In all the hubbub about the SEC fining El Paso for violating the Foreign Corrupt Practices Act through bribes paid in connection with the Oil for Food program, there has been little mention that OFAC was also part of the hunting party that bagged El Paso. And an examination of the facts that led to El Paso’s settlement of the OFAC charges shows a violation premised on an extremely broad reading of the sanctions regimes administered by OFAC.

According to the settlement agreement:

From June 2001 until May 2002, EL PASO purchased Iraqi oil for which third-party intermediaries and/or allocation holders paid approximately $5.48 million in illegal surcharges to the former Government of Iraq.

Obviously unlicensed payments to Saddam Hussein’s government violated the Section 575.210 of the Iraqi Sanctions Regulations in place at the time. However, notice that there is no allegation that El Paso made those unlicensed payments, only that El Paso purchased oil from third-parties that had made such payments.

The settlement agreement attempts to link El Paso to the third-party payments as follows:

Other oil market participants and officials of the former Iraqi Government informed EL PASO that surcharges were being demanded on Iraqi oil allocations in the Oil-for-Food program. . . . Although EL PASO took steps designed to prevent the purchase of Iraqi oil from third parties on which illegal surcharges had been paid, such procedures proved inadequate.

For these third-party payments to Saddam’s government to give rise to liability by El Paso under the Iraqi Sanctions Regulations, they would need to be seen as a transaction which had the purpose or effect of evading the regulations or which facilitated the evasion of the regulations in violation of section 575.211 of the Iraqi Sanctions Regulations. Somehow it seems a stretch to assert that an ineffective program to prevent third-party payments to the Hussein government can be deemed an effort to evade the sanctions regulations. That argument might have had some force if El Paso knew of the payments and purchased the oil without making any effort to avoid purchasing oil on which such unlicensed payments had been made. But that was not the case.

It’s hard to see where this theory of liability ends. Does a company violate the SDN regulations if it purchases goods that the seller had bought from an SDN? What additional due diligence should a company conduct on its overseas vendors to assure that they are not violating any of OFAC’s sanctions regulations? After El Paso, the answers to these questions no longer seem very clear.

Last week I posted on the issuance by OFAC of a license to the U.S. Embassy in Nepal and USAID to continue providing financial support to the Government of Nepal notwithstanding that the Communist Party of Nepal (the “CPN”), an entity on OFAC’s SDN list, had been made part of an interim coalition government in Nepal. At that time, the text of the license had not been released and it was difficult to determine the extent to which it might cover NGOs in Nepal providing assistance to the Government of Nepal.

In an email interview with James Moriarty that was excerpted today on the website of the Kantipur Daily and the Kathmandu Post), Ambassador Moriarty provided additional information on the OFAC license:

The US Mission in Nepal has been authorized to continue providing economic and development assistance to the Government of Nepal and to the peace process, even after the Maoists take up positions in the government. . . . To quote from the license itself, USAID, the Department of State and their US contractors and grantees “are authorized to engage in transactions with the Government of Nepal (GON), including any political subdivision, agency or instrumentality of the GON, notwithstanding the involvement of the Communist Party of Nepal-Maoist (CPN-M) in the GON, provided the transactions are necessary for the entry into and execution of State and USAID grants or contracts for the provision of assistance or economic support in Nepal, or to support implementation of the Comprehensive Peace Agreement entered into on November 21, 2006 by the GON and the CPN(M), as authorized by the grant or contract. This authorization includes working with or through public international organizations, as authorized by the grant or contract.”

Thus, it is clear now that the license does cover NGOs that are U.S. contractors to the U.S. Embassy or USAID. Other U.S. NGOs or other U.S. firms that are not contractors to the Embassy or USAID will need separate licenses from OFAC to provide goods, services or financial aid to the Government of Nepal or state-owned enterprises.

The U.S. Embassy in Nepal announced today that OFAC has granted a license to the U.S. Mission in Nepal and to the U.S. Agency for International Development to continue to provide assistance to the Government of Nepal notwithstanding the participation of the Communist Party of Nepal (usually referred to simply as the Maoists) in the interim government of Nepal. As we noted in an earlier post, the Maoists were added to the SDN list in 2003. Even though the Government of Nepal has reached a peace accord with the Maoists and included them in the interim government, the United States has not removed them from the SDN list. This means that provision of goods, services or financial assistance to the Government of Nepal or its agencies violates OFAC’s anti-terrorism sanctions regulations.

Neither the Embassy nor OFAC has yet released a copy of the license so the scope of the license is not clear. Whether it covers U.S. companies and NGOs in Nepal that may have dealings with the government remains to be seen. For the moment, it must be assumed that U.S. companies and NGOs will need separate licenses from OFAC to provide financial assistance, goods or services to the Government of Nepal, its agencies and its state-owned enterprises until such time as the Maoists are either removed from the SDN list or are removed from the interim government.