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Gregg Sofer
Ever wonder what is going on behind the scenes as the government investigates criminal cases? Are you interested in the strategies the government employs when bringing prosecutions? I'm your host, Gregg Sofer, and along with my colleagues in Husch Blackwell's White Collar, Internal Investigations and Compliance Team, we will bring to bear over 200 years of experience inside the government to provide you and your business thought provoking and topical legal analysis.
00;00;28;09 - 00;00;56;09
Gregg Sofer
As we discuss some of the country's most interesting criminal cases and issues related to compliance and internal investigations. Welcome to the Justice Insiders. I’m your host, Gregg Sofer and today I'm lucky enough to have one of my partners, Grant Leach, who comes from our Omaha, Nebraska office. And Grant specializes in the trade areas, particularly he's part of Husch Blackwell's International Trade and Supply Chain practice.
00;00;56;20 - 00;01;14;13
Gregg Sofer
We're thrilled to have Grant on today to continue our continuing discussions about sanctions and the difficult web of regulations that companies face in today's increasing focus on sanctions. So Grant, welcome to the show and thanks for joining us today.
00;01;14;22 - 00;01;16;18
Grant Leach
Oh, Gregg, thank you so much for having me.
00;01;16;25 - 00;01;49;09
Gregg Sofer
So I think, first of all, set our listeners. We ought to go through the tapestry of law and agents fees, regulators, prosecutors that are out there in this space. And we'll focus more a little later in the show on OFAC, because there's been some recent developments from OFAC that are important to our clients. But I think the most important thing, at least at the beginning, is trying to understand how complex all this is.
00;01;49;09 - 00;02;17;20
Gregg Sofer
So I'm just going to start with some terms and perhaps you can educate our listeners who don't know this already. What we're talking about here. So can you just sort of start off and tell us who's in this space, which U.S. government agencies will limit it to the United States? For now, which U.S. government agencies are out there imposing penalties in the trade space that's commonly referred to as sanctions?
00;02;18;11 - 00;03;00;23
Grant Leach
Yeah. So that term sanctions, it means different things to different people. I think among what I specialize in is export controls and trade sanctions. And those can be two very different baskets. But for shorthand, when a lot of people say sanctions, they're talking about both export controls and trade sanctions. And the export controls, those cover physical commodities. They cover software and they cover information and technology related to those fiscal commodities and software.
00;03;01;11 - 00;03;45;10
Grant Leach
On one level, there is the International Traffic in Arms Regulations. Those are export controls that apply to defense articles, software for those defense articles, technical data, those are very restrictive, have a lot of compliance obligations that attached to them. Then the next level down are the export administrate regulations, the EAR. Those cover different types of commodities, software and information that in many ways are still just super important for maintaining U.S. national security or maintaining U.S. foreign policy objectives.
00;03;45;25 - 00;04;08;17
Grant Leach
But they're also things that have a lot of civil application outside of the military use. So for certain countries, the U.S. government is very happy to let you ship. Those are regulated items without a license. Then for other items, we will let you ship it outside the U.S. But you need to get a license beforehand and then others will be mostly completely prohibited.
00;04;08;23 - 00;04;13;04
Gregg Sofer
Fair to say that these are licensing regimes, is that an accurate way of putting it?
00;04;13;10 - 00;04;31;21
Grant Leach
Yes, there is a licensing aspect to them. Part of it is licensing, part of it's prohibited. And on the export controls side, it's all going to depend on what the item software or technology is that you're dealing with. And then also the country or the end user where it's going.
00;04;31;29 - 00;04;59;19
Gregg Sofer
And there are people who spend their entire lives sorting through extraordinarily complex questions related to the EAR, you don't have time on our podcast to do that today. But again, let's go a little bit deeper just on these and we'll get around to some of the other regulatory and statutory regimes. But who is out there in the ITAR space investigating and regulating those items and who's out there in the air space?
00;04;59;19 - 00;05;05;11
Gregg Sofer
And again, we don't have to get into every single entity, but there are some main players here, right?
