- Russian corporations de-listed through significant specific steps agreed to with OFAC
- Exporter settles for $7.7 million and agrees to comprehensive compliance measures
- OFAC outlines sanctions compliance best practices, expands oversight
As 2018 came to a close, the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) announced two actions that should be studied by any party subject to U.S. economic sanctions. OFAC is the U.S. government agency with principal responsibility for administering U.S. sanctions regulations.
First, on December 19, OFAC published a letter to members of the U.S. Congress announcing the agency’s intention to remove a group of Russian corporations from the List of Specially Designated and Blocked Persons List (SDN List) that OFAC maintains. As a general matter, U.S. individuals and entities are prohibited from engaging in any transaction with an SDN.
Then, on December 20, OFAC released its settlement agreement with Zoltek Companies, Inc. (Zoltek) for violations of the Belarus Sanctions Regulations. According to OFAC, the violations consisted of at least 26 transactions with an SDN.
These actions are quite different. But as described below, each includes very useful guidance about OFAC’s current view of sanctions compliance best practices.
De-listed Russian Companies are Affiliated with Individual Russian SDN Oleg Deripaska
In April 2018, OFAC designated Russian oligarch Oleg Deripaska as an SDN. Three companies affiliated with Deripaska were also designated: En+, Rusal, and ESE.
According to OFAC, Deripaska owns approximately 70 percent of En+, which means the company is owned by an SDN, and thereby is itself an SDN. This is well-established under the so-called “50 percent rule.” See our September 2016 blog post on a prior OFAC matter involving the 50 percent rule.
Under the 50 percent rule, any entity owned 50 percent or more in the aggregate by one or more SDNs is itself designated as an SDN, even if the entity is not specifically listed on the SDN List. OFAC guidance on the 50 percent rule is available here.
The long-arm of the 50 percent rule is especially evident in the designations of Rusal and ESE. While Deripaska has only a tiny direct interest in Rusal, Rusal is majority owned by En+. Thus, Rusal is itself an SDN because it is more than 50 percent owned by an SDN (En+). The same holds true for ESE, which is majority-owned by En+ and Deripaska.
En+, Rusal, and ESE De-listed Following Significant Restructuring, Compliance Commitments
OFAC agreed to de-list the three companies in exchange for the companies agreeing to significantly reduce Deripaska’s direct and indirect shareholding stake in the companies, amend their corporate governance structure, and undertake intrusive auditing, certification, and reporting obligations.
While the precise details of the agreement, particularly related to the ownership and corporate governance structure of the three companies, are beyond the scope of this article, below is a short list of steps taken:
- Deripaska’s ownership in En+ reduced to 44.95 percent
- Deripaska’s En+ voting rights limited
- En+ established an independent board of directors
- Specific restrictions were imposed to limit Deripaska’s ability to control En+
Compliance Commitments Include Auditing, Reporting, Certifications
Under the agreement with the companies, OFAC will have a significant supervisory role similar to a monitorship. While relatively common in the context of Foreign Corrupt Practices Act enforcement matters, there are few if any instances in which OFAC has imposed a monitor for sanctions violations.
It is the compliance commitments that OFAC will be monitoring that make this matter most relevant. Those commitments include (1) submitting periodic certifications to OFAC of ongoing compliance with the agreement; (2) auditing the companies’ engagements with Deripaska to ensure the companies remain independent of his ownership and control; and (3) notifying OFAC of changes in the voting rights and ownership interests in En+.
Zoltek Fined for Transactions with Party Designated Pursuant to 50 Percent Rule
The Zoltek matter is more of a standard OFAC enforcement action, where the agency penalizes a party for violating U.S. sanctions. Those violations involved transactions with an entity, OJSC Polymir, that was designated as an SDN because it was owned by another SDN, J.S.C. Naftan. OJSC Polymir was not in fact listed on the SDN List but rather was designated pursuant to the 50 percent rule.
The transactions at issue were conducted in principal part by Zoltek’s subsidiary in Hungary. However, according to OFAC, approval for the transactions was provided by Zoltek personnel in the United States. Those personnel thereby facilitated transactions prohibited under U.S. sanctions on Belarus. Such facilitation, i.e., supporting or authorizing a transaction by a non-U.S. party that a U.S. party cannot engage in, is penalized in the same fashion as a direct transaction with an SDN.
Notably, Zoltek apparently relied on advice from Hungarian counsel, who advised the company that U.S. sanctions on Belarus do not apply in Hungary. To some extent, that advice is accurate: if no U.S. person in the United States (or Hungary or elsewhere) had facilitated or played any direct role in the transactions, they would not have been subject to U.S. sanctions laws.
To resolve the violations, which Zoltek voluntarily disclosed to OFAC, Zoltek agreed to pay OFAC a penalty in the amount of $7,772,102.
Zoltek Agrees to Detailed Compliance Obligations
In addition, Zoltek agreed to implement a lengthy list of compliance measures, including:
- Senior Management Commitment. Zoltek certified that senior management will support the company’s OFAC compliance program, including providing adequate resources through expanding the number of compliance personnel deployed within the company.
- Risk Assessment. Zoltek committed to assessing sanctions compliance risk on a regular basis using a methodology that specifically reflects the company’s operations and risks.
- Internal Controls. Zoltek designed and implemented written sanctions compliance policies and procedures, including enhanced recordkeeping and screening policies.
- Testing and Auditing. Beyond its commitment to regularly assessing sanctions compliance risk, Zoltek agreed that its testing and auditing program would be bolstered to ensure that audits address sanctions risk and are conducted in an independent manner.
- Zoltek committed to providing appropriate sanctions compliance training and other instruction to personnel on at least an annual basis and in any other circumstances as needed.
- Annual Certification. For the next five years, Zoltek must submit a certification to OFAC to confirm that the company has implemented and continues to maintain the sanctions compliance measures outlined in the settlement agreement.
The compliance obligations to which Zoltek has agreed are not that unusual. The required steps – ensuring management commitment to compliance, providing training to personnel, maintaining appropriate internal controls, auditing and testing compliance on a regular basis – are well-established compliance best practices for exporters and other companies conducting international business.
Nonetheless, OFAC’s settlement agreement with Zoltek offers an unusually detailed delineation of what the agency expects.
Moreover, both the Zoltek matter and the Deripaska matter are unusual in that OFAC is maintaining a continuing supervisory role to ensure the parties’ compliance obligations are met. Going forward, it seems that OFAC may be willing to engage in more active oversight of companies seeking to address U.S. sanctions issues.