The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today announced it was imposing a $4.1 million penalty against Nebraska-based Berkshire Hathaway Inc. for illicit transactions by its Turkish subsidiary Iscar Kesici Takim Ticareti ve Imalati Limited Sirket (“Iscar Turkey”) with Iran. While announcements of OFAC penalties for sanctions violations are not rare, this one has a few notable points.
At first glance, the fact pattern is not terribly uncommon. A Middle Eastern subsidiary of a U.S. company engaged in illicit trade with Iran. Oftentimes this comes from misunderstanding by local managers and employees. This time, the knowledge was there, as were clear warnings coming from the home base not to violate sanctions. According to the OFAC Settlement Agreement, Iscar Turkey is in the business of manufacturing machinery, specifically cutting tools and inserts. Its local manager thought EU and US sanctions on Iran would ultimately be lifted, and to prepare for this, began low level trade with Iran using Euro payments and falsified invoices from Turkish companies (to hide that the shipments were going to Iran). This was coupled with other actions, including travel to Iran. In all, 144 transactions were consummated with Iran, with the transaction value totaling $383,443.
So what are the takeaways? Here are just a few.
Transaction Value versus Penalty Amount. $383,443 is roughly 9% of the final penalty amount settled with OFAC – $4,144,651. But it would be foolish to look at the penalty alone. Think of the legal fees and the cost of the internal review just to start – a lot of work likely went into this response and reaching this settlement. That is not cheap and beyond financial cost, probably resulted in many lost hours at the company directed towards the internal review and back and forth with counsel and compliance experts. Notably, this case arose from a Voluntary Self-Disclosure (VSD), which means the maximum penalty amount was already reduced by 50% (OFAC encourages such disclosures by offering up a 50% discount, with other factors potentially also helping bring down the penalty amount). In other words, penalties could have been much higher had OFAC learned about this on its own without the VSD. OFAC itself mentions the base civil penalty amount was $18,420,672 – meaning Berkshire’s pro-active response and the existing facts caused a 77%+ reduction in potential penalties.
Hefty Settlement Covenants. Remedial steps are critical in mitigating penalties in an apparent violation. The steps Berkshire agreed to here are fairly rigorous. There are specific mentions in the Settlement Agreement of management commitment, imposing strict internal controls, better training, risk assessment, and testing and auditing. These are all fairly standard steps a company in such a position should take, but the granularity of the covenants in the Settlement Agreements highlights their importance.
Berkshire had taken some precautions. Oftentimes fines can come from pure recklessness from the top down, but this does not really seem to be the case here. Per the Settlement Agreement “The Apparent Violations occurred under the direction of certain Iscar Turkey senior managers despite Berkshire and IMC’s repeated communications to Iscar Turkey regarding U.S. sanctions against Iran and the application of the ITSR to Iscar Turkey’s operations.”
Like many cases before it, but in some ways more so, the lesson learned here is that the discovery of violations merit serious responses. While Iscar Turkey was the downstream subsidiary of a major, public U.S. corporation, it is still a foreign company. The transactions were not huge in value, and arguably not even a footnote for a company of Berkshire’s scale. Therefore, seeing this, one can imagine what the stakes could be for sanctions violations by U.S. persons in the United States.
Importantly, companies sometimes simply do no take these violations seriously. Maybe it’s due to their personal beliefs (e.g., opposition to sanctions, thinking the sale bears no impact on U.S. policy) or the fact that OFAC is still a civil agency and such cases often do not have a criminal enforcement angle. This can be disastrous for several reasons – it prevents a serious response which can mitigate the penalty as well as reduce the likelihood of future violations, and it also prevents learning a lesson (perhaps unless OFAC responds by coming down with a hefty penalty). While it should go without saying, not committing to serious compliance approaches can be damaging and can lead to violations. Not taking serious approaches can be far worse. Based on what is provided in the Settlement Agreement, Berkshire’s remedial approach appears to have likely been fairly solid.
The lessons learned here are broad and go far beyond Iran sanctions, which were far narrower in scale in 2012-2016 when the violations occurred in this case. They tell us a lot about the agency’s approaches, and perhaps unaffected by who will be sitting in the White House on January 20, 2021. As such, those thinking a potential Biden win could cause sanctions to reverse course should look at examples like this – Obama-era violations, and take note.