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Breach: When Compliance Fails Handling OFAC Enforcement and Investigations. Presented by: Erich C. Ferrari, Ferrari Legal, P.C. Enforcement and Investigations. When compliance fails, where do you go next? Investigations Voluntary Self Disclosures Administrative Subpoenas Enforcement

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Breach: When Compliance Fails Handling OFAC Enforcement and Investigations

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Breach: When Compliance FailsHandling OFAC Enforcement and Investigations

Presented by:

Erich C. Ferrari, Ferrari Legal, P.C.

Enforcement and Investigations

  • When compliance fails, where do you go next?

  • Investigations

    • Voluntary Self Disclosures

    • Administrative Subpoenas

  • Enforcement

    • Penalties

    • Pre-Penalty Notices

Recent Cases Dealing With OFAC Enforcement and Investigations

  • 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?

OFAC Investigations

  • 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

OFAC Investigations

  • 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: BahruddinHaqqani; Tehran; Khartoum; Bandar Abbas)

    • The bank may call OFAC’s “hotline” for guidance (800-540-6322).

OFAC Investigations

  • 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.

OFAC Investigations

  • 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.

OFAC Investigations

  • 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

OFAC Investigations

  • 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.

OFAC Investigations

  • 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.

Voluntary Self Disclosures

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

Voluntary Self Disclosures

  • 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

Voluntary Self Disclosures

  • 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)

Voluntary Self Disclosures

  • 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

Enforcement Guidelines

  • Interim final rule published 9/8/08

  • Final rule published 11/9/09


  • Flexibility to achieve appropriate results

  • Predictability/equity in results

Enforcement Guidelines

  • 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

Enforcement Guidelines

General Factors

A. Willful or Reckless Violation of Law

  • Willfulness

  • Recklessness

  • Concealment

  • Pattern of conduct

  • Prior Notice

  • Management Involvement

Enforcement Guidelines

General Factors

B. Awareness of Conduct at Issue

  • Actual Knowledge

  • Reason to Know

  • Management Involvement

Enforcement Guidelines

General Factors

C. 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

Enforcement Guidelines

General Factors

D. Individual Characteristics

  • Individual vs. Entity

  • Commercial Sophistication

  • Size of Operations and Financial Condition

  • Volume of Transactions

  • Sanctions Violation History

Enforcement Guidelines

General Factors

E. Compliance Program

  • Existence and adequacy of OFAC compliance program

  • Views of regulators

Enforcement Guidelines

General Factors

F. 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?

Enforcement Guidelines

General Factors

G. Cooperation with OFAC

  • Voluntarily self-disclosure?

  • Provide all relevant information?

  • Provide information regarding other related violations?

  • Subpoena required?

  • Prompt response?

  • Tolling agreement?

Enforcement Guidelines

General Factors

H. 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

Enforcement Guidelines

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

* A Cautionary Letter?

* A Finding of Violation?

* A Civil Monetary Penalty?

Enforcement Guidelines

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

Enforcement Guidelines

Finding of Violation

  • If 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.

Enforcement Guidelines

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?

Enforcement Guidelines

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

Penalty Calculations

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

Penalty Calculations

Penalty Calculations

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

Penalty Process

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

Penalty Process

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.

Enforcement Guidelines

Penalty Notice

  • If 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.

Penalty Process


  • 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.

Penalty Process

  • 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.

Contact Information

  • If you have questions after the event, please contact me:

    • Phone: 202-280-6370

    • Email:

    • Book: The Iranian Transactions Regulations Practice Guide


      THANK YOU!

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