Recent Developments in Sanctions Enforcement

April 8, 2015
Recent Developments in Sanctions
Schlumberger Oilfield Holdings Pleads Guilty to Criminal Sanctions
Charges Related to Conduct that “Facilitated” Business from the
United States; PayPal Resolves Apparent Sanctions Violations with
OFAC Caused in Part by the Failure to Employ Adequate Screening
Technology and Procedures
On March 25, 2015, Schlumberger Oilfield Holdings, Ltd. (“SOHL”), a non-U.S. wholly-owned subsidiary
of Schlumberger Ltd. (“Schlumberger”), also a non-U.S. corporation and one of the largest oilfield
services organizations in the world, entered into an agreement with the U.S. Department of Justice
(“DOJ”) to plead guilty to conspiring to violate the International Emergency Economic Powers Act
(“IEEPA”) by facilitating the provision of oilfield services to customers in Iran and Sudan through
Schlumberger’s U.S.-based business segment. As a part of the plea agreement, SOHL agreed to pay
approximately $232.7 million in criminal penalties, including a $77.5 million criminal forfeiture and a
$155.2 million criminal fine. The criminal fine represents the largest criminal fine (but not total penalty) in
connection with an IEEPA prosecution. SOHL also agreed to submit to a three-year corporate probation
period. SOHL’s plea agreement marks the first time DOJ has taken criminal action against a non-U.S.
corporation for sanctions program violations based primarily on a “facilitation” theory premised on
“business decisions” and business support from the United States of otherwise lawful conduct by nonU.S. entities within the corporate organization but that related to sanctioned countries (in this case, Iran
and Sudan). In the Statement of Offense filed with the United States District Court for the District of
Columbia, it was acknowledged that it was lawful for SOHL, a non-U.S. entity, to operate in Iran and
Sudan under certain circumstances, and it was also acknowledged that SOHL had policies and
procedures designed to ensure that the company did not violate U.S. economic sanctions. However,
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Schlumberger was alleged to have inadequate training to ensure that all of its employees acted in
accordance with these sanctions compliance policies and procedures.
On that same day, PayPal, Inc. (“PayPal”), a licensed money services business (“MSB”), agreed to pay
over $7.65 million to the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) to settle
potential civil liability for apparent violations of various OFAC economic sanctions programs, including
those related to Iran and Sudan. Notably, the Settlement Agreement with OFAC, as well as OFAC’s
posting describing the settlement, highlighted PayPal’s failure to employ adequate screening technology
and procedures as an important factor contributing to the apparent violations.
Among other things, these matters involving SOHL and PayPal highlight the importance for companies
that engage in international business of having in place policies and procedures reasonably designed to
ensure compliance with U.S. economic sanctions, following those policies strictly, and providing
appropriate training for all employees.
Schlumberger is one of the largest oilfield services organizations in the world. In documents filed with the
court, the DOJ acknowledged that SOHL, incorporated in the British Virgin Islands, and Schlumberger,
incorporated in Curaçao, could, as non-U.S. companies, lawfully operate in Iran and Sudan under certain
conditions. However, in doing so, among other things, U.S. persons, and U.S.-origin goods and services,
may not be involved. OFAC’s Iran and Sudan sanctions programs (which are adopted under the authority
of Executive Orders of the President of the United States that are issued under IEEPA, among other
authorities), generally prohibit U.S. persons from “facilitating” transactions involving Iran and Sudan,
exporting or causing to export services to Iran and Sudan and engaging in transactions to evade or avoid
the prohibitions of OFAC’s Iran and Sudan sanctions programs.
The principal conduct at issue in this matter related to the conduct of personnel from Schlumberger’s
Drilling & Measurements (“D&M”) business segment, which was headquartered in Sugar Land, Texas,
and provided oilfield drilling and measurement technology to oilfield locations worldwide. DOJ alleged
that from February 2004 through June 2010, activities of the D&M business violated the IEEPA (and
SOHL conspired to violate IEEPA) by facilitating transactions with Iran and Sudan, by exporting, and
causing the export of, services to Iran and Sudan, and by engaging in transactions to evade or avoid the
prohibitions of OFAC’s Iran and Sudan sanctions programs.
The DOJ acknowledged that Schlumberger had policies and procedures designed to ensure that the
company did not violate U.S. economic sanctions, but attributes the conduct in question to
Schlumberger’s failure to ensure that D&M’s employees in the U.S. (including non-U.S. citizens who
resided in the U.S.) fully complied with these sanctions-related policies and procedures. The underlying
conduct that led to the criminal settlement included several elements, discussed in further detail below. In
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April 8, 2015
sum, DOJ alleged that D&M, with the “involvement, knowledge, approval, and encouragement of D&M
management personnel”:
systematically approved and disguised capital expenditure requests from Iran and Sudan for,
among other things, the manufacture of new oilfield drilling tools and spending;
directed the transfer of oilfield drilling equipment to oilfields in Iran and Sudan;
undertook “business decisions” specifically concerning Iran and Sudan; and
provided technical services to troubleshoot mechanical failures and sustain sophisticated
oilfield drilling equipment in Iran and Sudan.
