The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Delaware Department of Justice recently signed a Memorandum of Understanding (MOU) that aims to enhance their information-sharing and joint investigation efforts relating to sanctions enforcement.
The pact is significant as it relates to overall U.S. sanctions enforcement because Delaware consistently holds the largest single share of incorporated entities in the United States, and that number grows every year. According to data provided by the Delaware Division of Corporations, 89 percent of all U.S. initial public offerings chose Delaware as their corporate home in 2019, and nearly 70 percent of Fortune 500 companies are incorporated in the state.
“Delaware is recognized nationally and globally as a critical venue in the business community,” said Delaware Attorney General Kathy Jennings. “We take that role, and the responsibility that accompanies it, seriously.”
What makes Delaware an attractive state to incorporate in more than any other is its history of allowing for a fair degree of anonymity in the incorporation process and the ability to shield beneficial ownership information. Such factors increase the likelihood that foreign individuals and entities will use a Delaware-incorporated entity to evade sanctions.
“To the extent the state has information about a Delaware corporation that OFAC does not, and vice versa, the parties now have a framework for more easily facilitating its exchange,” says Alex Brackett, a member of the government investigations and white-collar group at law firm McGuireWoods.
“In the last few years, Delaware has taken steps to strengthen its role in the policing of sanctions issues. This MOU is clearly consistent with, and a continuation of, that effort,” Brackett adds. “And this kind of collaboration has the potential to serve, to at least some extent, as a force multiplier for OFAC, an agency whose resources are often stretched thin.”
According to OFAC, the MOU aims to:
- Promote the sharing of certain U.S. economic sanctions-related information between OFAC and the Delaware Department of Justice and facilitate coordinated investigations;
- Foster cooperative efforts between OFAC and Delaware to heighten awareness of U.S. economic sanctions within both the Delaware business community and the general public;
- Protect national security by promoting compliance with U.S. trade and economic sanctions laws;
- Support litigation against entities placed on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List);
- Improve transparency into corporate structures used to disguise illicit business dealings; and
- Prevent abuse of U.S. companies by criminal and terrorist organizations, corrupt individuals, and other blocked persons through cancellation of entities or imposition of OFAC penalties.
“The Delaware Division of Corporations already cooperates regularly with our partners in federal law enforcement, including OFAC, to root out illegal activity connected to our state’s business registry,” said Delaware Secretary of State Jeffrey Bullock. “In recent years, we have changed state laws and regulations, and stepped up our work with the Department of Justice to shut down Delaware corporations and LLCs connected to illegal activity. This agreement builds on that progress.”
A unique MOU
While OFAC has several other MOUs in place with state and federal financial regulators, this appears to be the first with a state Department of Justice. “To date, most of these agreements have been targeted at sanctions investigations in the financial services space, such as OFAC’s collaboration with the New York Department of Financial Services (NYDFS),” says Tom Best, a partner at law firm Paul Hastings.
The MOUs appear to share the same purpose. For example, OFAC’s MOU with NYDFS similarly allows for information-sharing and coordination in enforcement efforts and further provides that OFAC will notify NYDFS where it becomes aware of an apparent sanctions’ violation by a NYDFS-supervised banking entity.
Andrew Jacobson, an associate at law firm Seward & Kissel, says during his former role as an enforcement attorney at the NYDFS, “this information-sharing mechanism was essential for initiating and conducting enforcement actions for violations of the U.S.’s economic sanctions laws. The Delaware MOU has a similar mechanism, whereby the agencies will make referrals of potential violations of each other’s statutes, where appropriate.”
Enhanced sanctions enforcement
Best says he doesn’t anticipate the MOU between OFAC and Delaware’s Department of Justice will raise the sanctions enforcement risk level in a material way for most U.S. financial institutions and companies. “While there could be some additional information that flows from the Delaware Department of Justice to OFAC that could cause OFAC to commence an investigation that it would not otherwise have, those instances are probably less likely to implicate large U.S. corporates, given their existing screening systems and compliance and other processes,” he says.
The more likely impact will be felt by “individuals and entities using Delaware-incorporated entities in order to conceal and facilitate illegal activities such as money laundering and terrorist financing, at least in the first instance,” Brackett says. He advises that “any Delaware-incorporated entity with any appreciable international trade or other sanctions-related risk profile evaluate the strength and effectiveness of its sanctions-compliance program in light of the MOU.”
“Sanctions compliance is not a new concern for in-house counsel, compliance, or risk officers,” says Bruce Paulsen, a partner at Seward & Kissel. “That said, the MOU should certainly remind in-house personnel to double down on their sanctions compliance efforts, including through the use of a risk-based approach.”
“Given the cooperation between the State of Delaware and OFAC, an entity incorporated in Delaware with foreign subsidiaries/operations should pay closer attention to ensure that its foreign operations and subsidiaries are informed and trained on U.S. sanctions regulations,” says Mauricio Escobar, a senior associate at law firm Kilpatrick Townsend. “Where there is an identified sanctions violation by a Delaware-incorporated entity (or sanctions violation by a foreign subsidiary or foreign operation of a Delaware-incorporated business), the MOU allows OFAC and the State of Delaware to work together to shut down or otherwise disrupt the illegal activities of the business.”
“This cooperation between OFAC and the State of Delaware should not change how businesses view OFAC sanctions enforcement,” Escobar says. “Business should continue to maintain a risk-based sanctions compliance program while looking to the guidance in OFAC’s compliance framework that was issued in May 2019.”
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