SDN on the dotted line: court cancels OFAC penalty for interacting with SDN executive at non-SDN company

On December 31, 2019, Judge Jane Boyle of the US District Court for the Northern District of Texas canceled (PDF) the 2017 penalty assessed by the US Treasury Department’s Office of Foreign Assets Control (OFAC) against ExxonMobil. 

The $2m penalty arose from Exxon’s purported violations of US sanctions related to Crimea and Ukraine – specifically, based on OFAC’s position that the sanctions prohibit US persons from entering into agreements that are signed by individuals on OFAC’s list of specially designated nationals and blocked persons (SDNs), even if they are signing on behalf of a non-SDN company. Judge Boyle found that OFAC had not provided Exxon with 'fair notice' of OFAC’s interpretation of the relevant sanctions.

As detailed below, Judge Boyle’s decision may be read as:

• encouraging companies to seek guidance from OFAC where the regulations are ambiguous;
• calling into question OFAC’s common practice of citing guidance in one context as applicable to others; and
• confirming that regulated parties may rely on public statements from the White House/Treasury Department regarding the intent and purpose of specific sanctions programs.

Background

The penalty relates to Exxon’s dealings with Rosneft and specifically with Rosneft’s SDN CEO, Igor Sechin, who signed agreements with Exxon on Rosneft’s behalf in 2014. 

In the penalty notice, OFAC took the position that the relevant sanctions prohibit US persons and entities from dealing with SDNs in either the SDNs’ personal or professional capacities – and, as a result, signing a contract with an SDN was prohibited, even if the entity on whose behalf the SDN signed was not sanctioned. 

The same day that the penalty became public (July 20, 2017), Exxon filed suit under the Administrative Procedures Act to contest the penalty. The parties briefed cross-motions for summary judgment in the summer and fall of 2019.

Judge Boyle’s decision

Judge Boyle granted Exxon’s motion for summary judgment and canceled the penalty. She did not, however, reject OFAC’s legal theory outright. Instead of finding that the sanctions applied to SDNs only in their 'personal' capacities, she found that Exxon lacked fair notice of OFAC’s position.

As a preliminary matter, Judge Boyle determined that 'the signing of a contract [by an SDN] could be a service, given that it is labor performed in the interest of others—here, Sechin’s act of signing the contracts was undoubtedly performed in Rosneft’s interest.' She proceeded to find, however, that the relevant sanctions regulations 'do[] not "fairly address" whether a U.S. entity receives a service from an SDN when that SDN performs a service enabling the U.S. person to contract with a non-blocked entity.'

In other words, Exxon did not have 'fair notice, based on the language of the Regulations, that Sechin’s signing of the contracts was a service received by Exxon' (emphasis added).

Because of her finding on fair notice, Judge Boyle declined to decide other issues with potentially further-reaching legal impact, including whether:

• the sanctions actually prohibited Exxon’s conduct; 
• OFAC’s interpretation was entitled to deference; and 
• OFAC acted arbitrarily and capriciously in imposing the penalty.

Implications

Judge Boyle’s holding provides helpful takeaways for companies confronting ambiguous provisions of US sanctions, both in the Crimea/Ukraine context and more broadly.

Seeking OFAC guidance

Judge Boyle 'consider[ed] Exxon’s failure to seek guidance from OFAC as a relevant—though not dispositive—factor in assessing whether Exxon received fair notice of OFAC’s interpretation of the Regulations', citing a precedent in which 'the regulated party’s failure to inquire about the meaning of a regulation [was] relevant in concluding that the party received fair notice.'

This comment confirms that a company may not be able to claim lack of fair notice when the company acts based on an aggressive interpretation of an ambiguous provision of the sanctions without seeking OFAC guidance. 

Put plainly, a company may have to live with the repercussions of sticking its head in the sand.

Looking to other sanctions programs

OFAC claimed that its publicly available frequently asked question #285, which dealt with a similar issue under the (now-defunct) Burma sanctions, gave Exxon fair notice of OFAC’s approach under the Crimea regulations. 

Judge Boyle noted that both the Burma and Crimea sanctions regulations expressly state that '[d]iffering foreign policy and national security circumstances may result in differing interpretations of similar language among the parts of this chapter.' 

As a result, Judge Boyle found that, since OFAC reserves 'the opportunity to interpret sanctions programs differently, it may not then claim that a regulated party should know that OFAC interprets the programs identically without OFAC’s explicit clarification.'

Public statements and media coverage

Finally, in the face of ambiguous regulations and guidance from OFAC, Exxon was entitled to rely on public statements from the Executive Branch indicating that the Crimea sanctions were meant to target: 

• the '"personal assets" of the "cronies of the Russian government," "rather than the business entities and industries that they may manage or oversee."'; and
• SDNs' 'personal assets, but not companies that they may manage on behalf of the Russian state''.

On the other hand, Judge Boyle found that regulated parties 'could not reasonably rely, "in good faith," upon statements from third-party news outlets' for insight on how OFAC would approach a particular enforcement question – even where the media coverage was based on representations from US government officials.