This post was written by Michael J. Lowell.
On July 10, 2012, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) announced that Great Western Malting Co. (“Great Western”), a U.S. company, had agreed to pay $1.35 million to settle apparent violations of the Cuban Assets Control Regulations, 31 C.F.R. Part 515 (“Cuba sanctions”). The Cuba sanctions generally prohibit U.S. persons and companies (and their foreign subsidiaries) from engaging in any transaction in which Cuba or a Cuban national has any interest whatsoever, direct or indirect. These sanctions also prohibit U.S. persons from aiding or facilitating a foreign person’s transactions in Cuba. Criminal penalties for violating the Cuba sanctions range up to 10 years in prison, $1,000,000 in corporate fines, and $250,000 in individual fines, per violation, and civil penalties may also be imposed.
Great Western is a U.S.-based company producing malt for the brewing, distilling and food markets. OFAC’s settlement announcement indicates that Great Western’s U.S.-based personnel provided back-office support for a foreign affiliate’s sales of foreign-origin barley malt to Cuba. This case is noteworthy because the liability appears to be based solely on Great Western’s facilitation of its foreign affiliate’s sales of foreign products.
This case also demonstrates the real value of OFAC’s voluntary disclosure process and the risk of discovery for violations that are often perceived as difficult to detect. OFAC imposed the $1.35 million penalty despite the fact that the goods involved were foreign-origin, the primary activity was by a foreign person, and OFAC licenses were available for this activity. In many cases, similar violations have been closed with a warning only on the basis of a voluntary disclosure. OFAC’s discovery of these violations, which would not typically be easily discovered, since it is back-office support, should cause some caution in future decision-making on whether or not to file a voluntary disclosure. It should also be noted that the penalty reflects significant mitigation (total possible base penalty of $5.9 million) due at least in part to Great Western’s substantial cooperation with OFAC after discovery of the violation, including entering into a statute of limitations tolling agreement.
This enforcement action is a warning to companies operating globally with business in the United States and in U.S.-sanctioned countries — particularly U.S.-based companies whose foreign affiliates and subsidiaries conduct business in Cuba, Iran, Sudan or Syria. Companies should consider whether they have sufficient internal controls in place to prevent inadvertent back-office support or other forms of facilitation of their related companies’ sales in sanctioned countries.
Clients working in the health care industry, including pharmaceutical and medical device companies, can face the same challenge posed by Great Western: how to ensure that support of a foreign affiliate’s operations does not implicate U.S. sanctions. This issue comes up in a variety of contexts. Some recent examples where we have seen this issue arise for our pharmaceutical clients include:
• Global Product Launch and Registration – the involvement of U.S. citizens or U.S. subsidiaries (legal, marketing, product, manufacturing) in a European-based pharmaceutical company’s global launches of new medicines
• Marketing – the reliance on U.S.-based marketing support for European-headquartered pharmaceutical companies’ sales in Cuba, Iran, and Syria
• Conference Arrangement and Attendees – the involvement of U.S. personnel in organizing, managing, or supporting conferences in Iran and Cuba in addition to issues associated with assisting the attendance of Iranian and Cuban doctors at conferences outside the United States
• R&D and Production – U.S. citizen expertise being provided to support the operations of affiliated companies primarily supporting development or sales in sanctioned countries
• Legal and Compliance – counseling in-house lawyers and compliance officers on the “fine line” between advising foreign affiliates on the legality of a chosen course of action and approving or facilitating the course of action (which would be prohibited)
• Sales – U.S. back office support for a foreign affiliate’s sales in sanctioned countries
Our recent experience with global clients with headquarters in Europe and operations in the United States and Iran has demonstrated the importance of minimizing risks with proactive OFAC licenses and implementing internal controls or, failing that, voluntary disclosure, which can allow for resolution of the matter with OFAC with no penalty.
There also can be myriad other sanctions issues different from those raised by the Great Western settlement, including export control requirements relating to exports of lab equipment, medical devices, chemicals, unfinished and finished goods, foreign national employee or visitor licensing requirements (so-called, deemed exports), and issues relating to the corresponding financial transactions. Fortunately, OFAC provides exceptions (general licenses) and generally has a favorable licensing policy where a specific license is necessary for exports of medicines to sanctioned countries, so there are a number of possible solutions.