US Department of the Treasury’s Office of Foreign Assets Control Enters into Largest Ever Settlement Agreement Against Non-Financial Institution

On April 25, 2023, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a $508 million settlement with British American Tobacco p.l.c. (BAT)—one of the world’s largest tobacco companies—resolving civil liability for alleged violations of U.S. economic sanctions on the Democratic People’s Republic of Korea (DPRK) and proliferators of weapons of mass destruction (WMD). The U.S. Department of Justice (DOJ) also announced a deferred prosecution agreement in connection with a criminal information charging BAT with conspiracy to commit bank fraud and to violate the International Emergency Economic Powers Act (IEEPA). A subsidiary of BAT, British-American Tobacco Marketing (Singapore) PTE Ltd. (BATM), pleaded guilty to the same charges and agreed to pay penalties, increasing the settlement amount to $629 million.

This enforcement action follows announcements by several federal agencies of their focus on and prioritization of the enforcement of national security regimes, including those involving economic sanctions and export controls. Indeed, in discussing the BAT settlement, Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson stated, “[c]ompanies that seek to profit from circumventing sanctions by obscuring their involvement will be discovered and will pay a price. . . . Firms that deal with blocked persons, even indirectly, will be penalized when their schemes implicate the U.S. financial system.”

Thus, companies that engage with multi-national entities and/or third-party intermediaries abroad are on notice that they must closely scrutinize their compliance efforts to avoid sanctions violations and ensure export compliance.

BAT’s Conduct

In 2007, BAT, including its subsidiaries, allegedly formed a scheme to sell its stake in a joint venture, formed in 2001 by BATM and a DPRK company, to a company in Singapore. However, in reality, BAT retained ownership and control over the joint venture and, from 2009 through 2016, the DPRK company remitted joint venture profits, including payments owed to BATM, through at least one OFAC-sanctioned foreign trade bank. This exposed BAT to liability by forming and executing the broader scheme to use the U.S. financial system in furtherance of the joint venture’s related business—even if interacting only indirectly through an OFAC-sanctioned bank.

After BAT authorized its subsidiaries to exit the joint venture business in 2016, amid international sanctions against DPRK, BATM continued to export cigarettes to the DPRK Embassy in Singapore through 2017. The payments were either cleared through U.S. banks or received at a foreign branch of a U.S. bank. The transactions resulted in an estimated $700 million in revenue for DPRK entities, and ultimately, for the government of DPRK.

Economic Impact of Cigarette Sales in DPRK

This case is part of a larger DOJ response to the ongoing efforts of DPRK to evade sanctions and use the U.S. financial system to engage in illicit activities, such as trafficking in tobacco products, which generate revenue for advancing DPRK’s Weapons of Mass Destruction (WMD) programs. DPRK has been developing nuclear weapons since at least 2006 and has financed these activities through the illicit trafficking of tobacco and counterfeit cigarettes since at least 1992.

DPRK’s counterfeit cigarette production capacity is estimated to exceed two billion packs of cigarettes a year. Counterfeit cigarettes are a major source of income to the DPRK regime and may be the single most lucrative item in the DPRK portfolio, as smuggled tobacco is estimated to garner revenue as much as $20 on every $1 spent in cost. DPRK tobacco sales are alleged to flow back to the DPRK government, including to slush funds designed to sustain the loyalty government officials and to underwrite weapons development programs.

Screening current and new customers, intermediaries, and counterparties through the U.S. Government’s sanctions lists, as well as conducting risk-based due diligence on customers and intermediaries is essential. It is also critical that every company employ a risk-based approach to sanctions and export compliance by developing, implementing, and updating its own compliance policies and procedures based on its individual risk profile. Buchanan has a coordinated team with deep national security experience who are here to assist.