This note reports on an interesting and important US federal court decision concerning sanctions enforcement and, significantly, a rare instance of a business challenging OFAC’s interpretation of a US sanctions regime. Exxon was successful in voiding a US$2 million sanctions penalty. However, for the rest of us this case demonstrates why caution around sanctions remains of paramount importance.

Exxon’s sanctions-related fine

During March 2014, the President of the United States issued Executive Orders 13660 and 13661 pertaining to circumstances in the Crimea and Ukraine.  EO 13661 authorized the Secretary of the Treasury to designate individuals and entities as Specially Designated Nationals (SDNs) in connection with the Ukraine-related sanctions program.  Approximately one month later, the Treasury designated Igor Sechin, a senior Rosneft executive, as an SDN.  As later explained by a US federal court, when “announcing Sechin’s designation, the Treasury noted that Rosneft ‘[had] not been sanctioned,’ though the Treasury did designate other entities that were ‘owned or controlled by persons … whose property and interests in property are blocked.’”

Exxon had been doing business with Rosneft for many years prior to that point.  With respect to one series of contracts, Sechin signed the same for Rosneft on May 23, 2014.  OFAC issued a penalty notice to Exxon, grounded on the assertion that there had been a violation of the prohibition against the receipt of services from a blocked individual.  Exxon challenged the resulting $2 million fine – and prevailed.

Decision voiding sanctions fine on Exxon

On December 31, 2019, Judge Jane Boyle, of the US District Court for the Northern District of Texas, granted summary judgment to Exxon voiding the US$2 million fine. Judge Boyle held that OFAC’s Penalty Notice against Exxon violated the Due Process Clause of the Fifth Amendment as Plaintiffs lacked fair notice that their conduct was prohibited.

Judge Boyle did admonish Exxon for not seeking guidance from OFAC, describing the behavior as “risky” and “perhaps imprudent.” However, only after penalizing Exxon, did OFAC provide guidance clarifying that conduct like Exxon’s was prohibited such that the applicable “ascertainable certainty” standard was not satisfied by any prior guidance or language used by OFAC.

The ascertainable certainty standard says that,“[i]f, by reviewing the regulations and other public statements issued by the agency, a regulated party acting in good faith [could] identify, with ‘ascertainable certainty,’ the standards with which the agency expects parties to conform, then the agency has fairly notified a petitioner of the agency’s interpretation.” Gen. Elec. Co. v. EPA, 53 F.3d 1324, 1329 (D.C. Cir. 1995) (citing Diamond Roofing Co. v. Occupational Safety & Health Review Comm’n, 528 F.2d 645, 649 (5th Cir. 1976)). If this standard is not met, fair notice may still be found where other factors would support such finding. Chief among those factors are the failure to seek guidance or public statements issued by the agency or administration.

As part of this analysis, a court will parse the language of the regulation. Here, the interpretation of “receipt” of “services” by listed individuals was at the center of the court’s focus. Judge Boyle found that the regulation did not fairly address whether a US entity receives a service from a listed individual where that individual performs a service enabling the US entity to contract with an unlisted entity. Exxon did not have fair notice that Sechin’s signing of the contracts on behalf of Rosneft would fall under the above language and qualify as the receipt of services. No other factors considered by the court changed that outcome. Thus, summary judgment was entered in favor of Exxon Mobil.

Exxon escapes sanctions fine; what is the lesson of this tale?

OFAC continuously releases guidance on its sanction regime. Although Exxon won a rare victory, companies (and particularly those standing as US persons) must exercise considerable caution when entering into contracts with individuals or entities tied to regions subject to sanctions regimes.  Guidance from experienced sanctions attorneys should be sought throughout.  Where there is regulatory uncertainty, close consideration should be given to attempting to contact OFAC for guidance and to documenting such efforts.

However, in a cautionary tale with a twist, the decision by Judge Boyle shows that US sanctions and related publications by OFAC are not beyond a standard of reasonable interpretation and careful review by the courts.

See Exxon Mobil Corporation et al v. Mnuchin et al., 3:17-cv-01930-B (N.D. Tex. 2020).

Further details

For further details, please contact Edward Floyd or Jonas Patzwall or your usual contact at Floyd Zadkovich. For another recent sanctions update, you can see our comments on the BIMCO Sanctions Clause 2020.

Floyd Zadkovich is an international law firm comprising a US law firm registered in New York and an English law firm regulated by the SRA in London.  We have extensive and continuing experience advising an array of clients on sanctions and related issues, including the effect of sanctions of international commercial contracts and business, confirming whether or not certain companies or individuals are subject to sanctions, dealing with incidents or issues occurring in real-time as a result of potentially sanctioned conduct, and applying to and liaising with OFAC to obtain special licenses or clarifications on contemplated trade for clients.

 

This article is to be considered general commentary only. This is not to be relied upon as legal advice for any particular circumstances.

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