Distilling Lessons From Recent Sanctions Cases

Compliance and legal executives wondering how to lessen the blow of export controls and sanctions enforcement will want to pore over the latest settlements to distill the do’s and don’ts of handling these criminal investigations.

Since 2007, the Justice Department has entered into 18 publicly disclosed agreements—16 deferred-prosecution agreements and two non-prosecution agreements—to resolve sanctions or export controls violations, according to a recent analysis from law firm Gibson Dunn & Crutcher. Over that period, these DPAs and NPAs have netted the government more than $6.3 billion in penalties and recoveries.

The Justice Department entered into 15 of those 18 agreements since 2010, compared to just three in the prior three years, a noticeable acceleration in the pace of enforcement. And among those DPAs and NPAs, it’s apparent that trade sanctions and export controls violations have plagued almost every industry. As is often the case, the financial services sector has seen the most enforcement activity (eight settlements, totaling $6 billion in penalties and recoveries, according to Gibson Dunn’s analysis). Other industries to reach agreements include oil and gas, aerospace and defense, construction, technology, and retail. 

“We see a real lack of the key compliance program components, especially in certain areas of export controls and sanctions, in general,” says Jonathan Poling, an international trade lawyer at law firm Akin Gump. Some industries—such as retail, consumer goods, and hospitality—may be “less aware of the need to have robust sanctions and export controls policies in place, because they don’t appreciate the risks involved in the same way that highly regulated industries like banks, oil and gas, and defense contractors do,” he says.

The troika of government departments that oversee sanctions and export law (Commerce Department for export controls, State and Treasury departments for sanctions) have published guidelines in their regulations that spell out aggravating and mitigating factors. These regulations, together with the DPAs and NPAs, provide compliance and legal executives a trove of insight into how these cases are resolved.

Aggravating factors, for example, include: 

Willful or reckless misconduct;

Knowledge by senior executives or senior management;

A long-term pattern of misconduct;

Harm to national security; and

Lack of internal controls. 

Take Germany-based Commerzbank and its U.S. branch, Commerz New York, as an example. Commerzbank reached a settlement with the Justice Department in March and will pay a total of $1.45 billion in penalties to resolve criminal charges for violations of the International Emergency Economic Powers Act (IEEPA) and the Bank Secrecy Act. Specifically, the bank deliberately failed to have an effective anti-money laundering program; failed to conduct due diligence on its foreign correspondent accounts; and failed to file suspicious activity reports.

“The government sets a high bar that must be met before it considers a company as a cooperative party in an investigation and before it extends leniency to that company.”
Jonathan Poling, International Trade Lawyer, Akin Gump

“Commerzbank concealed hundreds of millions of dollars in transactions prohibited by U.S. sanctions laws on behalf of Iranian and Sudanese businesses,” Assistant Attorney General Leslie Caldwell said in a statement about the case.  “Commerzbank committed these crimes, even though managers inside the bank raised red flags about its sanctions-violating practices.”

In comparison, mitigating factors that could reduce a sentence for a company include:

Remedial steps taken toward future compliance;

No OFAC actions in the previous five years;

New or improved internal controls;

Conducting an internal investigation;

Cooperation with OFAC during its investigation; and

Agreeing to extend the statute of limitations on prosecution.

The clearest example is Essie Cosmetics, which entered into an NPA with the government in 2012, becoming only the second company to reach a non-prosecution deal for sanctions violations (the last one was with paint supplier PPG Industries in 2010). In that case, OFAC alleged that Essie and its former chief executive, Max Sortino, violated the IEEPA by knowingly exporting nail care products worth $33,299 on three separate occasions in 2009 and 2010 to a distributor in Iran.

