The Office of Foreign Assets Control of the U.S. Treasury Department recently issued a series of instructive press releases regarding enforcement actions taken against several companies. The decision to publicize these enforcement actions could signal a more activist and expansionist approach to sanctions enforcement matters and may evidence a broadening of OFAC’s enforcement priorities as the long run of enforcement against financial institutions begins to wind down. The actions demonstrate a focus on acquisition due diligence and conduct by overseas entities, and in particular on aggressive action against U.S. companies who fail to terminate sanctioned business by their newly acquired overseas subsidiaries; indeed, in a number of these cases OFAC took enforcement action despite the fact that the U.S. acquiror explicitly directed the termination of the sanctioned business, was deceived by officials of the acquired entity, and voluntarily self-reported the violation after discovering it. OFAC has also begun to spell out, in enforcement actions, the elements of sanctions compliance programs it imposes on violators (and, presumably, would consider a benchmark for other companies).
AppliChem: On February 14, 2019, OFAC assessed a penalty of over $5.5 million against AppliChem GmbH, a German manufacturer of chemicals and reagents. The penalty arose from 304 apparent violations of the Cuban Assets Control Regulations (“CACR”) between May 2012 and February 2016 involving sales of chemical reagents to Cuba. OFAC deemed this an “egregious” case despite voluntary self-disclosure by AppliChem’s U.S. parent, Illinois Tool Works, Inc. (“ITW”).
ITW acquired AppliChem in January 2012, making AppliChem subject to the CACR. Before the acquisition, ITW warned AppliChem that it would need to stop all Cuba transactions following the acquisition. After the acquisition, in January 2012, ITW sent AppliChem’s managers (who were also the former owners) an explanation of ITW’s guidelines for complying with the CACR. However, AppliChem continued to violate sanctions laws by doing business in Cuba, shipping reagents to buyers that had entered into contracts prior to the acquisition. Upon discovering that AppliChem continued to do business in Cuba, in April 2012 ITW’s legal department instructed AppliChem’s managers that all sales to Cuba must be ended immediately. AppliChem’s managers represented to ITW that all of AppliChem’s open Cuba transactions had been cancelled. Following a voluntary self-disclosure by ITW in January 2013, OFAC issued a cautionary letter in May 2015.
In January 2016, ITW received an anonymous report through its ethics hotline that AppliChem continued to sell to Cuba. ITW conducted an investigation, which revealed that AppliChem’s managers had created a scheme to hide its Cuba business from ITW. Specifically, the investigation found that between February and April 2012, AppliChem had established procedures to ensure that the company would not prepare or retain documents relating to its Cuba business that mentioned Cuba. Pursuant to those procedures, AppliChem used a code word (“Caribbean”) to refer to Cuba, and retained external vendors to prepare shipping and other necessary documents that previously were prepared internally. AppliChem senior management provided training on the procedures to staff, who apparently described the reasons for the procedures as an “open secret” among employees. The investigation also found that on two occasions (in March 2013 and June 2015), AppliChem employees reported the continued sales to Cuba to an ITW manager in Spain. In response, the manager had sought assurances from an intermediary company that a shipment would not be diverted to Cuba and reminded local employees about ITW’s sanctions compliance policy, but he did not launch any further investigation.
OFAC considered the willful conduct by AppliChem’s management and use of written procedures designed to circumvent U.S. sanctions as among the aggravating factors. In announcing the penalty, OFAC emphasized the importance of risk-based controls to ensure subsidiaries’ compliance with U.S. sanctions, follow-up diligence after acquisitions of foreign entities known to transact with OFAC-sanctioned countries or persons, and appropriate responses to information suggesting possible U.S. sanctions violations.
