Print

News & Resources

LEGAL DEVELOPMENTS ALERT: DOJ and OFAC Sanctions Enforcement Actions Highlight New Sanctions Risks for Non-U.S. Companies Based on Use of U.S. Financial System

On July 16, 2020, the U.S. government announced criminal and civil enforcement actions against Essentra FZE Co. Ltd. (“Essentra”), a global supplier of cigarette products incorporated in the U.A.E., for North Korea Sanctions violations. In the criminal enforcement action, Essentra entered into a deferred prosecution agreement (“DPA”) with the U.S. Department of Justice (“DOJ”) for conspiring to violate the International Emergency Economic Powers Act and defrauding the United States in connection with evading sanctions on North Korea. This DPA is noteworthy because it marks the DOJ’s first ever corporate enforcement action for violations of sanctions on North Korea. In the civil enforcement action, Essentra entered into a settlement agreement with the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”). Under these agreements, Essentra admitted that it received payments in bank accounts operated by the foreign branch of a U.S. financial institution that were for the sale of cigarette products that Essentra knew were destined for North Korea. It is notable that Essentra was targeted for criminal enforcement for receiving U.S. dollar or other currency payments into accounts held at a non-U.S. branch of a U.S. bank. By contrast, OFAC’s 2017 landmark TransTel enforcement action involved a company initiating U.S. dollar payments, thereby causing U.S. intermediary banks to export financial services to a sanctioned country. Here, DOJ and OFAC make clear that, regardless of which way the money flows, the facts may support liability under U.S. sanctions regimes. These actions signal that OFAC and the DOJ may be adopting a broader approach to sanctions enforcement.

The Underlying Conduct

Between September 2018 and December 2018, Essentra received three wire transfers for payments totaling approximately $333,272 in its bank accounts at the Dubai, U.A.E. branch of a U.S. financial institution. Only one of the three payments was in U.S. dollars and transited through the United States; the other two payments were in Emirati dirham, but deposited in an account held at the Dubai branch of the U.S. financial institution. The payments were made for the sale of cigarette filters that Essentra knew were destined for North Korea.  Essentra conducted the sale through front companies and falsified shipping records to conceal the fact that the cigarette filters would be exported to North Korea, for example, by indicating a shipment would be going to Dalian, China. 

The OFAC Settlement Agreement

Under Essentra’s settlement agreement with OFAC, Essentra will pay $665,112, which is nearly double the amount involved in the transactions at issue, but less than the applicable statutory maximum civil monetary penalty OFAC could have imposed, which was approximately $923,766. OFAC deemed the penalty satisfied by payment of a greater amount assessed by the DOJ arising out of the same conduct. Essentra’s settlement terms with OFAC contain substantial ongoing compliance commitments, which generally align with OFAC's May 2019 Compliance Framework, including:

  • management oversight, sanctions compliance risk assessments, sanctions-related enhancements to internal controls, sanctions-related testing and audit procedures, and sanctions compliance training for employees;
  • significant structural changes, such as the appointment of a Global Compliance Director, and other personnel responsible for integration of sanction compliance policies and procedures into the business operations;
  • inclusion and involvement of “the full spectrum of busines functions” in the Company’s sanctions compliance program;
  • periodic review and reporting obligations, such as annual sanctions risk reviews, quarterly sanctions compliance reporting obligations; and an annual review, either by Essentra’s UK parent or by external auditors, testing the effectiveness of the Company’s sanctions compliance program; and
  • annually certifying for the next five years that the Company has implemented and continues to maintain the sanctions compliance measures under the agreement.

The Deferred Prosecution Agreement with DOJ

Under the DPA, Essentra agreed to pay a fine of $666,543.88, which also satisfies Essentra’s penalty under its OFAC settlement agreement. In reaching the resolution, the DPA cited Essentra’s comprehensive improvement of its sanctions compliance program, willingness to take disciplinary action against employees involved in the conduct, and having voluntarily made foreign employees available for interviews with DOJ. Similar to the OFAC settlement obligations, Essentra agreed to implement changes to its corporate compliance program, and to take on reporting obligations for the three-year period of the DPA. These obligations include quarterly reports that record both improvements to its sanctions compliance program and any violations of U.S. sanctions laws that it discovers, as well as the completion of global sanctions training covering various applicable sanctions regimes. Essentra also agreed to cooperate with other DOJ investigations and any investigations by foreign authorities relating to the conduct described in the DPA and the Statement of Facts. 

Implications

As the U.S. government is increasingly resorting to sanctions to pursue its national interests or to address geopolitical disputes, multinational businesses, including non-U.S. companies, are faced with unprecedented sanctions compliance risks. As recent sanctions enforcement actions against TransTel and Essentra have shown, even companies with no visible ties to the U.S. are not immune to sanctions compliance risks. The criminal and civil actions against Essentra send a clear message to the global business community that the United States will pursue sanctions violations, regardless of where they originate, where they involve U.S. financial institutions. Companies should take this opportunity to review and assess their sanctions-related risks and current compliance programs in light of these enforcement actions and OFAC’s Compliance Framework. 

For questions regarding export controls and economic sanctions regulations, please contact:

Vincent W. Li
vli@smithpachter.com

Daniel A. Solomon
dsolomon@smithpachter.com

Zachary D. Prince
zprince@smithpachter.com

Categories


Archives