Presented by:Erich C. Ferrari, Ferrari Legal, P.C.

–When compliance fails, where do you go next?–Investigations–Voluntary Self Disclosures–Administrative Subpoenas–Enforcement –Penalties–Pre-Penalty Notices

• Innospec: disclosure gone wrong?• OFAC Voluntary Self Disclosure (VSD) used in

criminal prosecution

• Pinnacle Aircraft Parts: too overprotective?• Legal advice leads to failure to appropriately answer

administrative subpoena

• What’s a lawyer/compliance officer to do?

• Investigations can be triggered by:• Self-disclosures• License history or determination requests• Referrals from CBP, ICE, FBI, BIS, IRS-CI• Open source research• Anonymous tips• Suspicious Activity Reports (SARs)• Blocking and reject reports

• All of the major U.S. banks use “interdict software” to check every wire transfer and accountholder against OFAC’s SDN list and the countries against which we have sanctions.

• When a bank gets a “hit,” it suspends the payment until it makes a decision as to whether the hit is positive or false. (Examples: Bahruddin Haqqani; Tehran; Khartoum; Bandar Abbas)• The bank may call OFAC’s “hotline” for guidance (800-

540-6322).

• When a bank blocks or rejects a transaction pursuant to OFAC sanctions, it is required to report it to OFAC within 10 days. OFAC receives 8000+ of these per year.

• OFAC then reviews every reported transaction and flags those where it appears that a U.S. person may have been violating U.S. sanctions (roughly 10 percent).

• Most of the reported transactions involve parties outside the United States, and therefore are unlikely to trigger an OFAC investigation.

• Roughly 10 percent of the transactions do involve a U.S. person engaging in potentially prohibited conduct. The payment might be destined for or originated by someone with a U.S. address, or at a U.S. bank account. Or the payment could reference a U.S. person.

• In each of those instances, OFAC issues an administrative subpoena to the U.S. person, asking for an explanation of the payment and the U.S. person’s role in it.

• Statutes give OFAC broad administrative subpoena authority, including penalties for failure to respond

• OFAC issues more than 1,000 administrative subpoenas per year

• More than half of OFAC’s administrative subpoenas are pursuant to the Iranian Transactions Regulations

• If the transactions date years back in time, OFAC will ask the possible violator to sign a tolling agreement.• This enables OFAC to complete a thorough

investigation without older violations becoming ineligible for penalty due to the five-year statute of limitations.

• Refusal to sign a tolling agreement is not considered an aggravating factor.• However, entering into a tolling agreement is a

basis for mitigating the enforcement response.

• Investigations conclude in one of the following ways:• No action, if there was no violation after all.• A Cautionary Letter, urging greater care next

time.• A referral to criminal investigators if it appears

the violations may have been criminal in nature.• A finding of violation.• A settlement.• A civil monetary penalty.

Self-initiated notice before or at the same time as OFAC or

any other federal, state or local government agency or official

discovers the apparent or substantially similar violation “Substantially similar” apparent violations are part of a series of

similar apparent violations or are related to the same pattern or practice of conduct

• To disclose or not to disclose, that is the question

• Telling on yourself: managing your client’s reaction/expectations

• Fools rush in: thoroughly consider the matter• Exemptions, general licenses, interpretative guidance

• Err on the side of disclosure

• Once the decision is made to disclose, act quickly,• Supplement later if you need to

• Two bites at the apple: Corollary to Federal Criminal Sentencing:• Departures/Variance vs. VSD/Pre-Penalty Notice Response

• Advocacy: State your position—USE THE (en)FORCE(ment guidelines)

You’ve made the decision now move!

Race to the courthouse analogy whoever gets there first wins

Make sure to provide enough information◦One sentence is not enough.

Supplement, Supplement, and Supplement◦You made the leap now pull the parachute string

IEEPA Enhancement Act - October 16, 2007(P.L. 110-96, 121 Stat 1011 )

IEEPA Penalty Increase to Greater of:

$250,000 or 2X Transaction Amount

Retroactive Application

Interim final rule published 9/8/08 Final rule published 11/9/09

Goals Flexibility to achieve appropriate results Predictability/equity in results

13 factors OFAC considers in determining the appropriate administrative action in response to an apparent violation

More holistic approach General factors replace aggravating/mitigating

factors New penalty calculation process New PPN process

General FactorsA. Willful or Reckless Violation of Law

• Willfulness• Recklessness• Concealment• Pattern of conduct• Prior Notice• Management Involvement

