Stop me if you’ve heard this one: “We don’t make munitions or sell weapons, so we are good on all those export-law requirements.”
Statements like this make most trade compliance managers cringe. Why? Because there’s so much more to import/export compliance than just “selling munitions.” I can remember a case, years ago, when GEICO got in trouble for selling car insurance to a narcotics kingpin on OFAC’s SDN List. (Seriously, Google it.)
Or if you’re looking for something more recent, take the enforcement case announced last month against 3M Company. Based in Minnesota, 3M is a global manufacturer producing a variety of products for different industries. Many of their products are used every day – Post-it Notes, Scotch Tape, and N95 masks, just to name a few. Specific to this case, 3M violated U.S. export sanctions law by allowing end users in Iran to purchase reflective license plate sheeting. This product is reflective material dedicated to license plates for vehicles allowing the motorist with a legible, fully reflective license plate. Surprised that 3M would settle for almost $10 million for alleged violations over something so benign? Let’s take a closer look at the details and timeline to see how 3M wound up in this pickle.
Trade Compliance Timeline of Events
November 2015: That’s when 3M’s subsidiary in the UAE began working on an RFP for the reflective license plate sheeting. The subsidiary (3M Gulf Ltd.) was responding to a German entity, but they supposedly knew the final destination was Iran. 3M Gulf anticipated the implementation of OFAC’s General License H (GLH) under the Joint Comprehensive Plan of Action (JCPOA) to be applied to this proposal.
January 2016: JCPOA goes into effect, as does OFAC GLH which authorized foreign subsidiaries of U.S. companies to engage in certain transactions with Iran. However, this excluded Iranian military, law enforcement, etc., and further prohibited U.S. Person involvement to facilitate trade with Iran, either directly or indirectly, unless it is related to export compliance guidance.
Back in Minnesota, 3M issued formal guidance as well as internal procedures clearly explaining the above. These came directly from the company’s Trade Compliance Counsel at headquarters.
Early March 2016: 3M Gulf receives approval from 3M’s U.S. Trade Compliance team – despite the end user being listed as “transport authorities in Iran.” Note that exporting to Iranian Law Enforcement is strictly prohibited and not permitted under GLH and should have been identified as a Red Flag requiring a drill down on the exact end user. At the time of its restricted party screening, 3M Gulf omitted the pages containing reference to Iran. This lead the company’s trade compliance department to think that the end user was in Germany.
Mid-March 2016: 3M Gulf distributes internal procedures in-line with Corporate procedures outlining the process for Iran transactions. Both the U.S. Corporate procedures and 3M Gulf procedures reiterated that transacting with Iranian law enforcement and affiliated entities was not permitted, nor was U.S. involvement outside of export compliance guidance allowed. This procedure was electronically sent to employees … including the senior manager working on the RFP.
May 2016: Training is provided to 3M Gulf employees on the new policy with Iran. This training is followed up via email with the presentation slide deck.
April 2016: The German distributor contacts the senior manager at 3M Gulf, as well as a manager at 3M East (Swiss subsidiary), alerting them of a change to the transaction. Germany would now be selling directly to a reseller in Iran – Bonyad Taavon Naja. This change should have prompted a new, separate review of the transaction by Trade Compliance, but that step was skipped.
Shortly after, the 3M Gulf Senior Manager and 3M East manager received a due diligence report indicating a connection between Bonyad Taavon Naja and Iran’s Law Enforcement Forces. Unfortunately, this Red Flag was dismissed and not escalated to the Trade Compliance Department for review.
September 2016: 3M Gulf and 3M East continue to withhold details of the transaction to avoid a re-review by Trade Compliance, despite the internal guidance and procedures issued and the training given supported by the slide deck. Enter the Logistics managers, who raised their own concerns pertaining to the vague end-user/end-use in Iran. They request that the transaction be put back through Trade Compliance for approval. Instead, the Logistics team is (falsely) told that approval had already been granted.
September 2016 – September 2018: 3M makes 43 shipments from the U.S. to the German reseller, who then resold to SDN Bonyad Taavon Naja in Iran.
Back at 3M in the US, an employee had knowingly approved six credit notes related to the Iran sale, contributed to two internal assessments, and assisted with quality control issues while also receiving sales incentives for the Iran business. As a reminder, this type of activity is outside of the permitted export compliance guidance under OFAC GLH and instead is an example of trade facilitation with Iran.
Late 2018: OFAC rescinded GLH and issued a wind-down period. At that time, 3M identified the unauthorized sales and shipments, submitted to OFAC a voluntarily self-disclosure, terminated or reprimanded the culpable employees, hired new Trade Compliance counsel, enhanced sanctions training and ceased business with the German distributor.
Because of the U.S. person’s involvement in supporting Iran sales and the shipments to the Iranian Law Enforcement, there were a total of 54 apparent violations resulting in a settlement of almost $10 million.
So, what went wrong here? After all, 3M had dedicated counsel on staff and a trade compliance department. The company issued new procedures and training, and there were enough red flags to stop an entire truckload of license plate sheeting (even the reflective kind).
This case highlights the importance of:
- Supporting company policies and procedures with effective controls.
- Meaningful More than just a check in the box, training should empower employees with knowledge to protect the company from illegal export activities.
- Understanding red flags and how to evaluate them … especially related to sanctioned countries.
- Compliance starts at the top. Having a culture of compliance throughout the organization – both in the U.S. and foreign subsidiaries – is required, not optional.
- Effective compliance programs place a higher value on adhering to the law than illicit or questionable sales.
- No industry is exempt from the purview of OFAC compliance when operating in an international environment.
- The higher-risk transactions require a higher level of scrutiny to ensure a successful compliance program. In this case, I am sure 3M wishes that its trade compliance department would have taken that “second look” at the sale.
- The importance of continual auditing can root out bad actors who seek to hide information from trade compliance personnel.
- Designating trade compliance advocates at all locations, including foreign subsidiaries.
- Always Know Your Customer. (And when it comes to distributors/resellers, make sure you know their customer, etc. … “to the end of the line.”) This includes knowing the end user and end use to ensure they are not prohibited.
Of course, hindsight is 20/20. But this case details some key principles we can all learn from. You can read more about the case here.
Do any of these behaviors and activities sound familiar? Perhaps too familiar?
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