Intermediaries in global trade, such as freight forwarders and logistics providers, are linchpins of international commerce.  They face the commercial pressure to act with speed and flexibility to meet urgent client demands while maintaining strict adherence to rigorous sanctions compliance.

This exact tension was at the heart of the Fracht FWO case.

The Issue

Faced with a pressing request from a major automobile manufacturer to transport car parts from Mexico to Argentina, and fearing the loss of the customer’s business, two of Fracht’s senior vice presidents made a fateful decision.  They bypassed their own company’s internal compliance policies and sanctions screening procedures to quickly secure an aircraft through a recently recommended broker.  This shortcut led them to execute a contract with EMTRASUR, a Venezuelan state-owned cargo airline, despite numerous red flags, including the carrier’s identity, its Venezuelan address, and its Venezuelan aircraft tail number.  Over the next week, Fracht made two payments totaling nearly $1 million for services provided.  This single business decision, driven by commercial pressure, resulted in a cascade of sanctions violations that OFAC deemed “egregious,” leading to a $1.61 million penalty.

Key Strategic Takeaways for Your Business

1. Prioritize a “Culture of Compliance” Over Commercial Urgency.

The core failure in the Fracht case was a decision by senior personnel to prioritize a client’s urgent needs at the expense of compliance.  Fracht’s settlement agreement with OFAC explicitly requires that senior management foster a “culture of compliance” throughout the entire organization, ensuring that policies are followed even in the face of business pressure.  An effective compliance program must be empowered to withstand the incentive to cut corners for the sake of expediency.

2. Empower and Adequately Resource Your Compliance Function.

A compliance policy is useless if it is not resourced or empowered to act.  The Fracht case was triggered when two vice presidents bypassed their company’s internal screening policies.  The settlement mandates that Fracht’s compliance unit be delegated sufficient authority and autonomy and receive adequate resources (including human capital and technology) to effectively manage sanctions risk.  For your business, this means that the compliance function must have the power and executive backing to stop a potentially problematic transaction.

3. Understand the Nuances of Sanctions Risk.

The Fracht case highlights two technical, but essential, sanctions concepts.

• First, Fracht dealt with EMTRASUR, an entity not on the SDN List but still considered blocked under OFAC’s 50 Percent Rule because it is wholly owned by the sanctioned airline CONVIASA.  Under the 50 Percent Rule, any entity that is owned 50 percent or more by a person (or persons) on the SDN List is itself considered blocked, regardless of whether that entity is separately named on the list.
• Second, the aircraft used was blocked property of the designated Iranian airline Mahan Air, and it remained blocked even after being transferred to a new owner and having its tail number changed.  Significantly, the aircraft’s permanent manufacturer serial number was included in its SDN List entry and remained a traceable identifier.  Your due diligence must account for these complex ownership and asset-history risks by tracking identifiers beyond fluid ones like tail or registration numbers.

4. Win the Race to Disclose; Hesitation is Costly.

The Fracht case shows that there is no credit for confessing to something that the government already knows.  Fracht did report the incident to OFAC, but it was too late; the disclosure came only after another U.S. government agency had discovered the issue.  A disclosure only qualifies for the significant penalty mitigation of a formal Voluntary Self-Disclosure (VSD) if it is made before OFAC learns of the matter from another source.  Because U.S. authorities were already aware of the aircraft’s charter and detention, Fracht’s disclosure was not considered voluntary.  This failure was a primary reason that the violation was deemed “egregious” and the base penalty was set at the statutory maximum of $2,147,700. 

Once a compliance failure is identified, executives are in a race against discovery; delaying a disclosure is a costly gamble.