Construction Specialties Inc. OFAC Settlement: $660.6K

During a June 2016 visit by CS executives to CSME in Dubai, CSME's general manager (GM), a non-U.S. person, made a business pitch for CSME to supply building materials for a shopping mall in Tehran, Iran. CS executives informed CSME's GM that CSME should not pursue any business in Iran until CS consulted with external counsel. Two months later, in August 2016, CS disseminated a new Iran sanctions policy to CSME and other relevant business units, developed with the assistance of outside counsel. The policy reflected then-active General License H and the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR), which authorized foreign subsidiaries of U.S. persons to conduct certain commercial trade transactions with Iran. General License H, however, expressly did not authorize the direct or indirect exportation, reexportation, sale, or supply of goods from the United States to Iran. CS executives also emailed specific written instructions to CSME's GM that U.S. persons were not allowed to engage in, facilitate, or support Iranian business in any way.

Notwithstanding CS's circulation of the new policy, between December 4, 2016 and August 3, 2017, CSME, at the GM's direction, imported goods from CS and another U.S. supplier to the UAE and then knowingly reexported them to Iran, resulting in three apparent violations of § 560.215 of the ITSR. CSME's GM and another CSME senior manager engaged in a pattern of behavior that concealed or obfuscated the destination of the goods from the U.S. suppliers. Among their deceptive acts, the senior managers falsified the ultimate destination on seven purchase orders to the U.S. suppliers, omitted the ultimate destination on another purchase order, used a false project name to avoid linkage to Iran, and took steps to ensure that the purchase of U.S.-origin goods and their association with Iran would not be reflected in CSME records. CSME also removed labels denoting the U.S. origin of goods and commingled U.S.-origin goods with UAE-produced goods when sold to Iran.

The conduct was discovered when a U.S. person employed at CSME in Dubai overheard the CSME senior managers reference U.S.-origin goods for a "big job." When the U.S. person employee inquired, the managers told them they were "confused." The employee inspected related documentation and discovered elevated levels of sales, general, and administrative expenses in the region, which the U.S. person employee believed corroborated their suspicion. CSME's GM immediately dismissed the employee after they confronted the GM about the unexplained elevation in regional expenses. That same day, the employee flew to the United States and reported their discovery and suspicions to CS headquarters. CS initiated an internal review, terminated all Iran-related business activity, and voluntarily reported the matter to OFAC.

The statutory maximum civil monetary penalty applicable in this matter is $2,201,982. OFAC determined that the apparent violations were egregious and voluntarily self-disclosed. Accordingly, under OFAC's Economic Sanctions Enforcement Guidelines, the base civil monetary penalty amount equals one half of the applicable statutory maximum, which in this case is $1,100,991. The settlement amount of $660,594 reflects OFAC's consideration of the General Factors under the Enforcement Guidelines.

This action highlights the challenges that multinational companies face when they pursue business opportunities in high-risk jurisdictions. Especially, though certainly not exclusively in such areas, employees may act on their own initiative to disregard policies and controls and seek to circumvent applicable sanctions. In such cases, their actions may result in violations attributable to their parent organizations. Companies should consider the need to institute tailored controls, using a risk-based approach, to avail themselves of permissible opportunities while precluding the ability of "rogue" employees to engage in prohibited conduct.

More generally, this case illustrates the importance for parent companies to ensure that they and their overseas subsidiaries implement appropriate compliance programs and procedures, routinely audit their overseas subsidiaries or ensure that independent auditing occurs, and otherwise exercise appropriate oversight over activities of those subsidiaries that may pose sanctions risks. Appropriate testing or audit functions responsive to firms' business operations and sanctions environment can help ensure that their overseas subsidiaries, particularly in high-risk jurisdictions, effectively implement compliance programs and procedures.

This case also demonstrates the importance of "seeing something and saying something" if misconduct is discovered or suspected, and of responding quickly and meaningfully to the credible claims of those who speak up. Whistleblowers play a vital role in identifying prohibited conduct and promoting compliance, and responsible companies should have channels in place for employees to raise concerns without fear of retaliation. Firms should consider creating and proactively communicating the existence of mechanisms by which employees can confidentially and without fear of reprisal report potential breaches of a company's sanctions compliance policies, procedures, and internal controls. To appropriately respond to such reports, companies should consider establishing processes to investigate possible misconduct, complete a timely and thorough investigation, follow up with any necessary remedial response, report possible violations to OFAC, and cooperate actively in any subsequent investigation.

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