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US Penalizes ExxonMobil for Violating US Sanctions on Russia

Exxon's deal with rosneft would have genrated shipments of export cargo and import cargo in international trade.

US Penalizes ExxonMobil for Violating US Sanctions on Russia

On July 20, 2017, the US Treasury Department Office of Foreign Assets Control (OFAC) announced that ExxonMobil (Exxon) must pay a $2 million penalty for violating US sanctions on Russia. On the same day, Exxon responded by suing OFAC.

There is a lot to this story, including a political angle given that current US Secretary of State Rex Tillerson was the boss of Exxon at the time of the violations. We will get to that, but we first want to focus on the potential implications of this action for US companies.

Background of US Sanctions on Russia

Back in 2014, the US government announced sanctions against Russia related to its annexation of Crimea. Like most other US sanctions, the Russia sanctions are administered by OFAC.

US sanctions on Russia, however, are somewhat unique in that they are tailored to target particular industries, entities, and individuals. The sanctions are also two-tiered: some Russian parties are designated as Specially Designated Nationals (SDNs) with which US companies and individuals can conduct virtually no business. Many other Russian parties are designated as restricted parties with which US companies and individuals can conduct some, but not all, business.

In September 2014, OFAC designated Rosneft OAO, one of Russia’s largest oil and gas companies, as a restricted party under Directive 2 – related to issuance of debt of 90-days maturity or more – and Directive 4 – related to activities in support of deepwater, Arctic and shale development projects in Russia. (The US Commerce Department has imposed similar restrictions on exports to Rosneft.) Igor Sechin, the president of Rosneft and one of Russia’s richest men, was designated as an SDN in April 2014.

Through these 2014 actions, OFAC appeared to be drawing a distinction between Sechin, who was totally off limits for US companies, and Rosneft, which could continue to be a business partner to US companies in many cases.

To further illustrate this point, concurrent with Sechin’s designation, OFAC issued a press release that made clear that US persons were prohibited from conducting business with Sechin, but did not mention Rosneft itself.

Exxon’s Violations of US Sanctions in Russia

In May 2014, Exxon signed eight legal documents related to oil and gas projects in Russia. Sechin signed each of these documents – presumably on behalf of Rosneft, though the July 20, 2017, penalty notice does not make that entirely clear.

Exxon has argued that there is a distinction between conducting business with Sechin in his professional versus personal capacity. Exxon apparently believed that the former (i.e., dealing with Sechin in his official capacity as president of Rosneft) was permitted.

OFAC has dismissed the personal-versus-professional distinction. The agency asserts that both the language of the sanctions regulations along with guidance (that was) on its website make clear that Exxon’s conduct was prohibited. That guidance, issued in 2013 in relation to US sanctions on Burma, stated that US parties should “be cautious in dealings with [a non-designated] entity to ensure that [the US party is] not providing funds, goods, or services to the SDN.” (We would link to that guidance on OFAC’s website if it were still there.)

Key Takeaways from Exxon’s Penalties

Probably most important for US companies, is the fact that so many of Russia’s biggest companies are presided over by SDNs. We understand that it is common, and may sometimes even be required, for Russian company presidents to sign contracts before they enter into force. As highlighted in the Exxon matter, even if a Russian company’s president’s signature is not required, any contract signed by an SDN is off-limits for a US company. Negotiation and other business discussions with an SDN, prior to actual contract signature, would be prohibited, too.

We can only guess at the number of US companies – banks? technology companies? service providers? – that maintain contracts with Russia’s biggest companies, many of which are headed by an SDN. If those contracts were signed by an SDN, violations occurred.

We wonder what this means for any actual work that Exxon, and likely other US companies, will be performing under contracts signed by an SDN. Would it now be prohibited for Exxon to perform under any contract that Sechin signed? That seems to follow naturally from the penalty imposed here. Yet there is no indication in OFAC’s penalty announcement that the agency intends to penalize Exxon for performing under contracts signed by Sechin. (As noted above, it is not entirely clear that the “legal documents” that Sechin signed were in fact contracts, but it seems like a safe assumption.)

A $2-million penalty does not seem like an existential threat to Exxon. But it would be something entirely different if OFAC were to prohibit the company from performing under contracts that could be worth billions of dollars, or penalizing the company for work already performed under those contracts. We would not be surprised to see OFAC issue guidance to clarify what appears to be a distinction between signing the contract – which is prohibited – and performing – which apparently is not. It would be fantastic if that guidance also explained why that distinction exists.

When announcing the Exxon penalty, OFAC noted that “ExxonMobil’s senior-most executives knew of Sechin’s status as an SDN when they dealt in the blocked services of Sechin.” Exxon’s “senior-most executive” at the time was current US Secretary of State Rex Tillerson. To be clear, OFAC has not specifically accused Tillerson or any other executive of committing, facilitating, or abetting these violations. Nonetheless, OFAC’s language seems to leave open the possibility that its investigation could extend to individuals who were involved, possibly including Tillerson.

