OFAC Enforcement Action: Kollmorgen Corporation

Because Kollmorgen’s Turkish affiliate serviced machines operating in Iran on six occasions, they agreed to a $13,381 settlement. At first glance, it appears that Kollmorgen knew its responsibilities:

Kollmorgen acquired control of Elsim in early 2013, thereby making Elsim subject to the ITSR’s prohibitions for any activity or conduct engaged in by Elsim, including conduct or activity occurring outside of the United States. Prior to the acquisition, Kollmorgen hired an external law firm and an external auditing and consulting company to perform sanctions due diligence on Elsim. The due diligence results demonstrated that Elsim made sales to, and had customers in, Iran prior to its acquisition by Kollmorgen. Based on these results, Kollmorgen determined it would need to take steps to prevent such sales from occurring in the future and educate Elsim on the applicability of U.S. sanctions.

Kollmorgen subsequently implemented a wide range of pre- and post-acquisition compliance measures designed to ensure Elsim complied with U.S. sanctions, which included but were not limited to the following:

(i) conducting a comprehensive review of Elsim’s customer database in order to identify any sales or customers located in, or with connections to, countries or regions subject to U.S. economic and trade sanctions;

Kollmorgen acquired control of Elsim in early 2013, thereby making Elsim subject to the ITSR’s prohibitions for any activity or conduct engaged in by Elsim, including conduct or activity occurring outside of the United States. Prior to the acquisition, Kollmorgen hired an external law firm and an external auditing and consulting company to perform sanctions due diligence on Elsim. The due diligence results demonstrated that Elsim made sales to, and had customers in, Iran prior to its acquisition by Kollmorgen. Based on these results, Kollmorgen determined it would need to take steps to prevent such sales from occurring in the future and educate Elsim on the applicability of U.S. sanctions.

Kollmorgen subsequently implemented a wide range of pre- and post-acquisition compliance measures designed to ensure Elsim complied with U.S. sanctions, which included but were not limited to the following:

(i) conducting a comprehensive review of Elsim’s customer database in order to identify any sales or customers located in, or with connections to, countries or regions subject to U.S. economic and trade sanctions;

However, apparently the Turkish affiliate not only ignored their obligations, but management “threatened to fire employees if they refused to travel to Iran”. Management also directed the employees to falsify their trips as vacation. Meanwhile, the affiliate was falsely certifying to Kollmorgen that they were not selling to Iran.

In October 2015, a whistleblower at the Turkish firm notified Kollmorgen of what was going on. The Turkish firm, however, tried to obstruct Kollmorgen’s investigation in a number of ways. Kollmorgen investigated and disclosed to OFAC.

Additionally, these are the remedial actions Kollmorgen then took:

(i) terminating the Elsim managers responsible for, and involved in, the Apparent Violations;

(ii) implementing new procedures to educate Elsim employees on compliance with U.S. economic and trade sanctions;

(iii) requiring Elsim to seek pre-approval from an officer based outside of Turkey for all foreign after-sales service trips; and

(iv) requiring Elsim to inform its major Turkish customers that Elsim cannot provide goods or services to Iran.

However, OFAC decided to penalize the parent company, despite its oversight and prompt remediation and its being misled by the Turkish affiliate:

Notwithstanding Kollmorgen’s extensive compliance efforts, OFAC determined a penalty was the appropriate administrative response to the Apparent Violations due to Elsim’s egregious conduct and specific risk profile, including that Elsim had previously engaged in business with Iran. Additionally, as described in detail below, the conduct of Elsim management and their subsequent attempts to impede Kollmorgen’s internal investigation warranted further action by OFAC.

The non-egregious, voluntarily self-reported violations carried a statutory maximum of $1,500,000 (for 6 violations) and had a base penalty of $7434.

So, why was the penalty so much larger?

  • The settlement amount reflects OFAC’s consideration of the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A. OFAC determined the following to be aggravating factors:
    1. Elsim willfully provided goods and services to Iran in violation of the ITSR;
    2. Elsim management knew its employees were traveling to Iran to provide services and directed them to do so;
    3. Elsim management concealed the Apparent Violations from Kollmorgen and others by deleting and falsifying records as well as directing their subordinates to do so; and
    4. the Apparent Violations conferred economic benefit to Iran.

    OFAC determined the following to be mitigating factors:

    1. neither Kollmorgen nor Elsim have received a penalty notice or finding of violation from OFAC in the five years preceding the earliest apparent violation;
    2. Kollmorgen cooperated with OFAC by conducting an effective and extensive internal investigation and submitting a comprehensive voluntary self-disclosure to OFAC; and, as described in detail above,
    3. Kollmorgen’s extensive preventative and remedial conduct. If OFAC had determined this case was egregious, the base civil monetary penalty amount for the Apparent Violations would have been $750,000.

    And the moral of the story?

    This case highlights the importance of: (1) performing heightened due diligence, particularly with regard to affiliates, subsidiaries, or counter-parties known to transact with OFAC- sanctioned countries or persons, or that otherwise pose high-risks due to their geographic location, customers and/or suppliers, or products and services they offer; and (2) implementing proactive controls when U.S. persons, directly or indirectly, acquire companies with preexisting relationships with sanctioned persons and jurisdictions.

    As noted in a separate post, the manager primarily responsible for the violations and the obstruction of the Kollmorgen investigation has been placed on the Foreign Sanctions Evaders (FSE) List.

    Still, Mr. Watchlist wonders if Kollmorgen hasn’t been made an example of. It’s pretty clear they tried to do the right thing, after the acquisition and when notified of the violations. Perhaps if the base penalty had been much larger, thre resultant settlement might not have larger than the base.

    Links:

    OFAC Notice

    OFAC Enforcement Information

    One thought on “OFAC Enforcement Action: Kollmorgen Corporation

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