Global manufacturing firm 3M reached a $9.6m settlement with the US Treasury Department’s Office of Foreign Assets Control (OFAC) after it allegedly violated US sanctions on Iran.
OFAC imposed a $9.6m settlement on the global manufacturing giant 3M, with the company agreeing to settle its potential civil liability for 54 apparent violations of OFAC sanctions on Iran that arose from its subsidiary’s sale of reflective license plate sheeting to an Iranian entity controlled by the Iranian Law Enforcement Forces.
Between September 2016 and September 2018, 3M East AG sold 43 orders of this product to a reseller with knowledge that it was destined for a customer in Iran. One US employee of another 3M subsidiary was substantively involved in these sales as well, OFAC said.
This is the second regulatory enforcement action against 3M in recent weeks, as the company was fined $6.5m to settle Foreign Corrupt Practices Act violations with the US Securities and Exchange Commission last month. The sanctions violation was labeled “egregious,” but the business was amply credited for self-reporting the violation to authorities.
Due diligence failures
Right at the time the US was involved in helping to create the Joint Comprehensive Plan of Action (JCPOA) with Iran, many of these activities at 3M were brewing.
The JCPOA was the landmark accord reached between Iran and several world powers, and it has since lapsed, despite some efforts underway to revive it.
“The trade compliance employee responsible for doing restricted party checks mistook the German intermediary to be the end user of the sheeting and did not perform due diligence on the Iranian entity.”
OFAC
As the JCPOA was being negotiated, some global businesses were eyeing a key term of it: foreign subsidiaries of US companies were going to be able to sell certain goods to Iranian customers.
In light of the JCPOA, employees of 3M’s Middle East operations (3M Gulf) decided they would sell reflective sheeting for license plates to a German company, which would then sell those blank license plates onward to Iranian transportation authorities, or more specifically, to the Iranian government that controls the transportation sector.
3M’s trade compliance counsel in the United States approved that arrangement; in doing so, he made clear that the approval was only for the specific scenario described, specifically the “conversion” of the sheeting into license plate blanks for onward sale to Iran.
“The trade compliance employee responsible for doing restricted-party checks mistook the German intermediary to be the end user of the sheeting, and did not perform due diligence on the Iranian end-use customer,” OFAC said.
Several weeks later, the German company actually told 3M’s Middle Eastern and European offices that it wouldn’t be converting the sheeting into blank license plates after all and would be selling the reflective sheeting to Iranian buyers directly.
Here was evidence that the proposal as intended was being contravened and products were going to be shipped directly to Iranian officials.
But the change of plans were never communicated to the trade compliance team.
“Despite this departure from the proposal as approved,” OFAC said, the 3M Middle East and European offices “did not bring this change to trade compliance’s attention.”
A few weeks later, the local 3M offices received a due diligence report that tied their end-use customers to the Iranian police — more evidence of sanctions breaches — but those 3M executives also failed to bring that detail to the trade compliance team’s attention.
Later, local 3M officials decided to change the contracting entity from 3M Gulf to 3M East, based in Switzerland, even though 3M Gulf was the only 3M subsidiary permitted to do business with Iran at all.
Despite knowing the prohibition on US person involvement in business dealings with Iran and receiving internal guidance on this prohibition, one US person approved six credit notes relating to the Iran business.
When numerous managers involved in planning the logistics of the Iran business raised concerns, “including about the shift out of 3M Gulf, the identity of the end user, and the need to go back to [trade compliance] counsel for review of the transaction,” these local 3M employees ignored them. At other times, those employees accurately described the Iran business as a resale, but falsely claimed they had already received approval from the trade compliance team, OFAC said.
Finally, despite knowing the prohibition on US person involvement in business dealings with Iran and receiving internal guidance on this prohibition on multiple occasions, one US person approved six credit notes contributed to two internal assessments, and assisted with a quality control issue all relating to the Iran business, .
All in all, 3M ended up sending the 43 orders to Iran from 2016 to 2018 until the Trump Administration took the US out of the JCPOA.
Mitigating and aggravating factors
In a separate document attending the settlement (an enforcement release), OFAC listed the aggravating and mitigating factors of 3M’s sanctions violations case.
The agency pointed out 3M Gulf senior managers’ willful actions in evading US sanctions laws by exporting products to a prohibited entity in Iran and called numerous other employees “reckless” in their handling of 3M’s sales by failing to properly evaluate the proposed sales from a sanctions compliance perspective.
OFAC counted the mere fact that 3M and 3M Gulf had a risk-based OFAC compliance program in place — the trade compliance team — as a mitigating factor however. “The company voluntarily self-disclosed the violations to OFAC and provided substantial cooperation throughout OFAC’s investigation through the provision of responsive and detailed information in a well-organized manner,” OFAC said.
The company could have been subject to a $27.4m fine rather than the $9.6m one it received, which is a sizable difference, especially given the number of times 3M fell down on the compliance job in this case.
The company performed a thorough investigation, instituted remedial measures, and terminated the employment of or formally reprimanded six employees, plus added trade compliance counsel to 3M Gulf and 3M headquarters.
The company added enhanced sanctions compliance measures specific to the license plate business, introduced enhanced due diligence for any business involving a sanctioned country or region, and instituted a re-review of any approved proposals that had been changed. It also mandated enhanced trade compliance training for all applicable employees.
Cooperation credit and lessons
Once again, US agency enforcement units are signalling to corporate entities that self-disclosing and remediating weak compliance programs and internal controls will result in the levying of smaller penalties and gentler treatment in press releases. This sounds like small potatoes, but the company could have been subject to a $27.4m fine rather than the $9.6m one it received, which is a sizable difference, especially given the number of times 3M actually failed on the compliance job in this case.
The level of remediation may be the difference here as well because the company took decisive action, disciplined employees, instituted new layers of approval and oversight, plus enhanced training, soon after learning of its compliance failures.
Company policies and internal controls are crucial, but they must be proactively administered so they adjust to a changing sanctions landscape – a landscape that requires heightened scrutiny due to its fluctuations, increased number of higher-risk customers, transactions and geographies.
Indeed, businesses should not underestimate the fact that business interactions against the backdrop of heightened geopolitical tensions have the potential of more frequently involving not just regulatory compliance risks, but also critical US national security interests.