The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.
Your U.S.-based company is known for its high-end electronic components, which are used by research and development labs around the world. Some company products are manufactured at the home office in Chicago, Illinois, while other products are produced at an affiliate company’s facility in Malaysia. Most of your sales, on-site installation services, and customer and product support are performed by affiliated companies which are located in 22 countries throughout the world.
Recently, you were copied on an email indicating that your company’s affiliate in Abu Dhabi secured a lucrative contract for installation, training, and support services with the state-owned gas company in Iran. The email proudly announced that the winning bid was based on “the outstanding cost and supply analysis provided by the Chicago office.” You’ve done some quick due diligence and determined that no U.S. assets will be involved in the contract: all of the products used in the contract are manufactured by the Malaysian affiliate, all of the personal services (installation, training, and support) will be provided by Emirati (that is, people from Abu Dhabi), and all of the technical information for the contract comes either from Malaysia or Abu Dhabi.
Given that the U.S. is not involved in any way with this contract, are there any regulatory enforcement risks that your company faces in the United States?
Your definition of “not involved in any way,” may be very different than the definition used by the Office of Foreign Assets Control (OFAC) or the U.S. Department of Justice.
Trade with Iran – both commercial and financial transactions – is subject to sanctions from the U.S. government, sanctions which are enforced by OFAC, a unit within the U.S. Department of the Treasury. Over the past few years, these trade sanctions have eased in some respects and been strengthened in others. In January 2014, for example, Iran’s actions toward control of its nuclear program resulted in a slight easing of some sanctions. Before that, however, the Iran Threat Reduction and Syrian Human Rights Act of 2012 (the “Threat Reduction Act”) expanded sanctions to make U.S. entities directly liable for any such transactions and activities that are undertaken by their foreign subsidiaries. Specifically, “an entity [including partnerships, trusts, joint ventures, associations, corporations and other organizations] owned or controlled by a United States person and established or maintained outside the United States” cannot be involved in any transaction with the Government of Iran if the transaction would be illegal if carried out in the United States or by a U.S. person.
This extension of Iranian sanctions to foreign affiliates of U.S. companies seems to hinge on the words “owned or controlled by.” Under the Threat Reduction Act, a foreign affiliate is only owned or controlled by a U.S. company if the American company (i) holds more than 50% of the affiliate’s equity (i.e., stock), (ii) holds a majority of seats on the board of directors for the affiliate, or (iii) otherwise controls “the actions, policies or personnel decisions” of the foreign affiliate.
So if a foreign affiliate of a U.S. company does not meet any of these tests, can the foreign affiliate conduct trade with Iran? At this point, the U.S. company has to consider whether it is really involved in the business of the foreign affiliate when it comes to embargoed countries such as Iran. At this point, the U.S. company has to think of Schlumberger.
In March 2015, the U.S. Department of Justice, together with OFAC and the Bureau of Industry and Security (U.S. Department of Commerce) announced a $232.7 Million penalty against Schlumberger Oilfield Holdings Ltd. (SOHL), a British Virgin Islands company and a wholly-owned subsidiary of Schlumberger Ltd., which is headquartered in Houston, Texas. SOHL pled guilty to conspiring to violate the International Emergency Economic Powers Act (IEEPA) “by willfully facilitating illegal transactions and engaging in trade with Iran and Sudan.” From 2004 through 2010, a business unit of SOHL provided oilfield services to Schlumberger customers in Iran and Sudan.
In the Schlumberger case, although the main contracts with Iran were performed by the foreign affiliate, SOHL employees residing in the United States approved the company’s capital expenditure requests from Iran for the manufacture of new oilfield drilling tools, made and implemented business decisions specifically concerning Iran, and provided certain technical services and expertise in order to maintain drilling equipment located in Iran. As stated by U.S. Attorney Ronald C. Machen Jr.:
This is a landmark case that puts global corporations on notice that they must respect our trade laws when on American soil[.] Even if you don’t directly ship goods from the United States to sanctioned countries, you violate our laws when you facilitate trade with those countries from a U.S.-based office building. [W]hether your employees are from the U.S. or abroad, when they are in the United States, they will abide by our laws or you will be held accountable.
Returning to the fact pattern involving our U.S. electronics manufacturer, even though all of the equipment and technical expertise for the Iranian contract are slated to come from its affiliates in Malaysia and Abu Dhabi, and even though it is not clear whether these affiliates are “owned or controlled by” the U.S. parent company, the contract itself was won with support from the “Chicago office.” This would clearly imply that U.S.-based persons facilitated transactions involving Iran. This level of involvement exposes the U.S. company to enforcement action and legal liabilities.
And the legal liabilities can be great. Under the IEEPA, civil penalties can reach the greater of $250,000 or twice the transaction amount, and criminal penalties can include fines of up to $1,000,000 (per transaction) and imprisonment for not more than 20 years, or both. (50 U.S.C. § 1705). In the Schlumberger case, the monetary penalty was $155 Million and an additional $77.6 Million in assets were forfeited to the United States. Furthermore, SOHL was placed on 3 years’ probation and made to hire an independent consultant who will review the company’s internal sanctions policies, procedures, and company-generated sanctions audit reports.
The bottom line is that a U.S. company with foreign affiliates has to ensure that a rigorous export compliance program extends to the activities of each of those affiliates. In this digital, interconnected age, because so much information, technical and administrative assistance, and capital resources tends to flow between affiliated companies – both into and out of the United States – in the absence of a strong export compliance program, what a U.S. company doesn’t necessarily know about its foreign affiliates definitely can come back to hurt it.