On September 2, 2008, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) issued an interim final rule, "Economic Sanctions Enforcement Guidelines" (Guidelines), to explain its policy for determining the appropriate enforcement response to an apparent violation of U.S. economic sanctions enforced by OFAC and the amount of any civil monetary penalty (CMP). The Guidelines became effective on September 8, 2008, when they were published in the Federal Register, and supersede OFAC's interim enforcement procedures for banking institutions (Interim Final Rule for Banks), dated January 12, 2006, and OFAC's proposed enforcement guidelines (Proposed Rule), dated January 29, 2003 (other than the proposed Appendix to the Cuban Assets Control Regulations).
The Guidelines were prompted by OFAC's increased penalty authority under the International Emergency Economic Powers Enhancement Act (Enhancement Act), which was signed into law on October 16, 2007, and will apply to all pending and future enforcement matters before OFAC, subject to a handful of specified exceptions.
OFAC administers and enforces list-based and country-based economic sanctions against targeted foreign countries and regimes, terrorists and terrorist organizations, and others, in furtherance of U.S. policy goals (collectively, the OFAC Sanctions). OFAC Sanctions apply to all U.S. citizens and permanent residents located anywhere in the world, entities organized under U.S. law (including foreign branches), U.S. branches of foreign entities, all persons (individuals and entities) located in the United States and, in limited circumstances, foreign subsidiaries of U.S. entities and foreign persons (collectively, Subject Persons). OFAC Sanctions implicate a wide range of commercial and financial transactions--including the provision of services and dealings in property--involving targeted countries, entities and individuals, that are undertaken (both directly and indirectly) by Subject Persons.
The Guidelines have three main components. First, the Guidelines describe the enforcement responses available to OFAC depending upon the facts and circumstances of a given case. Second, the Guidelines set forth the factors that OFAC will evaluate to determine the appropriate enforcement response to an apparent violation of the OFAC Sanctions. Finally, the Guidelines establish how OFAC will determine the amount of CMPs and encourage voluntary self-disclosures of apparent violations to reduce otherwise applicable CMPs.
This Regulatory Alert briefly discusses those aspects of the Guidelines, particularly as they differ from the Interim Final Rule for Banks and the Proposed Rule.
Enforcement Responses
Under the Guidelines, OFAC investigations of possible violations of the OFAC Sanctions could lead to one of seven outcomes: (a) no action; (b) requests for additional information; (c) cautionary letters; (d) findings of violations; (e) civil monetary penalties; (f) criminal referrals; (g) other administrative actions, such as license denial, suspension, modification or revocation and cease and desist orders. Cautionary letters and findings of violations are new options for OFAC in response to an apparent violation of the OFAC Sanctions.
A cautionary letter is appropriate if OFAC determines that a finding of a violation is not warranted or insufficient information is available to conclude a violation has occurred, but OFAC believes the underlying conduct could lead to a violation in other circumstances or the Subject Person does not appear to be taking sufficient measures to assure compliance with the OFAC Sanctions. A cautionary letter is not a final agency action, but places the Subject Person on notice that similar conduct may result in a finding of violation or the imposition of CMPs. A finding of violation is appropriate if OFAC determines a violation has occurred, but that a CMP would not be the most advisable response. A finding indicates OFAC's concern about the violation and/or the Subject Person's compliance policies and practices. A finding of violation is a final enforcement response, unless further information emerges, and the Subject Person may respond to OFAC's determination.
General Factors
The Guidelines set out 11 factors (General Factors), some or all of which OFAC will consider in determining the appropriate enforcement response and, if a CMP is appropriate, the amount of the penalty. In establishing the General Factors, OFAC has moved away from the concepts of "mitigating" and "aggravating" factors toward a more holistic assessment of the facts and circumstances applicable to a particular case.