Kollmorgen: On February 7, 2019, a week before the announcement of the action against AppliChem, OFAC announced a settlement for about $13,000 with Kollmorgen Corporation, a Virginia-based company, on behalf of its Turkish affiliate, Elsim Elektroteknik Sistemler Sanayi ve Ticaret Anonim Sirketi. The settlement with Kollmorgen concerned apparent violations of the Iranian Transactions and Sanctions Regulations (“ITSR”) by Elsim between July 2013 and July 2015, based on servicing products in Iran and providing products, parts or services with knowledge that they were for Iranian end-users. In conjunction with the settlement, OFAC designated the managing director of Elsim, who allegedly directed the sanctions violations and tried to conceal them, individually as a U.S. sanctions target under the “Foreign Sanctions Evaders” program. This marks the first time that OFAC designated a foreign individual as a Foreign Sanctions Evader in connection with an enforcement action.
OFAC’s press release states that Kollmorgen acquired Elsim in 2013, which made Elsim subject to the ITSR. Kollmorgen’s pre-acquisition due diligence showed that Elsim made sales and had customers in Iran. Consequently, Kollmorgen implemented various pre- and post-acquisition compliance measures intended to prevent Elsim from violating U.S. sanctions, including blocking Elsim’s Iran-related customers from making orders, notifying Elsim employees of U.S. sanctions against Iran and Elsim’s obligation not to sell products to Iran, requiring quarterly certifications from Elsim’s senior management that no Elsim products were being provided to Iran, and establishing an ethics hotline for reporting violations of law.
According to OFAC’s settlement announcement, “[i]n spite of Kollmorgen’s extensive efforts,” Elsim willfully transacted with Iran. Elsim management allegedly directed employees to falsify corporate records relating to travel to Iran and made false certifications to Kollmorgen regarding transactions with Iran. Following an internal complaint by an Elsim employee through the ethics hotline, Kollmorgen conducted an internal investigation, which Elsim managers allegedly tried to obstruct by instructing employees to falsify records, misleading Kollmorgen’s attorneys, and attempting to delete emails. OFAC acknowledged Kollmorgen’s “extensive” internal investigation and “preventative and remedial” efforts in imposing the relatively low penalty and concluded that a penalty was appropriate due to Elsim’s egregious conduct, risk profile based on its prior business dealings in Iran and efforts to obstruct Kollmorgen’s internal investigation. However, the violation by Kollmorgen was deemed non-egregious.
In announcing OFAC’s sanction against Evren Kayakiran, the managing director of Elsim, the Treasury Under Secretary for Terrorism and Financial Intelligence described the designation of a Foreign Sanctions Evader concurrently with a related corporate settlement as “a marked change” in OFAC’s approach. He also characterized the action as a “clear warning” of the potential individual exposure for supervisors or managers who direct staff to commit or cover up sanctions violations. The designation of Elsim’s managing director as a Foreign Sanctions Evader prohibits all indirect or direct transactions or dealings with him within U.S. jurisdiction, including all foreign exchange, cash transfer or securities transactions clearing through the United States.
Zoltek: Toward the end of last year, on December 20, 2018, OFAC announced a settlement for nearly $7.8 million with manufacturer Zoltek Companies, Inc. (“Zoltek”), a Missouri-based holding company, and its subsidiaries, including U.S.-based Zoltek Corporation and Hungarian-based Zoltek Vegyipari ZRT. The settlement concerned apparent violations of Belarus sanctions based on the U.S. subsidiary’s approval of multiple transactions between the Hungarian subsidiary and an entity on OFAC’s List of Specially Designated Nationals and Blocked Persons between January 2012 and October 2015.
Senior executives at Zoltek’s U.S. subsidiary were responsible for approving the Hungarian subsidiary’s purchases of a chemical used for producing carbon fiber. The U.S. subsidiary approved over 20 transactions between the Hungarian subsidiary and an entity on OFAC’s SDN List. By approving the transactions, the U.S. subsidiary dealt in property of a blocked entity in apparent violation of the Belarus sanctions.