00;05;05;11 - 00;05;19;29
Grant Leach
Yeah. So on the Avatar side, it is the U.S. State Department's Directorate of Defense Trade Controls that handles the kind of day to day licensing and review administering those regulations even.
00;05;19;29 - 00;05;41;22
Gregg Sofer
That's a complex question because the DDTC inside the Department of State, sometimes there are questions about whether the item in question really falls under their jurisdiction versus the Department of Commerce who largely looks at the EAR, is that right?
00;05;42;04 - 00;05;50;12
Grant Leach
Yes. The EAR is the department of Commerce, Bureau of Industry and Security, that's BIS.
00;05;50;26 - 00;06;04;27
Gregg Sofer
Okay. So the Department of State is looking at ITAR, the Department of Commerce by their Bureau of Industry and Security is looking at the EAR. What else is out there in the sanctions? We'll call it the sanctions space.
00;06;05;13 - 00;06;47;18
Grant Leach
So the other side of the coin are trade sanctions, and those are imposed by the U.S. Treasury Department's Office of Foreign Assets Control. That's OFAC. Whereas the export controls will cover mostly items, technology and services. The affect sanctions can be much broader and they can prohibit any export of services, any financial transaction, any sort of activities that would be with or for the benefit of entire countries in some instances.
00;06;48;15 - 00;07;18;07
Grant Leach
Or if we placed a sanctions designation on a certain individual or a certain company, those OFAC sanctions will prohibit any transactions with or for the benefit of that individual on what's called the SDN list. That’s the specially designated nationals and blocked persons list. But it also extends to any blocked property in which someone who's on the SDN list has a 50% or greater ownership interest.
00;07;18;21 - 00;07;20;14
Gregg Sofer
And that includes companies, correct?
00;07;20;26 - 00;07;51;19
Grant Leach
Yeah. Yeah. And OFAC doesn't do us the courtesy of telling us which subsidiaries are owned by those people on the SDN list. Sometimes they'll take one of those sanctions subsidiaries and add them on the burden list just to help everyone figure it out. But their perspective is that as the exporter, it's your responsibility to know who owns the companies that you're transacting with and whether those owners are on the SDN.
00;07;52;17 - 00;08;04;24
Gregg Sofer
How does the government determine whether you're on one of these lists, whether you're in a blocked country, a blocked person, a blocked piece of property? How does that happen and where does one find this information?
00;08;05;08 - 00;08;26;17
Grant Leach
The government has a lot of tools in their sanctions and export controls toolbox. Like I was talking about the SDN list commerce has their own list, the entity list and each list kind of comes with different restrictions and there's different criteria that each government agency will consider before they put you on one of those lists.
00;08;26;23 - 00;08;29;14
Gregg Sofer
So often an interagency determination, right?
00;08;29;20 - 00;08;48;25
Grant Leach
Yes. Yes. And they'll think about what consequences go with each list and kind of what policy objective they're trying to achieve. When we put some more on the entity list that will prohibit anyone from exporting or exporting items to them that are subject to the R.
00;08;49;01 - 00;08;50;04
Gregg Sofer
Without a license, right?
00;08;50;04 - 00;09;29;11
Grant Leach
Yeah. Without a license or depending on which designations go with their name. But it's not going to force a U.S. bank to freeze the payments that anyone tries to send to that person on the entity list would also put someone on the SDN list that is going to require any US financial institution that processes a payment. That would be an account in the U.S. It would also be if a U.S. bank has a correspondent account somewhere or that they operate in connection with a foreign bank for the purpose of performing currency conversions.
00;09;29;23 - 00;09;50;06
Grant Leach
If one of those correspondent accounts gets a hold of one of these payments, they also have to freeze it if a sanctioned country or if it is the end is involved. And then once that payment is frozen or in some instances if it's rejected, they also have to report that to OFAC. That's a mandatory reporting requirement for them.
