Deterrence and Disclosure: The Dual Logics Promoting U.S. Sanctions Compliance

The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) is the primary agency responsible for promoting compliance with U.S. economic sanctions. OFAC has a mandate to educate firms about U.S. sanctions requirements, and is also responsible for detecting and punishing sanctions violations. With the signing of the International Emergency Economic Powers Enhancement Act in 2007, OFAC gained the power to impose substantial financial penalties on companies for sanctions violations. For example, OFAC imposed massive fines against Credit Suisse in 2009, ING Bank in 2012, and BNP Paribas in 2014. While OFAC’s dual mandates of educating firms of how to comply with sanctions and punishing violations seem at odds with each other, they are actually complementary and have encouraged OFAC to adopt strategies that leverage deterrence and voluntary self-disclosure to prevent future violations.

OFAC fulfills its mandate to educate the public about U.S. sanctions obligations through providing informational resources, holding and participating in outreach events, and providing direct feedback to companies. These investments in outreach help promote compliance with sanctions by reducing the number of unintentional sanctions violations, which occur as a result of firms being unaware of their sanctions obligations or how to comply with them. More effective industry outreach will also lower the overall number of violations that OFAC is responsible for identifying and punishing.

OFAC’s sanctions enforcement strategy has changed significantly over the past sixteen years. In 2003, OFAC conducted 153 enforcement actions against corporate sanctions violators, but this number dropped drastically to 7 in 2018. However, at the same time, the average financial penalties imposed against firms as part of OFAC enforcement actions rose from $22,858 to $8,231,676 during that same period. Starting right at the tail end of the George W. Bush administration, OFAC shifted from a fishing strategy that caught many violators and imposed small fines to a whale-hunting strategy that focused on pursuing a smaller number of high-profile enforcement actions that could result in substantial penalties. This whale-hunting strategy used high-profile enforcement actions to raise awareness about sanctions obligations, encourage corporate investments in sanctions compliance, and deter firms from engaging in deliberate violations.

Policies that encourage voluntary self-disclosure of sanctions violations can complement OFAC’s whale-hunting enforcement strategy. OFAC has significant discretion in deciding how to respond to the sanctions violations it learns about. It can also compensate companies that voluntarily self-disclose violations by reducing their financial penalties or by allowing companies to adopt remedial sanctions compliance measures instead of penalizing them. These policies encourage firms to admit violations that OFAC may not have discovered and incentivize investments in preventing future sanctions violations.

OFAC wants firms to fear being caught for violating sanctions, but also to trust that it will respond to voluntarily self-disclosures and cooperation in fixing why violations occurred with greater leniency. The more firms self-report unintentional violations, the more resources OFAC can focus on pursuing cases of deliberate sanctions violations. These tend to result in higher profile cases involving larger penalties. The more substantial the penalties associated with OFAC enforcement actions are, the greater the perceived incentives firms have to disclose violations themselves. This fosters a virtuous cycle in which the limited enforcement actions OFAC currently takes both discourages unintentional and deliberate violations and encourages higher levels of self-disclosure when companies violate sanctions, fulfilling their dual mandates.

Bryan Early is an associate professor in the political science department at the University of Albany.

Read more in the CNAS Grappling with the Growing Use of Sanctions commentary series.