Correspondingly, and as if there is not already enough news related to Russia, the fact that a company once managed by a current Trump administration official violated US sanctions against Russia is only likely to increase existing congressional pressure to codify existing Russian sanctions into law. As congressional pressure intensifies, the scope and breath of sanctions against Russian entities may change.

We cannot ignore the importance of Exxon’s countersuit here. Challenges to OFAC penalty actions are rare. It will be interesting to see how OFAC (an executive agency) responds to Exxon’s suit, particularly in light of the role of Tillerson (an executive official) at Exxon at the time of the alleged violations.

Regardless of how all of this shakes out, the Exxon matter serves as a yet another reminder that a thorough review of sanctions regulations and guidance must occur prior to engaging in transactions with countries or entities affected by sanctions regulations. This review is especially important when conducting business in or with Russia, which is subject to particularly nuanced sanctions, or in any case in which an SDN may be involved. If nothing else, the Exxon matter demonstrates that an SDN is an SDN, whether acting as a private individual, corporate representative, government official, or in any other capacity.

Thad McBride is a partner and Cheryl Palmeri is an associate in Bass, Berry & Sims PLC’s Washington, D.C. office in the firm’s International Trade Practice Group. They focus on counseling clients on compliance with economic sanctions and embargoes, US export regulations (ITAR and EAR), and the Foreign Corrupt Practices Act (FCPA).

The US government prosecutes cases of shipments of export cargo and import cargo in international trade to sanctioned parties.

Lessons from the Historic ZTE Enforcement Action

On March 7, 2017, Chinese telecommunications company, Zhongxing Telecommunications Equipment Corp. (ZTE), signed on to three separate settlement agreements with the United States, agreeing to pay $892 million for violations of US sanctions and export controls. Even more could be due if ZTE strays from the commitments it has made under the settlement agreements. This is one of the largest penalties ever imposed by the US government for export and sanctions violations.

We think several lessons can be derived from this action.

Background. ZTE is one of the largest telecommunication and information technology companies in the world. According to its website, ZTE filed more patent applications in 2016 than any other company in the world. The company plays a significant role in the US telecommunications market.

According to press reports, investigations into ZTE’s practices date back to 2012, when it first submitted information to the US government about possible export violations.

To avoid US export controls and trade with Iran and North Korea, the company purportedly used code names for embargoed countries; deleted references to embargoed customers; removed its logo from shipments to Iran containing US-origin goods; and commingled US and non-US goods in packages to minimize detection by US officials.

In all, the US government asserted, ZTE supplied over 20 million US-origin goods to Iran.

In March 2016, the US government added two ZTE entities to the Entity List (maintained by the US Commerce Department) meaning that a license was needed to export or transfer nearly any US-origin product to the company. Almost immediately thereafter, the US government issued a general license to allow exports to the two ZTE entities designated on the Entity List.

This general license was apparently issued because of the importance of ZTE to the global telecommunications industry – and under the presumption that ZTE would cooperate with the US government in finalizing the settlement in this matter.

Lessons. While this matter really could be the basis of an entire class in law or business school, we would highlight the following three lessons that apply to every company involved in international business:

The US government maintains very broad jurisdiction over exports and sanctions violations. While ZTE has a significant presence in the United States, the company is ultimately based in China. Many violations apparently originated outside the United States and involved non-US persons. In fact, most of the largest sanctions and export enforcement actions have involved non-US companies. Clearly, US companies that commit export violations are targets for enforcement officials; just as clearly, non-US companies are too.

Importance of tone from the top. Publicly available information about this matter suggest that senior ZTE personnel had a role in the transactions that ZTE conducted, and may even have had an active role in the subterfuges used to try to avoid detection. Every exporter knows how difficult it is to comply with the myriad rules that govern trade from the United States or involving US-origin goods. Without clear emphasis on the importance of compliance from the highest ranks of an organization, it can be extremely hard to ensure compliance.

Value of cooperation. It seems likely that ZTE would have paid quite a price for these violations even if it had fully cooperated with the government upon learning of the problematic conduct. But it seems equally likely that the reason the ultimate penalty was so large is because of how ZTE tried to cover up its conduct, both on a day-to-day basis and when the government did inquire. According to the Justice Department press release announcing the settlement, the company “repeatedly lied to and misled federal investigators, its own attorneys and internal investigators.” As the saying goes, the cover up is worse than the crime.

Thad McBride is a partner and Cheryl Palmeri is an associate in Bass, Berry & Sims PLC’s Washington, D.C. office in the firm’s International Trade Practice Group. They focus on counseling clients on compliance with economic sanctions and embargoes, US export regulations (ITAR and EAR), and the Foreign Corrupt Practices Act (FCPA).