The U.S. government recently settled criminal and civil charges against United Technologies Corporation (“UTC”) and ING Bank N.V. (“ING”) for alleged export control and economic sanctions violations, respectively. These actions highlight the lengths to which U.S. authorities will go to pursue what might seem to be arguable theories of liability when they believe that companies are undermining U.S. national security and foreign policy interests. In particular, U.S. agencies will readily enforce U.S. trade controls against non-U.S. operations overseas. These cases also illustrate how ancillary implications of trade controls enforcement actions, such as mandated compliance programs and public relations harm, can dwarf what might seem to be modest legal penalties. The cases reinforce the need for multinational companies to adopt a holistic, world-wide approach to trade controls compliance.
On June 28, 2012, UTC, a U.S. UTC subsidiary, Hamilton Sundstrand Corporation (“HSC”), and a Canadian UTC subsidiary, Pratt & Whitney Canada Corp. (“PWC”), settled civil charges brought by the State Department and criminal charges brought by a United States Attorney for alleged violations of the International Traffic in Arms Regulations (“ITAR”) and their authorizing statute, the Arms Export Control Act (“AECA”). The central charges involved allegations that PWC exported to China helicopter engine-testing software that had been modified for development of military helicopter engines. According to U.S. authorities, the software supplied by the Canadian entity materially assisted the Chinese military in developing its first modern attack helicopter, the Z-10. Enforcement officials also allege that UTC mishandled an internal investigation and disclosure activity following initial revelations of ITAR violations.
The UTC entities were charged with illegally exporting the engine-testing software in violation of the AECA and the ITAR, making false statements to the U.S. government related to those exports, and failing timely to inform the U.S. government of the export of defense articles to China. PWC pleaded guilty to the first two charges, and UTC, HSC and PWC entered into a deferred prosecution agreement to settle the remaining criminal charges. UTC entered into a consent agreement with the State Department to settle civil charges. The UTC entities agreed to make $75 million in penalty payments. The UTC entities also committed to appoint a government-approved ITAR compliance monitor, establish extensive compliance policies and procedures, and continue in-depth internal investigations. Finally, the State Department “debarred” PWC under the ITAR, meaning that for a 3-year term it is generally not permitted to participate in ITAR-regulated export activities.
As is often the case with trade controls enforcement actions, the penalty payments (some of which can be used to defray compliance program costs) may be the least of the adverse implications for the settling company. UTC has reportedly spent $30 million and hired over 1,000 full and part-time employees to revamp its compliance program. Disruption of UTC’s business is likely far-reaching.
At the same time, the case is based on what is often an elusive and uncertain proposition: that an otherwise generic, non-military item—here, engine-testing software—was modified to render it specific to military activity and, therefore, controlled for export under the ITAR. Furthermore, the core, underlying alleged wrongdoing—software exports to China—was committed by a non-U.S. entity outside the United States.
On June 12, 2012, U.S. authorities announced a $619 million settlement with ING of the Netherlands to resolve civil and criminal charges of violations of U.S. embargoes and economic sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). ING is the fifth major European bank to settle OFAC-sanctions charges in recent years, and the $619 million amount is the largest monetary penalty to date for OFAC sanctions violations.
Enforcement officials accused ING of processing thousands of wire transfers totaling over $1.6 billion dollars in violation of OFAC embargo requirements relating to Burma, Cuba, Iran, Sudan and now-repealed sanctions against Libya. ING allegedly stripped references to sanctioned countries before processing transactions through U.S. financial institutions and manipulated inter-bank (SWIFT) communications to prevent U.S. financial institutions from detecting blocked transactions. It is also alleged that ING routed payments involving Cuban clients through non-sanctioned clients, provided advice to sanctioned entities seeking to avoid U.S. sanctions, and allowed clients to use shell companies to conceal transactions with U.S.-sanctioned persons (“specially designated nationals” or “SDNs”).
Again, even $619 million in penalty payments is probably not the foremost challenge for ING as compared to other costs and reputational damage. As part of the settlement, ING committed to review its compliance policies and procedures and to examine a risk-based sample of U.S. dollar payments to ensure compliance with OFAC regulations. ING has already created a team of personnel focused on preventing violations and implemented enhanced compliance and risk programs that employ over 400 full-time employees.
Furthermore—and as with prior OFAC settlements with European banks—there would seem to be questions about whether the OFAC measures actually extend extraterritorially to all of the alleged wrongful activity. The alleged wrongdoing appears to comprise actions by non-U.S. entities outside the United States. The theory of liability underlying the settlement seems to be that ING came within the scope of OFAC prohibitions (acted in the United States) when it issued instructions to U.S. banks to execute correspondent account transactions in support of transactions with sanctioned countries and persons.