Publications

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The new Economic Sanctions Enforcement Guidelines (the new Enforcement Guidelines) issued on September 8, 2008¹ by the Office of Foreign Assets Control (OFAC), the agency of the US Treasury Department responsible for administering and enforcing economic sanctions programs, reflect OFAC’s approach to the application of the dramatically higher civil penalty amounts provided for violations of economic sanctions programs under the International Emergency Economic Powers Enhancement Act² (the Enhancement Act). The Enhancement Act provides for maximum civil penalty amounts that are the greater of $250,000 or twice the amount of the transaction that is the basis of the violation with respect to which the penalty is imposed.³ Prior to the Enhancement Act, the maximum statutory civil penalties OFAC could impose under the International Emergency Economic Powers Act (IEEPA) were the lesser of $11,000, adjusted to $50,000 in 2006, or the amount of the transaction at issue.⁴ See Appendix A for a list of current OFAC programs.

The new Enforcement Guidelines supersede prior Enforcement Guidelines issued by OFAC in 2003⁵ and 2006⁶ (the 2003 Guidelines and the 2006 Guidelines, respectively). The 2003 Guidelines were generally applicable to all OFAC enforcement cases but were superseded by the 2006 Guidelines with respect to enforcement cases pertaining to banking institutions. In addition to the higher civil penalties that may now be imposed, the new Enforcement Guidelines also mark a departure from past agency policies and procedures in that they:

• are no longer geared toward a specific industry sector, as in the case of the 2006 Guidelines;⁷
• no longer provide a general range of 10-75 percent mitigation from the amount proposed in a PrePenalty Notice, as did the 2003 Guidelines for non-bank related civil penalty cases;
• no longer separately identify mitigating and aggravating factors but adopt the “holistic” approach of identifying “General Factors” that can be viewed in either light, depending upon the circumstances;
• provide for the issuance of “findings of violation” that constitute final agency action in lieu of the warning letters provided for in the 2003 Guidelines and the evaluative letters provided for in the 2006 Guidelines, with a corresponding potential adverse impact on “first offense” as a mitigating factor;
• distinguish between “egregious” and “non-egregious” civil monetary penalty cases in recognition that the enhanced maximum civil penalties authorized by the Enhancement Act should be reserved for the most serious cases; and 
• implement new procedures for determining the proposed base civil penalty amount based upon: 1) the egregiousness of the activity (including the transaction amount); and 2) whether the case involves a voluntary self-disclosure (more strictly defined). Once the base amount is established, it may be adjusted upward or downward depending upon an evaluation of other applicable General Factors.

Application of New Enforcement Guidelines to Pending Cases

OFAC’s new Enforcement Guidelines apply to all violations with respect to which enforcement action is pending or commenced on or after October 16, 2007, the enactment date of the Enhancement Act. OFAC interprets this to mean that the new Enforcement Guidelines apply to all violations with respect to which a Final Penalty Notice had not been issued as of October 16, 2007.⁸ There are three exceptions to this policy where enforcement cases will be grandfathered and the prior applicable OFAC Enforcement Guidelines will continue to apply⁹:

• cases in which a prepenalty notice (PPN) was mailed prior to October 16, 2007;
• cases in which OFAC has communicated to a party that a particular settlement amount would be recommended internally, and the party has made a written settlement offer to OFAC at that amount; and
• cases in which a party has agreed to a statute of limitations (SOL) waiver, where the SOL would have otherwise expired prior to October 16, 2007.

Finding of Violation and Alternate Enforcement Actions

The new Enforcement Guidelines incorporate longstanding alternate agency actions to the imposition of civil penalties, including no action, cease and desist orders, requirements to furnish information, and denial, modification, suspension or revocation of general or specific licenses. The “findings of violation” provided for in the new Enforcement Guidelines as a substitute for warning letters in the 2003 Guidelines and evaluative letters in the 2006 guidelines is a significant departure from OFAC’s previous response when it determines that a violation has occurred but does not warrant imposition of a civil monetary penalty. The findings of violation constitute final agency action, providing recipients with an opportunity to respond. The findings of violation then become part of the party’s compliance record with OFAC, vitiating any subsequent mitigation for a first offense if violations occur in the future that are subject to civil penalties. Reporting and disclosure requirements involving other government agencies may also be implicated.

