Article: US Sanctions - OFAC Penalties

The United States Treasury Department’s Office of Foreign Assets Control (OFAC) is primarily responsible for investigating and enforcing civil economic sanctions violations by US companies and individuals and in the case of US sanctions against Iran and Cuba, foreign subsidiaries of US companies.

OFAC has the authority to impose significant civil fines. For OFAC sanctions authorized under The International Emergency Economic Powers Act (IEEPA) the maximum civil fine per violation is $307,922 or an amount that is twice the amount of the transaction that is the basis of the violation. For violations under the Trading with the Enemy Act (TWEA) which involves Cuban sanctions, the maximum fine is $90,743 per violation. (These amounts are subject to annual adjustment to take account of inflation). Civil violations are “strict liability” offences, meaning that a company or individual can be liable for committing a civil violation regardless of knowledge or the degree of fault.
Since April 2003, OFAC has published its civil penalties and informal settlements. In 2019, OFAC’s enforcement penalties hit a record high as they issued a total of about $1.3 billion in fines. US citizens who have bought Cuban cigars have attracted the ire of the US authorities. However, penalties of a few hundred dollars pale into significance when compared with the penalties imposed on corporate entities. US and foreign banks have also been heavily penalised.

Highest OFAC monetary penalties:

Civil enforcement process

OFAC has wide powers and its investigations can lead to requests for additional information, the issuance of a cautionary letter, or the refusal, suspension or modification of permissive licences. Additionally, OFAC can issue a ‘cease and desist’ order, make a finding of a violation, impose a civil monetary penalty or refer the matter for criminal investigation/prosecution.

When determining whether a violation of US sanctions law has taken place, OFAC will consider the following factors, which in turn may influence the level of any penalty imposed:

1. Wilful misconduct (e.g. knowledge that the action would breach sanctions) or recklessness (including the failure to exercise minimal caution).
2. The level of actual knowledge or awareness of the conduct at issue.
3. Concealment of conduct with the purpose of misleading OFAC or embarking upon a pattern of conduct in violation of US law.
4. Timing of the violation in relation to the imposition of sanctions.
5. Level of management or supervisory involvement.
6. Level of harm to US sanctions programme objectives.
7. Commercial sophistication, size, and financial condition of the subject person.
8. Volume of transactions and history of any previous breaches of sanctions over the previous five years.
9. Existence, nature and adequacy of risk based OFAC compliance programme.
10. Remedial response and level of co-operation with OFAC, including whether a violation was voluntarily disclosed.

OFAC has issued guidelines which describe the process by which it calculates penalty amounts. A failure to maintain adequate records or comply with a request for information can result in a penalty up to $59,413. Civil monetary penalties are assessed on a case-by-case basis, but commonly they are calculated as a proportion of a ‘base’ penalty amount. The base penalty can be increased if OFAC considers the sanctionable conduct was egregious, e.g. involving a particularly serious violation of the law requiring a strong enforcement response. OFAC encourages voluntary self-disclosure; this allows OFAC to deploy its resources efficiently and permits companies and individuals to militate against potential penalties. The following chart provides further guidance.

Mitigating or aggravating factors will impact upon the final level of the penalty. For example, substantial co-operation (albeit in the absence of voluntary self-disclosure) will generally reduce the base penalty by between 25 and 40%. Also, a first violation will generally attract a reduction of 25%. When assessing risks, OFAC’s risk matrix considers various factors that will attract a high-risk category, including:

• large/fluctuating client base in an international environment
• large number of high-risk customers
• overseas branches or multiple correspondent accounts with foreign banks
• international transactions
• management disengagement from OFAC compliance risks

In recent enforcement actions, OFAC assessed whether the parties’ complied with the ‘Framework for OFAC Compliance Commitments’ (the Compliance Framework) which was issued by OFAC in May 2019. It sets out OFAC’s expectations of the essential elements of an effective sanctions’ compliance programme. Further details are provided on the club’s sanctions pages which is available here.
Members should continue to be mindful of the non-monetary impact an OFAC investigation and penalty assessment can have upon their business, including reputational issues and distraction of key management personnel. When combined with the possible level of penalties, members are well advised to exercise high levels of due diligence when dealing with high risk jurisdictions and to implement a risk-based compliance programme especially when engaging in transactions which involve jurisdictions impacted by US sanctions.

Category: Sanctions