Let me start by saying “oh, my.” Four egregious violations, thankfully self-reported. The base penalty was $584,386 but the resulting fine was $894,111.
- On or about February 12, 2014, EF Data and Memotec, Inc. (“Memotec”), a wholly owned subsidiary of EF Data located in Montreal, Canada, prepared a price quote for satellite equipment … telephone support, and technical training for a Canadian … manufacturer (the “Canadian Company”). The sales agreement later listed the ultimate destination … as Sudan. EF Data’s sales agreement also included … that Memotec would provide telephone support and technical training services…
- One month prior to shipping the equipment …, EF Data’s Credit Manager alerted other senior EF Data managers that they might encounter export issues because the end-user …was located in Sudan. … EF Data’s former Director of Logistics and Export Compliance Official received a document … indicating the shipment’s ultimate consignee was SCAA. Immediately prior to shipping the equipment …, EF Data received yet another warning from its third-party screening software alerting EF Data to OFAC export restrictions for Sudan. After learning SCAA was the equipment’s ultimate end-user…, EF Data’s former Director of Logistics and Export Compliance Official attempted to transfer OFAC compliance obligations from EF Data to the Canadian Company.
- EF Data shipped the satellite equipment… The Canadian Company then integrated the satellite equipment …shipped the V-SAT Network to SCAA … From September 29, 2014, to October 2, 2014, Memotec trained seven SCAA employees on the equipment’s use
- After sending a disclosure of the Apparent Violations to OFAC on October 24, 2014, .. the Senior Vice President of Comtech and President of EF Data sent an email to EF Data’s former Director of Logistics and Export Compliance Official with instructions to inform Memotec that an OFAC license was required to perform warranty services on the equipment shipped to SCAA. On November 18, 2014, EF Data applied for an OFAC license to provide SCAA services for the setup, support, operation, and any troubleshooting that was required pursuant to the purchase order, and refiled the license application on February 23, 2015 after its initial application was voided by OFAC.
- Despite the lack of authorization to proceed with any activities while EF Data’s OFAC license application was pending, Memotec continued to provide telephone support until October 19, 2015 for the equipment shipped to SCAA as obligated by EF Data’s sales agreement with the Canadian Company. Separately, in March 2015, EF Data’s former Director of Logistics and Export Compliance Official approved a warranty request to loan (and export from the United States) four hardware units to the Canadian Company to fix a problem SCAA was experiencing with its hardware. OFAC denied EF Data’s license application to provide such warranty services on March 13, 2016.
They also note, however, “Taken together, the volume of business and total amount of payments underlying the Apparent Violations was not significant compared to the total volume of transactions undertaken by Comtech or EF Data on an annual basis.”
Aggravating Factors (6)
(1) EF Data demonstrated reckless disregard for U.S. sanctions requirements and failed to exercise a minimal degree of caution or care by approving warranty services for equipment provided to SCAA while an OFAC license application was pending (and ultimately denied);
(2) EF Data failed to heed warning signs, such as an alert from its compliance screening software indicating that the sale of the satellite equipment could have led to the Apparent Violations, and proceeded with the transactions;
(3) EF Data managers, including export compliance personnel, proceeded with the indirect exportation of goods and the facilitation of services despite having actual knowledge that the ultimate destination of the equipment was Sudan and that the final customer was SCAA;
(4) EF Data’s Apparent Violations allowed SCAA to access and utilize U.S.-origin satellite equipment and facilitated SCAA’s access to training, warranty, and telephone support services, resulting in an economic benefit to the Government of Sudan;
(5) Comtech, which operates through its subsidiary EF Data, is a sophisticated supplier with significant international operations, has multiple foreign subsidiaries, and has experience applying OFAC regulations to its business; and
(6) EF Data provided shifting explanations in response to OFAC subpoenas and a request for information, and its subpoena response included an internal email to Comtech and Memotec personnel that was manipulated by EF Data’s former Director of Logistics and Export Compliance Official to omit certain relevant language, requiring OFAC to expend significant additional time and resources to build an accurate administrative record of the Apparent Violations.
Mitigating Factor (!)
(1) Comtech and EF Data have not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transaction giving rise to the Apparent Violations.
This case highlights the importance not only of investing in adequate internal controls to identify, interdict, and escalate prohibited transactions, but also of developing internal checks and balances so individual employees are not able to override those controls and approve otherwise prohibited transactions. This case also demonstrates the risks of proceeding with transactions while a license application is pending with OFAC with respect to those transactions. Additionally, companies engaging in high-risk international transactions should understand their obligations under OFAC regulations and recognize that they cannot shift those obligations onto their foreign customers or counterparties.
I am just speechless… thinking that using your foreign subsidiary would make everything OK, not waiting for the licensing decision, ignoring multiple red flags… and then being evasive when you got caught.