British American Tobacco OFAC Settlement: $508.6M

In 2001, BAT's Singapore subsidiary, British-American Tobacco Marketing (Singapore) PTE Ltd. ("BATM"), and a North Korean company (the "North Korea Company") established a joint venture company (the "Joint Venture") in North Korea to manufacture and distribute BAT cigarettes. BATM held a 60 percent stake and supplied the Joint Venture with machines, equipment, tobacco, and other material to produce cigarettes ("Kit Sets"), along with professional services.

In 2007, BAT's Standing Committee, which included BAT's top executives in London, approved a scheme to sell BATM's stake in the Joint Venture to a Singapore-based trading group (the "Singapore Company") for one euro, citing concerns over BAT's public association with North Korea and difficulty remitting profits. The divestment, completed in August 2007, purposefully obscured BAT's continued effective ownership and control over the Joint Venture. The Singapore Company understood it would act "as a vehicle for BAT to bring out [the Joint Venture's] money and distribute [dividends] back to BAT." BAT retained a contractual right to reacquire its stake at any time for one euro, and BATM continued to sell Kit Sets and other goods and services to the Joint Venture through the Singapore Company.

Between 2009 and 2016, the North Korea Company remitted USD payments owed to BATM via the Singapore Company through a complex, multi-step process. Funds moved from the North Korea Company's account with OFAC-designated Foreign Trade Bank (FTB) in North Korea through accounts in China that contained the interests of FTB and front companies for OFAC-designated Korea Kwangson Banking Corporation (KKBC), then through the Singapore Company's accounts in Singapore, and ultimately to BATM's account at the foreign branch of a U.S. bank. According to BAT, this process was meant to reduce the risk of the money being frozen "in any leg of the transaction" process. The scheme caused twelve U.S. banks to process 228 USD payments from the North Korea Company to the Singapore Company totaling approximately $251,631,903, transactions in which blocked entities KKBC and FTB had an interest.

Multiple internal memoranda and emails indicated that BAT managers in Asia Pacific offices understood as early as 2005 that U.S. restrictions could prohibit banks from processing payments involving North Korea. BAT and its subsidiaries did not cease their conduct after KKBC and FTB were respectively designated, despite knowing both were involved in the remittance of funds. BAT also concealed apparently violative conduct from banks, including by letting a wire transfer expire rather than respond to a bank inquiry that would have revealed the payment's connection to North Korea.

After the Kit Set business wound down, BATM continued to export cigarettes to the DPRK Embassy in Singapore between March 18, 2016 and September 14, 2017, receiving approximately $29,685.72. BATM and the Singapore Company removed any mention of the DPRK Embassy from transactional documents, and BATM received payments at accounts held at both the Singapore branch of a U.S. bank and a non-U.S. bank.

This conduct resulted in one apparent violation of § 544.205(b) of the Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. part 544 ("WMDPSR"), covering the 228-payment conspiracy, and 15 apparent violations of § 510.212 of the North Korea Sanctions Regulations, 31 C.F.R. part 510 ("NKSR"), for the 15 payments totaling $29,685.72 received in connection with the DPRK Embassy cigarette sales.

The Apparent Violations were not voluntarily self-disclosed. OFAC determined they constitute an egregious case. Accordingly, under OFAC's Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, the base civil monetary penalty equals the statutory maximum of $508,612,492.

The statutory maximum was calculated as twice the value of each transaction associated with the apparent conspiracy between August 11, 2009 and October 11, 2016, plus $356,579 for each of the 15 wire transfers for DPRK Embassy cigarette sales processed by U.S. financial institutions.

The $508,612,492 settlement amount has two components. BAT's obligation to pay $503,263,807 for the apparent conspiracy violation of § 544.205(b) of the WMDPSR shall be deemed satisfied by payment of a greater amount in satisfaction of penalties assessed by DOJ arising out of the same pattern of conduct during the same time period. BAT has agreed to separately remit $5,348,685 reflecting the 15 apparent violations of § 510.212 of the NKSR.

OFAC took this action concurrently with the U.S. Department of Justice (DOJ). BAT's obligation to pay $503,263,807 to OFAC for its apparent conspiracy violation of § 544.205(b) of the WMDPSR shall be deemed satisfied by payment of a greater amount in satisfaction of penalties assessed by DOJ arising out of the same pattern of conduct during the same time period.

Foreign firms that form and participate in conspiracies that cause U.S. persons to engage in prohibited transactions, including dealing in property in which blocked persons have an interest, expose themselves to strict penalties. Creating the illusion of distance between a firm and apparently violative conduct does not shield that firm from liability. Here, the parent company's apparent conspiracy caused payments to flow from North Korea, through accounts in which sanctioned North Korean banks had an interest, and then through the U.S. financial system and ultimately to a subsidiary located in Singapore. Even though the parent company and subsidiary did not deal directly with the two sanctioned banks, they exposed themselves to civil liability 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.

Firms seeking to comply with sanctions regulations should reevaluate their sanctions risk exposure as regulatory developments occur. Particularly for multinational corporations, employing a risk assessment in a manner, and with a frequency, that adequately accounts for potential risks, may help identify and halt apparently violative conduct early, or before it happens. In this matter, although BAT knew in 2007 that changing sanctions regulations could create liability in the future, it failed to cease its violative activity when KKBC and FTB were respectively designated in 2009 and 2013.

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