OFAC Enforcement Action: ZAG IP, LLC

ZAG settled its liability for 5 voluntarily self-disclosed, non-egregious apparent ITSR (Iranian Transactions and Sanctions Regulations) violations for $506,230, as compared to a base penalty of $625,000 and a maximum penalty of $28,991,923 (double the total transaction value).

Basically, ZAG had a Indian supplier who, due to a problem at its production facility, was unable to supply the cement clinker product (see Wikipedia page link below, if you’re curious) for shipment to a Tanzanian customer. When the customer wouldn’t budge on the timing of a shipment, ZAG ended up contracting with a firm in the U.A.E. that falsely claimed that its Iranian-origin product wasn’t barred under the ITSR, despite the goods were produced in and shopped from Iran.

Here’s OFAC’s math:

OFAC considered the following to be aggravating factors:

1. although ZAG did exercise limited due diligence, it acted with reckless disregard for sanctions requirements by failing to substantively address the U.S. sanctions prohibitions in place with respect to Iran despite contemporaneous risk indicators;
2. ZAG’s senior management was aware that ZAG was purchasing and reselling goods of Iranian origin at the time of the conduct at issue;
3. the transactions giving rise to the apparent violations conferred significant economic benefits to Iran;
4. ZAG is a commercially sophisticated company operating globally with experience and expertise in international transactions; and
5. ZAG did not have an effective OFAC compliance program in place at the time of the transactions commensurate with its level of risk.

OFAC considered the following to be mitigating factors:

1. ZAG has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transactions giving rise to the apparent violations;
2. ZAG was a small business entity as defined by the U.S. Small Business Administration’s standards;
3. ZAG undertook significant remedial measures by conducting a thorough internal investigation to determine the causes of the compliance failures associated with the apparent violations and enhancing its sanctions compliance policy and procedures, including by developing and implementing a U.S. Export Controls and Economic Compliance Manual and appointing a sanctions compliance officer; and
4. ZAG cooperated with OFAC’s investigation by providing all relevant information regarding the apparent violations in an organized fashion and by responding to OFAC’s requests for information in a timely and efficient manner.

And the moral of the story:

This case demonstrates the importance for companies operating in high-risk industries (e.g., international trading) to implement risk-based compliance measures, especially when engaging in transactions involving exposure to jurisdictions or persons implicated by U.S. sanctions. It is essential that companies engaging in international transactions consider and respond to sanctions-related warning signs, such as information that goods originating from, being loaded or unloaded at ports located in, or trans-shipping through, countries or regions subject to comprehensive U.S. economic and trade sanctions. For more information regarding OFAC regulations, please go to: http://www.treasury.gov/ofac.

Interesting note here: OFAC is having its cake and eating it, too – by simultaneously claiming that ZAG is small, yet commercially sophisticated. Hmmm…. from the Enforcement Guidelines, under “Individual Characteristics”:

1. Commercial Sophistication: the commercial sophistication and experience of the Subject Person. Is the Subject Person an individual or an entity? If an individual, was the conduct constituting the apparent violation for personal or business reasons?

2. Size of Operations and Financial Condition: the size of a Subject Person’s business operations and overall financial condition, where such information is available and relevant. Qualification of the Subject Person as a small business or organization for the purposes of the Small Business Regulatory Enforcement Fairness Act, as determined by reference to the applicable regulations of the Small Business Administration, may also be considered.

So, because they are sophisticated, we hold it against them, but we cap their penalty because they are small? What lessons should firms derive from that tension?

Link:

OFAC Enforcement Information

Cement clinker Wikipedia page