The settlement agreement notes that by February 2015, various executives at the U.S. subsidiary, including the CEO, COO, and President, received information about, and subsequently discussed, the U.S. sanctions against the blocked entity. Yet the U.S. subsidiary does not appear to have sought guidance or counsel about U.S. sanctions compliance obligations, continuing the conduct despite that information. OFAC suggested that the U.S. subsidiary took guidance from advice the Hungarian subsidiary obtained from Hungarian counsel to the effect that U.S. sanctions did not apply in Hungary. OFAC deemed as “egregious” apparent violations that occurred after multiple senior managers at the U.S. subsidiary showed actual knowledge of the blocked entity’s status, but deemed as “non-egregious” the apparent violations occurring before that point.
The action was notable in part because the only participation of the U.S. entity in the sales was to approve the transactions by the Hungarian entity outside U.S. jurisdiction, emphasizing that OFAC’s “facilitation” principles forbid any participation by U.S. entities in transactions by their overseas affiliates with sanctioned persons.
However, the settlement was more notable for its inclusion of a detailed set of specifications for an OFAC compliance program to be introduced as part of a settlement, a development that we have seen in a number of pending cases. The terms of the program are instructive both as likely aspects of future settlements and as guideposts to OFAC’s view of the elements of an effective compliance program.
- Management Commitment. Zoltek agreed to ensure that top-level management are committed to supporting its sanctions compliance program, promote a “culture of compliance,” and empower the sanctions compliance program and staff. The company committed that top-level management have reviewed and approved the program. Management recognized the seriousness of apparent violations of U.S. sanctions, confirmed their understanding of Zoltek’s apparent violations, and committed to implementing necessary measures to reduce the risk of recurrence, including the expansion of the Director of Global Compliance’s role to cover U.S. sanctions issues. Zoltek also committed to ensuring that its compliance unit is delegated sufficient authority and autonomy to use its policies and procedures in a manner that effectively controls its sanctions risk, and receives sufficient resources.
- Risk Assessment. Zoltek represented that it conducts sanctions risk assessments in a manner and with a frequency that adequately addresses potential risks (which could be posed by clients, products, supply chain, intermediaries, counterparties, transactions and locations), and that it has developed a methodology to identify, analyze and address its risks. The company agreed to update the risk assessment to address the root causes of and the conduct underlying apparent violations or systemic deficiencies that are identified in the ordinary course of business.
- Internal Controls. Zoltek represented that it has designed and implemented written policies and procedures on sanctions compliance that are relevant, capture its day-to-day operations and procedures, are simple to follow, and prohibit misconduct. The company agreed to maintain clear and effective internal controls for identifying, banning, escalating and reporting sanctioned transactions, to enforce its policies and procedures for the internal controls, and to ensure the adequacy of its OFAC-related recordkeeping policies and procedures. Zoltek committed to ensure that it will take immediate and effective action to identify and implement compensating controls until the root causes of any weaknesses in its internal controls relating to sanctions compliance can be identified and remediated. The company represented that it has clearly communicated its sanctions compliance policies and procedures to all relevant staff, as well as relevant gatekeepers and business units operating in high-risk areas, has appointed employees to integrate those policies and procedures into its daily operations (including through consultations with relevant business units), and has implemented software to screen its vendors (as well as their parents and subsidiaries) against government restricted lists on a daily basis.
- Testing and Audit. Zoltek agreed to ensure that its testing or audit function is board accountable, independent, and has sufficient standing, skills, resources and authority. The company also committed to ensure that its testing and audit procedures are appropriate to the level and sophistication of its sanctions compliance program, and reflects a comprehensive and objective assessment of its sanctions risks and internal controls. Zoltek agreed to periodically update its risk assessment and review its sanctions policies, procedures and practices to identify and address any deficiencies, and to ensure that it will take immediate and effective action to identify and implement compensating controls until the root causes of any weaknesses underlying confirmed negative tests or audit results relating to sanctions compliance can be identified and remediated.