00;09;50;12 - 00;10;21;02
Gregg Sofer
Two questions here. One, if my company wants to avoid having a problem with our fact, for instance, the list that you're talking about are publicly available. They're also plugged into software. Right. That companies can check when they're trying to conduct business. But what level of due diligence is required in terms of downstream vendors, downstream suppliers? How far should our clients be digging?
00;10;21;02 - 00;10;22;02
Gregg Sofer
As a general matter.
00;10;22;22 - 00;10;57;00
Grant Leach
That's a really tough question because when you look at these regulations, the way they're drafted, these are strict liability violations. If you make the mistake of doing business with somewhere on the SDN list or if you make the mistake of sending something to the wrong person without an export license is just going to be a violation. They don't tell you any minimum amount of diligence or maximum amount of diligence you can do to avoid a violation.
00;10;57;11 - 00;11;26;11
Grant Leach
They just tell you, don't ship these items to these persons and don't conduct transactions with these items and these persons in practice. What happens is each of these, in fact, under their own regulations, have penalty calculation guidelines that they follow. And they say that as part of that penalty calculus, that they perform when they have found a violation, they're going to consider.
00;11;27;10 - 00;12;01;27
Grant Leach
And the wording differs under each of those umbrellas, but they're going to consider whether or not you had a reasonable risk based compliance program. And so if they find a violation, then they'll be willing to either severely reduce your penalties or in many cases, completely waive penalties if they agree that you had a reasonable risk based compliance program, in that you had made appropriate efforts to avoid and prevent that violation from occurring.
00;12;02;02 - 00;12;30;06
Gregg Sofer
That makes a lot of sense. And we've talked a lot on the podcast about the importance of a compliance program and how very important it is to government when it's looking at imposing a sanction or a penalty or even bringing a criminal prosecution. But the question I think that's is the hard question, as you point out, is that compliance program, how many levels down do I have to dig?
00;12;30;08 - 00;12;55;01
Gregg Sofer
Because I could be dealing with one company and that company could be dealing with another company and that company could be dealing in another company if get down the line three, four or five levels and then somebody on the as the end or you're sending that, as you point out, the commodity or you're dealing with an entity that has been banned somehow by the United States government is on one of these lists that we've described.
00;12;55;17 - 00;13;07;19
Gregg Sofer
What point is this a problem for me? And what point can I say, well, that's just unreasonable or is there no such line? I mean, are you just sort of on a case by case basis just stuck trying to make these arguments?
00;13;08;09 - 00;13;36;18
Grant Leach
Yeah, it really case by case. And the government has a lot of opportunity to change their mind or, you know, didn't we'll get into this later with the idea of this ten years that limitations. But one of the things that really terrifies me about how this statute of limitations has moved for ovac is that now it gives them the opportunity to reconsider what they think is a reasonable risk based compliance measure.
00;13;36;27 - 00;14;04;01
Grant Leach
Potentially ten years after the fact, with the full benefit of hindsight. But I think to kind of touch on what you were talking about with these, whether it's export controls or trade sanctions, one thing that sets them apart from all of the other regulatory regimes is that they feature export prohibitions, but also reexport prohibitions and on the effect side, facilitation prohibitions.
00;14;04;17 - 00;14;28;14
Grant Leach
So you can be liable and on sometimes there's an old requirement, many times there's not you can be liable for what your customer in a foreign country does with your products after they receive those goods. And in many instances, you're subject to U.S. jurisdiction. You have bank accounts in the U.S. so you're really concerned. But it's this foreign customer that you're doing business with.
00;14;28;29 - 00;14;53;04
Grant Leach
They might not have that same U.S. bank account. They might not care. You are going to be the easiest throat to the U.S. government to choke. So these foreign companies, you accept a lot of liability for what they do. And so part of that expectation for a reasonable risk based compliance program is making sure that you're doing business with foreign parties where you know who they are and you're comfortable.