The General Factors to be considered are: (a) willful or reckless violations of law, including whether the Subject Person engaged willful misconduct or a deliberate intent to violate the OFAC Sanctions, and any concealment, pattern of misconduct, prior notice of violations, and management involvement; (b) awareness of the conduct at issue, including whether the Subject Person had actual knowledge or "reason to know" about the violation and management involvement; (c) harm to sanctions program objectives, such as the benefit of the violation to the sanctioned individual, entity or country, implications for U.S. policy, eligibility of the conduct for a license, and the conduct's support for humanitarian activities; (d) individual characteristics of the Subject Person, such as commercial sophistication, size of operations and financial condition, volume of transactions and sanctions violation history; (e) the existence and nature of the Subject Person's OFAC compliance program; (f) remedial responses to the apparent violation undertaken by the Subject Person; (g) the nature and extent of the Subject Person's cooperation with OFAC; (h) the timing of the apparent violation in relation to imposition of sanctions; (i) enforcement action taken by federal, state or local agencies against the Subject Person for the apparent violation or similar violations; (j) deterrence effects of an administrative action against the Subject Person; and (k) other relevant factors determined on a case-by-case basis.
Notably, in discussing the General Factors that will be taken into account in determining OFAC's enforcement of apparent violations, the Guidelines make no reference to OFAC risk assessments or to a risk-based approach to compliance, which were central features of the now superseded Interim Final Rule for Banks. Nor do the penalty outcomes, discussed below, take into consideration the adequacy of a Subject Person's OFAC compliance program based on its risk profile. Because the Guidelines supersede the Interim Final Rule for Banks and are silent on compliance priorities, the Guidelines appear to retreat from the risk-oriented approach emphasized in the 2006 interim enforcement procedures. However, as a practical matter, it would seem reasonable to maintain a risk-based compliance program, absent further guidance from OFAC.
Civil Monetary Penalty Amounts and Process
The Guidelines take a new approach to calculating CMPs by considering, in addition to transaction value, whether the conduct giving rise to the OFAC Sanctions violation is "egregious" or "non-egregious," and whether the violation was voluntarily self-disclosed. Egregious cases are the most serious sanctions violations, based on an assessment of all General Factors, with particular attention paid to willfulness or recklessness, awareness of conduct, harm to sanctions program objectives, and the individual characteristics of the Subject Person. OFAC anticipates that most enforcement cases will involve non-egregious violations. Voluntary self-disclosure means that the Subject Person self-initiated the disclosure of an apparent violation before OFAC or any other governmental agency or official discovered the apparent violation or a substantially similar violation. Voluntary self-disclosure results in a 50 percent reduction of the otherwise applicable base penalty amount.
Base penalties for egregious cases that are not voluntarily self-disclosed are equal to the statutory maximum amount ($250,000 per violation) set forth in the Enhancement Act. By contrast, voluntary self-disclosure of egregious violations results in a base penalty of 50 percent of the statutory maximum amount. Non-egregious cases that are not voluntarily self-disclosed incur a base penalty ranging from $1,000 to $250,000 per violation, based on the value of the transaction underlying the violation. By contrast, voluntary self-disclosure of non-egregious violations results in a base penalty of 50 percent of the transaction value, capped at $125,000 per violation. Once a base penalty amount is calculated, it may be adjusted up or down based on the evaluation of the General Factors. The Guidelines establish that substantial cooperation with OFAC generally results in a 25 to 40 percent reduction of the base penalty and that first violations generally result in a reduction of up to 25 percent of the base penalty.
The Guidelines further establish penalties for the failure to respond to a requirement to furnish requested information to OFAC of up to $20,000 for transactions of less than or equal to $500,000 and up to $50,000 for transactions of more than $500,000; penalties for late filings of up to $2,500; and penalties for the first failure to maintain required records of up to $5,000, with penalties for each additional violation of up to $10,000.
The Guidelines also modify the penalty notification process in an effort to increase transparency. After concluding that a violation of the OFAC Sanctions has occurred and CMPs would be appropriate, OFAC will issue a pre-penalty notice that will describe the alleged violation, identify the relevant General Factors, and provide the actual penalty that OFAC proposes to impose, in addition to the maximum possible penalty. OFAC will give Subject Persons the opportunity to respond to pre-penalty notices with arguments and/or evidence regarding the amount of the proposed penalty. OFAC will consider this information prior to issuing a final notice. Finally, the Guidelines also provide a streamlined process for settling allegations of violations, similar to that in the Proposed Rule.
OFAC has requested comments on certain aspects of the Guidelines, including the appropriateness of the General Factors, the definition of an "egregious" case, the proposed base penalty amounts, and the new penalty process, on or before November 7, 2008.
