Today, OFAC announced that Essentra FZE settled apparent violations of the Norht Korea Sanctions Regulations for $665,112. This represented a discount from the base penalty of $923,766 for egregious, not voluntarily self-disclosed violations, but was almost double the value of the goods involved ($333,272).
What Essenta FZE did
In early 2018, an Essentra FZE senior manager and a customer-facing employee were introduced to a DPRK national during a business meeting arranged by the regional director of a foreign tobacco
In the Spring of 2018, a draft contract that indicated the filter rods would be shipped from the UAE to China was sent to Essentra FZE. The Essentra FZE senior manager later asked, “Any news on NK contract… Eagerly awaiting the progress[.]” Essentra FZE subsequently received an executed copy of a contract that made no mention of the DPRK. Instead, it identified the counterparties as front companies located in third-countries, and related transactional documents identified the “ship to” party as an entity located in China. Shortly after receiving a copy of this contract, Essentra FZE received additional purchase orders to ship more filter rods to an entity in China with the knowledge the goods were ultimately destined for the DPRK. The senior manager undertook these activities in a deceptive manner in violation of company policies and procedures.
Essentra FZE’s manufacturing and exportation of cigarette filters to the DPRK resulted in three wire transfers to pay for the goods, one in U.S. dollars that transited the United States and two in another currency, that were deposited into Essentra FZE’s accounts at the foreign branch of a U.S. manufacture cigarette filter rods for exportation to the DPRK. The customer-facing employee for Essentra FZE later exchanged messages with this DPRK national who provided the instructions, “[D]on’t mention that customer is in my country… You just mention China or where else. Contract will be signed by other foreign company.” The DPRK national asked Essentra FZE to avoid identifying the DPRK several times after this exchange.
During this meeting, the DPRK national asked Essentra FZE whether it could
bank (the “Branch”) between September 2018 and December 2018 (the “Apparent Violations”). Accordingly, Essentra FZE appears to have violated § 510.212 of the NKSR, when it caused U.S. persons (including the Branch) to export, directly or indirectly, financial services to the DPRK or otherwise facilitate export transactions that would have been prohibited if engaged in by U.S. persons in apparent violation of §§ 510.206 and 510.211 of the NKSR
The action notes, in a footnote, that the two Essenta employees mentioned are no longer with the firm. It says they have “since been exited”… sounds involuntary to me.
Another footnote reminds folks that foreign branches of US-organized firms are considered US persons who, of course, are required to follow US sanctions laws and regulations.
The calculation of the penalty
OFAC determined the following to be aggravating factors:
(1) Essentra FZE willfully violated the NKSR when its senior manager and a customer-facing employee agreed to conceal the DPRK nexus to the export of its cigarette filters, and agreed to transact with non-DPRK front companies despite the fact that the company’s compliance policy warned that its banks would not handle transactions with sanctioned jurisdictions such as the DPRK;
(2) The senior manager and customer-facing employee at Essentra FZE had actual knowledge that the conduct at issue concerned the sale of cigarette filters to the DPRK;
(3) Essentra FZE significantly harmed U.S. foreign policy objectives when it caused U.S. persons to confer economic benefits to the DPRK while providing goods that are often combined with tobacco or tobacco products; and
(4) Essentra FZE is part of a sophisticated commercial group operating in international filters markets around the world.
OFAC determined the following to be mitigating factors:
(1) Essentra FZE has not received a Penalty Notice or Finding of Violation from OFAC in the five years preceding the date of the earliest transaction giving rise to the Apparent Violations; and
(2) Essentra FZE cooperated substantially with OFAC’s investigation, including by promptly providing well-organized submissions in response to requests for information, and has agreed to provide ongoing cooperation as a term of settlement.
The lesson to learn from this
As noted in OFAC’s Framework for Compliance Commitments (the “Framework”), many non-U.S. persons have engaged in violations of OFAC’s regulations by processing financial transactions to, through, or involving U.S. financial institutions that pertain to commercial activity with an OFAC- sanctioned country, region, or person. Although no organizations subject to U.S. jurisdiction may be involved in the underlying commercial activity—such as the shipment of goods to or from a third-country to an OFAC-sanctioned country—the inclusion of a U.S. financial institution in any payments associated with these commercial activities can result in or cause prohibited activity (e.g., the exportation or reexportation of services from the United States, or by U.S. persons, to a comprehensively sanctioned country).
FWIW, this is a pretty clear case of what “egregious” looks like…
* for you of more tender years, the post title is a reference to the classic Salem cigarette ad jingle. Oh, the good old days… when you saw cigarette ads, but no ambulance chaser or erectile dysfunction commercials…