00;14;53;04 - 00;15;27;07
Grant Leach
You can trust them in what they're going to do with your products as far as a minimum, in my experience, I think that whether it's OFAC or BIS, they're going to expect you to be screening and reviewing all of the information that is in your immediate possession, the minimum. If this information goes across your servers or if you're getting a document that's going to say who this item is getting shipped to, they're going to expect you to review that, make sure that that address is not in Cuba, Iran, Syria, North Korea.
00;15;27;18 - 00;15;45;02
Grant Leach
They're going to expect you to screen that name. And then when they start kind of those outer rings of your compliance program, they're going to be asking, well, is this information one, how easy would it be for you to get a hold of this information if you asked for it and then to kind of what was the risk reward?
00;15;45;02 - 00;16;03;24
Grant Leach
How sensitive is this? What a lot of companies that we deal with, they'll look at it and say, okay, some of these products, these are commodities that are traded routinely, that there's no specialized action to them. Even if we asked who the end user is going to be, it would be so incredibly easy for our customers to lie to us.
00;16;04;04 - 00;16;30;11
Grant Leach
There might not be the risk justification for asking for all that information, going through all the extra steps. On the other hand, if you have a product that is highly customized and if this is the kind of product that no one just decides at the start of a new day, that they're just going to buy one. This one, these are products where you are going to know exactly where it's going because you're going to have to do a lot of work to customize this for whoever the end user is.
00;16;30;11 - 00;16;59;29
Grant Leach
And then that's when the U.S. government's going to expect you to ask before you sell this to some engineering firm, middle person. Okay, where's the factory where this is going? Who's that factory? Who owns that factory? The more customization, the higher dollar values, particularly when you're dealing with products that are subject to these export classifications or adjacent to those products, that's when the US governments can expect you to start doing more diligence for those transactions.
00;17;00;12 - 00;17;30;12
Gregg Sofer
Right? So it really is a sliding scale and you really have to understand the landscape here is to understand what their risks, what is a compliance program. They have to understand what the risk is and you always have to consider. What I often see is in discussions about this from the government side is red flags, right? So I am ignoring a red flag and also being able to see that the flag is red is important, but ignoring a red flag is going to cause you a lot of problems.
00;17;30;23 - 00;17;32;05
Grant Leach
Yeah, definitely.
00;17;32;11 - 00;17;43;12
Gregg Sofer
So you experienced this in your practice every day you're dealing with the companies and individuals who are concerned about these kinds of things. How is it that this often comes to your attention?
00;17;43;20 - 00;18;05;15
Grant Leach
A couple of ways. One of the worst ways for it to show up is, is ovac is reaching out. Or if a client comes to us and says, Oh, we got this notice from our bank telling us that they froze this payment that we wanted to send in. It's been reported to OFAC. That is kind of one of the worst ways it can come up when it comes up.
00;18;05;25 - 00;18;46;10
Grant Leach
A lot of times if you're fortunate and you're being proactive and you have maybe one of your salespersons said, Oh, someone from this company wanted to purchase this. They told us They're in Turkey. We're not sure if we can ship the product there because of how it's classified. When people are being proactive, it's much, much easier to deal with these restrictions when you've already shipped the good and it gets stuck at a port, or if you shipped a product to someone that you weren't exactly sure who they were a couple months ago, and then all of a sudden you're getting an email because someone in Iran is emailing your service desk saying, Hey, I bought
00;18;46;10 - 00;19;07;13
Grant Leach
this product, I'm trying to download the software and now my download is blocked. Why can't I use this then? That's one of those red flags. I'll grab someone shipping my product to Iran. It's already there. Luckily, if you've had those mitigating measures that you're geo blocking those IP addresses, hopefully you've stopped them from getting that software. They need to activate it.
00;19;07;13 - 00;19;12;29
Grant Leach
But you still need to look into how this product got to Iran in the first place.
00;19;12;29 - 00;19;43;17
Gregg Sofer
Again, I think the message here is prophylactic early detection, early creation of a compliance program that fits the risk profile of the company could conceivably save you a tremendous amount of money and pain. What doesn't investigation of one of these look like? And I know there's lots of different ways that those investigations proceed. Indeed, there's many different agencies who could be investigating a violation at the same time.
