Dec

13

Do Due Diligence or Penalties May Be Due


Posted by at 7:20 pm on December 13, 2017
Category: Iran SanctionsOFAC

Dentsply Sirona HQ via https://corporate.dentsplysirona.com/en/about-dentsply-sirona/_jcr_content/main/tilesquarecontainer/components/tilesquare_355870153/picture.img.582.HIGH.jpg/1488408622677.jpg [Fair Use]Dentsply Sirona agreed to pay the Office of Foreign Assets Control (“OFAC”) $1,220,400 to settle charges in connection with 37 unlicensed exports of dental equipment to Iran. The value of the shipments was not stated but it would have been close to the $1,695,500 that OFAC asserted was the base penalty amount.

The significant issue is that these were not exports of Dentsply Sirona, but rather of two subsidiaries of Dentsply before it merged into Sirona in February 2016. OFAC, and the other export agencies, apply a rule of successor liability and although that rule is more defensible in a merger case, such as this one, it also has been applied in asset deals. And there is some chance in this case that Sirona may not have known about this sanctions liability until OFAC came knocking on the merged company’s doors given that the matter was not voluntarily disclosed by the parties.

According to the charging documents, the Dentsply subs sold dental products from the United States to foreign distributors with knowledge that they would be re-exported to Iran.  In addition, they continued to do so even after receiving confirmation that the items had, in fact, been re-exported to Iran.

One of the aggravating factors cited by OFAC was that personnel of the subsidiaries deliberately concealed from the parent company their knowledge of and participation in sales to distributors that were going to be re-exported to Iran. Although this case, on the one hand, emphasizes the need for due diligence on sanctions violations as part of the mergers and acquisitions process, it also raises the question here as to how due diligence would have caught these violations. The company’s export records would only show exports to the distributors outside Iran and would not reveal the subsequent re-exports to Iran. And the employees who had been busy lying to the parent company could not be expected to come clean about the scheme when presented with a due diligence questionnaire or in a due diligence interview.

That raises a larger question. Why on earth is it an aggravating factor for a parent company (and a successor entity) that it had rogue employees in its subsidiaries? If the parent had a reasonable compliance program, exercised reasonable review over the sub’s hiring practices with background checks, and had no knowledge of the con game going on, why should the penalty be increased? That hardly seems fair. Rather, the appropriate response should be referring the employees’ violation to the DOJ for criminal prosecution of those employees themselves. After all, the aggravating factor here is itself fairly conclusive proof of criminal intent by the sub’s employees.

 

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