OFAC Issues Final Rule on Economic Sanctions Enforcement Guidelines

The final rule replaces (and amends) the Guidelines previously promulgated as an interim final rule, which were effective September 8, 2008.

The Guidelines appear as an Appendix to the Reporting, Procedures and Penalties Regulations, 31 CFR Part 501, and set forth the policy OFAC follows in determining an appropriate enforcement response to apparent violations of U.S. economic sanctions programs that OFAC enforces.

Guidelines Applicable to OFAC Sanctions Programs Unless Excepted

The Guidelines are applicable to all persons subject to any of the sanctions programs administered by OFAC. However, in cases in which a Pre-Penalty Notice has been issued prior to the publication of the final rule, the case will continue to be processed in accordance with the enforcement guidelines pursuant to which such Pre-Penalty Notice was issued.

In addition, the Guidelines are not applicable to penalty or enforcement actions by other

agencies based on the same underlying course of conduct, the disposition of goods seized by U.S. Customs and Border Protection, or the release of blocked property by OFAC.

11 Sets of Comments Received, Most on Voluntary Self-Disclosure

OFAC received eleven sets of comments on the interim final rule; highlights are as follows:

Voluntary Self-Disclosure Definition Amended

Eight comments addressed the definition of voluntary self-disclosure (VSD):

No VSD for third parties required to notify OFAC. Many of the comments that addressed the definition of VSD expressed concern about the interim final rule definition's exclusion of apparent violations where "a third party is required to notify OFAC of the apparent violation or a substantially similar apparent violation because a transaction was blocked or rejected by that third party (regardless of whether or when OFAC actually receives such notice from the third party and regardless of whether the Subject Person was aware of the third party's disclosure)."

The comments argued that the definition should not exclude such self-initiated notifications to OFAC, and that OFAC should focus instead on the good faith of the party making the disclosure, regardless of whether another party was obligated to report the apparent violation.

OFAC considered these comments but believes that the recommended alternative approach would be difficult to administer in a meaningful manner. OFAC notes that the purpose of mitigating the enforcement response in VSD cases is to encourage the notification to OFAC of apparent violations of which OFAC would not otherwise have learned.

However, in response to one comment, OFAC has amended the VSD definition to make clear that in the event that a third party that is required to report an apparent violation to OFAC fails to do so, and the Subject Person notifies OFAC of the apparent violation in a manner otherwise consistent with a VSD, the notification will be considered a VSD. In those cases where the third party does notify OFAC before a final enforcement response to the apparent violation, the Subject Person's notification will not be considered a VSD even if the Subject Person's notification precedes the third party's notification.

Self-initiated notifications and government agencies. OFAC has made two additional changes to the VSD definition. The first change is to make clear that a self-initiated notification to OFAC that is made at the same time as another government agency learns of the apparent violation (through the Subject Person's disclosure to that other agency or otherwise) does qualify as a VSD if the other aspects of the definition are met. This change is intended to cover VSDs made simultaneously to OFAC and another government agency.

OFAC has also added the following sentence to the definition of VSD: "Notification of an apparent violation to another government agency (but not to OFAC) by a Subject Person, which is considered a voluntary self-disclosure by that agency, may be considered a voluntary self-disclosure by OFAC, based on a case-by-case assessment of the facts and circumstances."

This is intended to clarify that OFAC may treat a voluntary self-disclosure to another government agency as a VSD to OFAC when the circumstances so warrant.

OFAC to Still Consider if Risk-Based Compliance Programs Used

Six comments questioned whether OFAC intended to move away from the risk-based compliance approach reflected in the 2006 Economic Sanctions Enforcement Procedures for Banking Institutions, which, along with their appended risk matrices, were withdrawn by the interim final rule.

OFAC states that in no way has it moved away from considering an institution's risk-based compliance program in assessing the appropriate enforcement response to an apparent violation, and has provided clarification in the final rule to make this evident.

Tolling Agreement a Mitigating Factor, But Lack of One Not Aggravating Factor

Five comments argued that OFAC should not consider whether a Subject Person agreed to waive the statute of limitations or enter into a tolling agreement in assessing the Subject Person's cooperation with OFAC. The comments argued that it was unfair and contrary to public policy to consider this as a factor.

OFAC agrees that a Subject Person's refusal to enter into a tolling agreement should not be considered an aggravating factor in assessing a Subject Person's cooperation or otherwise. However, OFAC believes it appropriate to consider a Subject Person's entering into a tolling agreement in a positive light and as a basis for mitigating the enforcement response or lowering the penalty amount. The final rule thus clarifies that while a Subject Person's willingness to enter into a tolling agreement may be considered a mitigating factor, a Subject Person's unwillingness to enter into such an agreement will not be considered against the Subject Person.

"Substantially Similar" First Violations Receive Penalty Reduction

One commenter suggested that that OFAC clarify that, for purposes of the reduction of the penalty amount by up to 25% for cases involving a Subject Person's first violation, OFAC will consider the entire set of "substantially similar violations" at issue in a case as a single "first violation," and thus provide the penalty reduction for all transactions at issue, and not just for the first of the substantially similar violations.

OFAC intends that in enforcement cases addressing a set of "substantially similar violations," the penalty reduction for a Subject Person's first violation will generally apply to the entire set of "substantially similar violations" and not solely to the first of those violations, and has added a sentence to clarify this.

OFAC to Look at History to Determine if Apparent Violation is a First Violation

In addition, OFAC has clarified that an apparent violation generally will be considered a "first violation" if the Subject Person has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transaction giving rise to the apparent violation, and that in those cases where a prior penalty notice or Finding of Violation within the preceding five years involved conduct of a substantially different nature from the apparent violation at issue, OFAC may still consider the apparent violation at issue a "first violation."

(See ITT's Online Archives or 09/16/08 news, 08091625, for BP summary of OFAC's interim final rule.)

OFAC contact - Elton Ellison (202) 622-6140

OFAC final rule (FR Pub 11/09/09) available at http://edocket.access.gpo.gov/2009/pdf/E9-26754.pdf