00;19;44;14 - 00;19;50;01
Gregg Sofer
But tell our listeners a little bit about one of these investigations by the government tends to look like from your practice.
00;19;50;12 - 00;20;18;03
Grant Leach
If you're lucky, you'll get something from the government to tell you that you're under investigation. They'll send you an email and reach out. One of the enforcement officers might call you and ask you to explain something to them, but a lot of times you can be under investigation and not even know it because someone else as submitted a voluntary self-disclosure or the government as they're under resourced.
00;20;18;23 - 00;20;44;01
Grant Leach
And that causes them to have to kind of make the companies that are under review do a lot of their work for them. So we're working with a lot of companies that they submitted a voluntary self-disclosure to, and then buyers will come back and say, okay, you know, we don't think you've committed a violation. But while we have this opportunity to have a dialog with you, what do you know about this company or what do you know about that company?
00;20;44;06 - 00;21;06;07
Grant Leach
So they work through those channels just trying to collect as much information as they can. And we've seen that here, especially with Russia and all the diversion risk investigations that we used to expect to get resolved on a pretty short form, a short order, they started asking more and more questions unrelated to what was reported or how it started.
00;21;06;07 - 00;21;32;13
Grant Leach
They just if they had the opportunity to collect information, they're going to use that opportunity kind of working with a captive audience. And then we're also seeing that when you submit a voluntary self-disclosure before they'll resolve that the SD, if they have other persons that they think you may have done business with or might have information you can produce for them, they've shown a tendency to ask for a lot of that unrelated information.
00;21;32;29 - 00;21;57;24
Gregg Sofer
So we won't get into the whole topic of voluntary self-disclosure. We've touched on that in prior episodes, but bottom line for voluntary self-disclosure, the government has in many instances explicitly stated that it will limit if the company voluntarily produces this information early before they're contacted by the government, that there are benefits, significant benefits in terms of what kind of penalties might be imposed.
00;21;57;24 - 00;22;34;07
Gregg Sofer
It also could make a big difference on the criminal side. But we won't get into the great details and the tremendous angst that's often involved in determining whether or not a voluntary disclosure is a good idea and when it should be done and how it should be done. There's we've talked a little bit about this in other episodes, but what I'd like to talk about, what I see often from my end with the white collar side and the criminal side is that when one of these inquiries comes in on what they, the administrative or the civil side, I'm always extremely worried that there's also the potential for a criminal violation.
00;22;34;07 - 00;23;03;27
Gregg Sofer
And you said you're lucky if you find out the government is investigating you. You're unlucky. If the government breaks down your door, does a search warrant and indicts the company or individuals, which is something the Department of Justice has made very clear that they want to do. And I'm just curious, when you're dealing with your clients, how do you handle this multi-headed hydra of potential, all avenues of enforcement, which could include criminal prosecution?
00;23;04;06 - 00;23;04;18
Gregg Sofer
Yeah.
00;23;04;29 - 00;23;29;09
Grant Leach
So as we said earlier, the best way is to have a good compliance program that will hopefully stop you committing any of these violations in the first place. If that's not possible or if despite your best efforts, you unfortunately sold to someone who then reexported your product to the wrong place and triggered all this potential strict liability reexport exposure.
00;23;29;26 - 00;23;49;00
Grant Leach
You want to start by thinking about all of the possible reexport restrictions that could apply. You know, don't limit yourself just in the game, okay? This is only an old back problem. I only need to worry about whether this person was on the or back as the list or what country they were in. You need to ask yourself, who owned this person?
00;23;49;06 - 00;24;30;12
Grant Leach
Were those owners potentially on the OFAC list? Then you have to ask what items were involved in this transaction? Were there items that were potentially required an export license to go where they were supposed to go with all of the Russia sanctions on the business side, there is something called General Prohibition ten. So that prohibits you from not just exporting an item in violation of the air, but it also prohibits you from providing any services to an item that made it to a recipient or to a country it wasn't supposed to without an export license.
