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Posted February 26, 2006 by publisher in US Embargo

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By DAVID IVANOVICH | Houston Chronicle Washington Bureau

When U.N. inspectors became suspicious of Houston-based BayOil (USA)‘s handling of Iraqi oil in 2001, they sought help from the U.S. government.

The Office of Foreign Assets Control was asked to ferret out details of the oil trader’s shipping arrangements under the United Nations’ Oil-for-Food Program.

The agency waited eight months before sending BayOil a letter, according to a Senate report. But OFAC officials didn’t ask the questions U.N. overseers needed answered.

And when BayOil responded, the agency never forwarded the information.

Now BayOil is at the center of the oil-for-food scandal, accused of funneling millions of dollars to Saddam Hussein’s regime.

OFAC Director Robert Werner, having been grilled by a Senate panel on BayOil, acknowledges a sense of “frustration” with his agency’s handling of the inquiry.

OFAC’s failure to examine BayOil more aggressively provides a rare — and worrisome — glimpse into a tiny, secretive agency responsible for enforcing the nation’s economic sanctions against rogue nations, drug traffickers and terrorist groups.

Entrusted with helping to block funding of individuals and groups linked to terrorism, OFAC plays an even more crucial role in the wake of the Sept. 11, 2001, attacks.

But the BayOil case raises serious questions about whether this obscure, thinly staffed unit of the Treasury Department is capable of handling such sweeping responsibilities.

“The demands are intense,” Werner told lawmakers last year.

Former Treasury officials, Capitol Hill staffers, lawyers, business leaders and other OFAC watchers interviewed for this report describe a maddeningly opaque agency long known for being reflexively suspicious of any individual or company seeking its guidance.

“They were the most secretive people I’ve ever dealt with,” said Russell Mokhiber, editor of the Washington-based legal publication Corporate Crime Reporter. “It is important for this agency to come out from under its rock.”

Focus on Cuba
Despite its small staff — about 125, up from fewer than 10 two decades ago — OFAC concentrates much of its resources on Cuba.

That Havana focus has sparked criticism on Capitol Hill from lawmakers who argue that OFAC could better direct its efforts against more dangerous regimes and organizations.

As shown by the BayOil case, policing U.S. companies that purchased oil from Saddam’s regime was not an agency priority.

U.N. overseers were keen to see BayOil’s documents, in part, to learn whether the company was trying to accommodate Saddam’s demand that buyers of Iraqi crude pay his regime illegal surcharges, the Senate report said.

But Werner — who took over the agency in 2004, three years after the United Nations first asked for information about BayOil — says there was much confusion about OFAC’s responsibilities regarding the Oil-for-Food Program.

At the time, agency officials did not think they had the authority to demand the information the United Nations wanted, the Senate report said. (OFAC officials now say they did.) They also did not think they could legally send the information to the United Nations without BayOil’s permission.

Eventually, the BayOil documents were buried in an OFAC investigator’s file.

A New York federal grand jury since has accused BayOil owner David Chalmers Jr., associate Ludmil Dionissiev and a London-based oil trader of paying millions of dollars’ worth of illegal kickbacks to Saddam’s government while also fixing oil prices in a bid to mask those payments.

Conclusion disputed

Chalmers and the others have denied those charges.

Senate investigators who examined BayOil’s shipping records issued a report last year accusing the company of generating millions of dollars in illicit revenue by diverting Iraqi oil shipments to destinations not approved by the United Nations.

However, no BayOil official has been charged in the diverting of oil shipments.

Bart Dalton, an attorney for Chalmers and BayOil, argued that “it’s unfair to attempt to paint BayOil in some way guilty of some kind of criminal conduct when nobody else has thought as much.

“The Senate ... answers to no one and does not have to have its conclusions tested like the Southern District of New York, like real prosecutors have to,” Dalton said. “They can say what they want to say, for whatever reason they want to say it. We have never been accused of criminal conduct regarding this issue.”

Werner has pondered the BayOil chronology time and again.

“It is what it is,” Werner said in an interview. “We didn’t ask the right questions. It’s hard for me to reconstruct that.”

He points to the fact that the BayOil request came just weeks before Sept. 11, 2001.

And he says flatly that the agency didn’t have the resources to handle such a complex investigation. “We were overwhelmed and not able to follow up,” Werner said.

At the time of the BayOil inquiry, OFAC had only three or four staffers assigned to enforce the agency’s sanctions rules, according to the Senate report.

Now, with an annual budget of $22 million, OFAC has about a dozen investigators handling enforcement, Werner said.

Lacking the manpower to conduct its own investigations, OFAC relies on the Commerce Department, Customs or the Justice Department to handle in-depth probes.

Sets the rules

OFAC traces its roots to World War II, when the United States tried to block Nazi Germany from using the assets of conquered nations.

Today’s OFAC is largely the creation of Richard Newcomb, who headed the agency for 17 years before stepping down in 2004. Newcomb declined to comment.

During Newcomb’s tenure, OFAC’s responsibilities mushroomed as the United States employed economic sanctions more frequently as a foreign policy tool.