General FactorsB. Awareness of Conduct at Issue

• Actual Knowledge

• Reason to Know

• Management Involvement

General FactorsC. Harm to Sanctions Program Objectives

• Economic or Other Benefit to the Sanctioned Individual, Entity, or Country

• Implications for U.S. Policy

• License Eligibility

• Humanitarian Activity

General FactorsD. Individual Characteristics

• Individual vs. Entity

• Commercial Sophistication

• Size of Operations and Financial Condition

• Volume of Transactions

• Sanctions Violation History

General FactorsE. Compliance Program

• Existence and adequacy of OFAC compliance program

• Views of regulators

General FactorsF. Remedial Response

• Conduct stopped?

• Internal investigation into the causes and extent of the apparent violations?

• Compliance program implemented/improved?

• Thorough review to identify other possible violations?

General FactorsG. Cooperation with OFAC

• Voluntarily self-disclosure?

• Provide all relevant information?

• Provide information regarding other related violations?

• Subpoena required?

• Prompt response?

• Tolling agreement?

General FactorsH. Timing of Apparent Violation in Relation to

Imposition of Sanctions

I. Other Enforcement Action

J. Future Compliance/Deterrence Effect

K. Other Relevant Factors on a Case-by-Case Basis Allows for ensuring response is proportionate to the nature

of the violation

In light of the General Factors, what is most appropriate:

* A Cautionary Letter?

* A Finding of Violation?

* A Civil Monetary Penalty?

A Cautionary Letter is sent if it is not clear that a violation occurred, or a Finding of Violation or a civil monetary

penalty is not warranted under the circumstances, but the underlying conduct has raised some concerns

Finding of ViolationIf OFAC determines that a violation occurred, considers it important to document the occurrence, and concludes the conduct warrants an administrative response but that a civil monetary penalty is not the most appropriate response, OFAC may issue a Finding of Violation.It is a final agency determination unless OFAC later learns of additional related violations or other relevant facts.Respondent has an opportunity to respond before the determination becomes final.

If OFAC determines that a civil monetary penalty is appropriate, it considers the case with the following characteristics in mind:

Was it a Voluntary Self-Disclosure?

Was it an Egregious Case?

Was it an Egregious Case?

Focus on General Factors A-D

Willful or reckless

Awareness of conduct

Harm to sanctions program objectives

Individual characteristics

Director or Deputy Director determination

If a Finding of Violation is not appropriate, the next step is to calculate the penalty.

Adjustment for Relevant General Factors

Substantial Cooperation non VSD (25 - 40%)

First Violation (up to 25%)

Other General Factors Each may be considered mitigating or aggravating, resulting in a

higher or lower proposed penalty amount

Result is Proposed Penalty Amount

Pre-Penalty Notice

After OFAC calculates the appropriate monetary penalty, it will issue a Pre-Penalty Notice (PPN).

Description of alleged violations Specific regulations allegedly violated Base category (which of the four boxes were selected) for

penalty calculation and most relevant General Factors Maximum penalty amount Proposed penalty amount

Response to Pre-Penalty Notice

Alleged violator may submit a written response to the PPN.

Agree to the proposed penalty, Disagree that any penalty is warranted and

specify why, or Disagree with amount and explain why a

lower amount would be more appropriate.

Penalty NoticeIf OFAC receives no response within the time prescribed in the PPN, or if following the receipt of a response OFAC concludes that a civil monetary penalty is warranted, OFAC will issue a Penalty Notice (PN).A PN is a final agency determination that a violation has occurred.In the absence of a response to the PPN, the penalty amount in the PN generally will be the same as that in the PPN.

Settlements A settlement typically does not constitute a

final agency determination that a violation has occurred.

Settlement discussions may be initiated by OFAC, the alleged violator, or the alleged violator’s representative.

Settlement discussions can occur anytime before a PN is issued.

OFAC posts a summary of all settlements and penalties on its website.

Updated at least monthly, sometimes more often.

Be cautious whatever approach you take

Enforcement and Investigations can be intimidating, but it is manageable

Think through everything carefully before you make your move.

If you have questions after the event, please contact me:◦ Phone: 202-280-6370◦ Email: ferrari@ferrari-legal.com◦Book: The Iranian Transactions Regulations Practice Guide◦www.sanctionlaw.com

THANK YOU!