00;24;30;27 - 00;24;50;13
Grant Leach
So if you know or should have known that this item made its way to someone or to some part of the world in violation of the ah, you can also violate the law if you just provide services to support that item. So when you're looking at one of these transactions, you just have to you can't limit yourself just thinking about the fact sanctions.
00;24;50;27 - 00;25;09;19
Grant Leach
You really have to think about that whole alphabet soup of all these agencies and all of these that's regulations. And think about every one of these that you could have potentially violated because it's a lot of work. But I can tell you the government enforcement agencies on their side of the fence, they are working together to share this information with each other.
00;25;09;28 - 00;25;57;13
Gregg Sofer
You know, again, from my standpoint, when you're trying to determine, well, can I just deal with this on the civil side or the administrative side? The big question is always going to be what was the intent? What can the government prove in terms of a willful violation? And the language is fairly in IEP, which is the enforcement statutory regime for an artifact violation on the criminal side and on the civil side, the language talks about a person who willfully commits, willfully attempts to commit, willfully conspires to commit for aiding and abetting the commission of a violation of any license, order, regulation or a prohibition may be convicted upon conviction, be fined not more than $1,000,000
00;25;57;13 - 00;26;22;11
Gregg Sofer
and sent to prison for 20 years. And again, with the department pushing hard for individual prosecutions in an attempt to deter corporations from violating the law, this is something that has to be considered, and the only way to really get to the bottom of that in one of these transactions is to look at all of the communications back and forth that took place.
00;26;22;11 - 00;27;00;23
Gregg Sofer
And an investigation has to be conducted and that investigation has to be strong and deep and broad enough to ensure that you protected the company and its officers and or salespeople from the potential, at least, of a criminal case. And you have to understand that before going into this or you'll end up settling with one part of the government and then finding the federal government on the other side of your door with a warrant for somebody's arrest or a criminal indictment threat, at least to a company which especially for a public company, but even for a privately held company, could be absolutely devastating.
00;27;00;23 - 00;27;21;26
Gregg Sofer
So it's something that needs to be considered and something that we often are encountering. And again, the way around making that mistake is to really fully understand the full depth of who knew what when. And that has to be done often by looking at email traffic in texts and sometimes interviewing people. And it can be a real burden for the company to go through that.
00;27;21;26 - 00;28;01;02
Gregg Sofer
But it also is a necessary one if you want to understand how difficult and dangerous your situation is, I think it's a good place for us to pivot to what you referenced before, which is the latest development, which is a change in the statute of limitations. Again, most of our audience probably knows this, but the statute of limitations is there to prevent and preclude prosecutions and other kinds of enforcement on matters that are very old under the theory that it's not fair come, let's say, ten years down the road and say you violated this regulation by doing whatever it is that says you're doing, and ten years later, nobody remembers any of that.
00;28;01;02 - 00;28;24;03
Gregg Sofer
And nobody has any paperwork or documentation of any of this. The emails I just described there may be gone, been auto deleted, and you're in a position where you can't defend yourself. So the statute of limitation does a number of things, but that's one of the major things that it does, is it prevents the government from moving and people when information is so old and they can't defend themselves.
00;28;24;03 - 00;28;30;06
Gregg Sofer
There's been a big change here in the op ed context. Can you tell us what it is and what you think the implications of it are?
00;28;30;25 - 00;29;01;09
Grant Leach
Yeah, so it used to be that that statute of limitations period for these OFAC sanctions was five years. So if you drill winkle after five years, the enabling legislation didn't give back the authority to kind of ask for anything beyond five years. Congress enacted the statute recently. The 21st Century Peace through Strength Act. It was enacted effective April 24, 2024.
00;29;01;24 - 00;29;30;00
Grant Leach
And what that did was it extended the back said you limitations under the International Emergency Economic Powers Act that's EPA in under the Trading With the Enemy Act, that's TWEA, extended that out for civil and criminal violations to a ten year statute of limitations instead of a five year statute of limitations. And then they've done that kind of on a rolling basis.
