Alcon to pay $7.6M fine as OFAC takes a harder line against medical tech companies with faulty sanctions compliance programs

October 15, 2016
By: Dan Calloway, Legal Content Writer, SanctionsAlert.com

The Obama administration sent a message this summer that it was taking a more aggressive stance on medical tech firms as it reached its second consecutive and record settlement with a company for exporting medical-use products to sanctioned countries.

The latest enforcement action by US Treasury Department’s Office of Foreign Assets Control against a medical tech firm was against Alcon Laboratories, Inc., Fort Worth, Texas, and its affiliates in Switzerland. In July, Alcon settled potential civil liability in the amount of $7,617,150 for violations of the Iranian Transactions and Sanctions Regulations (ITSR) and the Sudanese Sanctions Regulations (SSR).

The Alcon case came a month after OFAC entered into a $$107,691 settlement with Hyperbranch Medical Technology, Inc. from Durham, NC, for its export of medical products to Iran.

History of violations in medical/pharmaceutical sector

The Alcon case is the 11^th time since 2003 that a medical/pharmaceutical company is subject to an OFAC enforcement action for violations of US sanctions laws.

With $7,617,150, Alcon paid 18 times more than the second largest OFAC penalty in the sector, imposed on American Optisurgical, Inc, from California, in 2013 for the alleged export of unlicensed medical goods and services to Iran.

Source: SanctionsAlert.com database of OFAC enforcement actions

513 violations

A closer look at the enforcement action against Alcon, a global medical company specializing in eye-care products, shows that it engaged in the unlicensed sale and exportation of medical end-use surgical and pharmaceutical products from the US to distributors in sanctioned countries Iran and Sudan.

Alcon’s misconduct was not an isolated incident. The violations are said to have occurred from August 2008 to December 2011 on a total of 513 occasions.

The settlement runs concurrently with Alcon’s additional settlement agreement with the Department of Commerce’s Bureau of Industry and Security (BIS).

No license

 This case is rather clear-cut in terms of the alleged violations; An exporter selling its goods to a sanctioned country without a license from the governing agency.

Enforcement of US sanctions, which are among the toughest of the world, rests with Treasury’s Office of Foreign Assets Control. Enforcement of US export controls lies with Commerce Department BIS. Both can make exceptions and issue a license under a 16-year-old law mandating that agricultural and medical humanitarian aid be exempted from sanctions or trade restrictions.

Licenses are reviewed on a case-by-case basis, and issued when the proposed deal or transaction serves US foreign policy goals. For example, for exporting food or medicine to provide relief in North Korea.

A license can simply authorize the company to extricate itself from a transaction. In other cases, the license authorizes the company to return money or to proceed with a proposed transaction, exports or re-exports of goods and technology from the US.

With a license, Alcon could have conducted trade that otherwise would be prohibited because of the sanctions or export controls.

Unlike enforcement actions, which are published on the OFAC website, licenses issued to companies seeking to do business with sanctioned entities or countries are not made public.

Aggravating and mitigating factors

An important takeaway from the Alcon case is OFAC’s discussion of aggravating and mitigating factors as it relates to settlement agreements and penalties.

The settlement amount for Alcon was approximately $7.5 million, a far cry from the statutory maximum civil monetary penalty amount of $138,982,584 and the so-called “base penalty” or proposed penalty of $16,927,000 for the apparent violations.

The settlement amount is reflective of OFAC’s consideration of both mitigating and aggravating factors promulgated by the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines. In OFAC’s official enforcement action the following aggravating factors were outlined:

• Alcon did not voluntarily self-disclose the alleged violations.
• Alcon’s senior management knew, or had reason to know about the alleged violations, thus making the alleged violations ‘willful’.
• Alcon, despite significant experience in international trade, demonstrated a reckless disregard for US Sanctions requirements by (1) having virtually no compliance program; and (2) failing to take adequate steps to investigate a third-party freight forwarders cessation of shipments to Iran on behalf of Alcon;

OFAC also found the following mitigating factors:

• The violations were not determined to be egregious;
• The alleged violations did not harm US sanctions programs because the exports at issue were licensable for sale to Iran and Sudan;
• Alcon was a first time OFAC offender;
• Alcon cooperated with OFAC by agreeing to toll the statute of limitations during the pendency of the investigation;
• Alcon implemented a robust compliance program in response to the investigation.

Alcon’s missteps teach vital lessons

OFAC’s enforcement actions describe what is important to the agency. From Alcon’s case we can draw several conclusions that will serve as practice points for companies selling life science products.

OFAC looks favorably upon companies that cooperate with OFAC investigations. A key element of cooperation appears to be the so-called tolling agreements. This is a contract between the parties to waive a right to claim that litigation should be dismissed due to the expiration of a statute of limitations. In the Alcon case, the tolling agreement gave OFAC additional time (beyond the normal 5-year statute of limitations) to review and potentially fine Alcon.

Secondly, OFAC places value on voluntary self-disclosures. By definition, if OFAC discovers a potential violation before a self-disclosure is filed and/or if the file is filed more than 30 days after you have become aware of a violation, you lose all mitigation potential. Thus if you find that your company is in violation of a sanctions law, it is beneficial to self-disclose to the agency.

Third, any indication that senior management was aware or should have been aware of potential sanctions violations will serve as a significant aggravating factor in OFAC’s penalty evaluation.

Lastly, is the importance of an export compliance program. If the question is why should companies invest in export compliance programs for their business that may not directly implicate national security concerns or deal directly with dangerous products, then the answer is simply risk management.

OFAC has shown us repeatedly, via its enforcement actions, that penalties for exporters are not calculated based solely on the value of the underlying transaction. In other words, even though your trade transaction might have been worth $100,000, you can be penalized at a much higher rate. In particular, it highlights the most important factor, which is the implementation of compliance controls.

Difference with Bank Secrecy Act

The Bank Secrecy Act, a US anti-money laundering law, imposes a legal requirement to maintain and implement a so-called anti-money laundering program. The US sanctions laws do not impose a similar legal mandate.

But, as the Alcon case shows, it makes sense financially to invest in an export compliance program, because it will influence the amount of the penalty to be paid when the government finds a sanctions violation.

Alcon is just another example of OFAC’s clear message that every exporter must have robust sanctions and export compliance controls and programs.