An Ohio business that manufactures pressure controls, switches, and sensors is our latest example of trade sanctions compliance gone wrong, and the steps a company should take to act on red flags before the business gets hauled in front of regulators.
The business, Cleveland-based UniControl, agreed Monday to pay $216,000 in penalties to the U.S. Office of Foreign Assets Control to settle charges that the company ignored numerous warning signs and allowed European business partners to re-export UniControl goods to Iran. In at least two instances, OFAC said, senior executives at UniControl had direct knowledge that their goods were destined for Iran, yet allowed the shipments to proceed anyway.
What happened, exactly? Let’s take a close look at what the OFAC settlement order says.
The conduct in question happened from July 2013 to March 2017. According to OFAC, UniControl processed 21 shipments of air pressure switches with a total value of roughly $687,000 to customers in Europe; and those European customers then resold those switches to customers in Iran. That’s a violation of U.S. export control sanctions against Iran that have been in place for many years.
The warning signs for UniControl were numerous. For example…
As early as 2010, one of those European customers said it had “a significant market” in Iran, and asked whether UniControl could serve as a supplier. UniControl declined, but “never took steps in the subsequent years of the business relationship” to assure that the European customer wouldn’t re-export UniControls’ goods to Iran anyway.
In 2014, UniControl and a European trade partner signed a sales agreement that explicitly listed Iran as a country to which the European company could re-sell UniControl goods. UniControl never sought to amend that agreement and clarify that, no, the Europeans couldn’t re-export its goods to Iran.
On two occasions UniControl employees attended trade conferences in Europe and chatted with Iranian nationals about their company’s products. In one of those instances, the conversation happened while UniControl sales reps were hanging out at the booth of their European distributors; in the other, the UniControl reps met with Iranian end-users directly.
And in 2017, those European distributors wrote to UniControl executives and asked the company to remove “Made in the USA” labels from its pressure switches before sending the goods along to Europe. Why? “The European trade partner explained that the Iranian end-user may have problems with the stated origin of the products,” according to OFAC. UniControl then sent two shipments of goods to the European distributor anyway.
That interaction seemed to be the tipping point for UniControl. The company consulted with outside counsel, and subsequently self-disclosed the apparent violations to OFAC. As part of that confession, UniControl admitted that it had actual knowledge that those last two transactions were intended specifically for re-export to Iran.
Enter the Compliance Calculations
According to statute, the maximum civil penalty UniControl would face for violations like this is $5.42 million. But because UniControl voluntarily self-reported the violations and because the violations themselves weren’t egregious, OFAC guidelines specify that the civil penalty should actually be only 50 percent of the transaction value — which, in this case, would mean a penalty of $343,595.
So how did we get from that amount down to the $216,000 that UniControl would actually pay? As usual, OFAC listed a few aggravating factors and a few mitigating ones.
The aggravating factors:
- In the first 19 shipments, UniControl didn’t follow up on multiple red flags that its European partners were re-exporting goods to Iran.
- In those first 19 shipments, UniControl senior executives either knew about, or should have been aware of, the re-exporting to Iran.
- In the final two shipments, UniControl allowed its pressure switches to be explored with actual knowledge that the goods would end up in Iran.
- And also in those final two shipments, the executives with actual knowledge about Iran included senior executives: the company president and its quality assurance supervisor, among others.
OK, none of those factors is welcome news. Now let’s consider the mitigating factors:
- UniControl is a relatively small company ($14 million in annual sales and fewer than 100 employees, according to Dun & Bradstreet), with no prior sanctions trouble.
- The company did cease all shipments to its European distributors after that final 2017 incident. Indeed, after those two shipments were processed, UniControl demanded that its distributors return the switches. One declined and sent the switches to Iran anyway. Rather than book the revenue, UniControl forfeited $66,900 in payments for the transaction.
- And UniControl cooperated with OFAC during the subsequent investigation “by submitting detailed and well-documented correspondence describing the apparent violations,” and entering into two tolling agreements with OFAC.
UniControl also beefed up its export compliance program by hiring outside counsel to overhaul the company’s policies and procedures. Those improvements include new policies for distributors to sign certificates assuring that UniControl goods won’t end up resold to prohibited end users; and that certification policy extends to the distributors’ own customers — that is, UniControl’s third- and fourth-parties. And UniControl added extra disclaimers in most of its trade documents to remind everyone, yet again, that its goods shouldn’t go to prohibited end-users.
Getting With the OFAC Program
Overall, this enforcement action is yet another reminder that sanctions compliance is serious business, and even smaller businesses that might not have fulsome compliance programs need to take the risk seriously. UniControl had plenty of clues drop into its lap over the course of four years — and only in the final instance, when its distributors all but clobbered UniControl over the head with a red flag, did the company finally decide it had a problem it needed to rectify.
As OFAC itself said in the settlement order:
This enforcement action highlights the importance of identifying and assessing multiple warning signs that indicate a foreign trade partner may be re-exporting goods to a sanctioned jurisdiction. In this case, the multiple indicia of sanctions risks should have prompted a commensurate compliance response. In particular, U.S. businesses should seek transparency when dealing with foreign trade partners and follow up on activities that raise concerns or suspicion.
In other words, don’t ignore a red flag. You only end up wrapped in even more trouble further down the road.