Alert December 01, 2009

OFAC Finalizes Enforcement Guidelines

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) published the final version of its “Economic Sanctions Enforcement Guidelines” (the “Final Guidelines”).  The Final Guidelines amend and finalize OFAC’s interim final Enforcement Guidelines (the “Interim Final Guidelines”), which have been in effect since they were published in September 2008.  The Interim Final Guidelines were described in the September 16, 2008 Alert.

Under the Final Guidelines, OFAC will continue to apply the framework established by the Interim Final Guidelines when determining OFAC’s enforcement response to apparent violations of OFAC sanctions programs.  Like the Interim Final Guidelines, the Final Guidelines provide that:

  • OFAC may take one of seven types of enforcement actions depending on the facts and circumstances of each case.  In response to an apparent violation, OFAC may issue (1) a no-action letter, (2) a request for additional information, (3) a cautionary letter, (4) a finding of a violation, (5) a civil monetary penalty, (6) a criminal referral to appropriate law enforcement agencies, or (7) other administrative actions (including license denial, suspension, or cease and desist order).
  • OFAC will consider certain “General Factors” in determining the appropriate enforcement response to an apparent violation and, if a civil monetary penalty is warranted, in establishing the amount of that penalty.  Included among the General Factors are (1) whether the conduct at issue involved a willful or reckless violation of the law; (2) awareness of the conduct at issue; (3) harm to sanctions program objectives; (4) the individual characteristics of the violating party, including (a) its level of commercial sophistication, (b) the size of its operations, (c) the total volume of its transactions compared to the apparent violations, (d) whether there is any history of violations, (e) the presence of a compliance program at the time of the violation, and (f) remedial steps taken in response to the violation; and (5) the violating party’s cooperation with OFAC, including in cases where the violation was not voluntarily disclosed.
  • In determining the amount of any civil money penalty, OFAC will distinguish between “egregious” and “non-egregious” cases.  Egregious cases are those representing the most serious sanctions violations, based on an analysis of all applicable General Factors, with substantial weight given to considerations of whether the violation involved willfulness or recklessness, awareness of the conduct giving rise to an apparent violation, harm to sanctions program objectives, and the individual characteristics of the subject person.  OFAC will impose significantly higher penalties for egregious cases.
  • Where OFAC determines that a civil penalty is appropriate, OFAC will determine a “base penalty amount,” based on two primary considerations: first, whether the conduct giving rise to a violation is egregious or non-egregious; and second, whether the case involves a voluntary self-disclosure by the subject person.  The base penalty amount is significantly higher for egregious violations, but in all cases the base penalty amount will be reduced 50% or more if the apparent violation is voluntarily self-disclosed.  Once the base penalty amount is determined, it may be adjusted upward or downward based on the General Factors; the resulting amount is the proposed civil money penalty.  As a general matter, OFAC will reduce the base penalty amount by 25% to 40% if a subject person that did not voluntarily self-disclose substantially cooperates with OFAC and by 25% if the apparent violation is the subject person’s first violation.
  • If OFAC concludes that a violation has occurred and a civil monetary penalty is the appropriate response, OFAC will issue a pre-penalty notice describing the alleged violation, identifying any relevant General Factors, and setting forth the proposed penalty.  Subject persons may respond to pre-penalty notices prior to the imposition of a final notice.

The Final Guidelines reflect OFAC’s consideration of comments from the public on, and OFAC’s own review of, the Interim Final Guidelines.  In the Final Guidelines, OFAC has clarified certain aspects of its enforcement approach.  The changes in the Final Guidelines include revisions to address the following issues:

  • Risk Based Compliance.  One of the General Factors that OFAC will consider in determining the appropriate enforcement response is whether the subject person had a compliance program at the time of the violation.  In issuing the Interim Final Guidelines, OFAC withdrew the 2006 Economic Sanctions Enforcement Procedures for Banking Institutions (the “Bank Guidelines”), which had emphasized the importance of a bank’s risk-based compliance program and included risk matrices in an appendix.  In response to comments, OFAC clarified in issuing the Final Guidelines that the withdrawal of the Bank Guidelines should not be viewed as an indication that OFAC has changed its views regarding the importance of an institution’s risk-based compliance program.  To further emphasize this point, the risk matrices from the Bank Guidelines were added as an appendix to the Final Guidelines.
  • Voluntary Self-Disclosure.  As described above, OFAC will reduce the base penalty amount by 50% or more if the subject person voluntarily discloses an apparent violation.  In the Final Guidelines, OFAC clarifies certain aspects of its definition of voluntary self-disclosure.  First, if a party other than the subject person is required to report an apparent violation to OFAC (such as a “blocked” or “rejected” transaction) but fails to report the transaction, a self-disclosure by the subject person to OFAC will still qualify as a voluntary disclosure.  The Final Guidelines also address the treatment of disclosures to other government agencies.  First, the Final Guidelines specify that a self-initiated disclosure to OFAC made at the same time as a disclosure to another government agency will qualify as a voluntary self-disclosure.  In addition, OFAC will consider on a case-by-case basis whether a self-disclosure to another governmental agency that is not made simultaneously with a disclosure to OFAC also qualifies as a voluntary self-disclosure to OFAC.
  • Cooperation with OFAC.  Even in the absence of voluntary disclosure, OFAC may reduce the base penalty amount by 25% to 40% if the subject person substantially cooperates with OFAC.  The Final Guidelines further clarify how a subject person may benefit from such cooperation.  First, although OFAC will not treat a subject person’s notice to OFAC as a voluntary self-disclosure if, after the subject person has made its disclosure to OFAC, OFAC learns of the apparent violation from a third party required to report the transaction, OFAC explains that the subject person can benefit from providing such a disclosure to OFAC because such an action could be viewed as cooperation with OFAC.  In addition, OFAC has amended the Final Guidelines to expressly provide that substantial cooperation with OFAC will be noted in OFAC’s publication of any civil money penalties.  The Final Guidelines also clarify that, although a subject person’s willingness to enter into a tolling agreement may be considered a mitigating factor in assessing the person’s cooperation with OFAC, OFAC will not view a refusal to enter into a tolling agreement as an aggravating factor.
  • Violations and Sanctions History.  OFAC revised the language in the Final Guidelines to clarify how it will treat the subject person’s history of past violations and sanctions.  First, in determining whether a subject person’s violation is a first violation (and therefore eligible for a 25% decrease in the base penalty), OFAC (a) will consider a group of substantially similar violations as a single violation, (b) will treat a violation as a first violation if the subject person has not received a penalty notice or finding of violation from OFAC during the five years prior to the violation, and (c) may consider a violation to be a first violation if the subject person has received a prior penalty notice or finding of violation during the preceding five years, but the previous violation involved conduct of a substantially different nature.  With respect to past sanctions, the Final Guidelines specify that, in considering a subject person’s sanctions history, which is a General Factor for purposes of determining OFAC penalties, OFAC will consider the subject person’s entire sanctions history, not just instances in which OFAC made a formal finding of sanctions violations.  In addition, the Final Guidelines state that, as a general matter, consideration will be given only to a subject person’s sanctions history during the five years preceding the apparent violation.
  • Calculation of Civil Money Penalties.  OFAC also made amendments in the Final Guidelines to clarify how certain civil money penalties will be calculated.  First, the base penalty grid in the Final Guidelines was revised to reflect the fact that the maximum statutory penalties for violations of OFAC sanctions adopted under the Trading With the Enemy Act are lower than the statutory maximums for violations of OFAC sanctions adopted under the International Emergency Economic Powers Act and other statutes.  In addition, to make the penalty for recordkeeping failures consistent with the penalty for a failure to comply with an OFAC information request, the Final Guidelines increase the maximum penalty for a failure to maintain records in conformance with OFAC requirements to $50,000 per violation.