the proposed penalty amount for OFAC’s further consideration. If a Subject Person or OFAC initiates a settlement negotiation, OFAC will consider the Subject Person’s arguments and evidence to determine an appropriate settlement amount. A settlement does not constitute a final finding by OFAC that a violation has occurred. If the Subject Person does not respond to the Pre-penalty Notice, OFAC will issue a Penalty Notice— a final finding by OFAC that a violation has occurred—and the civil penalty imposed will generally be the amount proposed in the Pre-Penalty Notice.
The 2008 Guidelines are available on OFAC’s website, at http://www.treasury.gov/offices/enforcement/ofac/policy/enf_guide_09082008.pdf.