OFAC’s Latest Warning on Distributors

A Texas company that sells video production technology has agreed to pay $190,000 to settle charges that it knowingly allowed its goods to be sold into Iran, in our latest example of sanctions compliance enforcement from the Office of Foreign Assets Control. 

OFAC announced the settlement last Thursday against NewTek, which sells live production and 3-D animation hardware and software systems. (NewTek is a subsidiary of the Vizrt Group, a Norwegian company that owns several other businesses dabbling in digital media equipment.) OFAC accused NewTek of exporting 49 products in the mid-2010s to overseas distributors, knowing that those distributors were then selling the goods onward to customers in Iran.

What happened specifically? According to the settlement order from OFAC, NewTek first engaged with a French distributor in 2013 and 2014. Pursuant to that contract, NewTek authorized distribution and support of NewTek’s products in the “Middle East” region. NewTek was specifically informed that the region included Iran, and knew the  French distributor worked with a reseller in Iran. Communications between NewTek and the distributor even included sales forecasts for Iran, and NewTek extended credits to its distributor for use with the Iranian reseller.

By the end of 2014, NewTek moved its Middle East business to another distributor, this one based in Dubai. The Iranian reseller shifted over to the Dubai distributor as part of the deal, and the agreement included a list of countries that counted as the Middle East sales territory — a list that explicitly included Iran. And NewTek’s chief operating officer negotiated the deal, so you can’t really argue that senior management didn’t know what was going on. 

Over the ensuing years, NewTek sold $583,000 worth of goods into Iran (including three sales to the Islamic Republic of Iran Broadcasting), making a profit of $61,000. 

Throughout the entire period (December 2013 to May 2018), NewTek had no export control or sanctions compliance program: no policies and procedures, no training, no nothing. NewTek apparently believed that by selling its products only to third-country distributors, it wouldn’t be liable for follow-on sales from those distributors into Iran.

Nope, that’s not how it works.

Enter the Compliance Calculations

According to statute, the maximum civil penalty NewTek would face for violations like this is $15 million. But because NewTek voluntarily self-disclosed the violations and because the violations themselves weren’t egregious, OFAC guidelines specify that the penalties should only be 50 percent of the transaction value — which in this case, would be $291,512. (That is, half of the $583,000 in sales to Iran.)

So how did we get from that $291,512 number down to the $189,500 that NewTek will actually pay? As usual, OFAC listed a few aggravating factors and a few mitigating ones. 

The aggravating factors:

• NewTek demonstrated reckless disregard for U.S. sanctions when it struck those distribution agreements, knowing that sanctions generally barred dealing with Iran and relying on a mistaken understanding that indirect dealings through distributors was OK.
• NewTek possessed actual knowledge of the problematic conduct. Managers and even members of the company’s four-member executive board knew about sales to Iranian end-users. 

And the mitigating factors:

• NewTek’s sales into Iran were only a small part of the company’s total revenue, and NewTek itself is a “relatively small” company. (Only about 50 employees and annual sales of $27.5 million, according to Dun & Bradstreet.)
• NewTek had no previous trouble with OFAC in the five preceding years.
• NewTek voluntarily self-reported the violations and cooperated with OFAC in the subsequent investigation.

NewTek also implemented numerous compliance program reforms. For starters, the company actually drafted export control policies and procedures, hired a director of compliance, and rolled out compliance training to sales, marketing, shipping, and service employees. 

The company also implemented bulk name screening of its registered customers and distributors against the Specially Designated Nationals list; and implemented geo-IP blocking measures to prevent people in Cuba, Iran, North Korea, Syria, and the Crimea from downloading or registering NewTek products.

Getting With the OFAC Program

Overall, this is yet another reminder from OFAC that sanctions compliance is serious business, and even smaller businesses that might not have fulsome compliance programs need to take the risk seriously.

Earlier this year, for example, OFAC dinged an Ohio maker of switches $216,000 for ignoring numerous red flags that distributors were selling its products into Iran; and fined a George bitcoin payments processor $507,000 for failing to implement geo-IP blocking against customers in Cuba, Iran, and elsewhere. 

In both of those cases, the companies at least had rudimentary sanctions compliance programs in place, even if their programs didn’t work well. In this case, NewTek didn’t seem to have any compliance program in place at all. 

OFAC also specifically warned against a company trusting its own hunches about sanctions compliance. To wit:

This enforcement action serves as a reminder that sales to third country distributors with knowledge or reason to know that such goods are intended specifically for Iran can give rise to apparent violations of the ITSR. Moreover, reliance on the understanding of an individual in a managerial or supervisory role, or reliance on informal sanctions compliance measures, may not be sufficient to mitigate sanctions compliance risks.

In other words, take sanctions compliance seriously. Build a formal program, with someone specifically assigned to be responsible for knowing the law. Anything less is playing with fire.