international regulatory enforcement
OFAC’s Mixed Signals Lead to Exxon Victory in District Court
By Jason Fiebig, Jeremy Steed, Christina Ferma, Thomas Jordan
To start the year, a long-awaited U.S. federal court ruling in Texas in a sanctions dispute involving the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) and multinational oil and gas conglomerate ExxonMobil (“Exxon”) was finally issued.
The following post provides background on the case, summarizes the court’s holding, identifies notable findings by the court, and highlights a number of key takeaways.
In July 2017, OFAC imposed a $2,000,000 penalty against Exxon in connection with that company’s signing of eight agreements with Rosneft OAO (“Rosneft”), a Russian energy company, relating to certain oil and gas projects. OFAC imposed the penalty as a result of its finding that Exxon had violated the Ukraine-Russia Sanctions Regulations by impermissibly receiving services from a Specially Designated National (“SDN”). The SDN was Rosneft’s signatory to the Exxon agreements – its then-President Igor Sechin, who had recently been designated an SDN by OFAC. OFAC imposed this penalty notwithstanding the fact that Rosneft had not been designated an SDN, or otherwise blocked, and OFAC and other Executive Branch offices had issued numerous – sometimes conflicting – statements on the scope of the regulations in question.
OFAC initially imposed the penalties on Exxon under the Ukraine-Russia Sanctions Regulations in July 2017. Exxon challenged the penalty assessment on constitutional grounds later that year, arguing that OFAC had not provided fair notice to Exxon, under the Due Process Clause of the Fifth Amendment to the U.S. Constitution, that OFAC would consider a U.S. person’s entry into an agreement with a non-sanctioned entity whose signatory was an SDN a prohibited receipt of “services” from that SDN under the applicable regulations. In an uncommon development, Exxon successfully argued that the Ukraine-Russia Sanctions Regulations did not provide sufficient notice as to how OFAC would interpret them in the situation in question, and the District Court ordered the penalties against the Company annulled.
Notable Findings by the Court
In addition to the core fair notice finding, the District Court also found that (i) public statements by OFAC on its website did not provide sufficient guidance to U.S. companies potentially subject to the restrictions contained in the Ukraine-related sanctions to create the requisite “ascertainable certainty” required to save OFAC’s administrative action; and (ii) statements made by certain U.S. government officials and subsequently reported by the news media did not constitute evidence of OFAC’s regulatory intent, regardless of whether they were consistent with OFAC’s official communications.
Additionally, the Court found that OFAC policy statements in similar factual contexts – but under different sanctions regimes (in this case the Burma Sanctions program, FAQ 285) – did not constitute evidence of OFAC’s regulatory intent in any way where OFAC imposed penalties subject to a different sanctions regime. The Court made this finding as a result of the language contained in OFAC’s regulations (Ukraine-Russia and other programs), which provides that the interpretation of similar language among different sanctions programs may differ based on foreign policy and national security circumstances. 31 CFR § 589.101
Exxon also had argued that public statements made by Executive Branch officials immediately following the issuance of the Ukraine-Russia-related sanctions “made clear that it was permissible to execute documents with Rosneft (including with Sechin signing in his capacity as a Rosneft representative)” and that such statements were probative of regulatory intent. In its opinion, the District Court listed several statements by OFAC and executive officials suggesting that Sechin’s designation was related to personal assets. The District Court concluded that Exxon relied in good faith on statements issued by senior U.S. government officials.
In the United States, enforcement agencies like OFAC generally receive significant deference in their decisions by the U.S. judicial branch and it is rare for a U.S. federal court to overrule an agency decision in such a significant and visible manner. That said, the ruling is limited in that it held that the defendant had not been given sufficient notice of OFAC’s interpretation of its regulations – not that OFAC’s interpretation of its regulations, which in this case could be questioned, was invalid.
How the Exxon ruling will affect OFAC’s enforcement of the broader U.S. sanctions regimes, and how it communicates its enforcement intentions in connection with new or changing sanctions programs, remains to be seen. We would expect, however, that OFAC will be increasingly careful as to the public statements it makes in connection with its enforcement intentions – in particular where those intentions rely on aggressive regulatory interpretations – now that Exxon is on the books. And, while we are interested in whether this case will influence OFAC’s enforcement of sanctions against non-sanctioned companies with ties to sanctioned individuals, we note that OFAC issued two FAQs after such alleged violations specifically stating that it considered that entry into a contract with a non-sanctioned entity signed by a blocked person would be considered a violation of the Ukraine-Russia sanctions regulations.
We will continue to follow the case and provide updates on the blog regarding this and other challenges to U.S. government enforcement actions in the export controls and sanctions arenas.