The DOJ also alleged that D&M personnel outside the United States undertook measures to conceal from
D&M personnel in the United States the involvement of Iran and Sudan, although the DOJ also alleged
that D&M personnel in the United States also approved certain requests of D&M personnel in Iran and
Sudan where the involvement of those countries was apparent from the face of the request.
There were several aspects to the underlying conduct that led to the criminal settlement, but perhaps
most interesting is the examples of “facilitation” that are provided by the documents made available by the
DOJ. “Facilitation” is a very broad concept under the OFAC-administered sanctions. With regard to Iran,
as interpreted by OFAC (and provided in the relevant Iranian sanctions regulations), a U.S. person is
generally prohibited from approving, financing, facilitating or guaranteeing any transaction by a non-U.S.
person (affiliated or non-affiliated), where the U.S. person could not itself engage in the transaction.
applicable Sudanese sanctions regulations, on the other hand, only state that facilitation by a U.S. person
of the exportation of goods, technology, or services to or from Sudan is prohibited, without providing any
further guidance.
Other than this, specific guidance from OFAC as to what might constitute “facilitation”
is scarce, although, importantly, in informal advice and discussions, OFAC staff has indicated that neither
the performance of clerical tasks nor being in an informational reporting line would, by itself, constitute
facilitation. At the same time, however, OFAC staff has indicated that any activity performed by a U.S.
person that goes beyond purely clerical tasks or passive receipt of information and the resulting
awareness of a company’s activities with respect to a sanctions target could violate OFAC sanctions
regulations. The DOJ’s examples in the court documents of “business decisions” are notable because
they provide additional guidance on the types of business decisions that may qualify as “facilitation” for
purposes of U.S. sanctions—at least from the DOJ’s perspective, as OFAC was not a party to this
settlement. The documents made available by the DOJ, however, are not specific about what conduct
constitutes “facilitation” and what conduct constitutes a prohibited export, or causing of an export, of a
service to Iran or Sudan, and on the basis of the conduct described below, there may be some overlap.
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First, the DOJ alleged that D&M management personnel in the United States—individuals who were
responsible for the supervision of D&M’s capital expenditure process (“CAPEX”) worldwide—approved
specific CAPEX requests on behalf of D&M operations in Iran and Sudan. According to the DOJ, D&M
personnel in the United States approved requests that on their face related to Iran and Sudan, and other
times D&M personnel outside of the United States used code words (such as “Northern Gulf” for Iran or
“South Egypt” for Sudan) to disguise the origin of the request.
One example cited by the DOJ is the approval by D&M personnel in the United States of a request from
D&M operations in Sudan to spend $660,000 to improve its infrastructure in Southern Egypt. Another
example is the approval by D&M personnel in the United States of expenditures for “swap” transactions,
in which newly-made equipment was then shipped from the United States to a non-sanctioned location
that already had an identical piece of equipment. Once the non-sanctioned location received the new
U.S.-origin equipment, it would arrange for the used equipment to be shipped to Iran or Sudan.
Second, the DOJ identified several “business decisions” as evidence of D&M U.S. personnel’s
“involvement” in Iranian operations. The DOJ focused in particular on steps taken by D&M personnel in
the U.S. “to maximize the efficiency and profitability of D&M operations in Iran.” Conduct cited by the
DOJ includes:
Email exchanges among D&M management in the U.S. and D&M management in Iran
related to the delivery of newly manufactured oilfield drilling equipment from France to Iran,
and the ultimate decision to relocate equipment from Canada to Iran. The DOJ references
several emails indicating that D&M management in the U.S. was involved in the process to
assist the D&M manager in Iran in delivering services, utilizing tools and maximizing
A senior D&M manager’s email to other D&M managers expressing disappointment regarding
business performance in various locations, including Iran, and a subsequent phone call to
review the business performance of D&M operations in Iran.
A senior D&M manager contacting management personnel in the United Kingdom, at the
request of D&M personnel in Iran, to expedite the processing of orders originating from Iran
for new oilfield equipment.
Minutes from a D&M “financial planning meeting,” held in Houston, Texas, attended by D&M
headquarters personnel and managers, that identify Iran as among the markets that need to
be focused on immediately.
