Pegasus Worldwide Logistics, a small company with about a dozen employees, agreed to pay a penalty of $175,015 for arranging a shipment for a U.S. customer of a sugar-packet filling machine valued at $5,950 from a Chinese firm on the SDN List for narcotics-related activities. In addition, OFAC charged Pegasus with six other violations arising from its failure to respond properly and promptly to an OFAC subpoena regarding this transaction. OFAC conceded, by the way, that the machine would not be any good at packing stuff intended to go up noses instead of in your coffee cup.
On May 30, 2023, OFAC placed Youli Technology Development Co., Ltd. (“Youli”), a China-based supplier of pill press and packaging equipment, on the SDN List for shipping machinery to individuals in the United States involved in the “manufacture of counterfeit pills using techniques intended to evade law enforcement scrutiny.” You can guess what happened next: the company changed its name. In an effort to evade U.S. sanctions, the company started calling itself Huizhou Youli Fushi Co., Ltd. (“Huizhou”).
The transaction at issue began with an August 2023 request from a U.S. company to Pegasus to arrange for the shipment of the sugar-packet filling machine which it had purchased from Youli. In September, after Youli had informed the U.S. company that the machine was ready, Pegasus contacted Youli by email to have a Chinese shipping agent prepare the shipping documents. The Chinese shipping agent’s documents when sent to Pegasus now identified Huizhou as the seller of the machine. Pegasus screened Huizhou and came up with zip, zero, zilch, nada.
OFAC’s enforcement release criticized Pegasus for screening too late:
Pegasus’s sanctions compliance procedure made no mention of when to check the SDN List, and, rather than performing any due diligence at the beginning of the transaction, Pegasus waited until just before the machine was to depart China, by which point Pegasus had already engaged in prohibited conduct.
The earlier violative conduct was Pegasus’s agreement in August 2023 with the U.S. purchaser to arrange for the shipment from Youli which was a prohibited dealing in a property in which a blocked person had an interest, namely, the sugar-packet filling machine. If Pegasus had screened then, it would have screened against Youli and, presumably, have declined the transaction, since that was the name on the SDN list. So OFAC has a good point here.
Instead, Pegasus waited until it received the shipping documents from the Chinese shipper it hired, and those documents used Youli’s sanctions-evading name of Huizhou. OFAC, however, piled on and said Pegasus should have screened the phone number given for Huizhou in the shipping documents which was, according to OFAC, the same as Youli’s phone number.
Youli’s other identifiers, however, including its phone number and email address, remained the same in all the relevant shipping documents and electronic communications following its designation. A Pegasus employee failed to screen these identifiers in contravention of the company’s policy which called for screening “parties’ name, address, email, phone, and other information” against the SDN List. Screening the other identifiers, including through a basic internet search, would have yielded a positive match for Youli.
It’s a little bit disingenuous to say that here because neither OFAC’s own screening page nor the Consolidated Screening List permit a search by email or phone number. And OFAC’s suggestion of a search of the phone number shown on the Chinese shipping documents is also not the solution to the screening issue caused by the name change. If the Chinese shipping documents gave, as was likely the case, the Chinese internal number 015815351839, a search for that number doesn’t bring up any reference to Youli, at least it does not yield that result currently. If Pegasus somehow knew to use the international number 8615815351839, that would bring up Youli, provided it left out standard formatting (like 861.581.535.1839) when consulting the great and glorious wizard of Google.
OFAC also criticized Pegasus for failing to screen the email address used in its communications with Youli, although neither of the government’s principal public screening interfaces permits direct searches by email address.
This is a two-way street. If OFAC expects a high degree of diligence by screeners, OFAC should be at least reasonably diligent in updating the SDN list in situations like this. What I don’t get here is that OFAC did not do anything in response to Youli/Huizhou’s sanction-evading trickery. By November 2023, OFAC was investigating the transaction and ultimately determined that Huizhou and Youli were one and the same. And yet OFAC has, more than three years later, failed to take the simple step of adding Huizhou to the Youli listing. Instead OFAC criticizes and fines Pegasus for not using roundabout and less reliable screening techniques on phone numbers.