A common thread has emerged among recent OFAC violations: U.S. trade compliance breaks down in overseas affiliates and subsidiaries.
A common thread has emerged in recent months involving several high-profile Office of Foreign Assets Control (OFAC) violations settlement agreements. I’m referring to violations that were the result of rogue or arrogant managers in the offices of U.S. companies’ overseas affiliates and subsidiaries, who cast aside their responsibility to U.S. export control and sanctions for the sake of personal greed.
Although the U.S. companies voluntarily self-disclosed those violations to OFAC, they still paid dearly for those overseas operations’ indiscretions in terms of stiff penalties, significant legal fees, tied-up resources and negative publicity in the press.
On March 27, OFAC reached a $1.9 million settlement with New Britain, Conn.-based toolmaker Stanley Black & Decker for the U.S. sanctions violations caused by its Chinese subsidiary, Jiangsu Guoqiang Tools Co., Ltd. (GQ).
At the time of the acquisition, a Stanley Black & Decker employee in charge of global trade compliance for China reviewed the company’s trade compliance policies and procedures with GQ’s export sales manager by telephone in August 2013 and then asked her to provide the training to her team within GQ. However, the toolmaker failed to monitor this activity or audit GQ’s operations to ensure its Iran-related sales ceased.
According to OFAC, between about June 29, 2013, and Dec. 30, 2014, GQ instead continued to export or attempted to export 23 shipments of power tools and spare parts, valued at about $3.2 million, to Iran, either directly or through third-party countries. The GQ staff deliberately attempted to conceal this activity, a violation of U.S. trade sanctions against Iran, from its owners and U.S. regulators.
In another case in late February, OFAC reached a $506,250 settlement with a Newtown, Conn.-based company for illegally sourcing cement clinker from Iran.
Between July 11, 2014, and Jan. 15, 2015, ZAG International purchased 263,563 metric tons of Iranian-origin cement clinker via a supplier in the United Arab Emirates, which was then resold by the company to a customer in Tanzania.
OFAC said ZAG’s managing director for the Asia-Pacific, Middle East and East Africa regions purchased the cement clinker, valued at about $14.5 million, with knowledge that it was sourced from Iran.
The agency slammed the company for acting “with reckless disregard for sanctions requirements by failing to substantively address the U.S. sanctions prohibitions in place with respect to Iran despite contemporaneous risk indicators.”
Surely, more of these types of compliance breakdowns will continue to surface due to U.S. parent companies failing to adequately support their global trade compliance operations. But it doesn’t have to be this way.
These OFAC enforcement cases are a clear indicator that the challenges U.S. parent companies face require a “corporate governance” agenda driven from the top which in turn is effectively and continuously communicated to the senior personnel in their overseas offices.
It’s important to identify a “compliance point of contact” at each affiliate that has at least dotted line accountability to the U.S. corporate headquarters compliance organization. The person selected must have the appropriate skill set and authority to act in a compliance role without being put into a position of duress.
While there’s no foolproof way to stop all compliance breakdowns, one method that I believe will go a long way to end most of the temptation of for wrongdoing is to draft a statement of liability for each senior manager in the affiliates and subsidiaries to sign. This document should affirm that if the corporate governance policy is breached under that individual’s watch, then that’s grounds for immediate dismissal and could result in legal action (i.e. personal liability) from the government of the country whose laws were violated.
DiVecchio, principal of Boston-based DiVecchio & Associates, has provided export compliance consulting services to U.S. exporters for more than 35 years. He may be reached by email at email@example.com.