Exxon Mobil Corporation’s end-of-year victory in a sanctions case before a federal court in Texas just might empower others in the regulated community to challenge the imposition of fines for alleged violations of sanctions regulations, some industry observers say.
On Dec. 31, 2019, the U.S. District Court for the Northern District of Texas agreed with the energy company that a $2 million fine imposed by the Office of Foreign Assets Control (OFAC) for allegedly violating Ukraine-related sanctions regulations should not stand.
“Victories like Exxon’s are relatively rare, first because OFAC settles most of its enforcement matters without issuing a formal penalty, and second because courts usually give OFAC a high level of deference in interpreting its regulations, even in the penalty context,” observed Matthew Tuchband, counsel at the law firm Arent Fox. “But a company that finds itself subject to or under the threat of an OFAC penalty may, and probably should, feel empowered by the Exxon decision to consider in greater depth whether they have been given fair notice that their actions were prohibited,” continued Tuchband, who previously served for 15 years as the deputy chief counsel for foreign assets control at the Treasury Department.
An emboldening decision
The case before the federal court required it “to determine which party receives the benefit of having its cake and eating it, too,” wrote Judge Jane Boyle in her opinion siding with Exxon. Back in 2014, President Barack Obama issued two executive orders on activities in Ukraine that allowed the Treasury Department to “block” the property of certain individuals with ties to the Russian government. Later, the White House issued a fact sheet about the sanctions that explained its focus was on individuals and their personal assets rather on than on companies those individuals might happen to manage on behalf of Russia.
One of the individuals designated by the U.S. Treasury Department was Igor Sechin, who was the president and chairman of the management board of Rosneft, a leading petroleum company in Russia. When announcing the designation of Sechin, the Treasury Department specifically noted his company was not being sanctioned.
Exxon had done business with Rosneft for some two decades, explained Boyle. After Sechin became a “specially designated national,” or SDN, subject to sanction, Exxon continued to do business with his company. In his capacity as Rosneft’s representative, Sechin signed a number of contracts with Exxon on behalf of his company. In 2014, OFAC imposed a civil penalty of $2 million on Exxon, and Exxon filed suit challenging that decision.
“The court did not dispute OFAC’s position that dealing with a specially designated national, even in his or her official capacity as a company officer, could be prohibited,” observed Jeremy Zucker, a partner at the law firm Dechert and co-chair of its International Trade and Government Regulation practice. “The court only said that if OFAC assumes that interpretation, OFAC needs to say so clearly in advance.”
Money and politics
Given the somewhat confusing situation in the Ukraine-Rosneft-Sechin matter, one might wonder why the U.S. Treasury Department sanctioned Sechin but not the company over which he presided, Rosneft. “Russia sanctions have always reflected a delicate balancing act between imposing significant pressure on the Kremlin without incurring enormous collateral damage,” observed Sean Kane, counsel at Dechert.
“Sechin was sanctioned because of his alleged connections to President Putin, but Rosneft is one of the world’s biggest oil companies,” Kane said. Pursuing Rosneft would be “an order of magnitude larger than any other company the U.S. has blocked, and tightly woven into world energy markets.”
Greater regulatory clarity
Moving forward, the regulated community might wonder what other U.S. companies are supposed to do regarding SDNs who happen to be CEOs of companies. “Given that OFAC normally interprets its sanctions reach very broadly to prohibit any dealing in any property in which a blocked person has any interest of any nature whatsoever, there are always going to be gray areas at the edges of that reach,” Tuchband said. “Under the court’s decision, if OFAC wants to pursue enforcement actions at that outer edge, it should be sure it has clearly put the public on notice of its interpretation of what is prohibited activity.”
“And although the court appeared to look to public statements of policy makers as well as FAQs that OFAC placed on its website, the primary way of providing constructive notice to the regulated public is through regulations or notices published in the Federal Register,” Tuchband explained.
It may well be OFAC operates with a bit more specificity of its own in the future when defining the parameters of sanctions against any given individual. “Notwithstanding the incredible value of the guidance OFAC provides on its website, each of OFAC’s sets of sanctions regulations contains a subpart with interpretive provisions, and that is where the public should be put on notice of the outer reaches of a prohibition,” Tuchband said.
Deals with SDNs
Still, U.S. companies might be interested in doing business with organizations helmed by specially designated individuals. “Going forward, U.S. persons must ensure they have no direct engagement” with these designees, said Cari Stinebower, a partner at the law firm Winston & Strawn. “This would include making sure the negotiating parties and signatories—among others—are not specially designated nationals.”
While companies “need to avoid dealing with” SDNs “in any capacity,” at the same time, “it remains acceptable to engage with a company even when its CEO (or other senior officer) has been designated as a specially designated national, as long as dealing with the company does not involve dealing with the individual,” Zucker said.
“In the absence of a company itself being designated or 50 percent or more owned by one or more SDNs, a U.S. company is not prohibited from signing contracts with other non-designated individuals representing the company, but it will be safest to stay as far away from the designated CEO as possible,” Tuchband cautioned.
A lesson or two in pushing back
Ultimately, Exxon’s win in Texas is an “outlier,” albeit an encouraging one, Stinebower said. “It is important to be able to challenge an agency decision in order to keep the process rigorous,” she maintained.
“Greater transparency is also welcome—particularly where an agency operating in the national security and foreign policy realm prefers less transparency in order to preserve flexibility,” Stinebower said.
Interestingly, Exxon’s win in Texas was not its only victory against government overreach last month. In a separate matter, a trial court in New York found in Exxon’s favor in a challenge brought by the New York Attorney General over Exxon’s public disclosures about climate change risk. Following 12 days of trial and testimony from 18 witnesses, the court found the state attorney general had “failed to establish” the law had been violated in connection with Exxon’s disclosures.
Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.