Egregiousness of Apparent Violation

For purposes of determining the base civil penalty amount, OFAC will consider two primary criteria. The first is the “egregiousness” of the apparent violation, based primarily upon an evaluation of the first four General Factors listed in the new Enforcement Guidelines, with particular emphasis on the first two. The determination as to whether a particular case is egregious, and thus eligible for the statutory maximum civil penalty amount, is reserved to the Director or Deputy Director. The first four primary factors in determining whether a case is egregious are excerpted in part from the new Enforcement Guidelines and read as follows:

1.  Willful or Reckless Violation of Law:

• Willfulness. Was the conduct at issue the result of a decision to take action with the knowledge that such action would constitute a violation of US law?
• Recklessness. Did the party demonstrate reckless disregard for US sanctions requirements or otherwise fail to exercise a minimal degree of caution or care in avoiding conduct, activities or transactions that lead to the apparent violation?
• Concealment. Was there an effort by the party to hide or purposely obfuscate its conduct, activities or transactions in order to mislead OFAC, federal, state or foreign regulators, or other parties involved in the transaction/conduct about an apparent violation?
• Pattern of Misconduct. Was the apparent violation the result of a pattern or practice of conduct or was it relatively isolated and atypical in nature?
• Prior Notice. Was the party on notice, or should it reasonably have been on notice, that the conduct at issue, or similar conduct, constituted a violation of US law?
• Management Involvement. Were supervisory or managerial level staff aware, or should they reasonably have been aware, of the willful or reckless misconduct?

2.  Awareness of Conduct at Issue.

• Actual Knowledge. Did the party have actual knowledge that the conduct, activity, or transaction giving rise to an apparent violation took place? In a corporate context, was the party purposefully not informed, or was this inadvertent?
• Reason to Know. Absent actual knowledge, did the party have reason to know, or should the party reasonably have known, based on all readily available information and with the exercise of reasonable due diligence, that the conduct, activity or transaction would or might take place?
• Management Involvement. Was the conduct, activity or transaction undertaken with the explicit or implicit knowledge of senior management? If not, did the lack of knowledge result from managerial disregard for its responsibility to comply with applicable sanctions laws?

3. Harm to Sanctions Program Objectives ¹⁰

• Economic or Other Benefit to the Sanctioned Individual, Entity, or Country. The number, size, and impact of the transactions or incidents constituting an apparent violation(s), the length of time over which they occurred, and the nature of the economic or other benefit conferred.
• Implications for US policy. The effect that the circumstances of the apparent violation had on the integrity of the US sanctions program and the related policy objectives involved.
• License eligibility. Whether the conduct constituting the apparent violation likely would have been licensed by OFAC under existing licensing policy.
• Humanitarian activity. Whether the conduct at issue was in support of a humanitarian activity.

4. Individual Characteristics.

• Commercial Sophistication.
• Size of Operations and Financial Condition.
• Volume of Transactions. OFAC may evaluate the apparent violation in the context of the total volume of transactions undertaken on an annual basis.
• Sanctions Violation History. This includes a review of cautionary, warning and evaluative letters issued, as well as findings of violation under the new Enforcement Guidelines.

Voluntary Self-Disclosure

The second primary criterion used in the new Enforcement Guidelines to determine the base civil penalty amount is the submission of a voluntary self-disclosure (VSD) by the party involved prior to the time that OFAC, or any other federal, state or local government agency or official, discovers the apparent violation or another substantially similar apparent violation. A VSD automatically results in 50 percent mitigation of the base civil penalty amount, whether the apparent violation is considered egregious or non-egregious. This marks a departure from the 2003 Guidelines, which provided for at least 50 percent mitigation in the case of a VSD. Additional mitigation in the new Enforcement Guidelines is dependant upon the evaluation of other applicable General Factors, including additional cooperation with OFAC beyond the submission of a VSD.

What is particularly significant with respect to the treatment of VSDs in the new Enforcement Guidelines is that a VSD is not credited as such by OFAC if, inter alia, a third party is required to notify OFAC of the apparent violation or a substantially similar apparent violation because a transaction was blocked or rejected by that third party regardless of whether or when OFAC actually receives such notice from the third party and regardless of whether the submitter of the VSD was aware of the third party’s disclosure. This is also a departure from the 2003 Guidelines, that stated that credit for a VSD might not be accorded if the violation had been previously disclosed, although the new Enforcement Guidelines are consistent with the approach taken in the 2006 Guidelines with respect to banking institutions. This effectively means that if an exporter were to voluntarily self-disclose that goods were shipped to the Government of Sudan, OFAC would not accord an automatic 50 percent reduction in calculating the base civil penalty amount if a related financial transaction involving the export was subject to a reporting requirement by a banking institution, whether or not that bank properly blocked and reported the payment.

