OFAC Fines Forwarder $1.6M for Alleged Sanctions Violations, Bypassing Red Flags

The company, Fracht FWO, didn’t voluntarily disclose the violations, which OFAC said were “egregious.” The agency said it could’ve fined Fracht more than $2 million but settled on a lesser amount because the forwarder cooperated with OFAC’s investigation and took “remedial efforts” to make sure the violations don’t happen again.

The violations began in May 2022, when Fracht’s Mexico affiliate was hired to transport a shipment of car parts from Mexico to Argentina. OFAC said the affiliate lacked the “requisite expertise, capacity, and resources” for the job, and it asked Fracht’s help in finding an aircraft. The agency said Fracht senior executives “expressed concern over satisfying the customer’s manufacturing needs and retaining their business if Fracht did not imminently find a suitable aircraft,” and they eventually agreed to a charter contract with a Mexico-based logistics broker to use Empresa de Transporte Aéreocargo del Sur S.A. (Emtrasur), a freight charterer and subsidiary of the OFAC-sanctioned Venezuelan state airline Conviasa.

OFAC noted that the contract listed Emtrasur's address in Venezuela and specified that the tail number of the aircraft was YV-3531, adding that “YV” indicates a Venezuelan aircraft. The agency also noted that Conviasa has been sanctioned since 2019, and the aircraft had been identified on the Specially Designated Nationals List as blocked property of Mahan Air, a sanctioned Iranian airline. Fracht also didn’t realize at the time of the contract that the aircraft was staffed by Iranian crew.

Along with the contract, OFAC said, the Mexican broker sent Fracht’s vice president of airfreight additional details about the flight, including the flight’s itinerary, which showed that the plane would be arriving in Mexico from Venezuela and that the flight included a layover in Venezuela before arriving in Argentina. The Fracht airfreight executive shared this information with Fracht’s vice president of strategic development.

“Despite these red flags, Fracht’s Vice President of Airfreight executed the contract without undertaking sanctions screening or internal legal review, contrary to Fracht’s compliance policies and procedures,” OFAC said.

Shortly after agreeing to the contract, Fracht paid the broker $885,000, and about $825,000 of that went to Emtrasur, the agency said.

OFAC also noted that Fracht had to pay a $110,000 late fee to Emtrasur because of “additional loading time in Mexico.” Fracht executives discussed the late fee in a group chat with Fracht’s CEO, where they also mentioned the name of the Venezuelan charter and the fact that it was a “subcompany of … CONVIASA,” but OFAC said Fracht’s CEO “was unaware that either company was blocked or that sanctions screening had not been performed.”

The CEO “deferred to the senior executive group’s decision to use the current plane and to pay EMTRASUR’s late fee,” and Fracht paid the late fee in June 2022.

OFAC said Fracht informed the U.S. government about the alleged violations soon after discovering that the plane’s crew was Iranian, and it “began taking numerous compliance steps to prevent future violation.” But the forwarder didn’t get credit for a voluntary disclosure because another U.S. agency had already discovered the issue, OFAC said.

“OFAC and other U.S. government agencies already knew of the Blocked Aircraft’s chartering and detention in Argentina and the attendant sanctions risks to the parties involved,” the agency said.

OFAC pointed to several aggravating factors that led to the $1,610,775 penalty, including that Fracht “demonstrated reckless disregard for U.S. sanctions requirements by foregoing its internal compliance processes” and agreeing to a contract with a sanctioned aircraft without enough due diligence, adding that it failed to “respond appropriately to significant red flags.” And although the alleged violations weren’t “willful,” OFAC said, Fracht executives had “actual knowledge” that payments would be made to Emtrasur and noted that the company is a large and sophisticated international business.

In total, Fracht “conferred a direct financial benefit of” about $935,000 to Emtrasur, which gave “substantial revenue” to the Nicolas Maduro regime in Venezuela.

OFAC also pointed to several mitigating factors, including the fact that Fracht hadn't received a penalty notice in the previous five years and took “broad and significant” steps to improve its compliance program and procedures, including by putting in place “remedial measures” for the employees involved and firing the employee who contracted with Emtrasur; mandating that all contracts are subject to legal review and sanctions-focused due diligence before execution; and revising the company’s air freight cargo contract templates to include sanctions compliance language.

Fracht also updated its vendor approval and vetting process so that all vendors are subject to sanctions due diligence; hired new compliance officers so that it now employs nine full-time compliance employees; committed to invest more than $1 million annually in compliance; “enhanced” its auditing procedures; and put in place quarterly reporting requirements and recurring employee compliance training.

OFAC said the case highlights the “numerous” sanctions risks faced by the freight and logistics industry and the importance of putting in place “strong internal controls and procedures,” and “ensuring they are followed,” including by all subsidiaries and employees.

The agency noted that key Fracht employees had “several opportunities to follow critical compliance policies” but didn’t. Compliance may at times come at the expense of convenience,” OFAC said. “A well-designed sanctions compliance program is only effective if it is adhered to, even in the face of urgent business demands.”

A Fracht spokesperson didn’t immediately respond to a request for comment.