In all the hubbub about the SEC fining El Paso for violating the Foreign Corrupt Practices Act through bribes paid in connection with the Oil for Food program, there has been little mention that OFAC was also part of the hunting party that bagged El Paso. And an examination of the facts that led to El Paso’s settlement of the OFAC charges shows a violation premised on an extremely broad reading of the sanctions regimes administered by OFAC.

According to the settlement agreement:

From June 2001 until May 2002, EL PASO purchased Iraqi oil for which third-party intermediaries and/or allocation holders paid approximately $5.48 million in illegal surcharges to the former Government of Iraq.

Obviously unlicensed payments to Saddam Hussein’s government violated the Section 575.210 of the Iraqi Sanctions Regulations in place at the time. However, notice that there is no allegation that El Paso made those unlicensed payments, only that El Paso purchased oil from third-parties that had made such payments.

The settlement agreement attempts to link El Paso to the third-party payments as follows:

Other oil market participants and officials of the former Iraqi Government informed EL PASO that surcharges were being demanded on Iraqi oil allocations in the Oil-for-Food program. . . . Although EL PASO took steps designed to prevent the purchase of Iraqi oil from third parties on which illegal surcharges had been paid, such procedures proved inadequate.

For these third-party payments to Saddam’s government to give rise to liability by El Paso under the Iraqi Sanctions Regulations, they would need to be seen as a transaction which had the purpose or effect of evading the regulations or which facilitated the evasion of the regulations in violation of section 575.211 of the Iraqi Sanctions Regulations. Somehow it seems a stretch to assert that an ineffective program to prevent third-party payments to the Hussein government can be deemed an effort to evade the sanctions regulations. That argument might have had some force if El Paso knew of the payments and purchased the oil without making any effort to avoid purchasing oil on which such unlicensed payments had been made. But that was not the case.

It’s hard to see where this theory of liability ends. Does a company violate the SDN regulations if it purchases goods that the seller had bought from an SDN? What additional due diligence should a company conduct on its overseas vendors to assure that they are not violating any of OFAC’s sanctions regulations? After El Paso, the answers to these questions no longer seem very clear.

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