PayPal and Schlumberger multi-million dollar settlements to OFAC, DOJ illustrate price of non-compliance



April 01, 2015

Export Controls & Economic Sanctions Alert

Author(s): Emily Crandall Harlan, Kevin T. Saunders, Alexandra Lopez-Casero

As the latest in the line of million and billion dollar settlements regarding sanctions violations, the PayPal and Schlumberger settlements further evidence the need for sanctions compliance at U.S. and international companies.

As the latest in the line of million and billion dollar settlements regarding violations of U.S. sanctions, the PayPal and Schlumberger settlements further evidence the need for sanctions compliance at U.S. and international companies. On March 25, the Departments of Justice and Commerce announced that Schlumberger Ltd., a leading supplier of technology for the oil and gas industry, agreed to pay more than $155 million to settle a sanctions enforcement case involving Iran and Sudan. The same day, the Treasury Department’s Office of Foreign Assets Control (OFAC) announced that it reached a $7.7 million settlement with PayPal, Inc. (PayPal) relating to the company’s failure to appropriately screen in-process transactions against the various U.S. sanctions lists.

Schlumberger subsidiary to plead guilty, pay record-setting criminal fine

Schlumberger Oilfield Holdings Ltd. (SOHL), a subsidiary of foreign-owned Schlumberger Ltd., will plead guilty in federal court and pay a total penalty of $232.7 million to resolve charges that employees of a business unit based in Texas worked with non-U.S. subsidiaries of the company to facilitate oilfield services for customers in Iran and Sudan. Specifically, U.S.-based employees of the unit concealed the identities of embargoed locations in the company’s computer system, provided technical assistance to Iranian and Sudanian customers and participated in decisions concerning SOHL operations in Iran and Sudan. Although SOHL apparently had sanctions policies and procedures in place, it failed to adequately train its U.S.-based employees and to ensure compliance.

Under the terms of the plea agreement, SOHL will plead guilty to conspiracy to violate the International Emergency Economic Powers Act (IEEPA). The plea agreement, court approval of which is pending, requires SOHL to pay $232.7 million dollars to the U.S. government (a $155.1 million criminal fine and $77.6 million in forfeiture). According to a press release issued by the Department of Justice, the criminal fine represents the largest criminal fine paid by any company in connection with an IEEPA prosecution.

In addition to guaranteeing the payment of the penalty, parent company Schlumberger Ltd. agreed to a host of others terms in the plea agreement, including to (1) submit to a three-year term of corporate probation, (2) continue to withdraw all operations in Iran and Sudan, (3) cooperate with and provide information to the U.S. government and (4) engage an independent compliance consultant to conduct a review of the company’s policies and procedures.

In announcing the plea, District of Columbia U.S. Attorney Ron Machen highlighted the significance of the case for global companies with U.S. operations, stating: “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 . . . . Today’s announcement should send a clear message to all global companies with a U.S. presence: whether 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.”

PayPal to pay $7.7 million to settle claims concerning $44,000 worth of transactions

Online payment service giant PayPal will pay $7.7 million to settle allegations that it violated several U.S. sanctions programs by failing to detect and block prohibited online transactions dating back to 2009. The penalty relates to 486 transactions, worth approximately $43,934, alleged to have violated the Iran, Cuba and Sudan sanctions, as well as the Global Terrorism Sanctions Regulations and the Weapons of Mass Destruction Proliferators Sanctions Regulations.

The Settlement Agreement with OFAC details the government’s allegations that, for several years up to and including 2013, PayPal failed to implement “effective compliance procedures and processes to identify, interdict[] and prevent transactions in apparent violation of the sanctions programs administered by OFAC.” While PayPal had identified a “series of OFAC-related issues with its payment systems” as early as March 2006, only in July 2011 did it implement a “short[-] term fix,” and finally in April 2013 it implemented a “long[-] term solution” whereby it could screen transactions in real time and reject OFAC-prohibited transactions.

At the center of the sanctions violations, the government alleged, was a Turkish national named Kursad Zafer Cire. The State Department designated Cire a Specially Designated National (SDN) in January 2009 based on his involvement in a scheme to assist Iran and Libya acquire nuclear equipment. Despite this designation, PayPal processed 136 transactions from an account registered to Cire over a three and a half year time period after he was designated as an SDN. According to the Settlement Agreement, PayPal’s software failed to identify Cire as an SDN for approximately six months after he was designated. Then PayPal employees apparently ignored alerts generated by PayPal’s electronic screening system on six separate occasions and cleared his name each time before finally identifying him as an SDN and blocking his account. Moreover, on the sixth occasion, PayPal requested and obtained a copy of Cire’s passport, which apparently showed “a date of birth and place of birth identical to those of the SDN.” Nonetheless, the PayPal risk officer did not block the account, “due to a misunderstanding of why” the account had been flagged.

Repeatedly ignoring (and then misinterpreting) internal alerts, including a clear SDN match, points to systemic compliance shortfalls, including lack of appropriate training. OFAC determined that PayPal’s handling of the Cire account showed “reckless disregard” for U.S. sanctions compliance and the violations were “egregious.” This is significant, given that OFAC uses a two-track approach to penalty assessments. The base penalty amount in egregious cases is generally based on the statutory maximum (the greater of $250,000 or twice the amount of the transaction). The base penalty in non-egregious cases, where the violation was disclosed through a voluntary self-disclosure, is generally half the transaction value (capped at $125,000 per violation).

Whether a violation is deemed “egregious” is generally determined based on several factors, such as whether the conduct was willful or reckless, the level of awareness within the company, and the level of harm done to the U.S. sanctions programs. OFAC has indicated that most penalty cases are generally “non-egregious.” In the PayPal case, OFAC found that PayPal’s other violations of the U.S. sanctions programs were not egregious.

The $7.7 million settlement amount is substantial, given the fact that (1) the transaction value ($43,934) was relatively low; (2) PayPal voluntarily self-disclosed the violations; (3) PayPal implemented an appropriate screening solution in April 2013; (4) PayPal hired new management in its Compliance Division and undertook various measures to strengthen its OFAC-screening processes; (5) PayPal substantially cooperated with OFAC’s investigation; and (6) PayPal had not received a penalty or finding of violation in the preceding five years. This case will undoubtedly lead some to question the benefit of voluntarily self-disclosing sanctions violations to OFAC.

Conclusion

These and the other recent high-profile sanctions enforcement cases highlight that U.S. and foreign firms continue to be at high risk for sanctions and other export enforcement cases.  They all underscore the need for a robust compliance program, the need to screen transactions and all counterparties in real-time and the compliance expectations placed on firms. The PayPal case in particular also illustrates the need to thoroughly train personnel on export compliance in times of increased use of electronic compliance measures, so that screening alerts are not only read and acted upon, but human beings ultimately manage and monitor all compliance functions.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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