Regulatory intelligence for US exporters

US Supplier Fined $660,000 After Whistleblower Discovers Alleged Iran Sanctions Violations

American building materials supplier Construction Specialties Inc. (CS) reached a $660,594 settlement with the Office of Foreign Assets Control this week for allegedly violating sanctions against Iran. OFAC said the company’s United Arab Emirates subsidiary, Construction Specialties Middle East (CSME), illegally reexported more than $1 million worth of construction materials to Iran and falsified trade documents to hide their destination.

Start A Trial

The company voluntarily disclosed the violations to OFAC after a Dubai-based employee discovered the sales and reported them to CS headquarters in New Jersey. As part of the settlement agreement, CS agreed to conduct an OFAC sanctions “risk assessment,” audits and compliance training and to take other steps to bolster its compliance procedures. CS also agreed to annually certify to OFAC that the company is complying with the settlement.

OFAC said the violations stemmed from a business pitch that CSME officials gave to CS executives during their visit to Dubai in 2016, in which CSME’s general manager suggested supplying building materials to Iran for a new shopping mall in Tehran. CS officials said they needed to speak with “external counsel” to see if those transactions would be allowed, and two months later they sent out a new Iran sanctions policy, which warned of doing business with Iran. The company’s executives wrote that they “want you all to be aware of [the prohibitions] so that neither you nor your teams inadvertently get involved.”

OFAC added that CS executives emailed “specific written instructions” to CSME’s general manager that said U.S. persons “were not allowed to engage in, facilitate, or support Iranian business in any way.” Despite the instructions, the CSME general manager went through with the sales, importing construction materials from CS and then reexporting the materials to Iran between December 2016 and August 2017.

The agency said CSME officials “engaged in a pattern of behavior that concealed or obfuscated the destination of the goods from the U.S. suppliers,” including by falsifying the ultimate destination of goods on seven purchase orders. They also omitted the ultimate destination on another purchase order, used a false project name to avoid any links to Iran and took steps to ensure the goods and their “association with Iran would not be reflected in CSME records,” OFAC said.

A U.S. person working at CSME in Dubai discovered the alleged violations after overhearing the senior managers discussing U.S.-origin goods for a “big job,” OFAC said. “When the U.S. person employee inquired, the managers told them they were ‘confused.’”

OFAC said the employee later inspected company documents that showed “elevated levels of sales” and “administrative expenses in the region.” After confronting CSME’s general manager, OFAC said, the employee was “dismissed.” The person flew to the U.S. the same day to report the conduct to CS headquarters, the agency said. CS began an internal review, ended the sales and voluntarily disclosed the violations.

OFAC said the alleged violations constituted an egregious case and pointed to several aggravating factors, including CSME senior management “willfully” violating U.S. sanctions against Iran and having “actual knowledge” of the conduct. The agency also noted that CSME is a “commercially sophisticated” company that is among 25 CS affiliates in 16 countries.

OFAC said it could have imposed a maximum $2,201,982 civil penalty, but it settled on a lesser amount due to several mitigating factors, including the fact that the CS New Jersey headquarters appeared to have been “unaware” of the sales and the CS sanctions compliance program “appears to have been reasonably designed to comply with the restrictions in place at that time.” The agency also applauded the company’s “remedial response,” which included firing all employees associated with the sales, conducting an investigation, hiring new compliance officials and issuing new company-wide corporate compliance policies. CS also cooperated with OFAC’s investigation.

The case highlights the challenges facing multinational companies operating in “high-risk jurisdictions,” OFAC said, adding that employees may sometimes “act on their own initiative to disregard policies and controls and seek to circumvent applicable sanctions.” In certain cases, actions of those employees may lead to violations “attributable to their parent organizations,” the agency said. “Companies should consider the need to institute tailored controls, using a risk-based approach, to avail themselves of permissible opportunities while precluding the ability of ‘rogue’ employees to engage in prohibited conduct.”

The case also demonstrates the importance of “seeing something and saying something” if misconduct is uncovered or suspected, OFAC said. Whistleblowers play a “vital role in identifying prohibited conduct and promoting compliance,” and “responsible companies” should have ways for employees to “raise concerns without fear of retaliation.” Companies should consider “proactively communicating the existence of mechanisms by which employees can confidentially and without fear of reprisal report potential breaches of a company’s sanctions compliance policies, procedures, and internal controls.”