“Be Attuned” To Office of Foreign Assets Control (“OFAC”) Sanctions

Written by: John E. Parkerson, Jr., Esq.

An April 19, 2021 U.S. Government settlement proved costly for a domestic U.S. company that was “not attuned” to U.S. laws that restrict doing business with entities in certain countries – for example, Iran — that the U.S. has identified as national security threats or human rights violators.

Alliance Steel, Inc. (“Alliance”), a designer and manufacturer of prefabricated steel structures based in Oklahoma City, Oklahoma, agreed to pay $435,003 (of a maximum applicable civil monetary penalty of $17,335,192) to settle its potential civil liability for 61 apparent violations of OFAC regulations related to its importation of engineering services from an Iranian engineering company. Alliance maintained an ongoing business relationship with the Iranian company over a period of approximately five years. This relatively low (for an OFAC settlement) amount reflects OFAC’s determination that Alliance’s conduct was non-egregious and voluntarily self-disclosed, and further reflects Alliance’s remedial response and cooperation with OFAC throughout the investigation.  Several facts about Alliance’s business conduct are worth noting:

• Alliance described itself as principally a domestic business—Alliance sells its products exclusively to domestic consumers, does not export goods or services, and does not market itself outside the U.S.
• During the time period in which the apparent violations occurred, Alliance conducted the majority of its engineering work internally. When demand for engineering services exceeded Alliance’s available resources, however, it outsourced the remaining work to third-party subcontractors. Now I am paying attention!
• The company’s Chief Engineer and Vice President of Engineering oversaw this process, and his brother owned an Iranian engineering company. Beginning to sense an issue?
• At the Chief Engineer’s direction, Alliance outsourced a significant portion of its engineering work to that Iranian company to the tune of $1,450,008. Paying closer attention?
• Moreover, at least 12 other members of Alliance senior management had actual knowledge that these transactions with the Iranian company were taking place, and Alliance even issued checks to the Iranian company as payment for each transaction pursuant to review of a two-page invoice containing the company’s permanent address in Tehran. Red flags yet?
• Alliance asserted that, because the company otherwise operates entirely within the U.S., its management officials were “not attuned to the laws and regulations administered by OFAC.” Sound like an effective defense?
• The illegal transactions ceased once Alliance hired a new CEO and he learned of them.

OFAC determined the following to be aggravating factors:

• Alliance failed to exercise a minimal degree of caution or care by failing to conduct basic due diligence regarding transactions with an Iranian company.
• Senior management had actual knowledge that Alliance was outsourcing work to an Iranian company.
• Alliance harmed the objectives of the Iran sanctions program by maintaining an ongoing business relationship with an Iranian company for over at least five years that conferred more than $1 million in benefits to Iran.

OFAC found mitigating factors that contributed to the settlement, including:

• Alliance voluntarily self-disclosed the violations to OFAC and cooperated with OFAC’s investigation by providing detailed information in a well-organized and timely manner.
• Alliance took remedial measures, including:
  • It terminated ongoing work with the Iranian engineering company and ceased all payments to the company;
  • It terminated the employee who initiated and oversaw these transactions; and
  • It developed and implemented an export compliance policy requiring, among other things, that management provide training for staff and that international contracting opportunities be approved by the company’s president.

Lessons learned:  U.S. companies must develop and maintain effective, risk-based sanctions compliance controls, even if they operate predominantly within the U.S.  They risk violating OFAC regulations if these companies undertake even isolated international business or contracting activities, and do not conduct basic regulatory diligence or have adequate personnel or policies to comply with U.S. sanctions requirements. Importantly, the case demonstrates the need for companies to train and enable staff – including senior management – to identify and address potential violations of U.S. sanctions.

Click here for a copy of OFAC’s Enforcement Release in the Alliance case.

Hall Booth Smith’s International Business group assists client companies in developing sanctions compliance and training programs that lower these risks.