September 16, 2016
Export Controls and Economic Sanctions Alert
A U.S. horticultural company recently agreed to pay a hefty penalty for exporting flower seeds to Iran, highlighting businesses’ need for robust compliance programs. This alert discusses what U.S.-based companies need to know.
A U.S.-based producer of flower seeds, PanAmerican Seed Company (PanAm Seed), has agreed to pay $4,320,000 for “indirectly” exporting flower seeds to Iran through consignees in Europe and the Middle East. The type of flower seeds that PanAm Seed sells can be found in garden centers in the U.S., Canada and Europe. This penalty is significant for this type of product. It demonstrates that the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) will continue to vigorously enforce Iran sanctions violations, as it has previously announced, despite the January 2016 changes to the so-called “secondary sanctions” imposed on non-U.S. persons. U.S. companies and exporters of U.S.-origin products and technology (wherever located) must remember that the January 2016 changes did not change the prohibitions that apply to U.S. persons and U.S.-origin products and technology. U.S. persons (still) may not, directly or indirectly, export anything to Iran without a general or specific license from OFAC. Likewise, U.S.-origin products and technology, wherever located, may not be re-exported by anyone to Iran without a general or specific license from OFAC, unless they fall under a de minimis threshold. Most importantly, this serves as a warning to exporters as to the prevailing pattern of violations resulting from the use of intermediaries. Companies must have robust compliance processes in place to limit the risk that distributors, resellers or other intermediaries re-export their products to Iran or other embargoed destinations in violation of U.S. export control laws and regulations.
The settlement agreement between PanAm Seed and OFAC published on September 13, 2016, settles PanAm Seed’s potential civil liability for “alleged violations” of the Iranian Transactions and Sanctions Regulations (ITSR). OFAC alleged that PanAm Seed, a division of Ball Horticultural Company (Ball Horticultural), through European and Middle Eastern consignees, indirectly exported flower seeds to two Iranian distributors on 48 occasions from May 2009 to March 2012.
According to the information published by OFAC, PanAm Seed shipped the seeds to the European and Middle Eastern consignees, at which point PanAm Seed’s customers would arrange for the seeds to be re-exported to Iran. Apparently, several personnel, including mid-level managers of PanAm Seed and/or Ball Horticultural were aware that the ultimate destination was Iran, and according to OFAC, were aware of the U.S. economic sanctions against Iran and of the fact that a license was required to export the flower seeds to Iran. Moreover, PanAm Seed apparently continued to engage in this conduct for eight months after its director of finance became aware of OFAC’s investigation.
OFAC determined that the apparent violations of the ITSR were egregious and willful, and that PanAm Seed systematically obfuscated what it knew to be prohibited conduct. This was a deciding factor why the proposed penalty was so high for flower seeds, which would have been eligible for a license under the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA). Whether a violation is deemed “egregious” generally is 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 program. OFAC also claimed that PanAm Seed’s actions resulted in a “$770,000 economic benefit” to Iran. OFAC did not disclose the purchase price or value of the seeds that were exported, which again seems to indicate that OFAC primarily penalized the company for “willfully” violating the ITSR.
Additionally, OFAC determined that PanAm Seed did not voluntarily self-disclose the alleged violations to OFAC. OFAC also claimed that initially the company did not cooperate with OFAC’s investigation—specifically, that it provided information that was “inaccurate, misleading, or incomplete.” Finally, OFAC indicated another aggravating factor was that PanAm Seed is a division of Ball Horticultural, which is a commercially sophisticated, international corporation.
The following were considered mitigating factors:
Under the settlement agreement, PanAm Seed agreed to pay $4,320,000 for potential civil liability arising out of the apparent violations.
What does this case means for U.S. companies exporting internationally?
First, companies must create a “culture of compliance” and implement robust compliance procedures throughout the organization. Here, at least some company employees, including mid-level managers, were apparently aware of the re-exports to Iran and systematically “obfuscated” what they knew to be prohibited conduct. Drafting and implementing compliance procedures alone will not stop “bad actors”; however, it will make similar activities significantly more difficult as colleagues in order processing and shipping get trained to follow compliance checklists, to look for red flags and to report compliance concerns internally through the appropriate channels.
Second, distributors, resellers and other intermediaries continue to pose a high risk for export control violations. Compliance procedures must extend to, and involve, intermediaries. Simply including a “standard” export compliance clause in a distributor or reseller agreement and expecting that the intermediary will implement the necessary controls is insufficient and, depending on the sophistication (or lack thereof), type of product, and territory of the intermediary, “naïve” or at least careless. There are effective and practical safeguards that companies can implement. Requiring that intermediaries provide end user certifications (EUC) from their customers that specifically state the country of final destination, end user and end use is not always feasible, but it greatly reduces the back-end compliance risk. Where exporters cannot obtain such certifications, depending on the industry, sales structure, territory or lack of leverage over their intermediaries, companies should consider a risk-based approach and determine in which cases obtaining EUCs is an absolute must, depending on the product, potential end use and geographic area. There are also other opportunities during the sales process where companies can obtain transaction-specific compliance certifications from intermediaries or end users.
Third, cooperating with OFAC in an investigation is a “no-brainer.” If the company truly did not cooperate with OFAC’s investigation—specifically, if it provided information that was “inaccurate, misleading, or incomplete,” then the company missed a key opportunity to mitigate potential penalties. While practitioners will sometimes question the benefit of submitting a voluntary disclosure for willful violations where OFAC may not necessarily reduce the penalty amount due to the willfullness of the violations, cooperating with export enforcement agencies and conducting a thorough internal investigation that provides accurate and robust information is a must as OFAC will generally grant mitigating treatment for cooperation.
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.