OFAC writes the rules companies must follow when business brings them in contact with pariah states such as Cuba and Iran.

Compiles no-no list
It handles 40,000 requests a year for permission to travel to nations such as Cuba, fields 2,000 calls a week on a hot line seeking compliance advice and identifies front companies used by terrorist groups, drug cartels and rogue countries.

And it compiles a list of “Specially Designated Nationals” — now more than 200 pages long — with whom American companies are forbidden to do business.

The agency has made headlines for going after Bobby Fischer for playing chess in Yugoslavia in violation of U.S. policy and investigating Chelsea Clinton’s classmates at Washington’s Sidwell Friends School for traveling to Cuba.

Late last year, OFAC objected to Major League Baseball’s plans to have Cuba play in the World Baseball Classic. That decision was reversed after President Bush — once managing partner of the Texas Rangers — took an interest, and OFAC officials were confident no proceeds would make their way back to Havana.

A transforming moment for OFAC came in August 1990, when Iraq invaded Kuwait. The United States imposed sanctions against both nations — Iraq to punish the country for its behavior, Kuwait to help keep its overseas assets out of Saddam’s hands.

OFAC needed to get the word out to banks and other parties on how to deal with the new rules.

The agency publishes its regulations in the government’s official publication, the Federal Register, but OFAC had always been notoriously slow getting its rules into print.

So OFAC officials, in those pre-Internet days, stacked up notices in a box atop a radiator at the Treasury Department’s annex building, in what became jokingly known as the radiator-distribution system.

Even stricter?

Lawyers, business groups, even other regulators have long complained about the agency’s not returning calls and answering mail.

OFAC was “a very unpopular place,” said William Reinsch, president of the National Foreign Trade Council and a former undersecretary for export administration at the Commerce Department.

“It just baffled me and drove the business types crazy,” Reinsch said. “The stuff that OFAC was doing was important and made a big difference to their businesses, particularly if they got caught in the wrong place.”

For an American company, tiptoeing through the nation’s Byzantine sanctions rules can be treacherous. Consider Iran:

No American firm — or individual — can legally do business with Iran. But a foreign subsidiary of a U.S. company is able to, as long as that foreign entity gets no help or direction fromits American parent company.

Now, as Iran faces off with the West over its nuclear ambitions, regulators could become even stricter in their interpretations of the regulations, OFAC experts say.

For Cuba, even foreign subsidiaries are forbidden to do business with Fidel Castro’s regime.

Companies ask OFAC to draw a “bright line” between legal and illegal behavior, Werner said. But agency officials say they must be extremely conservative when providing guidance.

Intentionally murky policies

OFAC experts say the agency keeps its rules vague.

“There is certainly the sense that OFAC likes to keep it that way,” said Washington attorney Greta Lichtenbaum. “They don’t want people to think there are ways to do business with sanctioned countries.”

Longtime OFAC head Newcomb “was a real master at finding ways that would discourage people from doing things they wanted to do, even if it was kind of unclear under a particular executive order or set of regulations that something was prohibited,” said one former Treasury official, who asked not to be named.

Was OFAC’s failure to investigate BayOil indicative or an anomaly? That’s difficult to gauge, based on the public record.

The agency’s civil enforcement history is largely a black hole.

Taken to court

Prior to 2003, regulators treated settlements with companies for alleged violations as confidential business information.

Corporate Crime Reporter’s Mokhiber and a colleague finally took the agency to court to force OFAC to release at least some details on past cases.

After that, OFAC periodically began releasing terse sketches of enforcement actions.

In August 2004, for example, OFAC revealed that ConocoPhillips, on behalf of both Conoco Inc. and Conoco Middle East Ltd., had paid two fines of $16,500 each for “facilitation of trade with Iran” in 1999 and 2000.

The agency refused to provide further details, and ConocoPhillips would reveal no more.

“While ConocoPhillips does not believe any of its activities violated U.S. economic sanctions laws, we felt it was important to resolve these claims,” company spokeswoman Kristi DesJarlais said.

OFAC records show the Salvation Army’s Texas Division got in trouble for “travel-related expenditures to Cuba” and paid a modest fine. Salvation Army spokesman Jimmy Taylor said a youth group band had traveled to Cuba to play in local churches, not realizing it needed to get approval from the government before making a trip.

Cuba violations

The Salvation Army’s not alone. OFAC records show that more companies run afoul of OFAC for allegedly violating rules barring business with Castro’s regime than any other country.

Werner, a former prosecutor, has vowed to bring greater transparency to his agency.

Last fall, OFAC began issuing one-paragraph summaries of alleged violations.

Last month, the agency issued new enforcement guidelines for banks, and Werner himself spoke on the new rules at a conference earlier this month.

After decades of secrecy, perhaps OFAC is coming out into the daylight.

  1. Follow up post #1 added on September 09, 2010 by publisher with 3905 total posts

    See our Cuba legal services for help with OFAC compliance, audits and Cuba related legal matters.

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