US Embassy in Khartoum

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Late last week Reuters reported that Adam Szubin, head of the Office of Foreign Assets Control (“OFAC”), announced that OFAC was stepping up its enforcement actions for violations of the U.S. sanctions on Sudan. According to Szubin, agents have built up a “queue” of enforcement actions against violators that will be rolled out in as early as a month’s time.

And Szubin is hoping to go for the big bucks:

Violating companies now face fines of up to $250,000 a breach or a charge of twice the offending transaction — a penalty that in some cases could run into millions, said Szubin. …

The recent increase in penalties for sanctions violators had strengthened OFAC’s hand, he added. …

Before the penalty increase, the company would have only had to pay up to $50,000 for each illegal sale — a charge that many organisations could write off.

“We’re now able to say, if your transactions totalled $40 million, and those were violative transactions, you could be facing a maximum penalty of $80 million. And that is no longer something that people will shrug off.”

This prospective uptick in enforcement actions, corresponds with increasing diplomatic parries between the U.S. and Sudan over the sanctions. According to a story in the Sudan Tribune, last year the government of Sudan had blocked 400 containers bound for the U.S. Embassy in Khartoum for failure to pay customs fees. The U.S. premised this non-payment on the Sudan sanctions and it was not until Sudanese president Omar Hassan Al-Bashir issued a decree granting an exception to the containers from custom fees that the containers were released. The Sudanese government later reversed its position and recently blocked entry of containers bound for the U.S. Embassy for non-payment of customs fees. In response, the U.S. has threatened to halt construction of a new U.S. Embassy in Khartoum. That construction has been underway for the past two years.

The Office of Foreign Assets Control (“OFAC”) released today its monthly report of penalties imposed by the agency. Of course, that report reveals that OFAC continues to protect our national security by chasing hapless cigarficianados who buy their Cuban Cohibas over the Internet. More interesting, however, was a Penalty Notice posted by OFAC in conjunction with the report and which imposed a penalty of $8,250 on Parkdale Mills, the largest independent yarn spinner in the United States.

According to the Penalty Notice, Parkdale attempted to import, in October 2003, 1.65 million pounds of cotton from Sudan. Upon learning that such a transaction would violate the Sudanese Sanctions Regulations, Parkdale cancelled the transaction and the cotton was never imported from Sudan to the United States. In April 2007, OFAC sent a Prepenalty Notice to Parkdale alleging that the attempted import of cotton from Sudan violated section 538.204 and section 538.210 of the Sudanese Sanctions Regulations.

In a written submission to OFAC, Parkdale raised a number of arguments in its defense. The first argument was the Parkdale was unaware of the embargo of Sudan. I suspect that had Parkdale made that argument to Judge Judy, it would have elicited her trademark riposte: “Don’t pee on my leg and tell me it’s raining.” Cotton is the main cash crop of Sudan and constitutes 45 percent of its exports. There is no way on earth that Parkdale didn’t know that Sudanese cotton was embargoed.

Second, Parkdale claimed that First Atlantic Commodities told it that there were no licensing requirements. This argument is pretty much the equivalent of saying that your Uncle George thought the transaction was okay, given that First Atlantic Commodities is a small North Carolina company that appears to be principally involved in the real estate business and not international trade.

Saving its best argument for last, Parkdale also noted that it had in fact cancelled the order when it discovered that it violated the embargo. More likely, it cancelled the order when a freight forwarder or shipper said it wouldn’t handle the transaction because it seems inconceivable that Parkdale “discovered’ the prohibition only after it ordered the cotton.

OFAC, not surprisingly, wasn’t impressed by the first two arguments made by Parkdale. It provided a 25% mitigation of the originally proposed $11,000 penalty and based that mitigation on Parkdale’s previously clean record, its cancellation of the order and its timely provision of a response to the Prepenalty Notice.

Parkdale should really consider itself lucky here. For the life of me, I don’t understand why it would try to mitigate an $11,000 fine from OFAC by telling a story which, even on the off chance that it were true, sounds like a whopper. A company like Parkdale is going to be assumed to be a sophisticated company that buys large amounts of cotton on the world market and would therefore be quite aware of the embargo on Sudanese cotton — unless the entire purchasing staff of the company had been conducting their trading operations from space ships in some distant galaxy. Moreover, no agency likes to hear companies assert that the agency’s regulatory activities were so unimportant that the company just couldn’t bother to keep abreast of agency regulations. If OFAC had been more aggressive, it might well have launched an investigation into whether the response to the Prepenalty Notice was a misrepresentation that warranted further civil and/or criminal penalties.

The Office of Foreign Assets Control (“OFAC”) announced expanded sanctions today against Sudan and added three individuals and thirty-one Sudanese companies to the SDN list. Doing business with these companies was already prohibited by the Sudanese Sanctions Regulations. The effect of the designations means that any funds of the newly-designated companies or individuals must be blocked when they come under the control of U.S. companies and individuals.

It’s always hard to anticipate the effect of such blocking. Certainly U.S. financial institutions have systems in place that will catch these funds should the newly-designated companies attempt to utilize those institutions. But other U.S. companies without such controls may well continue to provide services to the Sudanese SDNs.

Take IX Web Hosting, for example. IX hosts a number of websites on its servers in Hopkinsville, Kentucky. One of the websites hosted by IX Web Hosting just happens to be the website of Advanced Petroleum Company in Khartoum, one of the newly-designated SDNs. Of couse, such hosting already violated Section 538.205 of the Sudanese Sanctions Regulations (unless IX Web Hosting can somehow claim that it had no idea it was providing web-hosting to a company in Sudan). Under the new sanctions, if IX Web Hosting receives any hosting fees from Advanced Petroleum it will now have to block them.

We’ve noted on a number of occasions that the Internet poses unique challenges for sanctions compliance, challenges which a number of companies haven’t even begun to address. So how long before the Advanced Petroleum website disappears?