In cases where a party is denied an automatic 50 percent reduction from the base civil penalty amount for a VSD because of the circumstances set forth above or other reasons articulated in the new Enforcement Guidelines, mitigation may nonetheless be according in the range of 25-40 percent for the party’s “substantial cooperation” in providing substantial additional information to OFAC regarding the apparent violation and/or other related violations. It is therefore in the interests of a party involved in an enforcement proceeding with OFAC to cooperated fully with the investigation, including filing a VSD, even if OFAC does not recognize it as such for purposes of providing full 50 percent mitigation.

Mitigation for First Offense

The 2003 Guidelines highlighted the significance of a first offense as a mitigating factor, second only to a VSD in terms of percentage of automatic mitigation accorded. Mitigation for first offenses would result in at least 25 percent reduction in proposed civil penalty amounts, unless aggravating factors were also present. The new Enforcement Guidelines provide for mitigation up to 25 percent. The extent of mitigation will depend, in part, on whether the party had previously been issued a cautionary, warning or evaluative letter. The substitution of “findings of violation” – constituting final agency action – for the warning and evaluative letters employed in the 2003 and 2006 Enforcement Guidelines, respectively, will also reduce the importance of this mitigating factor in that a violation articulated in a “finding of violation” will now constitute the first offense on record, eliminating the availability of first offense mitigation for a subsequent offense resulting in a civil penalty action.

Additional General Factors Used by OFAC in Adjusting the Base Civil Penalty Amount

The remaining General Factors OFAC may consider in adjusting the base civil penalty amount upward or downward are listed as follows:

5. Compliance Program

• In cases involving banking institutions where OFAC has entered into a Memorandum of Understanding (MOU) with the bank’s regulator, OFAC will continue to consult with the regulator regarding the bank’s compliance program pursuant to the procedures set forth in the MOU.

6. Remedial Response

7. Cooperation with OFAC

• This General Factor takes into account the filing of a VSD and the degree of cooperation with regard to the submission of other relevant information, and whether the party agreed to a SOL waiver or tolling agreement.

8 Timing of apparent violation in relation to imposition of sanctions.

9. Other enforcement action

• This General Factor includes whether the settlement of alleged violations of OFAC regulations is part of a comprehensive settlement with other federal, state, or local agencies.

10. Future Compliance/Deterrence Effect

11. Other relevant factors on a case-by-case basis ¹¹

The General Factors set forth in the new Enforcement Guidelines generally track the mitigating and aggravating factors present in the 2003 Enforcement Guidelines, but each General Factor may be considered by OFAC to be mitigating or aggravating depending upon the circumstances of the individual enforcement case. While this approach makes sense in most instances, it is potentially troublesome with regard to the waiver of the SOL. Failure to waive the SOL may now be considered an aggravating factor, a result that could put OFAC at odds with the statutory purpose of providing persons with legal certainty that actions taking place prior to a given date will not give rise to enforcement action on the part of the government in the indefinite future.¹²

Calculation of Proposed Civil Penalty Amount

Egregious Cases: In cases determined to be egregious by the Director or Deputy Director of OFAC, the base civil penalty amount will be the statutory maximum; in IEEPA-based programs, equal to the greater of either $250,000 or twice the value of the transaction. This amount will be mitigated 50 percent for submission of a VSD, and adjusted further based upon the evaluation of other relevant General Factors.

Non-egregious cases: The calculation of the penalty amount in non-egregious cases, expected by OFAC to constitute the majority of enforcement cases, differs substantially depending upon whether the violation is disclosed through a VSD or comes (or is required to come) to OFAC’s attention by other means. The calculation of the initial civil penalty amount in cases involving a VSD will begin at one-half the transaction value, capped at a maximum base amount of $125,000 per violation or the statutory civil penalty amount otherwise applicable. This figure may then be adjusted based upon an evaluation of other relevant General Factors. The initial penalty amount in cases not involving a VSD will be determined by reference to the “applicable schedule amount” or ASA, capped at a maximum base amount of $250,000 per violation or the statutory civil penalty amount otherwise applicable.

The ASA provides that a violative transaction valued at less that $1,000 will result in an initial penalty of $1,000 continuing as follows:

• If the transaction is $1,000 or more, but less than $10,000, the penalty is $10,000;
• If the transaction is $10,000 or more, but less than $25,000, the penalty is $25,000;
• If the transaction is $25,000 or more, but less than $50,000, the penalty is $50,000;
• If the transaction is $50,000 or more, but less than $100,000, the penalty is $100,000;
• If the transaction is $100,000 or more, but less than $170,000, the penalty is $170,000;
• If the transaction is $170,000 or more, but less than $250,000, the penalty is $250,000.¹³

OFAC’s evaluation of other relevant General Factors may result in further adjustments of the penalty amount. The final penalty amount reflected in a Penalty Notice will not exceed the amount proposed in the PPN by more than 10 percent, or include additional alleged violations, unless a revised PPN has first been issued.

