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By Nicholas Turner, Meredith RathboneBrian Egan and Ed Krauland (Steptoe & Johnson LLP)

On December 31, 2019, the U.S. District Court for the Northern District of Texas threw out a $2 million fine issued in 2017 by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) under the Ukraine-Related Sanctions Regulations (“URSR”), 31 C.F.R. § 589.  The much-awaited opinion held that OFAC did not provide “fair notice” that the URSR prohibited dealing in contracts signed by a sanctioned individual on behalf of a non-sanctioned company, prior to the issuance of the penalty.

In reaching its decision, the Court concluded that the language of the URSR did not “’fairly address’ whether a U.S. entity receives a service from [a Specially Designated National (“SDN”)] when that SDN performs a service enabling the U.S. person to contract with a non-blocked entity.” Moreover, public statements made by relevant U.S. government officials in 2014—some of which could be read to conflict—did not “create ascertainable certainty” of OFAC’s intention with respect to the URSR’s application. (The Court also held that contemporaneous reports by media outlets were not probative of OFAC’s regulatory intent.)

Finally, the Court held that OFAC could not rely on a previously issued Frequently Asked Question (“FAQ”) under the now-terminated Burma Sanctions Regulations to fulfill the fair-notice requirement, even though it addressed a similar issue as the present case. The Court found that an FAQ issued in one sanctions program does not provide fair notice for how a similar issue would be interpreted in another sanctions program, in light of the caveat contained in the URSR and elsewhere that similar terms and concepts may be subject to different interpretations in different sanctions programs.

The takeaway: The case represents a rare example of a plaintiff succeeding in overturning an OFAC enforcement penalty, which may impact OFAC’s future actions. However, the decision is limited, since the Court ultimately did not challenge the agency’s interpretation that dealing in contracts signed by an SDN could constitute a prohibited receipt of service, only that OFAC failed to provide fair notice prior to issuing the penalty in this case. Indeed, OFAC subsequently issued two FAQs that made clear the URSR prohibit “entering into a contract that is signed by a blocked person.”

Sanctions arise in response to fast changing international events, challenging officials to crystallize and communicate policy on the fly. Meanwhile, multinational companies cannot easily suspend their operations to await detailed guidance on each new regulation or executive order. This was especially the case with U.S. sanctions in response to Russia’s annexation of the Crimea region in March 2014. While this case may lead some U.S. officials to more carefully manage public statements and clarify guidance, clients are reminded of the importance of staying abreast of OFAC’s developing policies and to seek advice, as needed, on the nuances of OFAC’s various programs, as no two programs are exactly alike.

Full Article: https://www.steptoeinternationalcomplianceblog.com/2020/01/district-court-throws-out-ofac-penalty-citing-due-process-unclear-regulations/