OFAC enforcement action

In July 2014, OFAC issued an administrative subpoena to OilCo alleging that the contracts signed by Sechin may have violated the Regulations. OFAC and OilCo exchanged communications about the alleged violation for about one year. During this time OilCo argued that the Regulations provide, or that press release statements by representatives of the U.S. Department of the Treasury reasonably indicate, that there is a distinction between interacting with Sechin in his personal capacity and in his professional capacity. OFAC rejected this argument by OilCo and issued the company a Penalty Notice imposing the $2 million civil penalty. 

In its enforcement information,² OFAC stated that knowledge of Sechin’s status as an SDN by OilCo’s senior-most executives and the company’s “reckless disregard” for U.S. sanctions requirements by failing to “consider warning signs associated with dealing in the blocked services of an SDN” were aggravating factors in its determination of the penalty.

As discussed below, while OilCo executives had knowledge of Sechin’s status as an SDN and the Government provided warnings about dealing with an SDN, the Court’s review hinged on whether the Government’s regulations and communications could have fairly notified OilCo that entering into contracts signed by an SDN (Sechin) on behalf of a party that is not an SDN (Rosneft) violated the Regulations. For this reason, the fact that OFAC later resolved the question in its answer to FAQ 400 was not relevant to the case, as discussed in more detail in sub-part (iii) (Public statements by OFAC) of the below sub-section Judicial Review – Other Factors.

Judicial review

On the same day that OFAC released its enforcement information, OilCo filed to have the penalty vacated in the U.S. District Court for the Northern District of Texas, Dallas Division. Since it was reviewing a federal administrative agency’s decision, the Court considered whether the agency had violated a constitutional right of OilCo, as the regulated party.³ The Court in this case examined whether the penalty violated the due process clause of the Fifth Amendment, which requires that individuals or entities are “give[n] fair notice of conduct that is forbidden or required.”⁴

The fair notice requirement is met when the agency in question states with “ascertainable certainty” the meaning of the regulations it has promulgated.⁵ The Court therefore examined the text of the Regulations along with Government statements about the Regulations and the underlying executive order, as well as other factors, to determine whether the prohibition of the conduct in question was stated with ascertainable certainty.⁶

Text of the Regulations

The Regulations prohibit all transactions prohibited under EO 13661, which blocks all “property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person”⁷ and prohibits transacting in such blocked property.⁸ The Regulations define “property” and “property interest” to include “services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent.”⁹

OilCo contended that a violation of the Regulations “based on the receipt of services requires possession or control of those services,” and that had it accepted a “service” from Sechin, “it still did not violate the Regulations because it lacked possession and control over Sechin’s alleged services.”¹⁰ The Court identified three separate questions from this contention: (i) is signing a contract a “service”? (ii) what constitutes “receipt” of services? and (iii) when does a person “come into possession” or “get” a service?¹¹

The Court determined that signing a contract is indeed a “service” for purposes of the Regulations, which include “services of any nature whatsoever” in the definition of “property” and “property interest.”¹² The Court also referenced Black’s Law Dictionary, which defines “service” as labor performed in the interest of or for the benefit of another, usually for a fee.¹³ However, the Court found unclear whether the Regulations prohibit any incidental benefit resulting from the service (in this case, the contracts) or whether “receipt” under the Regulations is limited to situations where the SDN’s services are intended to directly benefit the U.S. person. The Court explained that if the latter was true, then OilCo “would violate the Regulations where Sechin signed on [OilCo’s] behalf—not where Sechin signed on Rosneft’s behalf. The distinction is subtle, but it is nonetheless meaningful.”¹⁴ 

Had the Regulations identified the point at which a person comes into possession of a service, the Court might have been able to answer the question about the “receipt” of services. But on that point the Regulations are silent. The Court concluded that since the text of the Regulations does not fairly address what constitutes “receipt” of services, the text of the Regulations alone fails to provide ascertainable certainty as to the meaning of the prohibition.¹⁵

Other factors

(i) OFAC’s alleged uncertainty of its interpretation 

OFAC admitted in its administrative subpoena to OilCo that it had not yet formulated a position as to how EO 13661 would be applied to OilCo’s conduct, stating that it “preferred to review [OilCo’s] response to its subpoena and would only then act expeditiously . . . to resolve the legal question.”¹⁶ OilCo pointed to this statement and an acknowledgment by a senior OFAC official in an internal OFAC email that there was even “confusion” at OFAC with respect to whether entering into contracts signed by SDNs in their professional capacity is prohibited, in order to demonstrate lack of fair notice. 

