US Sanction Investigations Journey Through Agencies and Courts

In this era of growing geopolitical tension and ongoing expansion of US sanctions, federal agencies are devoting more attention and resources to investigations of potential sanctions violations, particularly focused on Russia, China, and Iran. Companies should be aware of how these investigations occur with the Treasury Department’s Office of Foreign Assets Control for civil/administrative matters and the Department of Justice for criminal matters.

Investigation Triggers

Sanctions investigations can begin from a variety of sources, including obligatory reports from the private sector, press reports and other intelligence, and voluntary self-disclosures. The first two categories can lead to US government investigations while VSDs give a company some initial control over an investigation.

The category of obligatory reports includes Reports of Blocked Transactions and Reports of Rejected Transactions submitted to OFAC as well as Suspicious Activity Reports filed with the Financial Crimes Enforcement Network.

Under sanctions regulations, the reports filed with OFAC must be submitted by US parties—primarily financial institutions—that are required to block or reject transactions because they are prohibited under US sanctions. US financial institutions must file SARs when they identify a transaction that is suspicious, which sometimes relates to US sanctions. These reports can give OFAC and the DOJ information to initiate investigations.

US government agencies also review press reports and intelligence that may relate to companies dealing with sanctioned parties or embargoed territories. Reports from whistleblowers fall into this category. At the end of 2022, Congress directed FinCEN to establish a whistleblower program to provide a financial incentive for individuals to report on sanctions violations. The details in these reports can be the basis for OFAC and/or the DOJ to request additional information from companies that can form the basis for a US sanctions investigation.

The third category involves VSDs that companies submit to OFAC and/or the DOJ. This process generally enables companies to control the initial stages of a US sanctions investigation because they have already fully investigated the conduct prior to the involvement of OFAC or the DOJ.

In addition, under OFAC enforcement guidelines and DOJ policy, companies that voluntarily disclose apparent sanctions violations can receive substantial reduction in the penalties that may be imposed. This VSD benefit is provided to companies that fully cooperate in OFAC or DOJ investigations and fully remediate conduct that violated sanctions.

There are potential downsides of VSDs, principally that the US government becomes aware of conduct that it might not otherwise have discovered. Even where the government becomes aware of the conduct without a VSD and initiates its own investigation, a company can still obtain a reduction in penalty through cooperation with OFAC and the DOJ, complete remediation, and other mitigating factors.

OFAC and the DOJ encourage companies to bring matters to their attention through VSDs, as evidenced by the recent “Tri-Seal Compliance Note.” However, there is no legal requirement to disclose apparent sanctions violations to OFAC or the DOJ. Responsible companies do decide not to submit a VSD after conducting an internal investigation and fully remediating the conduct, following careful consideration of the potential benefits and risks of such a disclosure.

Differences Between OFAC and DOJ

Companies seek to submit VSDs as soon as possible to secure their benefits and ensure that OFAC or the DOJ don’t learn about the same facts from other sources. However, the DOJ’s policy that a VSD must be submitted at the same time as OFAC to secure the benefit of a reduced penalty can complicate a company’s timing calculations.

It’s often more complex and time-consuming to determine whether potential criminal US sanctions violations have occurred than to find that US sanctions violations are worthy of disclosure under OFAC’s strict liability administrative regime.

Both OFAC and the DOJ can issue subpoenas and more informal requests for information to companies to obtain information in connection with an investigation. The DOJ can leverage the power of grand jury subpoenas and federal law to require that investigations be kept confidential, which can complicate the fact-gathering and investigation process within many companies.

The stakes between the two types of investigations can differ significantly. At most, OFAC can impose a civil monetary penalty and compliance commitments to resolve an investigation. By contrast, the DOJ can threaten companies and their employees with criminal prosecution and potential imprisonment for US sanctions violations, which means that ensuring a favorable outcome from a DOJ investigation can be paramount.

Key Considerations and Strategy

Whether responding to a subpoena or questions following a VSD, a company and its counsel should keep in mind the following considerations:

Cooperating with OFAC and the DOJ can be a key factor to favorable resolution of an enforcement case, including with respect to non-US companies that might otherwise be inclined to contest a subpoena or request for information on jurisdictional grounds. Companies can and should negotiate the scope of their responses to OFAC or the DOJ, to target them to investigators’ primary concerns and make the process manageable.

It’s important to address privacy and data protection issues that may affect what can be produced to OFAC or the DOJ, to ensure that the agencies understand and agree with the approach adopted by a company. Providing information to OFAC and the DOJ in an organized and well-explained fashion can go a long way to secure cooperation credit as part of an investigation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alexandre Lamy is a partner in Baker McKenzie’s international trade practice, assisting clients with sanctions and export controls and advising on corporate compliance matters.

Terry Gilroy is a partner in Baker McKenzie’s investigations compliance and ethics practice, advising businesses and individuals on white collar and financial crime issues.