10 Defense Strategies for Apparent OFAC Sanctions Violations
The Office of Foreign Assets Control (OFAC) closed 10 enforcement actions during the first eight months of 2023. These enforcement actions resulted in a total of $557 million in civil monetary penalties (CMP), with individual penalties ranging from less than $75,000 to more than $500 million.
These penalties were triggered by violations of OFAC’s sanctions programs; and, while OFAC takes financial institutions’ and businesses’ financial resources into account (among many other factors), its ultimate priority is deterrence. OFAC shares responsibility for protecting national security and advancing the United States’ foreign policy objectives, and its enforcement actions are intended, in large part, to promote compliance and dissuade sanctions violations in the future.
With that said, as OFAC’s recent enforcement actions demonstrate, sanctions violations present substantial liability risks. They can also present risks for criminal prosecution in some cases. As a result, entities charged with apparent sanctions violations need to do what they can to protect themselves—and this starts with formulating a strategic defense.
“Violations of OFAC’s sanctions programs can create substantial exposure for financial institutions, businesses, executives, and directors. When faced with apparent violations, avoiding unnecessary consequences starts with making an accurate assessment of the circumstances at hand and determining what options are available.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
What does it take to successfully defend against an OFAC enforcement action in 2023? Here are 10 key strategic considerations for OFAC sanctions violation defense:
1. Assess the Financial Institution’s or Company’s Compliance Program
When facing scrutiny from OFAC, a critical first step is to assess the financial institution’s or company’s compliance program. OFAC is going to do this as well, so knowing what OFAC is going to find—and planning accordingly—is crucial for formulating a strategic defense.
There is no magic formula for developing an effective OFAC sanctions compliance program. Instead, financial institutions and companies must work with their counsel to leverage OFAC’s compliance resources and develop a custom-tailored program that addresses their specific risks, opportunities, and needs. If an entity’s compliance program is adequate, being prepared to demonstrate this can be a highly effective defense strategy. If it isn’t, knowing this and addressing it head-on will be critical for mitigating the risks at hand.
2. Determine Whether Any Sanctions Violations Occurred
Along with assessing the efficacy of their OFAC sanctions compliance programs, financial institutions and companies targeted by OFAC should also proactively determine whether any sanctions violations have occurred. If OFAC’s inquiry is misguided, then demonstrating this may allow for a swift resolution. Conversely, if there are apparent sanctions violations that need to be addressed, then addressing them proactively—and understanding their potential implications from OFAC’s perspective—will be one of the keys to avoiding unnecessary consequences.
3. Determine the Scope and Cause of the Apparent Violations
If a targeted entity has apparent violations to address, then a key next step will involve determining the scope and cause of the apparent violations. This is critical for two primary reasons.
First, OFAC imposes civil monetary penalties (CMP) on a per-violation basis. If an entity has committed multiple sanctions violations (including repeated violations of the same sanction), this can increase the entity’s exposure exponentially. Second, the cause of an entity’s violation (or violations) is a key factor in determining the applicable CMP as well. As discussed in greater detail below, willfulness and inadvertence are aggravating and mitigating factors, respectively, and even reckless disregard for an entity’s sanctions compliance obligations can significantly increase the risks of facing OFAC scrutiny.
4. Assess the Need (and Opportunity) for Voluntary Self-Disclosure
When faced with an OFAC sanctions violation, voluntary self-disclosure provides an opportunity to mitigate the consequences while also establishing a positive working relationship with OFAC going forward. Voluntary self-disclosure (or the lack thereof) is a key factor in OFAC’s decision-making during the enforcement process, and failure to self-disclose a sanctions violation can up the stakes significantly.
Failure to timely self-disclose a sanctions violation can have similar consequences. As outlined in OFAC’s Economic Sanctions Enforcement Guidelines (the “Guidelines”), an entity’s disclosure of a sanctions violation must meet five criteria in order to qualify as “voluntary”:
- It must be self-initiated;
- It must not follow a third party’s disclosure of the same (or a substantially similar) apparent violation;
- It must be complete;
- It must not contain any false or misleading information; and,
- It must be made by an individual who has authorization from the entity’s senior management.
While voluntarily self-disclosing an apparent violation can be a key defense strategy, voluntarily providing information to OFAC too late can have the opposite of its intended effect. As a result, entities contemplating self-disclosure must take action promptly, and they must work with their counsel to ensure that the benefits of voluntary self-disclosure remain available.
