On September 8, 2008, the Office of Foreign Assets Control (“OFAC”) issued new enforcement guidelines that took effect immediately but are open for public comment until November 7. The Economic Sanctions Enforcement Guidelines  abandon OFAC’s 2006 effort to create risk-based enforcement procedures tailored to different industries and business sectors, focusing instead on a uniform standard and greater transparency. OFAC’s analysis of penalties centers on whether a case is “egregious” or “non-egregious,” whether a violation was voluntarily disclosed and the degree of cooperation with OFAC’s investigation. OFAC has replaced the concepts of “aggravating” and “mitigating” factors affecting penalty decisions with eleven “General Factors” to be evaluated. The Guidelines revoke both the 2003 enforcement guidelines and the 2006 enforcement procedures for banking institutions, but most entities subject to OFAC’s jurisdiction will find the Guidelines codify rather than fundamentally alter OFAC’s current practices. Financial institutions in particular should seriously consider taking advantage of the opportunity to comment.
No-Penalty Letters. The Guidelines helpfully outline OFAC’s approach to cases where the agency plans not to assess a penalty. Rather than letting a matter go unresolved indefinitely, OFAC will issue a no action letter, a cautionary letter, or a finding of violation, each indicating a slightly different level of concern by OFAC. Regular and timely issuance of such letters will be welcomed by entities that need to demonstrate to other regulators that an OFAC investigation has been closed. While the Guidelines state that no-action letters and findings of violation constitute final agency action, a cautionary letter “represents a final enforcement response to the apparent violation . . . but does not constitute a final agency determination as to whether a violation has occurred.”  It would be helpful if all three types of letters were to state unambiguously that no further enforcement action is anticipated.
Penalty Assessments. In cases where a civil penalty is to be assessed, the Guidelines introduce the new concepts of “egregious” and “non-egregious” violations. Although experience will eventually give companies, compliance officers and their advisors some feel for cases apt to be considered “egregious,” the term is not among those formally defined in section I of the Guidelines. Rather, Section V states that OFAC will base “egregiousness determinations” on an analysis of the General Factors, emphasizing: willfulness or recklessness; awareness of sanctions risks; harm to sanctions program objectives; and “individual characteristics.” These are the first four listed “General Factors,” each of which includes several subfactors. The other General Factors are: existence of a compliance program; the remedial response to an apparent violation, cooperation with OFAC; the timing of the violation; enforcement actions by other agencies; the deterrent effect of a penalty; and “other factors.” Egregiousness determinations will be made by the Director or Deputy Director of OFAC, suggesting that they will be relatively rare. Non-egregious cases will have a baseline penalty linked to the value of the transaction, capped at $250,000 per violation. In egregious cases, the baseline penalty will be the statutory maximum penalty under the International Emergency Economic Powers Enhancement Act,  usually the greater of twice the transaction value or $250,000 per violation. Baseline penalties will be halved for voluntarily disclosed violations, but, consistent with current practice, the Guidelines specify several categories of submissions that will not be deemed voluntary.
Once a baseline penalty is established, OFAC will apply the General Factors to adjust the proposed penalty, which will typically be reflected in a pre-penalty notice. The General Factors provide a helpful catalog of considerations OFAC will review in calculating a penalty, but OFAC intends to take a “holistic”  approach to making penalty determinations. There is no guidance on how the various General Factors will be weighted in any given case, so penalty calculations are apt to remain subjective and difficult to predict. After a pre-penalty notice is issued, the Guidelines’ procedures for resolution closely resemble existing procedures for civil penalties, including the possibility of negotiating a settlement.
Cooperation; Implications for Compliance Programs. Among the many factors that may affect a civil penalty under the Guidelines are cooperation with OFAC and the subject person’s compliance program. In view of OFAC’s emphasis on these factors, corporate compliance officers should review their existing programs against the standards described in the Guidelines, including the many subfactors comprising each General Factor. Echoing OFAC’s recent reliance on so-called “look-back” investigations, the Guidelines focus on whether an entity has “research[ed] and disclos[ed] to OFAC relevant information regarding any other apparent violations caused by the same course of action.”  OFAC does not clearly state whether such additional violations, if found on the company’s own initiative, will be treated as being voluntarily disclosed when they supplement a response to an administrative subpoena or other “non-voluntary” submission. OFAC also seems likely to interpret the Guidelines to preclude voluntary disclosure treatment for information independently generated and disclosed by a subject person but also included in an unrelated party’s look-back report.
The Guidelines make agreeing to a statute of limitations waiver or tolling agreement an element of the “Cooperation” General Factor. Exercising the right not to sign a tolling agreement will presumably expose the subject person to higher penalties (or, at least, less mitigation).
Together, tolling agreements and look-back reviews can impose substantial additional costs on OFAC compliance programs. Look-backs, in particular, can be vastly expensive without revealing any useful new information. If, as seems likely, they remain a significant part of the enforcement landscape, their scope and goals should be carefully focused by agreement between OFAC and the subject party.
Abandoning the Risk-Based Approach. The Guidelines constitute a significant departure from the risk-based approach announced with the promulgation of the 2006 enforcement procedures for the banking industry, but never discuss why that approach is being abandoned. OFAC seems to be moving back toward a strict liability standard, with penalty mitigation based on the General Factors and OFAC’s discretion. Given the breadth of OFAC’s responsibilities—from terrorism and non-proliferation to diamond trading—and the agency’s link to national security, substantial discretion is appropriate. As maximum civil penalties increase, however, from a former cap of $11,000 per violation to a current maximum of twice the value of an underlying transaction (including, for instance, a single, multimillion dollar funds transfer), the potential for serious disagreements also increases. Yet only the Cuba program provides an administrative mechanism for challenging civil penalties before a neutral third party. The opportunity to contest a civil penalty determination on the record, at least in cases deemed “egregious,” could help ensure fairness where penalties could theoretically reach millions of dollars.
Overall, the Guidelines reflect a serious effort to align OFAC’s written guidelines with its existing practices, which appear to have been disproportionately influenced by the current focus on Iran-linked financial transactions. Experience in the actual administration of the Guidelines will undoubtedly teach more than any analysis of the text, but entities subject to OFAC’s jurisdiction should take the opportunity to evaluate their compliance programs against the helpful information in the Guidelines. The breadth of the Guidelines and their potential importance to a range of industries suggest that companies and trade associations should seriously consider the opportunity to provide written comments.