In this series, we examine compliance violations and the resulting fines paid by companies. We will also explore the details of the violations to help other organizations steer away from these pitfalls.
In this first post, we will examine OFAC and SCG Plastics’ non-compliance areas.
What is OFAC?
The Office of Foreign Assets Control (OFAC) is a financial intelligence and enforcement agency that administers and enforces economic sanctions programs against specific countries and individuals. These restrictions are placed to accomplish foreign policy and national security goals. The sanctions can be selective or comprehensive. Companies and individuals under U.S. jurisdiction must comply with OFAC regulations to avoid severe penalties, including hefty fines and potential criminal charges.
In this post, let’s examine why the OFAC imposed a $20 million fine on SCG Plastics, a Thailand-based company, for violating the Iran sanctions program.
Background of the Case
From 2017 to 2018, SCG Plastics caused U.S. financial institutions to process transactions of $291 million related to the sale of High-Density Polyethylene Resin (HDPE) with Iranian origin. This HDPE was manufactured as a part of a joint venture agreement between SCG Plastics’ parent company and Iran’s National Petrochemicals Company (NPC). NPC is a part of the Iranian government.
HDPE is used for making a wide range of molded plastics and industrial products like shampoo bottles, food and beverage containers, and more. During 2017-18 SCG Plastics initiated wire transactions on behalf of the Iranian joint venture to pay the outstanding debts of the joint venture to third-party vendors. To disguise these transactions, SCG used shipping documentation to conceal the Iranian origin and the parties involved. As a result, U.S. financial institutions processed the transactions acting as correspondent banks, though they violated the OFAC sanctions.
U.S. financial institutions processed $291 million worth of transactions during this period. As a part of the investigation, OFAC determined 467 violations. Out of this, SCG voluntarily disclosed only 10 violations, while the remaining 457 were not. Due to these massive violations, OFAC charged a $20 million fine on SCG Plastics, which the latter agreed to pay.
In January 2022, SCG Plastics transferred all its assets and liabilities to Thai Poly Ethylene (TPE) Company Limited, a subsidiary of SCG Plastics’ parent company based in Thailand. Following this business transfer, SCG Plastics is no longer in business. Subsequently, TPE has entered into an agreement with OFAC to maintain compliance with its U.S. sanctions regulations for five years. This case also reflects how compliance gets passed on to successor companies.
Furthermore, this SCG Plastics case shows the long-reaching arm of the OFAC and how its jurisdiction extends to non-U.S companies that cause other companies to violate U.S. sanction laws.
Now that you know this case, what can you do to prevent violations to OFAC guidelines?
Learnings from the Settlement
The $20 million settlement between SCG Plastics and OFAC serves as a stark reminder of the importance of robust compliance practices. Here are some key takeaways for other organizations to consider:
Strengthen Compliance Programs
Have a comprehensive and effective compliance program to prevent violations. Also, ensure that your programs include thorough screening procedures, regular training for employees, and robust monitoring mechanisms. Continuous improvement and adaptation to changing regulations are also critical.
Conduct Regular Audits
Perform regular audits of your compliance programs to identify potential weaknesses and areas for improvement. Internal and external audits provide an objective assessment of your compliance efforts. Armed with the results of these audits, you can make appropriate changes to your compliance programs, which in turn can result in timely corrective actions.
Build a Culture of Compliance
Promote a culture of compliance within your organization. This involves creating an environment where employees understand the importance of adhering to regulations and feel empowered to report potential violations. Leadership should lead by example and prioritize compliance at all levels.
Voluntary Self-Disclosure
In the event of a violation, voluntary self-disclosure to regulatory authorities can mitigate penalties. Establish clear protocols for reporting violations and encourage employees to come forward with any concerns.
Stay Informed of Regulations
Stay informed about current regulations and updates from regulatory bodies. Also, regularly review and update your compliance programs to align with the latest requirements and guidelines. More importantly, understand what these changes mean for your organization and its operations, and change your processes accordingly.
Have a Dedicated Compliance Team
If you are a large organization that requires compliance across multiple jurisdictions, consider having a separate compliance team headed by a Chief Compliance Officer (CCO). Ensure that this compliance team interacts with other departments to ensure everyone is on the same page.
Thus, these are some key learnings from the SCG Plastics case.
Final Thoughts
In this compliance series, we explored the case of SCG Plastics and its $20 million settlement with OFAC. Yet again, this case underscores the critical importance of compliance in today’s business environment. Violating sanctions not only results in substantial financial penalties but also damages an organization’s reputation and credibility. By learning from the mistakes of others and implementing robust compliance practices, organizations can mitigate risks and avoid the severe consequences of non-compliance.
More importantly, the SCG Plastics case highlights the need for vigilance, continuous improvement, and a proactive approach to compliance. Organizations must prioritize compliance at all levels and stay informed about evolving requirements. Moreover, they must voluntarily disclose violations when it comes to their notice, as this can reduce fines greatly.
We hope these insights help you navigate the complex landscape of regulatory compliance and safeguard your operations against costly violations.