5. Evaluate OFAC’s General Factors for “Egregious” and “Non-Egregious” Violations
Along with voluntary self-disclosure, OFAC also considers the General Factors outlined in the Guidelines in order to characterize apparent violations as either “egregious” or “non-egregious.” Egregious violations carry higher base penalties, and they also involve more serious allegations that are often more difficult to defend against. While OFAC makes the ultimate decision regarding the egregiousness of an apparent violation, targeted entities can play a role in the decision-making process, and this begins with conducting a realistic assessment of the relevance of the General Factors. Some examples of these factors include:
- Willfulness or Recklessness – “Generally, to the extent the conduct at issue is the result of willful conduct or a deliberate intent to violate, attempt to violate, conspire to violate, or cause a violation of the law, the OFAC enforcement response will be stronger.”
- Awareness of Conduct at Issue – “Generally, the greater a Subject Person’s actual knowledge of, or reason to know about, the conduct constituting an apparent violation, the stronger the OFAC enforcement response will be.”
- Harm to Sanctions Program Objectives – “[T]he actual or potential harm to sanctions program objectives caused by the conduct giving rise to the apparent violation” also affects OFAC’s determination of egregiousness.
- Individual Characteristics – Individual characteristics including commercial sophistication, size of operations, financial condition, volume of transactions, and sanctions history are also relevant to OFAC’s determination.
- Compliance Program – “[T]he existence, nature and adequacy of a Subject Person’s risk-based OFAC compliance program at the time of the apparent violation, where relevant,” is a key factor in determining whether an apparent violation will be characterized as egregious.
Other examples include the entity’s remedial response (if any), cooperation with OFAC, and the timing of the apparent violation in relation to the imposition of the relevant sanctions. Within each of these categories, OFAC considers various specific facts and circumstances. For example, with respect to willfulness or recklessness, the Guidelines indicate that evidence of concealment, a pattern of conduct, prior notice, and management’s involvement are all pertinent to OFAC’s determination.
6. Evaluate All Applicable Aggravating and Mitigating Factors
In addition to considering the Guidelines’ General Factors when characterizing an apparent violation as egregious or non-egregious, OFAC also considers various aggravating and mitigating factors when determining what penalties to impose. As outlined in OFAC’s recent enforcement actions, some examples of these factors include:
- Whether the apparent violations were repeated or “isolated and atypical”
- Whether the apparent violations harmed foreign policy objectives
- The nature of the transaction(s) and the product(s) involved
- The volume of violations in comparison to the entity’s overall transaction volume
- Whether the entity took remedial action and/or cooperated with OFAC
7. Take Remedial Action as Necessary
When faced with an apparent OFAC sanctions violation, remedial action serves not only as an effective defense strategy, but also a crucial means of avoiding similar violations in the future. OFAC expects entities that have committed apparent sanctions violations to take appropriate remedial action, and doing so (when necessary) can help set the stage for a favorable resolution.
8. Assess Any National Security or Foreign Policy Implications of the Apparent Violations
In its Enforcement Releases, along with discussing applicable aggravating and mitigating factors, OFAC also discusses any broader national security or foreign policy implications associated with the apparent violations at issue. These can play a significant role in the enforcement process in some cases. Assessing these considerations and addressing them proactively can be crucial for achieving a favorable resolution with OFAC as well.
9. Deal with OFAC Proactively—Cooperating and Negotiating as Warranted
Cooperating with OFAC can also be helpful in appropriate circumstances. Cooperation is one of the General Factors listed in the Guidelines, and working cooperatively with OFAC can help to minimize the consequences of willful, reckless, and inadvertent violations. With that said, cooperating won’t always be in targeted entities’ best interests. When warranted, negotiating the base penalty amount can substantially reduce targeted entities’ liability as well.
10. Examine Potential Risks Outside of OFAC Enforcement Action
Finally, along with addressing the risks inherent in OFAC’s enforcement action, targeted financial institutions and companies must examine potential risks outside of OFAC’s enforcement action as well. For example, allegations of willful violations can lead to criminal charges in some cases, and criminal prosecution under the Bank Secrecy Act (BSA) and other pertinent statutes can present risks for both fines and prison time.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.