OFAC Penalty Highlights Risks of Directing Overseas Subsidiaries, Transactions

By Daniel Bethencourt

A U.S. manufacturer’s recent settlement of sanctions violations underscores the administrative hazards Americans encounter simply by approving transactions that occur entirely offshore—even without handling a payment directly, sources told ACAMS

On Dec. 20, the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, disclosed a $7.7 million penalty against Zoltek Corporation, a Missouri firm whose Hungarian subsidiary, Zoltek Vegyipari ZRT, bought thousands of tons of industrial chemicals “sourced” from Belarusian supplier J.S.C. Naftan from 2008 to 2015.

The penalty, though not unprecedented, veers from OFAC’s usual strategy of targeting entities whose violations have a substantial nexus to the United States, such as foreign banks stripping prohibited transactions of incriminating data to sail them through U.S. correspondents, said Jeremy Paner, a former federal sanctions official.

“Approval on its own … has technically always been a violation of law, but it’s never been an enforcement priority,” Paner, now an attorney with Holland & Hart in Washington, D.C., said. “There’s definitely technical violations of this [sort] all the time.”

Zoltek Vegyipari’s business with Naftan began in December 2008, roughly a year after OFAC added the latter firm’s parent company, the Belarusian State Concern for Oil and Chemistry, or Belneftekhim, to the U.S. list of Specially Designated Nationals.

Belneftekhim’s inclusion on the SDN list subjected not only its assets to blocking, but, pursuant to OFAC’s “50 percent rule,” those of its wholly owned subsidiary, Naftan, as well. Naftan in turn wholly owned Zoltek ZRT’s direct supplier, Polymir.

In August 2011, OFAC blacklisted Naftan directly.

According to the 11-page settlement, Zoltek ZRT’s local counsel, whom OFAC did not identify by name, advised at the time that blacklisting Naftan did not affect the subsidiary’s purchases from Polymir, and by extension Naftan, reasoning that “U.S. law did not apply in Hungary.”

But senior managers at Zoltek ZRT’s parent company in the United States reviewed and approved purchases from Polymir.

Their involvement conferred the U.S. nexus at the heart of the violations cited by OFAC, which generally prohibits Americans, whether inside or outside the United States, from direct or indirect commerce with blacklisted parties.

Seeking to avoid a similar U.S. nexus, a handful of European and Asian banks sought procedures for ringfencing their American employees from potential commerce with Iran after a global nuclear accord with the country took effect, reported in August 2017.

“Most people think OFAC sanctions are limited to funds transfers, and that’s not the case,” Brian O’Toole, a former senior official with the agency, said.

‘Please don’t worry’

In a February 2015 email, after a Hungarian employee raised concerns about U.S. sanctions against Naftan, the chief financial officer of Zoltek U.S. proposed routing future purchases through a “third-party trading company.”

Other U.S.-based senior managers, including the firm’s chief executive officer, chief operating officer and president, downplayed the possibility of sanctions violations in an email to a manager of Zoltek’s new parent company in Japan. “A final confirmation is being made with the U.S. government … so please don’t worry.”

But “neither Zoltek U.S. nor Zoltek’s parent company appears to have sought any guidance or counsel at this time regarding its obligations to comply with U.S. economic sanctions programs,” OFAC noted in the settlement.

The last purchase occurred in October 2015. Zoltek began disclosing the violations the following April.

OFAC’s case against Zoltek is not without precedent.

In 2015, the Texas-based headquarters of Schlumberger, a petroleum-equipment firm, forfeited $232 million after prosecutors accused U.S. employees of approving and obscuring expense requests for projects in Iran and Sudan from 2004 to 2010, as well as making decisions related to the deals and providing technical support.

OFAC assessed a $2 million fine against ExxonMobil in 2017, after U.S. executives of the company signed documents to enter a deal with Rosneft. The Russian firm was not blacklisted but the documents also bore the signature of its chief executive, Igor Sechin, who was and still is.

Exxon responded by filing a lawsuit against the Treasury Department on the basis that U.S. sanctions imposed by the SDN list applied only to Sechin personally and not to his professional role at Rosneft.

The lawsuit is ongoing, but Exxon dropped its joint venture with the Russian firm in February 2018.

As for Zoltek, OFAC appears to have taken issue because U.S. executives seemed aware of potential violations, and consulted an attorney in Hungary on their local risk without fully considering the firm’s role as a branch of a U.S. company, Michael Casey, an attorney with Kirkland & Ellis in London, said.

“OFAC is clearly sending the message that if a U.S. company’s foreign subsidiary elects to do business with a sanctioned person, it must proceed very carefully,” Casey said.

A Zoltek compliance manager said in a statement that the company has upgraded its compliance program to prevent similar violations.

Contact Daniel Bethencourt at

Topics : Sanctions
Source: U.S.: OFAC
Document Date: February 5, 2019