00;29;30;13 - 00;30;07;09
Grant Leach
They did put together a backstop date, but it's April 24, 2019. So if you had something that was older than five years and the statute limitations already run, they're not going to revive that and add an additional five years of coverage on something that had already expired but backstopped from April 24, 2019. Any violations that you've committed on or after April 24, 2019, instead of having affects the statute limitations and possible review period run out in 2024, it's going to run out in 2029.
00;30;08;00 - 00;30;33;18
Grant Leach
So this gives all back for and it's not all of your back sanctions programs, but anything under IPA or any way that's going to recover, that's going to cover Cuba, Iran, Syria, North Korea, all of the Russia programs, almost all of if not all of the SD, endless designations are now going to have a ten year statute of limitations going forward instead of five.
00;30;34;02 - 00;30;59;23
Gregg Sofer
Pivoting off our last discussion or I was talking about doing internal investigations, you devote an internal investigation now instead of having a stop at five years, you got to go. And and companies are creating their compliance program, right? They're going to have to be moving back in time rather than have to change the compliance program in order to accommodate the statute of limitations this year.
00;30;59;23 - 00;31;00;17
Gregg Sofer
Right.
00;31;00;17 - 00;31;28;29
Grant Leach
Yeah. You're definitely going to have to be mindful of retention periods. And when you see one of these red flags suggesting that a violation may have recurred previously, used to be able say, okay, we might have to look back as far as potentially five years to figure out whether any other violations that we need to address now is going to be potentially ten years subject to that and a backstop up date April 24, 2019.
00;31;28;29 - 00;31;48;05
Grant Leach
But five years from now, any time you see a red flag or something that you want to investigate or review internally, you're potentially going to have a ten year lookback period. If you want to be absolutely certain you don't have some sort of skeleton in your closet or potential unresolved ovac violation.
00;31;48;15 - 00;32;25;20
Gregg Sofer
In the closet argument, they're going to be buying a company now that's operating in that space. Your deal, due diligence the reps and warranties that are found in acquisition and mergers are going to have to look back even further because if you buy company or purchased a company combined with opening that has one of these skeletons in its closet further back than previously was protected by the statute stations, you could be buying yourself a real serious problem, but it sounds like there's different ways where this could raise its ugly head.
00;32;25;22 - 00;32;53;27
Grant Leach
Yeah. I can't even begin to think of how this can apply. One of OFAC's favorite pickles to stick people in is when a US company buys a foreign company that was previously never subject to sanctions because they were only owned by ownership in the EU. And the minute that company becomes owned by U.S. shareholders, they're going to be prohibited from transacting with Iran.
00;32;55;13 - 00;33;16;00
Grant Leach
And so there have been many instances where OFAC has caught some of these people and they're not going to be able to go back prior to when they were owned by U.S. companies. But, you know, some of these companies change ownership every couple of years. And so now all bank is potentially going to have be owned by a US company, sold back to an EU company.
00;33;16;14 - 00;33;28;21
Grant Leach
And for those two or three years that they were owned by a U.S. company, OFAC’s going to be able to investigate that ten years down the road, not just five years down the road. It's just a lot of moving parts to think about.
00;33;28;29 - 00;33;57;17
Gregg Sofer
So we've talked about so many complexities already in the short time we've been chatting. What if my company has 30 people in it or 20 people in it versus some huge Fortune 500 Global 50 company that a compliance department with 87 people in it and the latest and greatest software and a hotline to somebody like you, Grant, who I know helps companies do these exact kind of scenarios.
00;33;58;00 - 00;34;09;14
Gregg Sofer
Is that a defense? Is that a way to avoid prosecution, way to avoid penalties? What's the smaller mid range company supposed to do?
00;34;09;29 - 00;34;39;13
Grant Leach
Yeah, on the civil side, a lot of these are strict liability. They're not looking to intent, they're not looking to willfulness. If you ship one of these goods to a prohibited country or a prohibited end user or is depending on the facts and circumstances, if one of your customers reexport your goods to a prohibited country or prohibited end user that can be a strict liability or back violation.
