Defending Against Apparent OFAC Sanctions Violations: Key Strategies
Financial institutions and businesses in a broad range of industries are subject to Office of Foreign Assets Control (OFAC) sanctions compliance. Violations of OFAC sanctions can trigger substantial civil monetary penalties (CMP), and they can even expose entities (and their owners, executives, and personnel) to criminal prosecution in some cases. As a result, those targeted for apparent sanctions violations need to prioritize their defense, and they need to take a strategic approach to mitigating their risk to the greatest extent possible.
What does it take to successfully defend against an OFAC enforcement action involving apparent sanctions violations in 2023? The answer to this question depends on the circumstances involved. OFAC enforcement actions are highly fact-specific, and targeted entities must focus on the relevant facts (both positive and negative) in order to develop effective defense strategies.
“Several financial institutions and companies have faced substantial civil monetary penalties for OFAC sanctions violations in 2023. For entities targeted in OFAC enforcement actions, formulating and executing a strategic defense is essential for avoiding unnecessary civil – and potentially criminal – liability.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
With that said, there are some overarching strategic considerations involved with defending against apparent OFAC sanctions violations. Even when substantial CMP and the prospect of criminal prosecution are both on the table, it will often be possible to achieve a favorable resolution with a strategic defense. Here are some of the key factors for defending against apparent OFAC sanctions violations in 2023:
1. Evaluating the Circumstances and Assessing the Risks at Hand
When facing an OFAC investigation or enforcement action, it is essential to promptly evaluate the circumstances and assess the risks at hand. Informed decision-making is crucial, and making informed decisions starts with gaining a clear understanding of the relevant facts and law. With this in mind, some of the first strategic steps to take when facing scrutiny from OFAC will generally include:
Determining Whether Any Apparent Violations Occurred
One of the first steps to take when facing an OFAC investigation or enforcement action is to determine whether any apparent violations have occurred. OFAC has implemented multiple sanctions programs, and financial institutions and businesses are expected to comply with these programs when conducting (or deciding whether to conduct) business with specially designated nationals (SDNs) and certain other foreign parties.
Determining whether any apparent violations have occurred requires knowledge of all applicable sanctions programs. Depending on the circumstances, it may require analysis of an applicable specific license or general license—and various other considerations—as well. Due to the complexity of OFAC’s sanctions programs and the risks of failing to uncover a sanctions violation (or acknowledging liability when no violation has occurred), it is essential to undertake this step with the guidance and oversight of outside counsel.
Determining Why the Apparent Violation(s) Occurred
If this investigation uncovers any apparent OFAC sanctions violations, the next step is to determine why the apparent violation(s) occurred. This is important not only for preventing similar violations in the future, but also for assessing the risks of facing OFAC enforcement. OFAC treats willful, reckless, and inadvertent violations differently; and, if a targeted entity can show that the violation occurred despite its reasonable efforts to maintain compliance, this can play a significant role in the enforcement process as well.
Assessing the Scope of the Problem
Along with determining the cause of the apparent violation(s), it is also important to assess the scope of the problem. This, too, serves multiple purposes. Not only does it allow for an effective remedial response, but it also plays a key role in determining the aggregate CMP that are on the table—as the penalties for OFAC sanctions violations apply on a per-transaction basis.
2. Deciding How to Interact with OFAC
After conducting this assessment, targeted entities can then decide how to interact with OFAC. There are multiple ways to approach an OFAC investigation or enforcement action—and different strategies will make sense in different circumstances. To determine how best to proceed, targeted entities should work with their counsel to take steps including:
Evaluating the Need (and Opportunity) for Voluntary Self-Disclosure
OFAC expects financial institutions and companies to voluntarily self-disclose known sanctions violations. Voluntary self-disclosure is one of the key factors OFAC considers when determining what CMP to impose—as made clear in its Economic Sanctions Enforcement Guidelines (the “Guidelines”).
To count as “voluntary” a self-disclosure must be self-initiated, and it must be made before a similar disclosure is made by a third party. To secure the benefits of voluntary self-disclosure, the Guidelines also require that self-disclosures be complete, non-misleading, and followed “within a reasonable period of time” by a detailed report and appropriate responses to all OFAC inquiries.
