British American Tobacco to pay $635M in North Korea sanctions case

BAT engaged in a conspiracy to export tobacco products to North Korea via a Singapore-based subsidiary, according to the Treasury Department’s Office of Foreign Assets Control (OFAC) and Department of Justice (DOJ). The company divested from a joint venture between its Singapore subsidiary and a North Korean business in 2007 over concerns of public association with North Korea, an action that “purposefully obscured” its continued effective ownership and control over the venture, OFAC said Tuesday in its enforcement release.

Payments to BAT were remitted through Chinese accounts, shell companies, two U.S.-sanctioned North Korean banks, BAT’s Singapore-based subsidiary, and North Korea’s embassy in Singapore, OFAC said in its settlement agreement.

The scheme funneled approximately $415 million in U.S. dollar transactions from North Korea to BAT, the DOJ said in a press release. The transactions helped North Korea “establish and operate” a cigarette manufacturing business that generates more than $1 billion per year for the country’s government—money that supports the country’s nuclear and missile programs and weapons proliferation—OFAC said.

BAT’s Singapore subsidiary pleaded guilty to conspiracy to commit bank fraud and conspiracy to violate the International Emergency Economic Powers Act. BAT entered into a deferred prosecution agreement with the DOJ regarding the charges.

The DOJ also unsealed related charges, filed in U.S. District Court for the District of Columbia, against North Korean banker Sim Hyon-Sop and Chinese facilitators Qin Guoming and Han Linlin. All three men are at large, the agency said.

BAT cooperated with OFAC’s probe by agreeing to toll the statute of limitations on some of the charges, providing detailed documentation upon request of investigators, and giving prompt responses to information requests, the regulator said.

OFAC characterized BAT’s conduct as “egregious” and noted it was not voluntarily disclosed.

The company agreed to pay penalties surpassing $629 million as part of its settlement with the DOJ. A more than $503 million fine from OFAC was deemed satisfied by the DOJ payment. BAT separately agreed to remit approximately $5.3 million to OFAC regarding the transactions that took place through North Korea’s embassy in Singapore.

The fine is the largest in the history of the DOJ’s National Security Division, the agency said. The settlement is also the largest OFAC has secured with a nonfinancial institution, the Treasury stated.

Compliance considerations: BAT management “had actual knowledge regarding the apparent conspiracy from its inception through its termination,” OFAC said. That alleged awareness extended to the standing committee that signed off on the divestment from the joint venture.

The scheme involved 243 transactions processed by more than a dozen U.S. financial institutions from 2009-16, OFAC said. To obscure the fact North Korea was involved in the payments, BAT required counterparties to remove any mention of the country from transactional documents. When some of the scheme’s transactions were questioned or blocked by the banks, BAT ignored requests for information and would allow questioned wire transfers to expire, OFAC said.

“As this matter demonstrates, creating the illusion of distance between a firm and apparently violative conduct does not shield that firm from liability,” the regulator said. “… Even though the parent company and subsidiary did not deal directly with the two sanctioned banks, they exposed themselves to civil liability for sanctions violations when they formed and executed the broader scheme to use the U.S. financial system in furtherance of North Korea-related business.

“This matter further demonstrates that, without a culture of compliance driven by senior management and attendant policies and controls, firms increase the risk that they may engage in apparently violative conduct. Senior management decisions to approve or otherwise support arrangements that obscure dealings with sanctioned countries and parties can be reflected throughout an organization, compounding sanctions risks and increasing the likelihood of committing potential violations.”

Company response: BAT disclosed in July it reserved 450 million pounds (U.S. $558 million) to settle allegations it violated U.S. sanctions.

“On behalf of BAT, we deeply regret the misconduct arising from historical business activities that led to these settlements and acknowledge that we fell short of the highest standards rightly expected of us,” said Jack Bowles, BAT’s chief executive, in a press release. Bowles added the company “transformed” its ethics and compliance program in recent years.