April.02.2015
Last week, U.S. authorities settled criminal charges against a subsidiary of Schlumberger Ltd. and civil claims against PayPal, Inc. Federal authorities alleged that these companies violated U.S. embargoes and other economic sanctions.
The settlements reinforce and extend learning about sanctions compliance challenges, as the U.S. government increasingly views sanctions as a central means of combating international terrorism and related matters, such as proliferation of weapons of mass destruction ("WMD"):
The Schlumberger and PayPal cases involved alleged violations of economic sanctions prohibitions administered by the U.S. Department of the Treasury, Office of Foreign Assets Control ("OFAC"). These sanctions include broad embargoes of Crimea, Cuba, Iran, North Korea, Sudan and Syria and "blocking" measures against designated persons and certain of their affiliates. Blocking measures broadly forbid transactions that involve a direct or indirect interest of a sanctioned person. Persons who are publicly designated as being blocked are included on a list of "specially designated nationals" ("SDNs").
In general, these sanctions prohibitions extend to:
Basic Facts
On March 25, 2015, Schlumberger Oilfield Holdings, Ltd. ("SOHL"), a subsidiary of Schlumberger Ltd. ("Schlumberger"), entered into a plea agreement with U.S. authorities to settle criminal charges of conspiracy to violate the International Emergency Economic Powers Act (the "IEEPA") and, in particular, U.S. embargoes of Iran and Sudan that are based on the IEEPA. SOHL's alleged sanctions-inconsistent behavior included "facilitat[ing] trade with Iran and Sudan," "illegally export[ing] or caus[ing] the exports of services to Iran and Sudan," and "engag[ing] in transactions to evade or avoid" U.S. embargoes of Iran and Sudan from approximately February 2004 to June 2010. SOHL and Schlumberger are incorporated in the British Virgin Islands and the Netherlands Antilles/Curaçao, respectively. Schlumberger has headquarters in Paris, France, the Hague, Netherlands and Houston, Texas, with its Drilling & Measurements business segment ("D&M") headquartered in Sugar Land, Texas. SOHL and some of its non-U.S. affiliates provided D&M services to Schlumberger customers in Iran and Sudan.
Pursuant to the plea agreement, SOHL must pay a nearly $233 million penalty, submit to a three-year period of corporate probation during which it must not commit any additional federal felonies, and continue cooperating with U.S. authorities. In addition, Schlumberger must continue its cessation of Iranian and Sudanese operations, submit sanctions compliance reports to the U.S. government, respond to U.S. government requests to disclose information and materials related to compliance with U.S. sanctions regulations, and retain an independent internal compliance consultant.
Key Aspects
First, grounded in a conspiracy charge that is not clearly articulated and based mainly on alleged activity by non-U.S. persons outside the United States, the SOHL settlement reflects aggressive extraterritorial enforcement of U.S. economic sanctions. Both SOHL and Schlumberger are incorporated outside the United States. Alleged activity that took place outside the United States included, for example, equipment "swapping" to facilitate supply of U.S.-origin D&M equipment to Iran and Sudan – U.S. origin equipment was allegedly exported from the United States to an SOHL subsidiary already using identical one-year-old equipment in a non-embargoed country, with the subsidiary then reexporting its used equipment to Iran or Sudan. Alleged wrongdoing inside the United States appears to have been limited to activity by D&M personnel in the United States, such as allegedly approving spending for activity in Iran and Sudan. In some instances it appears that D&M personnel in the United States allegedly were aware of the involvement of sanctioned countries, but in other instances it is not clear that D&M U.S. personnel knew that contemplated activities were to occur in embargoed regions.
Given that the companies at issue are generally not U.S. persons and that much of the activity at issue occurred outside of the United States, the SOHL settlement raises questions about whether a conspiracy charge can, in effect, result in liability for a party acting outside the scope of sanctions prohibitions.
Second, the U.S. prosecutors acknowledged that Schlumberger maintained a U.S. sanctions compliance program. Due to failings in execution of the program, it proved inadequate to forestall even criminal liability for alleged sanctions violations. The government alleged that Schlumberger did not provide "adequate compliance training and supervision" to its D&M personnel in the United States and failed to instruct them to recuse themselves from any embargoed country business.
Third, a critical aspect of the case was alleged hiding of connections to Iran and Sudan in communications about Schlumberger activities. As has been true with regard to U.S. sanctions settlements with European banks, this alleged activity underpinned criminal allegations for "willful" violations and, in general, seemed to encourage U.S. authorities to adopt aggressive interpretations of sanctions prohibitions. Parties involved – including investigated non-U.S. companies and their home country governments – will tend to object less to seemingly overreaching allegations of violations if they are connected to purposeful manipulation of evidence.
Fourth, U.S. authorities investigated and prosecuted SOHL, a non-U.S. company, for U.S. sanctions violations notwithstanding that Schlumberger committed to and did withdraw from the sanctioned regions (Iran and Sudan).
Basic Facts
On March 23, 2015, PayPal, Inc. ("PayPal") entered into an agreement with OFAC to settle, without finding of fault, potential civil liability for alleged violations of economic sanctions programs including embargoes of Cuba, Iran and Sudan as well as regulations implementing blocking actions relating to WMD proliferation. PayPal, a California-based money services business, allegedly processed 486 transactions totaling approximately $44 thousand in violation of the regulations during several years up to and including 2013. Under the settlement agreement, PayPal agreed to pay the government over $7.5 million and to provide OFAC with a presentation on its current sanctions compliance program within six months.
Key Aspects
First, although PayPal's violations involve relatively minor monetary amounts, OFAC focused on a particular set of the transactions that it determined to be egregious. Over a period of approximately four years, PayPal processed 136 transactions (totaling just over $7 thousand) associated with an individual who had been blocked for WMD proliferation reasons. These transactions were deemed to have provided economic benefit to the sanctioned individual and to have undermined the integrity and policy objectives of the sanctions regulations. As a result, PayPal's penalty exceeds the monetary amounts transferred in the prohibited transactions by orders of magnitude.
Second, OFAC stressed that PayPal's sanctions compliance arrangements were inadequate to prevent PayPal's violations. PayPal did not "employ adequate screening technology and procedures" to screen and reject or block prohibited transactions. As a result, the transactions at issue were allowed to proceed even though each transaction concerned a PayPal account in which a sanctions target had an interest or contained "an explicit reference" to a country subject to sanctions or another term linked to such a country. Further, PayPal's automated interdiction filter was not "working properly" for at least six months causing it to fail to identify an SDN match with its accountholder at the time of his designation. PayPal also did not provide proper training to PayPal agents, who ignored red flags emerging from its interdiction software on multiple occasions and failed to adhere to PayPal's policies and procedures pertaining to an SDN match escalation.
Third, OFAC considered PayPal's voluntary disclosure and remedial measures, including hiring new compliance management personnel, improving its compliance program and processes and cooperating with the investigation, in its reduction of PayPal's penalty by over 120% from a penalty level calculated based on standard practice.