On 28 May 2020, Flex Ltd (“Flex”), a Singapore-based electronics manufacturer listed on the NASDAQ, disclosed in its 2020 US Securities and Exchange Commission (“SEC”) filing that it had initiated a voluntary self-disclosure to the US Office of Foreign Assets Control (“OFAC”) on 14 February 2019. The initial disclosure related to possible non-compliance with US sanctions by certain non-US companies affiliated with Flex. According to the SEC filing, an internal investigation is ongoing and Flex expects to complete the investigation and final disclosure to OFAC by the end of its second quarter of its fiscal year 2021
We set out in this article some key messages, which may help you navigate complex issues of sanctions law.
The long reach of sanctions laws
Flex’s disclosure comes in the wake of a series of enforcement actions against Asian companies for sanctions violations over the last five years, most notably the US$1.19 billion fine against Chinese telecommunications giant ZTE in 2017. In the same year, OFAC issued a finding of violation against Taiwan-based shipping company B Whale Corporation, and agreed to a US$415,350 settlement with Singapore oilfield services company COSL Singapore Ltd and a US$12 million settlement with Singapore technology company CSE Global Limited and its subsidiary, CSE TransTel Pte Ltd (the “CSE Settlement”). In June 2020, Singaporean national Tan Wee Beng, who was designated by OFAC and placed on the FBI’s Most Wanted List in 2018, was charged with falsifying documents in order to hide transactions with North Korean entities.
These cases have shown that Asian companies should be particularly cautious of the long reach of US sanctions laws, which extends to non-US companies in certain circumstances, including, among other things, where a transaction involves a US nexus (e.g. the use of the US dollar) or where secondary sanctions apply (i.e. sanctions targeted at wholly non-US actors in wholly non-US transactions). Non-US companies are also at risk of being designated on the US Specially Designated Nationals and Blocked Persons List, and blocked from any dealings involving the United States, if they are found to have materially assisted a person or entity on that list.
Moreover, as seen in the CSE Settlement, a Singapore-based parent company may be held liable for the actions of its Singapore subsidiary for violation of US sanctions. While the majority of recent cases involved financial institutions, companies in the telecommunications, energy, transportation and technology sectors, among others, have not been spared enforcement action. Depending on the outcome of Flex’s internal investigation, and any consequential regulatory investigation, Flex could be another example of OFAC taking enforcement action against Asian companies in these sectors.
In light of the heightened regulatory focus on non-US companies for possible non-compliance with US sanctions, the importance of early mitigating actions, such as undertaking comprehensive internal investigations, counterparty screening, cooperating with OFAC and implementing remedial measures, such as improved compliance processes and employee training, cannot be overstated. These actions may significantly reduce any penalties that may ultimately be imposed – in the CSE Settlement the original base penalty of US$38 million was eventually reduced by more than two thirds due to the mitigating actions taken by CSE including, among other things, CSE’s substantial cooperation with the OFAC investigation.
Given the broad reach of US sanctions, the prevalence of the US financial system and use of the US dollar, companies should always ensure that they are aware of the risks of dealing with companies that may be sanctioned or connected with sanctioned entities, and seek to mitigate these risks by ensuring that robust sanctions policies are implemented.
If you have any questions, please do not hesitate to contact us. We will continue to monitor developments relating to sanctions and issue additional briefings.
We would like to acknowledge the contribution of Matthias Ng, our Trainee Solicitor, to this news alert.