On July 20, 2017, the U.S. Department of the Treasury, Office of Foreign Assets Control ("OFAC") issued a penalty notice to ExxonMobil for violation of Ukraine/Russia-related sanctions targeting Russian government officials and their associates. The enforcement action has garnered significant attention for its political implications, but the political intrigue may obscure a crucial reminder for international investors and global companies: thorough and verified knowledge of your counterparty and associated persons and entities is necessary because any involvement with sanctioned individuals and entities raises sanctions compliance risks.
Exxon's violation stemmed from a deal with Rosneft OAO, an oil company owned by the Russian government. While Exxon was not prohibited from doing business with Rosneft, Exxon executed contracts in May 2014 that were signed on behalf of Rosneft by the company's President, Igor Sechin, who had been named a few weeks earlier to the Specially Designated Nationals and Blocked Persons List, commonly referred to as the "SDN List." In general, U.S. persons and entities may not engage in transactions with SDNs, including receiving "services" from an SDN. But Exxon entered into a contract with Rosneft, not with its President - so what's the catch? As OFAC has made painfully clear with the Exxon penalty notice, any SDN involvement in a transaction may be enough to taint the relationship from a sanctions perspective.
1. OFAC underscores a longstanding position: Transactions "involving" SDNs are generally prohibited
OFAC interprets the term "services" broadly such that transactions in any way involving an SON are generally regarded as off-limits for U.S. persons and entities. Notably, OFAC has issued FAQs specifically explaining that, while transactions with an entity are not prohibited simply because an SDN is employed by the entity, U.S. persons must "ensure that they are not engaged in transactions or dealings, directly or indirectly, with an SON, for example by entering into contracts that are signed by an SDN, entering into negotiations with an SDN, or by processing transactions, directly or indirectly, on behalf of the SDN."1 In the Exxon Penalty Notice, OFAC cited a version of this FAQ issued under the Burma sanctions regime (which has since been terminated) to emphasize that Exxon should have been on notice of OFAC's position that the company was prohibited from entering into a contract executed by an SDN.
2. Drawing a distinction without a difference?
While the OFAC guidance described above seems clear, Exxon has argued that it relied on media statements by administration officials indicating that the sanctions were not intended to impact the ability of American companies to do business with entities managed by designated individuals. Exxon has also cited specific administration confirmation, reported by the Wall Street Journal, that a U.S. person could participate in Rosneft board meetings if they involved "Rosneft's, and not Sechin's personal, business." However, in the Exxon Penalty Notice, OFAC summarily dismissed Exxon's reliance on these statements, asserting that the statements merely "provided context for the policy rationale" but did not create an exception to the general rule and emphasizing that the "plain language" of the Executive Order did not distinguish between personal and professional conduct. Rather, OFAC found that Exxon's violation was "egregious," noting that Exxon is a sophisticated international company and that Exxon failed to consider "warning signs" (including OFAC's FAQ) that the company was accepting services from an SDN regarded by OFAC as blocked.
OFAC has confirmed that execution of contracts and even participation in negotiations may constitute SDN "involvement" that could form the basis of a sanctions violation by any U.S. person or entity participating in the relevant transaction. However, the official statements Exxon cites regarding participation by a U.S. person in Rosneft board meetings signal that transactions touched by SDNs are not categorically prohibited. But where does the distinction lie? While perhaps Exxon should have been on notice as to OFAC's position on SDNs executing contracts, the circumstances surrounding the Exxon penalty ultimately raise more questions than OFAC answers about the boundaries of permissible SDN participation in transactions involving U.S. persons or entities.
Exxon has challenged OFAC's interpretation of the Executive Order providing for Sechin's designation, arguing that the breadth of OFAC's reading of prohibited services contravenes the plain text of the order. Given that that order tracks the language generally employed in Executive Orders of this nature, the challenge could have broad implications. But, for the time being, the Exxon action serves as a stern reminder that U.S. persons and entities may be held accountable for any involvement with a sanctioned individual or entity.
3. The current state of play
OFAC's reaction (or lack thereof) to the potential ambiguities raised by Exxon highlights the agency's expectation that U.S. entities operating internationally have a sophisticated understanding of OFAC's guidance and seek direct and specific guidance from OFAC where ambiguities arise. An entity need not be Exxon to be considered sophisticated in this regard. The Exxon action should prompt all international investors and companies with global business to carefully examine whether their compliance programs address the broad prohibitions on transactions involving SDNs, particularly when transacting in regions and industries targeted by sanctions.