Trade Lawyers Say OFAC Sanctions Enforcements Becoming More Frequent, Aggressive

A recent fine on a U.S. company while simultaneously penalizing the manager of the company's foreign subsidiary after both violated sanctions on Iran seems reflective of the increasingly aggressive nature and number of U.S. enforcement actions taken on sanctions violations during the last few months, according to several Washington trade lawyers. The fine was called “unprecedented” in early February by the Department of the Treasury. After distributing just one penalty through the first eight months of 2018, the Office of Foreign Assets Control doled out six penalties during the last four months of 2018, according to the office's records. And two months through 2019, OFAC already has administered four penalties worth more than $7 million, according to the agency, including a $5.5 million penalty against the German subsidiary of an Illinois-based company on Feb. 14.

But lawyers said OFAC's enforcement against the Virginia-based Kollmorgen Corporation, announced Feb. 7, was its most aggressive in months. “It was a shot across the bow to U.S. investors of foreign subsidiaries,” said John Smith, a lawyer at Morrison & Foerster who resigned as OFAC director last year, confirming the move was the first of its kind.

Kollmorgen was fined about $13,000 after OFAC said it controlled a Turkish-based company that was illegally sending machine parts to Iran between 2013 and 2015. The Turkish company, Elsim Elektroteknik Sistemler Sanayi ve Ticaret Anonim Sirketi, was bought by Kollmorgen in 2013. For two years after being acquired by Kollmorgen, Elsim management traded with Iran and threatened to fire employees who wouldn’t travel there, according to an enforcement notice. Elsim also ordered employees to hide their business travels to Iran by listing them as vacation trips in corporate records, the notice said.

Kollmorgen found out about the violations when an Elsim employee contacted Kollmorgen’s ethics department. OFAC said Kollmorgen disclosed the violations to the U.S. government when it found out. Even though OFAC said Kollmorgen did not know Elsim was dealing with Iran, OFAC said it issued the Radford, Virginia-based company the $13,381 fine partly because it acquired Elsim despite its “specific risk profile, including that Elsim had previously engaged in business with Iran.”

OFAC placed Evren Kayakiran, the Turkish manager primarily responsible for the violations, on the U.S. Foreign Sanctions Evaders list, which prohibits any U.S. person or business from trading with him. The move, according to Smith, was far-reaching: It sent a stern warning to U.S.-based companies and represented an escalating step in the Trump administration's aggressive use of sanctions to enforce national security policy.

Trade lawyer Christopher Stagg said he also has noticed a sharp increase in sanctions enforcements during the last few months, which he said have been increasingly deployed by the administration as a “more active use of foreign policy means.”

But Smith said there is one significant change between sanctions being enforced under the Trump administration and those enforced by past administrations: their intensity. “What seems to be different is that everything is maximum sanctions pressure,” Smith said. “You've got a U.S. administration led by a president who likes to talk tough, act tough and be aggressive toward friend and foe alike in pursuit of U.S. national security. Combining the uncertainty and grave conditions that exist in the world with the aggressive administration means you have more aggressive enforcements.”

Stagg said one of the biggest issues his clients face is the wide array of penalties and sanctions being implemented by OFAC, which he said can be unpredictable, specifically for U.S. companies looking to remain in compliance with the latest guidelines. “The day-to-day fluctuations when it comes to embargoed countries, putting persons on the [Specially Designated Nationals List] -- it just creates a lot of uncertainty,” Stagg said. “Many take the conservative approach of ‘let’s stand down.’”

Robert Shapiro, a Washington-based trade lawyer with Thompson Coburn, agreed. “In terms of trade, things have rarely been like this,” Shapiro said. "There are new sanctioned regimes popping up all over the place.”

Greta Lichtenbaum, a trade compliance lawyer with O'Melveny & Myers, said OFAC's recent enforcement notices are "really a lesson-learned exercise," with the agency warning other U.S. companies not to commit similar mistakes. But Lichtenbaum also said there has been a strong focus on enforcing penalties against foreign firms that violate sanctions. Of OFAC's last three civil settlements with sanctions violators, two have involved foreign companies. "They really want to send a very strong message to our trading partners that we are going to go after non-U.S. firms," Lichtenbaum said.

Other trade lawyers are stressing to their clients to be mindful of the increased pressure from OFAC. During a February trade event on U.S. sanctions, Alexandre Lamy, a lawyer at Baker McKenzie, told a room of trade lawyers to heed the clear messages OFAC has been sending. "You’re really seeing that OFAC is setting the bar very high for compliance programs," Lamy said, "especially for sophisticated multinational companies."

Smith, along with several other Washington lawyers, said the trend will likely continue. “I expect that sanctions themselves will increase,” Smith said, “and enforcement of sanctions will increase too.”