The Court declined to consider OilCo’s argument that OFAC’s alleged uncertainty affects the fair notice analysis because the case law assessing ascertainable certainty does not support finding that “non-public statements may create the kind of confusion that supports a finding of a due process violation.”¹⁷ The facts in this case indicate this to be a sensible position given that OilCo did not rely on OFAC’s internal deliberations (obtained during litigation) or administrative subpoena (presented after the alleged violation) in determining whether to engage in the conduct in question. Further, even if the case law generally allowed such a factor to weigh on the fair notice inquiry, the case OilCo cited¹⁸ in support of its argument involved active disagreement between offices within a federal agency, rather than mere uncertainty within a single office.¹⁹

(ii) OilCo’s failure to seek guidance from OFAC

The Court also deliberated the significance of OilCo’s failure to seek guidance from OFAC regarding whether the conduct in question was prohibited by the Regulations. OilCo disputed the inclusion of this issue as a factor in the Court’s analysis, stating that the Government has the burden to convey its interpretation. The Court relied on a related line of cases known as “void-for-vagueness claims” to determine that OilCo’s failure to seek guidance from OFAC does weigh in favor of finding fair notice.²⁰ However, the Court did not consider this factor to be dispositive.²¹

(iii) Public statements by OFAC 

OFAC itself made one public statement directly on point with respect to an SDN serving as signatory for a non-SDN. This statement was in the form of a Frequently Asked Question, posted publicly on OFAC’s website at the time of the violation. FAQ 285, issued in 2013, asks ”[i]f a Burmese Government minister is an SDN, how does that impact the ministry he leads?” OFAC’s answer was that parties would also be prohibited from entering into contracts signed by such SDN in their dealings with such ministry.²²

OilCo argued that FAQ 285 is inapposite to this case and fails to provide fair notice because OFAC has stated in the regulations of multiple sanctions programs, including the Regulations and the Burma sanctions regulations, that interpretations of similar language differ across sanctions programs due to “differing foreign policy and national security circumstances.”²³ The Court agreed with OilCo, reasoning that “[w]hile OFAC may reserve the opportunity to interpret sanctions programs differently, it may not then claim that a regulated party should know that OFAC interprets the programs identically without OFAC's explicit clarification.”²⁴

OFAC published new FAQs on this topic, FAQ 398 and FAQ 400, on August 13, 2014. FAQ 400 states in response to the question about whether a person can enter into contracts with a “blocked individual when that blocked individual is acting on behalf of the non-blocked entity that he or she controls (e.g., a blocked individual is an executive of a non-blocked entity and is signing a contract on behalf of the non-blocked entity)?”: “No. OFAC sanctions generally prohibit transactions involving, directly or indirectly, a blocked person, absent authorization from OFAC, even if the blocked person is acting on behalf of a non-blocked entity.”²⁵

While FAQ 400 appears to provide fair notice as to OFAC’s position on conduct that is proscribed with respect to the current question, this FAQ was released after the alleged violation and thus could not have provided fair notice to OilCo.

(iv) Public statements by other parts of the executive branch

OilCo averred that public statements by executive officials regarding EO 13661 made it “clear that it was permissible to execute documents with Rosneft (including with Sechin signing in his capacity as a Rosneft representative).”²⁶ Indeed, the day after EO 13661 was issued, the White House Press Secretary released a transcript from a conference call regarding Ukraine by senior officials of the Administration stating, “while we will not rule out taking additional steps in the future, our current focus [with sanctions] is to identify these cronies of the Russian government and target their personal assets and wealth, rather than the business entities and industries that they may manage or oversee.”²⁷ Similarly, a “Fact Sheet” on Ukraine-related sanctions also released on March 17, 2014 indicated that the Government’s “current focus is to identify these individuals and target their personal assets, but not companies that they may manage on behalf of the Russian state.”²⁸

Further, statements by the White House Deputy National Security Advisor in a PBS NewsHour interview and by senior Treasury Department officials reported in Foreign Policy and the Wall Street Journal, and a report from the New York Times based on representations from the Treasury Department, seemed to confirm OilCo’s interpretation of a distinction between OFAC’s treatment of the SDN and the company the SDN manages.²⁹ 

The Government responded that the public statements made in official settings can be reconciled as meaning that “transacting with a non-blocked company is permissible, but transacting with a blocked individual is not” and that the public statements in third-party news outlets cannot be relied upon.³⁰ The Court agreed with the Government regarding third-party news outlets, and thus declined to consider these four sources.³¹

The Government further contended that in any case the Regulations “trump” the press statement releases because (1) the press statements “lack the force of law” and the Regulations reflect OFAC’s official position and (2) the Regulations clarified the press statements since they were released afterwards.³² The Court rejected both of these reasons, explaining that press releases do not need to have the force of law because the inquiry is whether fair notice was provided, and reliance on pre-regulations guidance is appropriate in assessing the fairness of the Government’s notice as indicated by the Government’s own reliance on pre-regulations guidance in the form of FAQ 285.³³

Ascertainable certainty of proscribed conduct was not deemed to be provided by the official public statements of executive branch officials, as some statements seem to support OilCo’s position that an SDN may transact on behalf of a non-blocked entity without subjecting the U.S. counterparty to sanctions, while others support the opposite position, which was eventually clarified by FAQ 400 but not clear by the time the alleged violation occurred.³⁴

Ultimately, the Court held that because neither the text of the Regulations nor the public statements made by OFAC or other parts of the executive branch provided ascertainable certainty as to the conduct proscribed or permitted with respect to an SDN representing or signing on behalf of a non-blocked entity, OFAC’s Penalty Notice “violated the due process clause of the Fifth Amendment by depriving OilCo of fair notice.”³⁵ 

Conclusion

The following are our top five takeaways from this case.

