Another Interesting Sanctions Case

Another week, another interesting sanctions enforcement action from the Office of Foreign Assets Control. This time we have a Hong Kong trading company fined $5.2 million for facilitating trade with a chemicals business in Iran — but also catching a break because the company had warned its employees repeatedly to steer clear of Iranian customers.

The company is Sojitz Ltd., a local subsidiary of the Sojitz Corp. conglomerate based in Japan. According to a settlement announced by OFAC on Tuesday, several Sojitz employees disobeyed the company’s sanctions compliance policies and training, to broker a purchase of 64,000 tons of polyethylene resin originally manufactured in Iran. A Thailand supplier possessed the resin, and over the course of several dozen transactions in the mid-2010s, Sojitz paid that supplier $75.6 million to forward the materials onward to an end customer in China.

By executing the transactions in U.S. dollars, Sojitz relied on U.S. financial institutions to process transactions involving goods of Iranian origin. There’s your sanctions violation.

What’s interesting in this case are the actions of the errant employees and the company’s pre-existing compliance efforts. Even though the company failed to prevent the transactions, this case is a clear example of regulators recognizing a good-faith corporate compliance effort when they see one. 

For example, immediately prior to the resin transactions, the offending employees “were explicitly and repeatedly advised” that they couldn’t make U.S. dollar payments in connection with Iran-related business transactions. So to circumvent company policy, the employees left the Iranian country of origin information from relevant transaction documents. They also asked the Thai supplier to omit references to Iran in the bill of lading, and even told senior Sojitz managers and compliance executives that the Thai supplier had manufactured the resin itself.

Since the Sojitz managers didn’t know about the Iran connections, they left that information off the wire transfer instructions for the $75 million in payments. 

Evaluating Compliance and Penalty Factors

The statutory maximum civil penalty for misconduct like this is $151.5 million. Because Sojitz voluntarily self-disclosed the misconduct and OFAC deemed the offense not egregious, right away that knocked down the possible penalty to $8.7 million. (Although the OFAC statement does not say how Sojitz came to discover the offending employees’ misconduct in the first place.) 

And how did we get from there to the final $5.2 million amount? Let’s walk through the factors.

The aggravating factors making things worse:

• Sojitz’s offending employees hid the Iranian country of origin information for two years, despite having been told explicitly and repeatedly by the company’s compliance personnel that such conduct violated U.S. sanctions and company policy. 
• The offending employees, one of whom held a mid-level managerial position in the company, had direct, actual knowledge about the Iranian connections; 
• The resin transactions delivered “significant economic benefits” to Iran, and specifically to the petrochemical sector, a major source of revenue for the Iranian government.
• Sojitz is “a sophisticated offshore trading and cross-border trade financing company” with ready access to expertise in international trade, investment, financing, and sanctions compliance — and still, this happened. 

The mitigating factors making things better:

• Sojitz’s Hong Kong compliance personnel, as well as the trade compliance team based at the Sojitz headquarters in Japan, “explicitly and repeatedly” told employees — including the offenders — not to make U.S.-denominated transactions in connection with Iran.
• Senior Sojitz managers and compliance personnel had no knowledge that these Iran deals were happening.
• Sojitz voluntarily self-disclosed the misconduct once it was discovered, and the company had no prior OFAC sanctions trouble in the previous five years.
• Sojitz cooperated (“providing detailed information in a well-organized manner”) in the ensuing OFAC investigation.

OFAC also gave Sojitz a shout-out for its “significant remedial measures” after this incident came to light. Those actions included firing the offending employees; revising the company’s sanctions screening procedures so that all counterparties are subject to screening; and hiring additional compliance personnel with sanctions expertise. (OFAC also said Sojitz enhanced the independence and capability of its sanctions compliance team “by housing the unit inside the legal department,” which I’m sure will send some compliance professionals into apoplexy.) 

This is the second OFAC enforcement action in two weeks. In both instances, OFAC said the company in question should have had a more sophisticated approach to sanctions compliance, given the company’s size and resources. Last week’s company was AirBnB, and as I said then: this case is a reminder that a company needs to invest in compliance and automation to keep pace with business growth. 

Then again, you can’t ignore those OFAC statements about the offending employees ignoring their compliance training and evading compliance policies. The OFAC statement is clearly meant to convey a message: if the company tries to take sanctions compliance seriously — and, presumably, can document that effort — it won’t get taken to the woodshed. 

That’s another message worth taking to your board.