Foreign Sanctions Evader? US Company Penalized for Foreign Subsidiary’s Violation of Iran Sanctions
Kollmorgen Corporation, a maker of motors and automation platforms based in Radford, Virginia (“Kollmorgen”), recently paid $13,381 to settle potential civil liability for six violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (“ITSR”) by its Turkish affiliate, Elsim Elektroteknik Sistemler Sanayi ve Ticaret Anonim Sirketi (“Elsim”). And, OFAC named an individual manager of Elsim a foreign sanctions evader.
My Brother’s Keeper: Foreign Acquired Companies and Sanctions Due Diligence
Kollmorgen acquired control of Elsim in early 2013, thereby making Kollmorgen subject to the ITSR’s prohibitions for any activity or conduct engaged in by Elsim, including conduct or activity occurring outside of the United States.
According to Jim Chester, a global technology lawyer and partner in the Dallas office of Klemchuk LLP, “This case is both a cautionary tale for any U.S. companies who acquire foreign subsidiaries, as well as a case study of how a company should handle suspected violations of U.S. sanctions by its affiliates and rogue employees.”
Prior to the acquisition, Kollmorgen hired an external law firm and an external auditing and consulting company to perform foreign sanctions due diligence on Elsim. The due diligence results demonstrated that Elsim made sales to, and had customers in, Iran prior to its acquisition by Kollmorgen. Based on these results, Kollmorgen determined it would need to take steps to prevent such sales from occurring in the future and educate Elsim on the applicability of U.S. sanctions.
Identifying a Foreign Sanctions Evader
Kollmorgen subsequently implemented a wide range of pre- and post-acquisition compliance measures designed to ensure Elsim complied with U.S. sanctions. In spite of Kollmorgen’s extensive efforts to ensure Elsim complied with the ITSR, for two years after acquisition, Elsim willfully, and with full knowledge of the applicable prohibitions, dispatched employees to Iran to fulfill service agreements and engaged in other transactions related to Iran. Elsim management threatened to fire employees if they refused to travel to Iran. Upon returning from the service trips in Iran, Elsim employees were directed by Elsim management to falsify corporate records by listing the travel as vacation rather than business related.
Over the two years the transactions took place, Elsim management regularly and fraudulently certified to Kollmorgen that no Elsim products or services were being sent to Iran. It was only after an Elsim employee filed an internal complaint with Kollmorgen via the company’s ethics hotline in late October 2015 that the violative conduct came to light. Kollmorgen then retained outside counsel to investigate the matter.
Dealing with a Foreign Sanctions Evader
Upon being notified of Kollmorgen’s investigation, Elsim managers attempted to obstruct the investigation by instructing Elsim employees to delete references to Iran in company records and misleading Kollmorgen’s attorneys. Finally, Elsim managers also attempted to delete emails related to Iran. Despite this obstruction, Kollmorgen uncovered the apparent violations, conducted a full investigation, and disclosed its findings to OFAC in a comprehensive report.
Notwithstanding Kollmorgen’s extensive compliance efforts, OFAC determined a penalty was the appropriate administrative response to the apparent violations due to Elsim’s egregious conduct and specific risk profile, including that Elsim had previously engaged in business with Iran. Additionally, the conduct of Elsim management and their subsequent attempts to impede Kollmorgen’s internal investigation warranted further action by OFAC.
Because of Kollmorgen’s internal controls, proactive efforts and corrective measures, it was able to avoid $1,500,000 in potential penalties for the violations.
OFAC Names Individual a Foreign Sanctions Evader
In a historic first, OFAC named an individual a “Foreign Sanctions Evader” in relation to this civil enforcement action. In addition to the company’s penalty, OFAC sanctioned Evren Kayakiran, the Elsim manager primarily responsible for the conduct that led to the violations.
“Treasury is sanctioning Kayakiran not just for his willful violation of U.S. sanctions on Iran, but also for directing staff to commit and cover up these illegal acts. This is the first time that OFAC has designated an individual as a Foreign Sanctions Evader while resolving an enforcement matter and is a marked change to how we will counter these acts of deception,” said Sigal Mandelker, Treasury Under Secretary for Terrorism and Financial Intelligence.
Jim Chester declares, “This action is a clear warning that individuals in supervisory or managerial positions who direct staff to provide services, falsify records, commit fraud, or obstruct an investigation into sanctions violations expose themselves to serious personal risk.”
Kayakiran is being sanctioned as a foreign sanctions evader pursuant to Executive Order 13608, which targets efforts by foreign persons that engage in activities intended to evade U.S. economic and financial sanctions with respect to Iran and Syria. The Foreign Sanctions Evaders list (FSE List) is separate from OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), and it identifies foreign individuals and entities that have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions against Iran or Syria. As a result of the sanction, all transactions or dealings, whether direct or indirect, involving Kayakiran, in or related to (i) any goods, services, or technology in or intended for the United States, or (ii) any goods, services, or technology provided by or to U.S. persons, wherever located, are prohibited. Additionally, U.S. financial institutions must reject payments involving Kayakiran.
For more information, see the OFAC Press Release: https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190207_kollmorgen.pdf
More information on Jim Chester and the Klemchuk LLP international business and trade practice may be found here.
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