ILMA Compoundings - July 2019 - 15

that U.S. export compliance is truly cradle-to-grave,
meaning that the necessity for controls and prevention does
not end.
UTILIZING THE U.S. FINANCIAL SYSTEM, OR
PROCESSING PAYMENTS TO OR THROUGH U.S.
FINANCIAL INSTITUTIONS, FOR COMMERCIAL
TRANSACTIONS INVOLVING OFAC-SANCTIONED
PERSONS OR COUNTRIES
The fact is, the U.S. financial system is sufficiently underpinning and intertwined with the global system that it is
practically impossible to avoid utilizing some aspect of the
U.S. financial system. Hence, the strong desire by European
member states to create an electronic "barter" system as a
means of sidestepping the U.S. sanctions against Iran. This
particular element serves as a jurisdictional linchpin for U.S.
authorities to enforce sanctions violations, including those
that involve downstream reexports.
SANCTIONS SCREENING SOFTWARE OR FILTER FAULTS
This particular cause is precipitated by individuals tightening the search criteria in denied party-screening tools to
avoid irritating and time-consuming false positives. Unfortunately, this has led to severe criticism and a large number
of enforcement actions against exporters and reexporters
alike. Although this is very understandable as a practical
matter, it has proven quite expensive for a growing number
of exporters. Just as importantly, this is an element that
requires the exporter to also dictate and monitor the screening performed by its downstream reexporters.
IMPROPER DUE DILIGENCE ON CUSTOMERS
AND CLIENTS
To be clear, the term "improper" in this instance also means
"incomplete" and "ineffective." This is intended to speak
to insufficient or haphazard fact gathering prior to the
commercial transaction. Many steps required for "proper"
due diligence involve discussions and procedures that are
uncomfortable for all the involved parties. The importance
of thorough due diligence cannot be overstated, including
situations where the parties and transaction details are
repetitive. Important background facts can change without
being readily detectable.
DECENTRALIZED COMPLIANCE FUNCTIONS AND
INCONSISTENT APPLICATION OF A SANCTIONSCOMPLIANCE PROGRAM
Centralization of the compliance functions and consistency of the application of compliance measures probably
seem obvious on their face. The difficulties emerge when
programs are intended to apply to specifically limited
activities of the business and related personnel, or when
specific accounts (often the more longstanding ones) enjoy

lesser scrutiny. In many instances, this involves influence
by account managers who believe they have sufficient
understanding of the facts concerning the parties involved
in related transactions. The point made here by the OFAC
is that centralization and consistency are key factors that are
important to its evaluation of your compliance program,
after it found behavior warranting enforcement scrutiny.
Keep in mind that in many cases, this scrutiny and criticism
occur after months or years of investigative work by enforcement authorities.
UTILIZING NONSTANDARD PAYMENT OR
COMMERCIAL PRACTICES
Naturally, the OFAC's scrutiny of export and reexport conduct has precipitated creativity. Some of the nonstandard
practices are intended to prevent the conduct from actually
violating an OFAC standard, such as utilizing the UF
financial system. Others are simply creativity that responds
to transaction needs. Of course, there is also the conduct of
those nefarious parties desiring to simply avoid detection.
Regardless of the motivation, creativity that utilizes nonstandard payment or commercial practices creates flags that
draw OFAC attention. Even if the practices do not produce
serious violations, their presence will tend to precipitate or
increase scrutiny in an investigation and the incentive for
the agency or other authorities to justify further action.
INDIVIDUAL LIABILITY
Not all OFAC investigations and enforcement actions are
triggered by conduct of the exporting or reexporting organization, but by the conduct of an individual associated with
that transaction. This emphasizes the need for enhanced
training in scrutiny surrounding the conduct of exporter
and reexporter personnel, agents and others. This poses a
responsibility for the company to cast a broad net when
defining potential third-party risk that might lead to OFAC
enforcement action.
Please keep in mind that these are just the top 10 causes
identified by the OFAC. However, the company that properly addresses these causes will likely be well-positioned to
avoid other causes not mentioned here. For those that have
established compliance programs in this area, these critiques
of overall conduct should spur a thorough review and
evaluation of the program in place. Those that do not have
a relevant, established compliance program should develop
and implement one soon.
Eggenschwiler, an ILMA consultant, is an international
trade attorney and director of global trade for the
Redstone Group, a Trinity Consultants company.
He can be reached at 614-923-7472
or jeggenschwiler@redstonegrp.com.

ILMA Compoundings - July 2019

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