On September 9, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) entered a settlement agreement with NewTek, Inc. (“NewTek”), headquartered in San Antonio, Texas. According to a press release, NewTek agreed to pay $189,483 to settle its potential civil liability for 52 apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (“ITSR”). The apparent violations occurred between December 2013 and May 2018 when NewTek indirectly exported goods, technology, and services from the United States to Iran through non-U.S. distributors (the “Apparent Violations”).
This settlement agreement serves as a reminder that sales to non-U.S. distributors with knowledge or reason to know that such goods are intended specifically for Iran can violate the ITSR. As a result, companies that are incorporated in the U.S. and business entities that are majority-owned or controlled by U.S. persons should continue to conduct due diligence to determine whether any goods or services will be exported, directly or indirectly, to Iran.
The Apparent Violations
According to OFAC, from approximately December 2013 through May 2018, NewTek exported 49 products from the United States to two non-U.S. distributors with knowledge or reason to know its products were intended specifically for a reseller located in Iran (the “Iranian Reseller”). The Iranian Reseller sold three of the exported products to Islamic Republic of Iran Broadcasting, which was designated on OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List at the time. In addition, on at least three occasions, NewTek provided support, software updates, reseller training, or other services in support of sales to customers located in Iran.
Furthermore, NewTek did not have export control or sanctions compliance policies or procedures in place during the relevant time period and did not provide training to personnel regarding export control or sanctions compliance. According to OFAC, NewTek incorrectly believed that its product sales through third-party distributors to the Iranian Reseller were in accordance with applicable U.S. sanctions regulations because NewTek did not deal directly with Iran.
The Penalty Analysis
The statutory maximum civil monetary penalty was $15,031,546. However, OFAC considered the fact that NewTek voluntarily self-disclosed the Apparent Violations and that the Apparent Violations constituted a “non-egregious case.” Accordingly, under OFAC’s Economic Sanctions Enforcement Guidelines (“Enforcement Guidelines”), the applicable base civil monetary penalty amount was $291,512. Ultimately, the settlement amount of $189,483 reflected OFAC’s consideration of the General Factors under the Enforcement Guidelines.
OFAC determined the following to be aggravating factors:
- NewTek specifically authorized distribution and support of its goods in Iran pursuant to its arrangements with two third party distributors, knowing that relevant sanctions regulations generally barred dealings with Iran and relying on a mistaken understanding that its indirect dealings were permissible.
- NewTek employees at all levels within the company, including managers and certain members of NewTek’s four-member executive board, possessed direct knowledge and/or reason to know that NewTek products were exported to distributors intended specifically for sale to an Iranian Reseller and to end users located in Iran.
- NewTek facilitated access to its products and support services to resellers and users in Iran and to an SDN.
OFAC determined the following to be mitigating factors:
- Compared to NewTek’s overall revenue, the volume and total amount of payments underlying the Apparent Violations was not significant.
- According to OFAC, NewTek is a “relatively small company” that had not received a Penalty Notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the Apparent Violations.
- NewTek implemented remedial measures, including the following:
- Established export controls and sanctions compliance policies and procedures;
- Hired a Director of Compliance;
- Provided compliance training to employees in sales, marketing, shipping, service, and compliance personnel;
- Obtained formal export classifications from the U.S. Department of Commerce confirming that NewTek’s products are properly designated EAR99 for export control purposes;
- Implemented bulk name screening of its product registrants and current and pending distributors against OFAC’s SDN List; and
- Implemented geo-IP blocking measures to prevent individuals located in Cuba, Iran, North Korea, Syria, and the Crimea region of Ukraine from downloading or registering NewTek products.
- NewTek substantially cooperated with OFAC during the course of the investigation.
We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.