OFAC Imposes First Sanction for Russian Sectoral Sanctions Violations | Dechert LLP

On April 25, 2019, Haverly Systems, Inc. (Haverly) agreed to pay a $75,375 fine to the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) to settle charges related to two violations of security restrictions. sanctions for transactions with JSC Rosneft (Rosneft), which is on the US Sectoral Sanctions Identification List (SSI List). If the amount of the fine is not particularly high, the enforcement measure is notable as the first related to the SSI List restrictions and because OFAC sends a clear message urging individuals to exercise caution when doing business with sanctioned entities (even if the underlying activities permitted) and to implement effective sanctions compliance programs.

Overview of relevant SSI list restrictions

Under Directive 2 of the SSI List, U.S. Persons are prohibited from dealing in certain new Rosneft debt of specified terms ranging from 60 to 90 days depending on the date the debt was issued or created. “New debt” is broadly defined to include credit extensions (among other things), and OFAC has issued orientation confirming that the extension of payment terms longer than the applicable due date constitutes an extension of debt prohibited to entities on the SSI list.

Although U.S. sanctions generally do not restrict most business with SSI-listed entities, companies should ensure payment terms for the sale of goods or services to SSI-listed entities are below the threshold. due date of the applicable debt from the time title or ownership has passed (for payments relating to sales of goods) or the date of each final invoice (for payments relating to services, subscriptions and installments). For example, if a U.S. Person sells property to an SSI Debt Restricted Entity with a maturity of more than 60 days, the U.S. Person may only grant that entity 60 days or less from the date on which title is transferred to the entity. to pay for these goods. OFAC has advised that if companies believe they will not receive full payment at the end of the authorized period, they should contact OFAC to determine if a license or other authorization may be required.

Haverly fined for receiving payments over debt threshold

According to settlement documents made public by OFAC, Haverly, a New Jersey-based software company, issued two separate invoices to Rosneft in August 2015 relating to the licensing of software and the purchase of support systems. software. At the time, U.S. persons were prohibited from dealing in new Rosneft debt with a maturity of more than 90 days (this threshold was later reduced to more than 60 days), but they were not otherwise prevented from deal with Rosneft. Haverly was therefore authorized to license software and provide related support to Rosneft. Invoices issued to Rosneft initially had payment due dates between 30 and 70 days from the date of issue, which was in line with the SSI list restrictions in effect at the time.

However, approximately 70 days after the invoices were issued, Rosneft informed Haverly that it would not make any payments until Haverly submitted certain additional tax documents, which Haverly was unable to do during several months. Haverly finally received payment on the first invoice in May 2016, approximately 9 months after the invoice was issued. Rosneft made four attempts from May 2016 to October 2016 to pay the second bill – each attempt was rejected, correctly, by financial institutions who determined that the payment represented a prohibited transaction on Rosneft’s debt with a maturity of more than 90 days. Haverly was aware of the banks’ potential sanctions concerns but, apparently, due to the lack of a sanctions compliance program, did not recognize at the time that late collection of payments was prohibited. Haverly did not approach OFAC for advice or clearance and instead worked with Rosneft to find another way to settle the outstanding bill. Eventually, Haverly dated and reissued the second invoice to Rosneft and successfully received payment in January 2017.

OFAC noted a number of aggravating factors in determining the settlement amount, including that Haverly recklessly ignored sanction requirements by ignoring the banks’ concerns, that Haverly’s management team had a actual knowledge of the conduct giving rise to the violations and that Haverly did not maintain formal sanctions. compliance program. OFAC also determined that the violations were not voluntarily disclosed, but noted a number of other mitigating factors, including that the violations caused only minimal actual harm to the policy objectives. U.S. and that Haverly was engaged in turnaround efforts such as creating a new Sanctions Compliance Officer position and implementing a risk-based compliance program to screen all current and future clients at for sanction purposes.

OFAC urges caution and implementation of effective compliance programs

As OFAC expressly noted, this enforcement action is intended to demonstrate the general risk associated with entering into transactions with Russian entities and Russian economic sectors targeted by US sanctions. Companies doing business in Russia should exercise due diligence in business dealings that may involve SSI-listed entities in order to be fully aware of any restrictions that may apply. Although U.S. sanctions do not prohibit most transactions with SSI-listed entities, companies should avoid the use of unorthodox business practices such as modifying or tampering with business documents, or resubmitting payment information without a penalty term, phrase or locale.

OFAC also urges companies to develop and implement risk-based sanctions compliance programs that should include:

  • Policies, procedures and controls capable of identifying risky transactions and customers or counterparties to review;

  • A mechanism to escalate such matters to a sanctions compliance officer or point of contact for appropriate analysis;

  • An ability to respond and react to early warning signs regarding potential violations, including transactions blocked or rejected by financial institutions in accordance with OFAC regulations; and

  • An adequate training program.

The proper implementation of an effective sanctions compliance program can not only significantly reduce the likelihood of sanctions violations, but is also an important mitigating factor in potential enforcement actions should violations occur despite compliance efforts. from a company.

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