So, what happens if a economic sanctions list violation happens?
Well, in OFAC’s case, it’s pretty clear: they investigate and evaluate (based on the General Factors in their Enforcement Guidelines, and then take one of a number of actions:
- No Action – really! If there is insufficient evidence that a violation has occurred, or if OFAC believes it’s not serious enough to warrant further action (and doesn’t point to deficiencies in one’s sanctions screening program), OFAC will turn the other cheek
- Cautionary Letter – if there is insufficient evidence that there was a violation, but OFAC thinks that deficiencies in the screening program could lead to a violation or that the firm is exercising proper due diligence, OFAC will issue a Cautionary letter to point out its concerns
- Finding of Violation – if it’s clear that a violation has occurred, but OFAC does not feel a penalty is warranted, a Finding of Violation may be issued. In the Finding, OFAC will document the violation and any concerns it has about the firm’s compliance program. In addition, OFAC may point out specific deficiencies it believes should be corrected in the compliance program.
- Civil Penalty – hopefully, self-explanatory
- Criminal Referral – also self-explanatory
In addition, depending on the circumstances, OFAC may also deny, suspend, revoke or amend outstanding specific licenses and/or issue a Cease and Desist order.
There is even some variability in the Civil Penalty arena. It all depends on two factors: were the violations reported by you to OFAC (“voluntary self-disclosure”), and were the violations “egregious”? Egregiousness is not a term actually defined anywhere, but the Enforcement Guidelines state that it is determined by an evaluation of the General Factors, with more weight given to Factors A (“WIllful or Reckless Violation”), B (“Awareness of Conduct at issue”), C (“Harm to Sanctions Program Objectives”) and D (“Individual Characteristics”), with Factors A and B given the most weight.
So, if violations are egregious, the penalties are big. A self-disclosed non-egregious violation tops out at 1/2 of its non self-reported sibling, which is the statutory maximum. That maximum varies a tad, but a good yardstick is that, for violations of TWEA (Trading with the Enemy Act, for the Cuban program) and IEEPA (International Emergency Economic Powers Act, for all the rest except for drug trafficking), the maximum penalty is $250,000 or twice the transaction amount, whichever is higher. For violations of the Kingpin Act (actually, the Foreign Narcotics Trafficking Kingpin Designation Act), the maximum penalty is $1,075,000, a strange amount, to be sure.
If the violations are not egregious, the penalties are much lower. If the violations are self-disclosed, the base penalty is one-half the transaction value, with a cap of $32,500 for TWEA violations and $125,000 for all others (half of the statutory maximum). If they are not, the following schedule applies:
- For amounts under $1000: $1000
- For amounts under $10,000: $10,000
- For amounts under $25,000: $25,000
- For amounts under $50,000: $50,000
- For amounts under $100,000: $100,000
- For amounts under $170,000: $170,000
- For amounts $170,000 and more: $250,000
However, if the amount exceeds $65,000 and is a violation of TWEA, the penalty is capped at $65,000.
Now, that is all about the base penalty. That amount is then adjusted for a number of factors. My favorite is the “first-timer discount” – 25% comes right off the top if you’ve never been penalized by OFAC, or received a Finding of Violation, in the previous 5 years.
Additionally, if the firm did not voluntarily self-disclose, but it substantially cooperated with OFAC during the investigation, the penalty is generally reduced by 25 and 40%.
Beyond that, it’s all a matter of the General Factors, including cooperation with regulators and remediation of the program.
Hopefully, your firm will never have to know about this. This is one of those things it’s definitely not better to receive…