Conclusion

OFAC’s new Enforcement Guidelines provide a rational framework for applying the dramatically higher IEEPA civil penalty amounts available pursuant to the Enhancement Act, and the blend of aggravating with mitigating factors generally makes sense. The agency has placed a premium on cooperation by persons subject to enforcement actions, particularly with regard to VSDs. This objective is undercut substantially, however, by OFAC’s refusal to accord 50 percent mitigation for VSDs in circumstances where the transaction is otherwise reportable by a third party. Except with respect to non-egregious cases involving a VSD, the transaction value no longer serves as the initial point of reference for establishing the base civil penalty amount in an enforcement action, as was the case in the 2003 and 2006 Enforcement Guidelines. Given the much tighter eligibility criteria for VSDs, alternate mitigation can best be achieved through substantial cooperation with OFAC in the provision of additional information regarding the subject violation and other related violations that come to light.

Given OFAC’s more aggressive enforcement posture, settlement of enforcement actions prior to the issuance of a PPN, but particularly prior to a final Penalty Notice, is the most advantageous way of resolving cases with the agency. A settlement does not constitute a final agency determination that a violation has occurred. Settlement negotiations may be conditioned upon a party’s agreement to toll the SOL, and failure to do so may be viewed by OFAC as an aggravating factor. There is no set time frame for concluding the negotiations if they are conducted prior to the issuance of a PPN and in good faith. Comprehensive or global settlements of multiple apparent violations also remain an option.

With respect to banking institutions, OFAC may revert to its earlier practice of settling multiple apparent violations quarterly or every six months, or annually as provided under the fourth General Factor. While the new Enforcement Guidelines are no longer tailored to any particular sector, MOUs will remain in place and risk matrices relevant to banks remain on OFAC’s website. It is also significant that OFAC’s Compliance Division, historically the division within OFAC that most closely works with the banking sector, has resumed processing enforcement actions with respect to banks. This should help to preserve OFAC’s longstanding working relationship with the financial community.

Appendix A

Programs pursuant to which IEEPA civil penalties are applicable¹⁴:

• Belarus (EO 13405 (2006) – regulations pending)
• Burmese Sanctions Regulations, 31 CFR Part 537
• Cốte d’Ivoire (Ivory Coast)(EO 13396 (2006) – regulations pending)
• Democratic Republic of the Congo (EO 13413 (2006) – regulations pending)
• Foreign Assets Control Regulations, 31 CFR Part 500 (North Korea)
• Former Liberian Regime of Charles Taylor Sanctions Regulations, 31 CFR Part 593
• Global Terrorism Sanctions Regulations, 31 CFR Part 594¹⁵
• Highly Enriched Uranium (HEU) Agreement Assets Control Regulations, 31 CFR Part 540
• Iranian Assets Control Regulations, 31 CFR Part 535
• Iranian Transactions Regulations, 31 CFR Part 560
• Iraqi Sanctions Regulations, 31 CFR Part 575 (See also: EO 13315 and EO 13438)
• Narcotics Trafficking Sanctions Regulations (Colombia; “SDNTs”), 31 CFR Part 536
• Persons Undermining the Sovereignty of Lebanon or Its Democratic Processes and Institutions (EO 13441 (2007) – regulations pending)
• Sudanese Sanctions Regulations, 31 CFR Part 538
• Syrian Sanctions Regulations, 31 CFR Part 542
• Weapons of Mass Destruction Trade Control Regulations, 31 CFR Part 539 (See also: EO 13382 (2005) – regulations pending)
• Western Balkans Stabilization Regulations, 31 CFR Part 588
• Zimbabwe Sanctions Regulations, 31 CFR Part 541

Programs pursuant to which civil penalties under IEEPA are not applicable:

• Cuban Assets Control Regulations, 31 CFR Part 515 (Trading With the Enemy Act – Maximum civil penalty = $65,000)
• Foreign Narcotics Kingpin Sanctions Regulations, 31 CFR Part 598 (Foreign Narcotics Kingpin Designation Act - maximum civil penalty = $1,075,000)
• Rough Diamonds Control Regulations, 31 CFR Part 592 (Clean Diamond Trade Act - maximum civil penalty = $10,000)