NPA/DPA STATUS, 2015

Below is a 2015 Mid-Year Update on Corporate Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs).
2015 came in like a lion, bringing with it remarkable policy changes regarding corporate non-prosecution agreements ("NPA") and deferred prosecution agreements ("DPA").  The Department of Justice's ("DOJ") leadership has articulated new bright-line approaches to post-resolution conduct, including the unprecedented step of revoking an NPA.  The judiciary has edged further toward a more interventionist role in DPA oversight.  Finally, as we previously predicted, the first of dozens of anticipated NPA resolutions have emerged from the DOJ Tax Division's August 2013 "Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks" (the "DOJ Tax Swiss Bank Program").
In the first six months of 2015, DOJ entered into five DPAs and 23 NPAs.  In addition to DOJ's 28 agreements, the SEC entered into one DPA in the first part of 2015, bringing its total overall NPA and DPA count to eight.  This year's 29 year-to-date overall agreements vastly exceeds agreement counts from recent years, with 2014 seeing 13, and 2013 seeing 12 by this time in the year.  Indeed, 2015's NPA and DPA count has already exceeded the overall number of NPAs and DPAs in 2013, when there were only 28, and it is closely approaching last year's overall count of 30.  This is in large part due to the rollout of NPA resolutions under the DOJ Tax Swiss Bank Program, discussed at length below, which account for 15 of the 29.
                       Corporate NPAs and DPAs, 2000 – 2015

Source: Gibson Dunn.

In deciding not to prosecute the company, the U.S. Attorney’s Office for the Southern District of New York credited Essie with cooperating with the government’s investigation, and agreeing to a $200,000 civil forfeiture by the Homeland Security Department. Furthermore, neither Essie nor Sortino had any history of prior OFAC violations.

Sanctions vs. FCPA Enforcement

Sanctions cases tend to go to trial more often than Foreign Corrupt Practices Act cases, because of the potentially significant sentences that the government can impose—a maximum sentence of 20 years and a $1 million fine. Even if it’s your first offense, you’re still looking at a hefty five-year minimum sentence.

One case pending in the U.S. District Court for the Eastern District of New York, for example, alleges that Arc Electronics, a U.S.-based export company, and Apex System, a Russia-based procurement firm, carried out an elaborate illegal scheme to export controlled technology from the United States to Russian military and intelligence agencies. The Federal Bureau of Investigation first unsealed the indictment in 2012.

“This case appears likely to proceed to trial at this stage,” Poling says. “So these types of cases can and do go to trial; they don’t go to trial a lot where they involve corporate defendants, but they generally have the same chances of going to trial as an FCPA corporate case.”

The similarities between sanctions enforcement and FCPA cases are most pronounced in the arguments companies use to defend their cases; they tend to sound a lot like, “Yes, we screwed up, but we tried really hard to prevent the misconduct, so we deserve to be let off easy.”

As important as a robust compliance program is to securing a defense, cooperation during an investigation is equally important. The real issue companies struggle with is what “cooperation” now means to the government, particularly since the government’s expectations have increased and expanded over time, Poling says.

“The government sets a high bar that must be met before it considers a company as a cooperative party in an investigation, and before it extends leniency to that company,” Poling adds. That may include, but is not limited to, making employees available for interviews; providing access to documents located overseas; and providing names of other companies that might be involved in the alleged misconduct.

Changes Afoot

Compliance and legal executives will want to pay particular attention to a first-of-its-kind sanctions case, U.S. v. Fokker Services, currently on appeal in the D.C. Circuit Court. In that case, the government charged Dutch aerospace company Fokker Services with making more than 1,100 illegal shipments worth $21 million to Iran, Sudan, and Burma from 2005 to 2010 in violation of the IEEPA.

In 2014, Fokker agreed to forfeit $10.5 million as part of a DPA reached with federal prosecutors for the District of Columbia and also agreed to pay a $10.5 million civil penalty to settle charges by the Commerce Department’s Bureau of Industry and Security and Treasury’s Office of Foreign Assets Control.

That settlement seemed perfectly normal until federal district court judge Richard Leon ruled in February that the proposed $21 million penalty was “grossly disproportionate to the gravity of Fokker Services’ conduct in a post-911 world.” The government and defendant appealed the ruling to the U.S. Court of Appeals for the District of Columbia Circuit. 

“It’s an interesting case to watch because the federal district court judge rejected a deferred-prosecution agreement by the government and the company and asserted authority to reject the agreement on the substantive grounds of the settlement,” Poling says. “It could be a very important case for how courts will examine deferred prosecution agreements and what authority they have to review or deny them.”

Oral arguments in that case are scheduled for Sept. 11.