Evaluating the Benefits of Cooperating with OFAC
OFAC encourages entities to cooperate during its investigations into apparent sanctions violations. Along with voluntary self-disclosure, cooperation is one of the key factors OFAC considers when determining the “egregiousness” of a violation and the applicable base penalty amount.
While it will often make sense to cooperate during OFAC inquiries, targeted entities must make informed decisions based on the advice of counsel. They must also determine to what extent they will voluntarily share information with OFAC. While cooperating can be helpful in the right circumstances, it can also be risky, and inadvertent or unintentional disclosures of harmful information can increase the risk of civil or criminal penalties.
Determining Whether Settlement Negotiations Are Warranted
When it is not possible to avoid liability entirely, negotiating with OFAC may be the best approach. OFAC has shown a willingness to enter into settlement agreements when warranted, and these agreements have substantially reduced targeted entities’ liability in many cases. For example, in May of 2023, OFAC settled a case involving a base penalty amount of $19.6 billion for just $7.6 million after entering into settlement negotiations with the targeted entity.
3. Identifying and Targeting a Favorable Resolution
Finally, after deciding how to interact with OFAC (including determining whether settlement negotiations are warranted), executing the entity’s chosen strategy will involve working proactively to achieve a specific desired outcome. This, too, is a multi-step process that will generally involve measures including (but not limited to):
Assessing the “Egregiousness” of the Apparent Violation(s)
After conducting its investigation, OFAC will determine whether an apparent violation should be classified as “egregious” or “non-egregious.” Egregious violations carry higher base penalty amounts, and negotiating favorable settlements in these cases can present additional challenges. When deciding whether to classify a violation as egregious or non-egregious, OFAC considers the General Factors outlined in the Guidelines. The General Factors are:
- Evidence of a willful or reckless violation of the law (including any evidence of concealment or a pattern of conduct);
- Awareness of the conduct at issue (including actual awareness of the issue or facts such that the targeted entity had reason to know of the conduct involved);
- Any harm to OFAC’s sanctions program objectives (including economic benefits to sanctioned entities or negative implications for U.S. foreign policy objectives);
- The targeted entity’s individual characteristics (including commercial sophistication, size of operations, financial conduction, volume of transactions, and sanctions history);
- Whether the targeted entity had an effective OFAC sanctions compliance program in place at the time of the apparent violation;
- The targeted entity’s remedial response (if any), including the steps taken immediately upon learning of the conduct or transaction at issue;
- The nature and extent of the targeted entity’s cooperation with OFAC during its investigation (including, but not limited to, follow-up to voluntary self-disclosure);
- The timing of the apparent violation in relation to the imposition of the applicable OFAC sanctions;
- Whether the targeted entity is facing (or has faced) enforcement action from other federal agencies for the same or similar conduct; and,
- The future compliance and deterrent effect of enforcement as well as any other factors that OFAC “deems relevant on a case-by-case basis.
Applying OFAC’s Aggravating and Mitigating Circumstances
Along with these General Factors, OFAC also considers various aggravating and mitigating circumstances when determining the appropriate penalties for apparent sanctions violations. Addressing these circumstances proactively—highlighting applicable mitigating factors while addressing applicable aggravating factors—can be key to an effective defense as well. Some examples of relevant circumstances that OFAC has considered in recent enforcement actions include:
- Whether the apparent violations reflect a systemic failure or an “isolated and atypical” event;
- The nature of the transaction(s) and product(s) involved (with products of a “benign consumer nature” constituting a mitigating factor);
- The volume of the violations involved in relation to the overall volume of the targeted entity’s business;
- A lack of enforcement history with OFAC and good-faith efforts to remediate the issue while complying during OFAC’s investigation; and,
- The extent of the harm (if any) to U.S. national security interests or foreign policy objectives.
Taking Appropriate Remedial Action
As we’ve touched on above, remedial action (if any) is a key consideration in OFAC enforcement matters as well. If a targeted financial institution or company takes appropriate remedial action on its own initiative, this can help to facilitate a favorable resolution. It can help prevent future sanctions violations as well—and showing OFAC that an entity is in a better position to avoid violations than it was previously can also be a key component of an overall OFAC sanctions violation defense strategy.
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.