OFAC Announces its First Sanctions Penalty Based Solely on Providing Approval to a non-U.S. Subsidiary

by Jeremy Paner

Today, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a $7,772,102 settlement with Zoltek Companies, Inc. to resolve potential civil liability arising from apparent violations of the Belarus Sanctions Regulations.  According to OFAC, between January 2012 and October 2015, U.S.-based Zoltek Corporation violated the sanctions on Belarus by providing approval to its Hungary-based affiliate to make 26 purchases from a designated Belarusian company.

As a general matter of law, a U.S. company cannot approve transactions by a foreign company that would be prohibited if performed by a U.S. company.  The legality of the transaction from the perspective of the non-U.S. company is irrelevant.  However, prior to today’s announced settlement, OFAC had not penalized a company based solely on its approval of transactions conducted by a foreign subsidiary.[1]  Companies should evaluate the financial-related factors that may increase the risk of engaging in prohibited approval in light of this shift in enforcement prioritization.

The following financial-related risk factors indicate business operations or structures that may increase the risk of a U.S. company approving transactions with a sanctioned country or designated entity:

  • Procedures that require U.S. individuals or entities to approve expenditures by foreigners
  • Processing transfers/payments by U.S. individuals or entities on behalf of foreigners
  • Financial arrangements and payments between U.S. parent companies and foreign subsidiaries
  • Commingling of assets and shared accounts by U.S. and foreign affiliates
  • Accounting and auditing services performed by U.S. companies for non-U.S. affiliates

These risk factors can be effectively mitigated through certain due diligence measures without significant disruption to business activities.

We will continue to monitor developments in the enforcement of economic sanctions and publish updates as new developments arise.

[1] OFAC previously settled apparent sanctions violations with three U.S. companies involving approvals of payments by foreign subsidiaries. In each of those cases, however, the prohibited approvals were a relatively minor aspect of the violations.  For example, the apparent violations in the IPSA International Services, Inc. settlement involve the importation of Iranian-origin services; the National Oilwell Varco, Inc. settlement arises from exports to several sanctioned countries; and Ameron International Corporation referred business opportunities to its non-U.S. subsidiaries, provided services to Iran, sold goods to Cuba, and approved two capital expenditure requests by its non-U.S. subsidiaries, according to the OFAC settlement announcement.