October 21, 2014
On February 6, 2014 DF Deutsche Forfait AG received the dreaded news that it was placed on the Specially Designated Nationals and Blocked Persons List (SDN List) administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). According to OFAC’s press release, Deutsche Forfait’s SDN designation was made pursuant to Executive Order 13382, “Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters.” The allegations against the company included facilitating oil deals in circumvention of sanctions targeting the National Iranian Oil Company (NIOC), an entity determined to be an agent or affiliate of the Islamic Revolutionary Guard Corps (IRGC).
Being placed on the SDN List was devastating for Deutsche Forfait. For starters, receivables from the prior year, totaling 1.6 million euro, could not be collected. Most likely because U.S. persons were prohibited from making those payments to the company. OFAC regulations broadly prohibit U.S. persons from transacting with any person designated pursuant to Executive Order 13382, even with respect to transactions where the underlying deal has already been processed or was started prior to the date of the designation.
More stunning was the impact OFAC’s designation had on the value of the company. Deutsche Forfait sustained “a loss in the amount of half the company’s share capital.” The company’s shares tumbled from over 4 euro per unit at the start of 2014 to levels as low as 0.47 euro per unit shortly following news of the designation. That is more than an 85 percent drop in share value. Deutsche Forfait’s chief finance officer said in an interview that “[l]osses and one-off costs related to the group’s stint on the sanctions list . . . will exceed 10 million euro by the time the group has ramped up its business again.”
Deutsche Forfait’s Successful De-Listing Petition
As serious as the allegations were, and as devastating as the consequences of those allegations were on Deutsche Forfait’s profitability, the company managed to be taken off of the SDN List in just 249 days (February 6, 2014 to October 16, 2014). That is 601 days quicker than the average time it takes to be taken off of the SDN List (avg. 850 days), according to the company.
OFAC only removes persons from the SDN List if the reasons for removal can be “credibly” proven. Simply rearranging corporate structures or stating in the de-listing petition that problematic or harmful relationships have ceased will not result in a de-listing. Such statements and restructuring need to be shored up with certifiable facts, most likely in conjunction with an agreement with OFAC regarding remedial steps.
Although the evidentiary threshold for listing a person on the SDN List is the very low “reasonable cause to believe” standard, OFAC insists that its designations are accurate and far exceed that bare threshold. If one believes OFAC, it’s not surprising then that the agency unofficially requires a designee to admit wrongdoing as part of the de-listing process, and then prove why they should no longer appear on the SDN List.
As can be gleaned from the company’s press release and website, Deutsche Forfait appears to have taken OFAC’s preferred course of action by (1) admitting wrongdoing (sort of) and (2) credibly proving to OFAC why the company should no longer appear on the SDN List.
(1) For the entirety of Deutsche Forfait’s designation, the company held that it never violated U.S. economic sanctions. Although not false, this is a bit misleading as one does not need to violate sanctions regulations to be placed on the SDN List. Indeed, most people included in the SDN List are non-U.S. persons who are not subject to OFAC regulations. However, such foreign persons do participate in activities (e.g., conducting oil transactions with NIOC) that would be considered violations of sanctions had they been performed by U.S. persons. As a result of those transactions, OFAC can place foreign persons on the SDN List to protect the U.S. financial system and further U.S. national security objectives.
Deutsche Forfait presumably demonstrated to OFAC that its former board member, Ulrich Wippermann, was the person engaged in the targeted activities. Mr. Wippermann was designated alongside Deutsche Forfait in the same OFAC action on February 6, 2014. With Mr. Wippermann’s resignation and simultaneous termination only three weeks after the designations, Deutsche Forfait held at the time that it “is not aware that . . . Mr. Wippermann . . . committed violations of U.S. sanctions.” Again, misleading but not untrue. However, by October 16, 2014, Deutsche Forfait was taken off of the SDN List while Mr. Wippermann’s designation remained fully intact.
One can only assume that the company credibly demonstrated to OFAC that Mr. Wippermann was the isolated culprit, thereby confirming what OFAC probably already knew. As such, Deutsche Forfait likely admitted wrongdoing by proving to OFAC that at least one of its board members was involved in the problematic activity instead of denying the conduct altogether.
(2) Deutsche Forfait also likely demonstrated to OFAC “that the circumstances resulting in the designation no longer apply.” See 31 C.F.R. Section 501.807. One method of doing this was probably by proving to OFAC that the conduct at question was only being performed by a limited number of employees, i.e. Mr. Wippermann. The company then forthrightly terminated Mr. Wippermann. But this is not enough to absolve an SDN. Deutsche Forfait most likely had to identify how this conduct was allowed to go undetected and then propose remedial steps to ensure such conduct is not repeated in the future.
Pursuant to an agreement with OFAC dictating Deutsche Forfait’s terms of removal, the company has agreed to take the following remedial steps as outlined in its press release:
- Deutsche Forfait has undertaken not to maintain any business relations or other connections with any SDN-listed parties.
- Deutsche Forfait has given an assurance that to the best of its knowledge, its shareholder structure does not and will not maintain any connections with certain parties and that none of its shareholders will figure on the SDN list.
- Deutsche Forfait has agreed to install a compliance system, which is also in accordance with US sanctions law, to train its employees in the implementation of the expanded compliance guidelines, and to fulfil the corresponding compliance reporting requirements.
It is not surprising that OFAC utilized an agreement to fulfill its sanctions mission. The use of agreements (e.g., non-prosecution agreements, deferred prosecution agreements, monitorships, etc.) has been on the rise lately when prosecuting and investigating corporate actors. This is particularly true of federal law enforcement agencies such as the Department of Justice and SEC.
Before an agreement can be reached however, the parties must have some level of trust between them. This is probably where Deutsche Forfait’s use of attorneys, consultants, and auditors helped, totaling in over EUR 1.5 million in fees paid. Between implementing a compliance program, performing a full audit, and training employees, the company was able to credibly demonstrate to OFAC that “insufficient basis exists for the designation” and/or such steps “negate the basis for designation.” See 501.807(a).
The key to credibility is corroborated facts, third party-certified data, and authentic evidence. Designated persons tend to treat OFAC’s opaque de-listing process as a lack of procedure or formality. This is a mistake, as OFAC maintains comprehensive evidentiary files (known as designation packets) on those persons appearing on the SDN List. The evidence sustaining a designation is sourced from the intelligence community, law enforcement agencies, and others. Sometimes such evidence was gathered utilizing cutting edge surveillance technology. So although an SDN will likely never see the exact contents of their designation packet, they should be prepared to put up only highly credible arguments as if they were challenging their designation in federal court.
Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes. Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.