OFAC slapped a $2 million penalty on ExxonMobil on Thursday for alleged violations of U.S. sanctions on Russia. Specifically the allegations were that during a narrow, 9-day window in May 2014, the U.S.-based oil giant entered into several contracts with Russian energy company Rosneft OAO where the signatory was Igor Sechin, who was named by OFAC as a Specially Designated National (SDN). (It’s worthy to note that ExxonMobil then turned around and brought suit, alleging some similar arguments to those my law firm Akrivis Law Group successfully made on behalf of Epsilon Electronics in California in its landmark case challenging a $4 million penalty by OFAC.) Beyond the constitutional arguments, this case highlights the taint of the SDN in transactions.
SDNs, as you probably know, are non-U.S. entities (companies, organizations, or natural persons) who have been designated by OFAC for varying reasons. The list, which is effectively a “black list” for U.S. persons, numbers well into the hundreds of pages (it is almost reminiscent of the old white pages the phone company issued every year). While many are in sanctioned countries like Iran, Cuba, and Syria, many are in countries with which the United States maintains very robust trade and diplomatic ties. U.S. persons are generally barred from dealing with such entities and these entities’ assets that come into possession of U.S. persons must generally be blocked. Since there are many ways to get on to the SDN list (in large part through Executive Orders), not all designations are treated equally. In fact, there are sometimes carveouts for some SDNs.
Despite these nuances ion the list, many parties around the world, specifically banks, often adopt a “de-risking” approach towards SDNs – meaning they will generally not comb through the laws and enable or execute those transactions that may be exempted under law (even if they are specifically licensed by OFAC to do so) – rather, they prefer to simply not deal with such entities, even if a transaction does not include a single U.S. element. Long story short, it can be a fast downward spiral for any company, organization, or individual on a truly global scale. Getting off the list can be very challenging and time consuming.
So what happened here? Even though Rosneft was not itself on the SDN list, OFAC’s position was that ExxonMobil effectively imported the services of a designated entity, specifically Mr. Sechin. The dealing with Rosneft itself was not necessarily an issue per se, but having an SDN sign the contracts on behalf of Rosneft was. In other words, Sechin’s signature on the contract and other work he did in furtherance of constituted a prohibited dealing for ExxonMobil.
ExxonMobil tried to argue that White House statements at the time indicated that these types of transactions were not problematic (although OFAC published a somewhat responsive Frequently Asked Question or “FAQ” on the same issue vis-à-vis the Burmese sanctions). White House or government agency statements can be very useful in determining a compliance approach or strategy, but ultimately the actual law is what’s written in the books.
Beyond the issue of policy versus law, again, the most important point here arguably is that the presence of an SDN can taint an entire transaction. OFAC licenses for certain activities with sanctioned countries often state that certain entities remain off limits. Therefore even if an activity is specifically licensed by OFAC or subject to a general license, one must be very careful to avoid SDNs in any aspect of the transaction (unless there is an applicable carveout or the specific license clearly states that you are allowed to deal with a given SDN for a particular purpose). The presence of an SDN may not necessarily invalidate all activities surrounding a given transaction. However, it can not only constitute a violation of applicable OFAC regulations, but also lead to money or other assets being blocked.
The lesson here is particularly important in countries like Russia where many designated entities are persons or companies of extremely elevated importance in those countries’ economies. The SDN “taint” typically trickles down to any entity they own or control (think subsidiaries), which is why you should always do your due diligence and care to make sure all aspects of your transaction, not just the one that’s the focus of your attention, is compliant with applicable OFAC regulations.