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Rare Due Process Reprieve for Company Penalized by OFAC for Violating Ukraine Sanctions

Following a ruling issued last week by a federal judge in Texas, ExxonMobil Corporation (“ExxonMobil”) will not have to pay a previously issued penalty for contracting with Russia’s state-owned PJSC Rosneft Oil Company (“Rosneft”), since it was not provided fair notice by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) that Rosneft’s President and Chairman, designated by OFAC in his individual capacity, would provide a prohibited service to ExxonMobil by executing contracts between the parties in his official capacity.

Executive Order 13661 “Blocking Property of Additional Persons Contributing to the Situation in Ukraine”

 On March 16, 2014, President Obama issued E.O. 13661, which among other things, granted Treasury the authority to designate officials of the Russian Government and to prohibit U.S. Persons from doing business with designated persons, including companies they individually control through ownership of 50% or more of such companies.

Subsequently, on April 28, 2014, OFAC designated seven Russian government officials, “including members of the Russian leadership’s inner circle,” and 17 related entities, citing Russia’s persistent efforts to “destabilize Ukraine.” One designated individual was Igor Sechin, who served four years as Russia’s Deputy Prime Minister and whom OFAC identified as “President and Chairman of the Management Board for Rosneft, Russia’s leading petroleum company and one of the world’s largest publicly-traded oil companies.” According to OFAC, Sechin’s “utter loyalty” to President Putin was a “key component” of his standing in Russia. The Press Release, however, specifically remarked that Rosneft “has not been sanctioned.”

ExxonMobil’s Execution of Joint Exploration Contracts with Rosneft

In May 2014, shortly after the above designations, ExxonMobil and Rosneft executed eight joint exploration contracts—seven “Completion Deeds” pertaining to new oil drilling ventures in the Universitetskaya-1 well in the Arctic Circle’s Kara Sea, and one “Extension of a Memorandum of Understanding” pertaining to a pre-existing liquefied natural gas venture on Sakhalin Island in Eastern Russia. Igor Sechin, in his capacity as the head of Rosneft, signed these contracts for and on behalf of Rosneft.

OFAC’s Enforcement Action

In June 2014, OFAC issued an administrative subpoena to ExxonMobil based on OFAC’s “reason to believe” that ExxonMobil had violated the regulations discussed above. After months of back and forth between the parties, OFAC then issued a Pre-Penalty Notice to ExxonMobil. ExxonMobil responded to the Pre-Penalty Notice and presented its defense in-person to OFAC, but on July 20, 2017, OFAC proceeded to issue a Penalty Notice to ExxonMobil “for violating the Ukraine-related sanctions regulations.” The enforcement information included a finding that ExxonMobil had “demonstrated reckless disregard for U.S. sanctions requirements” by signing the deals with Sechin just weeks after he had been designated. Moreover, ExxonMobil’s actions allegedly had “caused significant harm to the Ukraine-related sanctions program.”

OFAC characterized the apparent violations as “egregious” and determined that ExxonMobil did not voluntarily self-disclose this conduct to OFAC. Accordingly, OFAC levied a fine of USD 2 million.

ExxonMobil’s Suit

ExxonMobil challenged the finding of violation and penalty assessment in the United States District Court for the Northern District of Texas the same day.  ExxonMobil argued that OFAC’s interpretation and implementation of the sanctions was “arbitrary and capricious” under the Administrative Procedure Act, 5 U.S.C. § 706 (2) (A) and (B), and that it also violated the Fifth Amendment Due Process Clause.

Essentially, the parties disagreed over the scope of the Ukraine-related sanctions. Specifically, did they prohibit U.S. Persons, including ExxonMobil, only from dealing with Sechin in his personal capacity, or did the prohibition more broadly extend to dealings with Sechin acting in his official capacity for Rosneft?

To support its position, ExxonMobil cited to numerous expressions of guidance from a variety of official sources, in addition to the fact that the April 28, 2014 designations expressly carved out Rosneft. For example, a March 2014 White House Fact Sheet and related White House Briefing stated that the sanctions targeted “individuals and their personal assets, but not the companies that they manage on behalf of the Russian state.” Further, an April 2014 Treasury Department Briefing confirmed that the sanctions applied to Sechin “individually.”  Meanwhile, the White House explained that, while Sechin was sanctioned in his “individual capacity,” Rosneft was not designated, “minimizing any impact or consequences on American companies.”  Then, in May 2014, Treasury clarified, by way of example, that the sanctions did not prohibit BP’s American Chief Executive Officer from participating in Rosneft board meetings with Sechin so long as the activity related to Rosneft’s business rather than to Sechin’s personal business. ExxonMobil also relied upon a 2012 ruling of the Supreme Court (id, SmithKlineBeecham) that:

It is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.

Ultimately, U.S. District Judge Jane Boyle, ruling on cross-motions for summary judgment, held that OFAC failed to afford ExxonMobil sufficient notice of its interpretation of the Ukraine-related sanctions as applied to Sechin. Specifically, the court held that regulated parties may rely upon official guidance from the White House and senior officials within Treasury. Therefore, Judge Boyle voided OFAC’s finding of violation and related penalty assessment.

Additional Considerations

This ruling is a rare win by a corporate or an individual against OFAC’s broad powers to enforce sanctions in furtherance of U.S. foreign policy. Parties assessed by OFAC for penalties for alleged sanctions violations usually reach settlements rather than fight back in court. In this case, ExxonMobil—one of the world’s largest companies with annual revenue of USD 200 to 300 billion—possessed the resources to defend itself.  It remains to be seen whether this judgment will embolden others, particularly those with shallower pockets, to challenge enforcement actions they believe to be arbitrary and capricious.

Parties should bear in mind that OFAC has released additional guidance specifically cautioning companies against entering into contracts executed by blacklisted individuals. Parties should also remember that they may seek clarifications and additional guidance from OFAC at any time and, if in doubt, should consider doing so prior to contracting or transacting.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 8

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About this Author

Richard Gibbon Criminal Defense Attorney Squire Patton Boggs Dubai, United Arab Emirates
Partner

Rich Gibbon is a partner in our Government Investigations & White Collar Practice and focuses on white collar criminal defense, regulatory enforcement and internal investigations. He has been based in the Middle East for 11 years and has extensive experience managing crises and counselling boards of directors and senior management across the Middle East and Africa, Levant, Europe, and South Asia through multi-agency, multi-jurisdictional financial crime investigations and enforcement actions. This includes multinational corporates in connection with anticorruption regimes and a...

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Rebecca Worthington, Squire Patton Boggs Law Firm, Washington DC, Corporate Law Litigation Attorney
Senior Associate

Rebecca Worthington’s practice focuses on litigation, investigations and white collar criminal defense. She has experience in defending cases brought under the False Claims Act and representing clients in internal and government investigations, including matters involving economic sanctions and the Foreign Corrupt Practices Act. She has been named a Washington DC Super Lawyers – Rising Star, among the top up-and-coming lawyers, defined as 40 years of age and younger or in the practice of law for less than 10 years.

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