Oil and gas giant ExxonMobil Corp. (NYSE: XOM) recently achieved what many in the export compliance profession thought would be impossible. It won a federal court case against the Treasury Department's Office of Foreign Assets Control (OFAC) to reverse a $2 million penalty for noncompliance.
In July 2017, OFAC issued the penalty against ExxonMobil for alleged "reckless disregard" of the Ukraine Related Sanctions Regulations when the company in May 2014 entered contracts with Russian oil company Rosneft OAO.
While Rosneft was not sanctioned at the time, the person who signed the contracts, Rosneft CEO and Chairman Igor Sechin, was listed on OFAC's Specially Designated Nationals and Blocked Persons (SDN) List. U.S. persons and companies are generally prohibited from conducting business with individuals or entities on the SDN List.
Within days of OFAC's penalty announcement, ExxonMobil filed a complaint in the U.S. District Court for the Northern District of Texas against Treasury Secretary Steven Mnuchin and OFAC Director John E. Smith. (Rex Tillerson, who was CEO of ExxonMobil at the time the Rosneft contracts were signed, was serving as President Donald Trump's secretary of state when the lawsuit was filed.)
ExxonMobil claimed in its lawsuit that OFAC's action was "unlawful" under the Administrative Procedures Act and did not give the company "fair notice," in violation of the Fifth Amendment to the U.S. Constitution.
OFAC, citing frequently asked question No. 285 involving U.S. sanctions against Burma in 2013, said in its penalty notice that ExxonMobil should have been "cautious in dealings with [a nondesignated] entity to ensure that they are not providing funds, goods, or services to the SDN, for example, by entering into any contracts that are signed by the SDN." ExxonMobil also challenged this statement in its lawsuit against OFAC.
On Dec. 31, the district court in Dallas sided with ExxonMobil and vacated OFAC's $2 million penalty against the company.
"This is an administrative case prompting the Court to determine which party receives the benefit of having its cake and eating it, too — the regulating agency that failed to clarify, or the regulated party that failed to ask," wrote District Court Judge Jane Boyce at the beginning of her decision.
Ultimately, the court determined that "OFAC relied upon Regulations that fail to address Exxon's conduct." It added that "Though the Regulations and public statements, taken together, would likely lead a regulated party, acting in good faith, to hesitate before completing transactions like Exxon's, they do not create ascertainable certainty that such conduct would be prohibited."
OFAC has not commented on the district court's decision, and it is uncertain whether the agency will appeal.
International trade compliance attorneys and consultants warn that OFAC's authority to pursue and impose penalties for noncompliance with economic sanctions has not diminished.
"OFAC may view the decision as limiting its ability to bring novel enforcement actions, but is unlikely to be deterred in enforcing the myriad prohibitions under its sanctions programs for which there is already thorough guidance and documentation," attorneys of law firm Arnold & Porter Kaye Scholer LLP stated in a Jan. 7 advisory.
However, the court's decision is expected to put more burden on OFAC and other federal agencies in charge of export controls, including the Commerce Department's Bureau of Industry and Security and the State Department's Directorate of Defense Trade Controls, to provide more clearly stated notice of enforcement standards set for the industry, said Paul DiVecchio, a 40-year export compliance consultant based in Boston.
DiVecchio said U.S. companies should also challenge OFAC and other agency decisions when appropriate.