Italian Company to Pay $950,000 for selling US-Origin Parts to Iran

The company agreed to pay $950,000 to settle its potential civil liability for apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR)

This week, the Office of Foreign Assets Control (OFAC) announced a settlement agreement with Nordgas S.r.l. (“Nordgas”), a company located in Italy that produces and sells components for gas boiler systems and applications. The company violated the Iranian Transactions and Sanctions Regulations (ITSR) by knowingly reexporting air pressure switches procured from a US company to customers in Iran, and obfuscating the end-users from the US manufacturer.

The enforcement action is a reminder that OFAC expects non- US companies to appropriately understand the risks they assume when involving U.S. persons and goods procured from the United States in dealings with sanctioned jurisdictions and entities.

The Misconduct

According to OFAC, Nordgas

• Conveyed interest for Iran end-use: in 2010, Nordgas sought to purchase air pressure switches for gas boiler systems from a US company with the intent of reexporting those switches to customers in Iran. It inquired whether the US company would supply the switches with the intent of reexport into the Iranian market. The US Company declined the request and informed Nordgas it could not export its U.S.-origin switches to Nordgas if the end-users were Iranian entities.
• Representation included Iran:  A couple of years later, Nordgas approached the same US company and expressed interest once again in the switches. Nordgas acknowledged the Iran restriction and represented to the US company that it would sell the switches to alternate customers in Italy.
• Obscured end user identity: Nordgas misled the U.S. company by claiming that the end-user was Nordgas’s Italian affiliate. To conceal its intentions, Nordgas employees started using deceptive replacement terms for Iran in correspondence and trade documentation with the U.S company. For several years, Nordgas continued to use code words to avoid referencing Iranian end-users in its communications with the U.S. company. In another instance, Nordgas rebuffed the US company’s offer to drop ship products directly to a purported European end user when Nordgas was facing shipment delays. Nordgas claimed logistical concerns.
• Removal of a “Made in USA” label:  In one instance, Nordgas requested that the US Company remove its “Made in USA” label from the switches to disguise their origin.

Finally in March 2017, the U.S. company became aware that Nordgas intended to reexport its goods to Iran and the U.S. company requested that Nordgas return the shipment accordingly—a request with which Nordgas complied and for which the U.S. company subsequently refunded Nordgas’ payment.

OFAC found that Nordgas violated §§ 560.203 and 560.204 of the ITSR, when it:

(i) engaged in the reexportation, sale, or supply, directly or indirectly, from the United States of 27 shipments of air pressure switches to a person in a third country with knowledge or reason to know they were intended specifically for supply, transshipment, or reexportation, directly or indirectly, to as many as ten different Iranian companies; and

(ii) caused a U.S. company to indirectly export goods to Iran.

Penalty and Remediation

As Nordgas did not voluntarily self-disclose the apparent violations and that the apparent violations constitute an egregious case, under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, app. A, Nordgas will pay a penalty of $950,000, of which $650,000 will be suspended pending satisfactory completion by Nordgas of the enhanced compliance commitments.

Nordgas ceased all shipments of goods from the United States to Iran and took remedial actions, such as implementing a sanctions compliance program and agreeing to enhanced compliance commitments in its settlement agreement with OFAC, including a commitment to submit a report to OFAC, on an annual basis for five years, detailing how Nordgas is meeting the compliance commitments described in the settlement agreement.

Compliance Thoughts

Firstly this case sounds eerily similar to OFAC’s earlier settlement with UniControl. Although OFAC does not specifically link the two companies and the two enforcement actions, the narrative and misconduct is so similar, one may only assume the two settlements are related. UniControl, a US-based manufacturer of airflow pressure switches (among other instrumentation) agreed to pay $216,464 to settle its apparent violations of the ITSR during roughly the same time period described in Nordgas’ case.

If the two cases are indeed related, it would be interesting to note that both the US manufacturer and the foreign client were held liable for violations of the ITSR. As the UniControl enforcement action has been covered at length by our US compliance peers, I will focus on Nordgas, as one could extract valuable lessons for non-US companies required to be compliant with US Sanctions.

As one may guess, the US Company, probably voluntarily self-disclosed the violations to OFAC once it was made aware of them. And this is what ends up happening a majority of the time, US entities/persons are encouraged to notify OFAC of such breaches. A full cooperation with OFAC earns the US Company a reduced penalty and non-egregious classification.

For example, UniControl self reported the violations of the ITSR committed by its European partner. The statutory maximum civil monetary penalty would have been $5,423,766, however because UniControl voluntarily self-disclosed, the base civil monetary penalty would be equal to the sum of one-half of the transaction value for each apparent violation. UniControl ended up paying only $216,464.

Now what is interesting, is that Nordgas’ settlement was substantially higher. With this enforcement action, OFAC wanted to emphasize that foreign companies could also be held liable for violations of the ITSR. OFAC’s prohibitions can extend not just to U.S. persons, but to their foreign trading activities as well.

OFAC also wanted to remind foreign companies that they should not expect their obligations with respect to U.S. sanctions to be fulfilled by their U.S. partners. In international trade transactions, each party is responsible for understanding their own obligations pursuant to OFAC regulations.

As a reminder, OFAC put in place a Framework for OFAC Compliance Commitments which applies to
organizations subject to U.S. jurisdiction, as well as foreign entities that conduct business in
or with the United States or U.S. persons, or that use U.S.-origin goods or services.

Non- US companies engaging in business with U.S. partners are advised to consult this framework to help them develop a risk-based sanctions compliance program and put appropriate controls in place to prevent prohibited transactions.