On July 20, the Office of Foreign Assets Control announced a $2 million penalty against ExxonMobil for violations related to eight documents, a contract extension and seven “Completion Deeds,” that ExxonMobil subsidiaries executed with the Russian state-owned company Rosneft in May 2014 on which Rosneft’s Chairman, Igor Sechin, was a signatory. That same day, ExxonMobil filed suit in the Northern District of Texas challenging OFAC’s action under the Administrative Procedure Act and on constitutional due process grounds.

Such direct legal challenges to an OFAC enforcement action by a major U.S. company are rare. Assuming neither side blinks, the case could have far-reaching compliance implications going forward by illuminating the scope of what it means to do business with SDN employees of non-blocked enterprises. Should ExxonMobil prevail, the decision could bring more clarity to the application of OFAC’s sanctions regulations and undermine OFAC’s practice of regulating via interpretive guidance and issuance of FAQs. Should OFAC prevail, companies will be faced with increasing uncertainty and pressure to identify and screen counterparty employees and agents that may have some ministerial role in connection with a non-blocked company.

Already, the case has provided new insights, for ExxonMobil appended to its complaint the detailed penalty letter that OFAC issued privately to ExxonMobil in conjunction with its public web notice. The penalty letter, undoubtedly drafted knowing ExxonMobil intended to challenge it in court, sheds light on arguments OFAC is likely going to use in defending its enforcement action and could use again in the future, if successful:

  • Cross-Applicability of Guidance Among Sanctions Programs: Among its arguments, ExxonMobil has emphasized that at the time of the conduct at issue in May 2014, OFAC had not definitively announced an interpretation that an SDN’s “involvement” in a transaction with an non-blocked entity (e.g.,by executing a contract) constituted a prohibited dealing in the “property or interests” of the SDN. OFAC has since made such guidance explicit for all OFAC sanctions programs in FAQs 398 and 400 on the OFAC website. In response to ExxonMobil’s argument, OFAC noted that an earlier FAQ 285, which only concerned interactions with SDNs designated under the Burma Sanctions Regulations, had been issued prior to May 2014 and that ExxonMobil should have taken that guidance into account in interpreting the scope of prohibited activity involving SDNs designated under the Ukraine-Related Sanctions Regulations. Significantly, this OFAC position, as ExxonMobil points out in its complaint, is inconsistent with longstanding OFAC policy set forth in Subpart A of each of its sanctions programs, which generally state that “[d]iffering foreign policy and national security circumstances may result in differing interpretations of similar language among the parts of this chapter.” In short, OFAC appears to be applying a heads I win, tails you lose approach when it comes to reliance on its interpretative guidance.
  • Assessing the Harm to Sanctions Programs Caused by Violations: Seemingly abandoning the concept of all persons being equal under the law, OFAC’s penalty letter makes explicit what practitioners have long suspected and experienced. In assessing the harm to the sanctions program objectives, as required under the Enforcement Guidelines, OFAC will consider the public profile of both the company committing the violation and the SDN with whom the company dealt. Specifically, OFAC emphasizes that ExxonMobil’s actions “given its public profile and sophistication, directly undercut Treasury’s efforts to isolate Sechin, thereby alleviating the intended pressure on the Russian government and its interlocutors.” And, despite numerous public administration statements that the sanctions on Sechin were on him personally and not on his employer Rosneft, OFAC argues that one of the reasons it considered ExxonMobil’s conduct to be egregious was that the company “dealt in the services of a high-profile SDN, designated as an official of the Government of the Russian Federation, at a sensitive period during the crisis in Ukraine.” Taken together, these statements suggest a view by OFAC that not all violations are created equal, and that a company with a less substantial public profile might be able to argue that its violations do not cause substantial harm to OFAC’s policy objectives, particularly if they also involve lower profile sanctions programs or SDNs.
  • What Counts as “Cooperation” with OFAC: In its penalty letter, OFAC rejects ExxonMobil’s argument that its penalty should be mitigated due to the company’s cooperation with OFAC’s inquiry. In doing so, OFAC expresses its view that merely complying with a subpoena issued by OFAC does not count as cooperation. Moreover, OFAC indicated that briefings that were provided to the agency at a company’s request—ExxonMobil held a series of such briefings—also did not indicate cooperation, apparently considering irrelevant ExxonMobil’s information and arguments as to why a blocked person’s signature on behalf of a non-blocked entity that the blocked person does not control, whether on a contract or a performance acknowledgement, cannot be considered receipt of a “service” from the blocked person or otherwise a transaction involving the blocked person’s property or interest in property.

As the litigation proceeds, it will likely yield a number of insights on these and other issues raised by the parties. Its outcome will be of interest to sanctions practitioners and compliance officials alike, given the effect it could have on a number of OFAC’s enforcement authorities.