Third, the DOJ alleged that D&M personnel in the United States provided technical support for D&M’s
oilfield drilling equipment in Iran and Sudan, including authorization to deviate from certain standard
specifications in order to troubleshoot technical issues. As examples of these technical services, the DOJ
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Technical specialists in the U.S. providing technical services related to the testing of “mud”
(i.e., a substance used to lubricate oilfield drilling equipment while in operation, taken from oil
wells in Sudan) to troubleshoot equipment failures suspected to have been caused by the
poor quality of mud; and
D&M management personnel in the U.S. approving a request from D&M personnel in Sudan
to use two separate tools to troubleshoot a problem they were experiencing with a particular
tool due to the composition of soil in the oil well.
The plea agreement, which is contingent upon federal court approval, imposes obligations on both SOHL
and Schlumberger. SOHL must, among other things, pay the U.S. government a total of $232,708,356 in
criminal penalties, submit to a three-year period of corporate probation, and comply with Schlumberger’s
sanctions compliance program.
Schlumberger’s undertakings, which are limited to the three-year
probation period, include reporting on its compliance with U.S. sanctions laws, and hiring an independent
consultant to review its sanctions compliance-related policies and procedures and internal audits.
According to the agreement, the consultant shall conduct two separate reviews of Schlumberger’s
sanctions compliance-related policies and procedures and internal audits during the probationary period,
after which it shall issue a written report to Schlumberger and the U.S. Government summarizing its
review and evaluation, including the evidence of potential violations, if any, identified in the internal audit
reports, and, as necessary, providing recommendations reasonably designed to improve the sanctions
policies and procedures.
According to the DOJ, the SOHL plea agreement represents “a landmark case that puts global
corporations on notice that they must respect our trade laws when on American soil,” and that even if the
corporations do not “directly ship goods from the United States to sanctioned countries, [they] violate our
laws when [they] facilitate trade with those countries from a U.S.-based office building.”
Also on March 25, 2015, PayPal agreed to pay $7,658,300 to settle its potential civil liability with OFAC
for processing transactions in apparent violation of the Cuba, Iran, Sudan, Global Terrorism and
Weapons of Mass Destruction Proliferators Sanctions Programs administered by OFAC.
According to the settlement agreement, for several years up to and including 2013, PayPal failed to
employ adequate screening technology and procedures to identify the potential involvement of U.S.
sanctions targets in transactions that PayPal processed. As a result of this failure, PayPal did not screen
in-process transactions in order to reject or block prohibited transactions as required by U.S. economic
sanctions programs. OFAC identified one set of apparent violations that resulted from this failure, each of
which either contained an explicit reference to a country subject to OFAC sanctions or another term
linked to the country (i.e., “Tehran,” “Khartoum,” “Cuba,” “Iran,” “Sudan,” “Iranian” or “Cuban”), or involved
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a PayPal account in which a person designated as a Specially Designated National and Blocked Person
(“SDN”) under OFAC’s Global Terrorism Sanctions Regulations had an interest.
In addition, PayPal also processed transactions to or from a PayPal account registered to a customer of
PayPal who was an individual designated on January 12, 2009 by OFAC as an SDN under OFAC’s
Nonproliferation of Weapons of Mass Destruction or “NPWMD” program. In this case, PayPal’s
automated interdiction filter initially failed to identify the account holder as a potential SDN for
approximately six months after the OFAC designation. Although the problem was fixed approximately six
months later, PayPal staff on multiple occasions, in violation of PayPal’s internal sanctions-related
policies and procedures, failed to obtain or review documentation corroborating the identity of the SDN
and dismissed alerts that were generated by the interdiction system. It was not until April 2013 when
PayPal properly blocked the account and reported it to OFAC.
OFAC determined that PayPal’s violations of the NPWMD program were “egregious.” The finding of
“egregiousness” was based on, among other factors, the following:
PayPal’s failure to identify its customer as a potential match to the SDN List for approximately
six months after the SDN’s designation;
After PayPal’s interdiction software ultimately flagged the customer as a potential match,
employees cleared name matches against the SDN’s account on six separate occasions prior
to appropriately identifying and blocking the account;
PayPal personnel repeatedly ignored certain warning signs that the customer in question was
a potential match to an SDN;
Multiple PayPal Risk Operations Agents failed to adhere to PayPal’s policies and procedures
pertaining to SDN match escalation;
Management was aware of the above; and
PayPal management knew of the conduct giving rise to the apparent violations and
demonstrated reckless disregard for U.S. economic sanctions requirements by failing to
implement appropriate controls.
OFAC deemed the other economic sanctions program violations “non-egregious.” In addition, OFAC
cited the remedial measures taken by PayPal, including hiring new compliance management and
strengthening OFAC screening processes and PayPal’s substantial cooperation with OFAC’s
investigation as “mitigating” factors to its enforcement response.