- Training. Zoltek agreed to ensure that its sanctions training program provides sufficient information and instruction to employees and stakeholders (such as clients, suppliers, business partners and counterparties) to support its sanctions compliance efforts. The company also committed to providing sanctions training that is appropriate in relation to its products, business relationships and where it operates, and that is sufficiently frequent (at a minimum, once a year) with regard to its sanctions risk assessment and risk profile. Zoltek committed to ensure that it will take immediate and effective action to train relevant personnel following confirmed negative tests, audit results or deficiencies relating to sanctions compliance. The company represented that its training program includes easily accessible resources available to all relevant employees and that it created a specific program to train all new and current employees on U.S. sanctions and export controls with respect to the conduct that is the subject of the settlement.
- Annual Certification. Zoltek committed that a senior executive or manager will submit an annual certification, for five years, confirming that the company has implemented and maintained the compliance measures specified in the settlement agreement.
Cobham: On November 27, 2018, OFAC announced a settlement for nearly $90,000 with Cobham Holdings, Inc., a Virginia-based technology and services provider in the defense industry. The settlement with Cobham concerned apparent violations of Ukraine-related sanctions by its former subsidiary Aeroflex/Metelics, Inc. (“Metelics”), a company in Massachusetts, based on two sales made through distributors in Canada and Russia to a company in Russia between July 2014 and January 2015.
In the course of negotiations to purchase Metelics from Cobham, the purchaser’s due diligence identified a shipment intended for end-use by a company that was blocked pursuant to OFAC’s 50 Percent Rule, a 2008 rule that extends sanctions restrictions to companies that are at least 50 percent owned by persons blocked under U.S. sanctions. Although the end-user (Almaz Antey Telecommunications LLC) itself never appeared on OFAC’s Specially Designated Nationals and Blocked Persons List, it was 51 percent owned by an entity (Joint-Stock Company Concern Almaz-Antey) on OFAC’s SDN List. Cobham conducted an investigation, which identified two other shipments for end-use by the same company.
The initial and primary transaction was entered into before the end-user’s parent was added to OFAC’s SDN List. Metelics did in fact follow its compliance procedures in connection with all of the transactions, including conducting screenings to check for blocked persons and obtaining approval of each shipment from its Director of Global Trade Compliance. Because of deficiencies in the screening software itself, which used match criteria that only found matches containing all words searched, Metelics did not identify the end-user as a blocked person. Despite Metelics’s good-faith efforts and use of a commercially available screening system, which OFAC did not appear to dispute, OFAC nevertheless brought an enforcement action. Moreover, OFAC considered the escalation of the transaction to Metelics’s Director of Global Trade Compliance, who approved the transaction only after screening failed to produce a “hit,” to be among the aggravating factors, along with Metelics’s failure to recognize “warning signs” that the end-user had “nearly the same name” as an entity on the SDN List. OFAC also cited prior apparent violations of Iran sanctions involving “Cobham and its compliance personnel,” as well as “recurring compliance failures” resulting in a consent agreement for Metelics. OFAC did, however, deem this a “non-egregious” case involving voluntary self-disclosure. The matter underscores that OFAC will bring enforcement actions against transactions involving non-listed subsidiaries of listed persons that fall afoul of the 50 Percent Rule.
These recent settlements indicate that OFAC will continue to take aggressive enforcement actions even as its cases with major financial institutions slow down. OFAC stressed the importance of follow-through and auditing following M&A transactions involving business with sanctioned countries that must be terminated. OFAC has also made clear that it expects fairly sophisticated sanctions compliance programs and procedures even from non-financial institutions.
 U.S. Dep’t of the Treasury, “Enforcement Information for February 14, 2019,” https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190214_applichem.pdf.
 U.S. Dep’t of the Treasury, “Enforcement Information for February 7, 2019,” https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190207_kollmorgen.pdf.
 U.S. Dep’t of the Treasury, “Enforcement Information for December 20, 2018,” https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20181220_zoltek.pdf
 U.S. Dep’t of the Treasury, “Enforcement Information for November 27, 2018,” https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20181127_metelics.pdf.