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US company to pay USD500,000+ for maybe not breaching sanctions.

Nigel Morris-Cotterill

The USA's Office of Foreign Assets Control has reached an agreement with a company from Connecticut over "apparent violations" of US sanctions against Iran.

Hang on... "apparent violations"? And the company has agreed to pay? It's time to abandon the linguistic and legal pussyfooting around.

What OFAC say is this "Today OFAC announced a USD506,250 settlement with ZAG IP, LLC (formerly known as ZAG International, LLC) (ZAG), a U.S. company with its business address in Newtown, Connecticut, for five apparent violations of 560.206 of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR). Specifically, between on or about 11 July, 2014 and on or about 15 January, 2015, through five separate transactions, ZAG purchased a total of 263,563 metric tons of Iranian-origin clinker from a company located in the United Arab Emirates, with knowledge that the cement clinker was sourced from Iran, and then resold and transported it to a company in Tanzania. OFAC determined that ZAG voluntarily self-disclosed the apparent violations to OFAC, and that the apparent violations constitute a non-egregious case."

OFAC statement:

The aggregate value of the five transactions was USD14,495,961. OFAC determined that ZAG voluntarily self-disclosed the apparent violations to OFAC, and that the apparent violations constitute a non-egregious case. The statutory maximum civil monetary penalty amount for the apparent violations was USD28,991,922, and the base civil monetary penalty amount was USD625,000. During the time period in which the apparent violations occurred, ZAG’s business focused on global sourcing and marketing of cement raw materials and providing strategic advisory services related to raw material selection for companies in the construction industry. On April 11, 2014, ZAG signed a supply contract with a company based in Tanzania (the “Purchaser”) and agreed to supply about 400,000 metric tons of cement clinker manufactured by a company based in India (the “Supplier”). Under the terms of the contract, ZAG was required to supply the Purchaser with a minimum of three shipments of cement clinker in 2014 and a minimum of five shipments in 2015 (about 50,000 metric tons per each shipment). On or about June 26, 2014, the Supplier sent an email to ZAG’s Managing Director of the Asia Pacific, Middle East, and East Africa Regions (“ZAG Managing Director”) that, due to a technical problem at its production plant, it would not have sufficient cement clinker to load onto ZAG’s vessel on or about July 5, 2014. ZAG attempted to reschedule the date of its first shipment to the Purchaser but was unable to do so after the Purchaser objected to any delays and threatened to cancel the entire contract. The ZAG Managing Director subsequently identified a business contact and trading company located in the United Arab Emirates (the “Alternative Supplier”) capable of providing alternative Iranian-origin cement clinker. Relying on the Alternative Supplier’s misrepresentation that the cement clinker was not subject to U.S. economic sanctions on Iran, ZAG purchased the alternative cement clinker from the Alternative Supplier despite its knowledge that the goods were produced by an Iranian manufacturer and shipped from a port in Iran. The settlement amount reflects OFAC’s consideration of the following facts and circumstances, pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A.

OFAC considered the following to be aggravating factors:

(1) although ZAG did exercise limited due diligence, it acted 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;
(2) ZAG’s senior management was aware that ZAG was purchasing and reselling goods of Iranian origin at the time of the conduct at issue;
(3) the transactions giving rise to the apparent violations conferred significant economic benefits to Iran;
(4) ZAG is a commercially sophisticated company operating globally with experience and expertise in international transactions; and (
5) ZAG did not have an effective OFAC compliance program in place at the time of the transactions commensurate with its level of risk.

OFAC considered the following to be mitigating factors:
(1) ZAG has not received a penalty notice or Finding of Violation from OFAC in the five years preceding the date of the transactions giving rise to the apparent violations;
(2) ZAG was a small business entity as defined by the U.S. Small Business Administration’s standards;
(3) ZAG undertook significant remedial measures by conducting a thorough internal investigation to determine the causes of the compliance failures associated with the apparent violations and enhancing its sanctions compliance policy and procedures, including by developing and implementing a U.S. Export Controls and Economic Compliance Manual and appointing a sanctions compliance officer; and
(4) ZAG cooperated with OFAC’s investigation by providing all relevant information regarding the apparent violations in an organized fashion and by responding to OFAC’s requests for information in a timely and efficient manner.

Ignoring the USA's obsession with talking big ("violations", "egregious") the big question is this: were breaches proved or admitted and, if so, why does OFAC refer to "apparent" breaches. It's not new: in 2012, Standard Chartered Bank "a $132 million agreement with Standard Chartered Bank (SCB) to settle its potential liability for apparent violations of U.S. sanctions." That was over the "stripping" affair where a number of banks were found to have removed information from transaction records to avoid detection by US banks and regulators. Then there's a "USD258,660,796 million agreement with Commerzbank AG (Commerzbank) to settle its potential civil liability for apparent violations of U.S. sanctions regulations. Today’s settlement resolves OFAC’s investigation into apparent violations by Commerzbank of U.S sanctions programs relating to Iran, Sudan, Proliferators of Weapons of Mass Destruction, Burma, and Cuba. " In November last year, an agreement with Societé Generale S.A

The big questions are these: why are shareholders not up in arms about these substantial payments when there is no formal determination of fault?

Also, this system appears to be an extension of the system that the USA is promoting under which there are deals done for companies to avoid prosecution.

OFAC's reasoning that it is a mitigating factor that companies have not been subject to OFAC sanctions for five years suggests that there is an institutionalised tolerance for breaches. Why, otherwise, would there be a time limit on past good behaviour?

The system needs overhaul: if offences are committed, then they should be classified as criminal and fines applied and those involved should be prosecuted. Legal and linguistic pussyfooting around is not the answer and it misleads the public.

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