Interestingly, in addition to the monetary settlement, PayPal also agreed to provide OFAC with a
presentation within six months summarizing its current policies and procedures for screening transactions
and/or customers for the purpose of compliance with OFAC’s regulations. This is not always a feature of
OFAC settlements, but in light of the apparent importance of inadequate procedures in this case, it
appears that OFAC is interested in hearing more about additional remedial measures to be taken by
PayPal in strengthening its procedures.
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The actions against SOHL and PayPal, particularly when coupled with other recent high-profile sanctionsrelated settlements involving DOJ, OFAC, and state and federal regulatory authorities, suggest that
sanctions compliance is, and for the foreseeable future will likely remain, a law enforcement and
regulatory priority, including against non-U.S. corporations. As noted by DOJ, SOHL’s plea agreement
indeed represents “a landmark case.” It marks the first time DOJ has taken criminal action against a nonU.S. corporation for sanctions program violations on a “facilitation” theory premised in part on “business
decisions” concerning sanctioned countries made from a U.S.-based office building. The examples of
conduct that DOJ described in the documents that it made available are ordinary activities for companies
doing business internationally, and highlight challenging compliance questions. The documents are also
useful in that they provide limited guidance as to the meaning of facilitation under the OFAC sanctions. In
addition, the action against SOHL, particularly when coupled with the proposed deferred prosecution
agreement (“DPA”) involving Fokker Services B.V.,
suggests that DOJ may be focusing sanctions-
related law enforcement attention on foreign non-bank companies whose activities have U.S.
jurisdictional ties, and it may be reasonable to anticipate more cases of this nature. The action also
suggests that DOJ will continue to seek guilty pleas in sanctions matters, and the record-setting criminal
fine – coupled with ongoing compliance and reporting requirements – demonstrates that the DOJ will
pursue sanctions violations vigorously.
Both the Schlumberger and PayPal matters also highlight the sanctions risks that companies doing
business internationally are bound to face and the importance of having policies and procedures
reasonably designed to ensure compliance with U.S. economic sanctions, of effectively implementing and
following those policies, and the need to provide appropriate training for all employees. It is not enough
simply to have policies and procedures in place.
Clients interested in further information concerning BSA/AML and sanctions developments are
encouraged to contact the Sullivan & Cromwell lawyers identified at the end of this memorandum.
Copyright © Sullivan & Cromwell LLP 2015
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April 8, 2015
DOJ, Statement of Offense, United States of America v. Schlumberger Oilfield Holdings, Ltd.
“U.S. person” means “any United States citizen, permanent resident alien, entity organized under
the laws of the United States or any jurisdiction within the United States (including foreign
branches), or any person in the United States.” 31 C.F.R. §§ 538.315 and 560.314.
DOJ, supra note 1 at ¶ 26.
Id. at ¶ 4; DOJ, Information, United States of America v. Schlumberger Oilfield Holdings, Ltd. ¶ 19
SOHL and Schlumberger have ceased providing oilfield services in Iran and Sudan. DOJ, supra
note 1 at ¶ 29.
31 C.F.R. § 560.208. Subsequent to the relevant period of the DOJ’s allegations involving D&M,
in December 2012, OFAC issued Iran sanctions regulations making foreign incorporated
subsidiaries of U.S. companies subject to the prohibitions of OFAC-administered sanctions.
Specifically, the regulations prohibit “an entity that is owned or controlled by a United States
person and established or maintained outside the United States … from knowingly engaging in
any transaction, directly or indirectly, with the Government of Iran or any person subject to the
jurisdiction of the Government of Iran that would be prohibited pursuant to this part if engaged in
by a United States person or in the United States.” 31 C.F.R. § 560.215.
31 C.F.R. § 538.206.
DOJ, supra note 1 at ¶ 5.
Id. at ¶ 7.
DOJ, Press Release, “Schlumberger Oilfield Holdings Ltd. Agrees to Plead Guilty and Pay Over
$232.7 Million for Violating US Sanctions by Facilitating Trade with Iran and Sudan” (Mar. 25,
2015), available at
Absent an applicable exception or license, it is generally unlawful for any U.S. person, (including
any U.S. branch or agency of a non-U.S. bank) to do business with an SDN, and any property
that is in the United States or within the possession or control of a U.S. person in which any SDN
has an interest must be blocked.
For additional discussion on United States of America v. Fokker Services B.V., please see our
previous memorandum to clients entitled “Judicial Review of Deferred Prosecution Agreements:
United States v. Fokker Services B.V.: District Court Rejects as “Grossly Disproportionate” a
Deferred Prosecution Agreement in U.S. Economic Sanctions Case” (Feb. 6, 2015), available
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April 8, 2015
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