00;34;39;28 - 00;35;10;24
Grant Leach
And there's no exception for the size of your company. It's just a violation in the way the regulations work is. Then when all determines one of those violations occurred, they will look and say to themselves, Did you have a reasonable risk based compliance program or were there other mitigating factors? The fact that you might be a smaller, less sophisticated company is a mitigating factor that they can consider in whether or not they want to waive or reduce penalties.
00;35;11;10 - 00;35;17;07
Grant Leach
But it's still a violation. You don't get a pass because you're a smaller, less sophisticated company.
00;35;17;27 - 00;35;28;07
Gregg Sofer
So small and medium sized companies are put in a tough spot without big compliance programs to dig. Why is it so hard for them to figure out whether or not there's transhipment?
00;35;28;23 - 00;36;05;10
Grant Leach
Only the dumbest criminals are trying to order stuff for Russia and telling you upfront that they want you to send it to Russia. What the bad actors are doing now and what the U.S. government expects U.S. companies to be aware of is that it is incredibly easy to divert products from Turkey or Saudi Arabia to Russia. And when you're seeing some of these new orders come in from customers in places like Turkey, Saudi Arabia, there's a list of at least 12 other countries that BEIS has designated as high risk diversion countries for Russia.
00;36;05;22 - 00;36;14;25
Grant Leach
They're expecting that you're going to scrutinize orders coming in from those third countries just as closely as you would scrutinize an order coming in directly from Russia.
00;36;15;01 - 00;36;44;10
Gregg Sofer
This goes to this question again, and it's a really important one, is you just can't stop at the surface level. And the compliance program and the whole culture of your organization can't be some topical quick hit research project when you're in this space, you have got to dig down. And so knowing what the government believes is a suspicious trans shipper, trans shipping country or location, another place to dig down.
00;36;44;11 - 00;36;53;07
Gregg Sofer
And if you're not aware of this and you're not incorporating this into the processes and controls, you could easily get yourself in a real pickle.
00;36;53;07 - 00;37;33;23
Grant Leach
Yeah, it's unfortunately, it's a compliance challenge. And I think there's a real disconnect where some of those middle market companies, from their perspective, they think, oh, we're a small company, the federal government isn't going to expect us to have a over compliance program or an export controls compliance program. And from the government's perspective, particularly if they're operating in a sensitive industry, if it's something connected to aerospace, if it's something connected to semiconductor manufacturing or production, they're not going to care how small the company is
00;37;33;23 - 00;37;34;19
Grant Leach
they're going after.
00;37;34;28 - 00;38;10;21
Gregg Sofer
No. And they've made very clear that they are going to make examples out of individuals and any company that violates these rules and regulations. And they believe that the best way to deter conduct by corporate actors and individuals is is to really come after folks. So if you're a mid-sized company and there is a big article in the newspaper that the company just was forced to pay multi million dollar penalty, or worse yet, that its CEO or some of its sales folks ended up getting indicted.
00;38;11;11 - 00;38;32;13
Gregg Sofer
I strongly believe the government believes that that's the best way to deter unlawful conduct and they're going to come after you with both barrels just the way it is these days, particularly when it comes to China and Russia and some of these other more sensitive areas. Well, Grant, I really appreciate you coming on the show and exploring this topic.
00;38;32;13 - 00;38;36;19
Gregg Sofer
I'm sure we'll be talking about it again. Thanks so much for coming on. Appreciate it.
00;38;37;01 - 00;38;38;01
Grant Leach
Yeah, thank you, Gregg.
00;38;38;16 - 00;39;01;03
Gregg Sofer
Thanks for joining us on The Justice Insiders. We hope you enjoyed this episode. Please go to Apple Podcasts or wherever you listen to the podcast to subscribe, rate and review the Justice Insiders. I'm your host, Gregg Sofer. And until next time, be well.