1. It is now clear that entering into a contract signed by a blocked person, even if the entity on whose behalf of the blocked party is signing is not a blocked entity, is prohibited by U.S. sanctions. U.S. persons should exercise caution when conducting other forms of business with non-blocked entities in which blocked individuals are involved (see OFAC FAQ 400).
2. OFAC’s interpretation of a certain regulations cannot be assumed to apply to an analogous regulation in a separate sanctions program, even if the two regulations are nearly identical or even identical. This is because there are different foreign policy and national security circumstances surrounding different sanctions programs.
3. Whether the fair notice requirement’s standard of “ascertainable certainty” is met will be determined by reference primarily to the text of the relevant regulations but also to other factors such as press release statements.
4. Uncertainty within OFAC that is not reported publicly with respect to a legal question is unlikely to be considered a factor in determining whether a regulated party had fair notice, especially if the regulated party learned of such uncertainty after the conduct in question allegedly occurred.
5. Whether a regulated party sought guidance from OFAC will be a factor in the determination of whether such party had fair notice of a regulation. Since there are multiple obstacles here, we recommend consulting counsel with expertise in U.S. sanctions in order to obtain such guidance.

1. Rosneft is subject to a separate set of sanctions pursuant to Executive Order 13662, but those authorities are not blocking sanctions and thus were not implicated in this action.
2. Released July 20, 2017.
3. [OilCo], 2019 U.S. Dist. LEXIS 222825, * 11-12.
4. Id. at *13 (citing FCC v. Fox Television Stations, Inc., 567 U.S. 239, 253 (2012)).
5. Diamond Roofing Co. v. Occupational Safety & Health Review Comm'n, 528 F.2d 645, 649 (5th Cir. 1976).
6. [OilCo] at * 14.
7. Section 1 of EO 13661.
8. Section 4 of EO 13661.
9. 31 C.F.R. § 589.308.
10. [OilCo] at * 17.
11. Id. at * 19, 22, 23.
12. 31 C.F.R. § 589.308.
13. See id. at * 19-20.
14. Id. at * 23.
15. Id. at * 25.
16. Id. at * 26-27.
17. [OilCo] at * 27 (quoting United States v. Lachman, 387 F.3d 42, 58 & n.16 (1st Cir. 2004)).
18. General Elec. Co. v. United States EPA, 53 F.3d 1324, 1332-34 (D.C. Cir. 1995).
19. Id. at * 28.
20. The Court allowed consideration of void-for-vagueness claims over OilCo’s objections. The Court  agreed that they are distinct from the fair notice line of cases, but nonetheless found them relevant in this case “[i]n light of the Supreme Court’s linking of vagueness and fair notice, and in the absence of precedent suggesting otherwise, the Court acknowledges that cases involving void-for-vagueness challenges based on a lack of fair notice are persuasive here.” Id. at * 32 (citing Christopher v. SmithKline Beecham Corporation, 567 U.S. 142, 158-59 (2012)).
21. See id. at * 34-35.
22. See id. at * 35.
23. Id. at * 37 (citing 31 C.F.R. § 589.101 for the provision in the Ukraine sanctions regulations and 31 C.F.R. § 537.101 (2017) for the provision in the Burma sanctions regulations).
24. Id. at * 37-38.
25. See id. at * 9-10; OFAC FAQS: Basic Information on OFAC and Sanctions, question 400.
26. Id. at * 38.
27. Id.
28. Id. at * 38-39.
29. Id. at * 39.
30. Id. at * 41.
31. “[OilCo] has not cited to, nor has the Court encountered, any fair-notice cases in which a regulated party relied upon the press's reporting to provide regulatory guidance. Perhaps this absence of legal authority underscores the unique facts of this case, or perhaps most regulated parties do not purport to bring a fair-notice claim based on information released by news outlets. Either way, the Court believes that a regulated party, in good faith, would not rely upon statements released by third-party news outlets in ensuring compliance with Ukraine-related sanctions regulations.” Id. at * 43-44.
32. Id. at * 42.
33. Id. at * 43.
34. Id. at * 47-48.
35. Id. at * 51.

Client Alert 2020-011