OFAC Settlements: When Good Intentions Aren’t Enough
27 Feb 2019

On February 7th, Kollmorgen Corporation (“Kollmorgen”) of Radford, Virginia, agreed to a settlement with the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) for six apparent Iran sanctions regulations violations by its Turkish affiliate Elsim Elektroteknik Sistemler Sanayi ve Ticaret Anonim Sirketi (“Elsim”). Despite significant preventative, investigatory, and remedial efforts by Kollmorgen, the $13,381 settlement was almost double the $7,434 base penalty.

Why? Good question. Let’s examine the facts and timeline first.

What happened? Kollmorgen purchases Elsim

Kollmorgen purchased Elsim in early 2013, after sanctions compliance due diligence was performed by an outside law firm, as well as by a second firm that provides audit and consulting services. That effort uncovered the fact that the new subsidiary had Iranian customers. In response, Kollmorgen implemented compliance measures to make sure that Elsim complied with U.S. sanctions requirements. These included:

  • Identifying all customers and sales in Elsim’s database that could pose a conflict with U.S. sanctions, both initially and on an ongoing basis
  • Blocking all Iranian customers so they could not make new orders
  • Issuing a memo to Elsim’s employee base that informed them about the U.S. Iran sanctions program, and their compliance obligations, including not to make additional sales of goods or services to Iranian clients
  • Training Elsim’s personnel on Kollmorgen’s trade compliance policies (with specific references to Iran), including employee obligations to report any sanctions violations
  • Requiring Elsim’s customers to agree to modified terms and conditions which specifically forbade resale of Elsim products to Iran
  • Requiring Elsim senior management to immediately cease all Iranian business, including support, and to certify on a quarterly basis that they were still no longer providing goods or services to Iran
  • Implementing an ethics whistleblower hotline for reporting any violations of the law

What happened next? Elsim violates Iran sanctions

Elsim, however, continued to do business in Iran over the next two years. Management threatened to fire anyone who refused to travel there, and had employees falsify the records of their travel so that it would appear to be personal travel rather than business-related. Despite their actions to the contrary, the Turkish firm continued to certify that they did no Iranian business.

What happened after that? Kollmorgen investigates and remediates

In October 2015, an Elsim employee used the ethics hotline to report the sanctions violations, after which Kollmorgen used outside counsel to conduct an investigation. The affiliate’s management, however, tried to obstruct the investigation by ordering staff to modify company records to remove references to Iran, as well as to lie to the attorneys. Management also attempted to delete emails related to its Iranian business.

Despite the efforts of Elsim management and staff, Kollmorgen discovered the sanctions violations and fully disclosed the details to OFAC. Additionally, Kollmorgen took prompt remedial action, including:

  • Terminating the management personnel responsible for the violations
  • Instituting new Elsim staff training procedures for educating personnel on compliance with U.S. sanctions requirements
  • Instituting a pre-approval process for all foreign post-sales service trips
  • Requiring Elsim to inform their major Turkish customers that they could no longer provide goods or services to Iran

What was the outcome? OFAC’s decision

OFAC decided to impose the civil monetary penalty “notwithstanding Kollmorgen’s extensive compliance effort.” This was deemed to be the appropriate response given the egregious nature of the actions taken by Elsim’s management in violating sanctions and in attempting to obstruct the subsequent investigation by its parent. The agency also noted that the subsidiary’s history of violations factored into its decision.

However, OFAC added that it had reduced the monetary penalty in consideration of Kollmorgen’s extensive cooperation and remediation efforts and the fact that neither of the firms had been subject to a significant enforcement action in the previous five years.

Nonetheless, the resulting settlement was almost double the base penalty amount, which is very rare in cases when there is a significant level of remediation and cooperation. Perhaps in an attempt to add some perspective, OFAC said in the order that the base penalty would’ve been $750,000 if agency officials had determined that the violations were egregious.

Additionally, the manager at Elsim primarily responsible for the actions that led to the sanctions violations was placed on the Foreign Sanctions Evaders with Respect to Iran and Syria (“FSE”) List. The agency last added designees to the FSE List in 2014, the same year it was created.

What more could Kollmorgen have done?

OFAC has, from time to time, used enforcement actions where the penalty imposed is small to impart a “lessons learned” message. They have also done this when a Finding of Violation is issued instead of a civil monetary penalty. Examples of this include the finding against Visa International for its failure to promptly report violations, and the small fine imposed on Deutsche Bank for not screening the SWIFT addresses of sanctioned banks.

In this case, OFAC said:

This case highlights the importance of: (1) performing heightened due diligence, particularly with regard to affiliates, subsidiaries, or counter-parties known to transact with OFAC- sanctioned countries or persons, or that otherwise pose high-risks due to their geographic location, customers and/or suppliers, or products and services they offer; and (2) implementing proactive controls when U.S. persons, directly or indirectly, acquire companies with preexisting relationships with sanctioned persons and jurisdictions.

And yet, that appears to be what Kollmorgen did both pre- and post-acquisition. So, how could they have avoided all of this, other than by not acquiring Elsim in the first place?

Consider the facts of the case. While Elsim was required to self-certify its compliance with Kollmorgen’s requirements, the parent firm did not proactively check up on its subsidiary. Given Elsim’s history of Iranian business, unannounced site visits and spot checks of its sales activities, shipping documents, revenue booking and travel records would have been prudent. While the affiliate may have been able to doctor the client information in its sales records, it would have had much more difficulty hiding booking of, or reimbursement for, employee business travel. Similarly, client payment for services rendered by Elsim would have been hard to hide without raising red flags (e.g. had clients paid in cash to avoid leaving a paper trail).

Had Elsim still been able to elude such enhanced oversight, it is unclear whether OFAC’s response would have been any different. However, such actions surely would have increased the likelihood of earlier detection of the violations and their disclosure to OFAC.

Addendum: another day, another subsidiary, another penalty

It is interesting to note that, on February 14, 2019, OFAC issued an enforcement action against AppliChem GmbH, which was an additional case where a subsidiary took proactive steps to retain business prohibited by its U.S. acquirer. In case the Kollmorgen case did not get one’s attention, perhaps this one, with its penalty in excess of $5 million, will.

 

Eric Sohn

 Eric A. Sohn, CAMS, global market strategist and product director, Dow Jones Risk & Compliance, New York, NY, USA, eric.sohn@dowjones.com

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